Tapping The Endogenous Growth Potential Of New Zealand - Monetary And Fiscal Policies

The COVID-19 has severely impacted the world economy, especially the industrial economy, from both the supply side and the demand side. International trade has been limited, and the global industrial chain and supply chain have been disrupted. In the absence of effective control overseas, New Zealand needs to strictly control the prolonged and recurrent economic risks caused by COVID-19 in the face of the situation that external risks are greater than internal risks and macro risks are greater than micro risks. The country should normalize the controlling work of the pandemic and make industrial recovery and economic growth the key tasks of our work this year. This article focuses on what other strategies we can opt for in terms of domestic macro adjustment in the process of resuming work, production, business and market.

Since the impact of the pandemic on New Zealand’s economy gradually wanes and economic activities gradually return to normal, some policies have successfully completed their milestone. Does it mean that these phased policies can be completely withdrawn in 2021? In 2021, New Zealand should continue to implement proactive fiscal policy and prudent monetary policy; and macro policy should neither tighten significantly nor slide further towards easing. There cannot be a “policy cliff”. Sudden policy disruptions that could make many sectors unadaptable should be avoided. There still are many unstable and uncertain factors in the macro economy in 2021, and it will take some time for the economy to recover to the pre-pandemic level, which requires the coordinated efforts of various macro policies, including fiscal and monetary policies.

Support of monetary policy should be divided into three stages: pandemic control, overall prevention and control with orderly resumption of work and production, and promotion of economic and social recovery and development. A general upturn in the New Zealand economy in 2021 can be expected. Internationally, despite the pandemic, vaccination are being actively carried out, and the worst situation is now behind us. Given the support from macro policies and the low base effect, it is generally certain that the economic indicators of major powers will continue to improve. Domestically, New Zealand economy has seen relatively strong internal driving forces, reasonably sufficient funding for micro entities, and a generally sound macro situation. However, the impact of base effect and the weak foundation for economic recovery should also be taken into account. The world economic situation remains complex and grim, and the recovery process is unstable and unbalanced. Various derivative risks caused by the outbreak cannot be ignored. The anti-globalization trend has become more pronounced since the pandemic, the global industrial chain and supply chain are facing shocks, and the sustainable growth of the global economy faces challenges.

What should the monetary policy be like in the next stage when New Zealand’s economy is rebounding? Firstly, New Zealand should flexibly keep the total volume reasonable and appropriate. To maintain the continuity, stability and sustainability of our policies, we must not only maintain the necessary support for economic recovery, but also avoid indiscriminate flooding. "Reasonable and appropriate" here means that the growth of money and credit should correspond with the needs of economic development, and that money supply and the growth of nongovernmental financing should be basically in line with nominal economic growth. Neither make the market lack money, nor let the market money overflow. In this phase, monetary policy should be more flexible in balancing the multiple objectives of stabilizing growth, reducing costs, controlling leverage and preventing risks. The government would gradually improve the controlling mechanism of monetary supply and the long-term mechanism for the bank to regulate the liquidity, capital and interest-rate constraints of the money creation. The government can use a full range of monetary policy tools, including refinancing and rediscounting, to maintain reasonable and adequate liquidity, replenish bank capital, and give full play to the incentive and restraint role of macro-prudential assessments. At the same time, we should also ensure policy coherence and cross-cycle regulation to prevent unexpected risks arising from policy interruption.

Secondly, New Zealand could gradually build institutions and mechanisms for the financial sector to effectively support the real economy. The government would improve the system of structural monetary policy tools, precisely allocate more financial resources to key areas and weak links in economic and social development. On the one hand, the government can deliberately adjust and continue the emergency policies introduced during the special period, and keep implementing the loans extension and credit support for small and micro businesses. On the other hand, the government should innovate structural monetary policy tools and make good use of inclusive refinancing and rediscount policies. With New Zealand’s economy and society are recovering, some weak links are coming to the fore, such as manufacturing, small-to-medium-sized enterprises, and scientific and technological innovation. These areas need more structural and direct monetary policy support. The foundation of economic recovery in 2021 is not yet solid. Therefore, the policy extension is still necessary to help small and micro businesses to tide over the difficulties and to realize the goal of protecting the employment of market players and residents.

Thirdly, New Zealand could improve the mechanism for setting and transmitting market-based interest rates. The government should ensure that the overall financing costs for enterprises remain stable while lowering them. New Zealand would further promote the marketization of deposit interest rates, crack down on all kinds of non-standard innovative deposit products in disguise, and maintain the order of fair competition in the deposit market. The government can strengthen the policy rate system and the benchmark rate of money market, especially the short-term and medium-term policy rates and lending facility, guide market interest rates to fluctuate around the policy rates, and improve the interest-rate corridor mechanism.

Fourthly, New Zealand could promote the market-oriented reform of the exchange rate of New Zealand dollar and balance internal and external equilibrium. While focusing on the macro-policy spillover effects of developed economies, we should exert the positive spillover effects of New Zealand’s macro-policy well and take the initiative in international macro-policy coordination. We can let the market play a decisive role in the formation of the New Zealand dollar exchange rate, give free rein to the role of the automatic stabilizer of macroeconomic and international balance of payments, and enhance the flexibility of the New Zealand dollar exchange rate. The government can guide enterprises to establish "risk neutrality" and financial institutions to provide risk management services on exchange rate to import and export enterprises based on the principle of actual need and risk neutrality. The government would reinforce macroprudential management of cross-border capital flows and keep the exchange rate of New Zealand dollar generally stable at a reasonable and balanced level.

We should never underestimate the power of regulatory policies for aggregate demand. There are bound to be bumps in the road to positive feedback such as economic overheating and house price bubbles. Severe shocks like the Great Depression, grievous unemployment and widespread corporate bankruptcies are the most disruptive to markets. A successful demand management policy can avoid or reduce these disruptions, which is an indispensable guarantee for endogenous economic growth. New Zealand has always attached great importance to macroeconomic stability and has been relatively successful in this regard. But there were many lessons learned in the choice of policy tools for macroeconomic stabilization. In the choice of policy tools to enhance aggregate demand, the standard monetary and fiscal policy tools, such as lowering interest rate and government borrowing to expand spending, have done their job. Debt investment relying on borrowed money that local authorities involve and lead has different degrees of government credit endorsement and is also popular among commercial financial institutions. However this is a costly way to boost aggregate demand. First, systemic financial risks can rise sharply. Second, local governments have to rely excessively on land finance. Third, resource waste is hard to avoid due to the lack of standardized supervision mechanism and risk assessment.

The fiscal response to the pandemic has also been divided into three phases. The pandemic is unwinding the clock. It has an impact on both the supply and demand sides of the economy. The fiscal policies to deal with the pandemic need to adopt different policy combinations according to the different stages, the core of which is the expansionary fiscal policy of reducing taxes and increasing spending. The early and most severe phase of the pandemic, when social isolation measures to contain the outbreak led to a sharp reduction in economic activity, required a rapid and massive transfusion of power to the economy. Countries have introduced large-scale financial subsidy measures for the middle and low income class. In the middle and later stages of the pandemic, the pandemic is basically under control, enterprises need to resume work and production, and the empowering policy needs to be extended to a certain extent. In order to restart and rebuild economic activity, fiscal spending will need to be precise. On the basis of achieving continuity and stability, fiscal policy should take time into consideration and maintain a certain intensity of expenditure to gradually realize normalization and sustainability. However, in addition to the proactive tax reduction, fiscal revenue in 2020 withstood the greatest test. On the one hand, we needed to significantly enlarge spending. On the other hand, the pandemic has greatly reduced government revenue. The gap between government revenues and expenditures has become more acute.

The main themes of economic work in 2021 should be high-quality development and supply-side reform. The new specific requirements for a proactive fiscal policy this year are to improve the quality and efficiency of the policy, make it more sustainable and stable, while maintaining a continuous but appropriate intensity of spending. To consolidate the hard-won situation of New Zealand's relative economic success in fighting the pandemic, it is essential to maintain a certain level of fiscal expenditure but cannot be as loose and aggressive as the early stage. It is difficult to accurately predict and control the changing situation of the pandemic, and it is difficult to clearly define the derivative risks caused by it. The foundation of New Zealand's economic recovery is not firm enough, which will be inevitably affected by the global economic recession. Therefore, the fiscal policy of reducing taxes and expanding spending will maintain a certain degree, so that the macro economy can hedge against fluctuations caused by exogenous shocks, and bring economic growth closer to the track of potential growth rate. However, the use of government investment funds should be more targeted and effective by innovating its application, guiding the development of key and strategic emerging industries, and strengthening cooperation between the government and private capital. In doing this, new fiscal policy should focus on the following aspects: the development of science and technology, the support for rural areas and farmers, the expansion of domestic demand, and the implementation of green economy.

First of all, the security and stability of the industrial chain and supply chain is a key area for coordinated development and security. Increasing financial input to scientific and technological innovation is not only a way to deal with the current economic difficulties, but also a foundation for consolidating the long-term economic growth of New Zealand. The core of current economic competition among big powers is the competition in science and technology. New Zealand still lags behind other developed countries in basic fields and key technologies. Finance in science and technology should make a difference.

Secondly, open the front door to aggregate demand management policies and let the fiscal policy tools really kick in. Expanding domestic demand is an important way to deepen internal economic ties by promoting consumptions and expanding investment. Summarize effective ways and methods, explore new ways of fiscal expenditure to promote consumption growth and consumption balance are critical in 2021. Investment can be enhanced from four aspects. First, pandemic is forcing domestic supply-side structural reform and the digital transformation of enterprises to survive. Digital economy creates many new industrial models. Digital economy needs the support of digital infrastructure. Digital infrastructure should be promoted comprehensively in the construction of 5G and other information networks and data centres; online shopping drives modern logistics that make the supply chain of modern distribution develops strongly; telemedicine and the application of big data and cloud computing in the medical field need deeper exploration. New Zealand should also keep up with the trend and pay attention to the digital finance and digital currency and strive not to be left far behind in the fourth industrial revolution. Second, invest to develop intelligent manufacturing. Unmanned factories will not be affected by the pandemic, and more high-tech rather than labour-intensive enterprises will survive the crisis. Third, strengthen investment in medical infrastructure, public health facilities and related service industry development through government investment and cooperation between government and private capital. There is still a lot of room for growth in the demand for public services, such as medical care, education and culture, and elderly care. Some crowded public goods can promote the supply of services by the way that public services drive market participation. Fourth, consolidate support for export enterprises, export tax rebates, export credit and export insurance. Promote the development of cross-border e-commerce, trade liberalization and facilitation, strengthen bilateral and multilateral FTA construction, promote the signing and implementation of the 15-country RCEP, and intensify trade and investment with ASEAN, the European Union, the African Union and other regions.

Thirdly, the government should improve the policy framework and incentive mechanism for green economy and direct financial resources toward carbon reduction projects. New Zealand has made climate change commitments under the United Nations Framework Convention on Climate Change, the Paris Agreement and the Kyoto Protocol to set bold reduce greenhouse gas emissions goals by 2030 and 2050. The green fiscal policy system can be established to comprehensively promote green transformation and green development in terms of tax and expenditure policies.

Lastly, in order to improve the quality and efficiency of fiscal policies, the government can carry out the reform of fiscal itself and accelerate the reform of tax system, budget system and fiscal relationship between the central and local governments. New Zealand can consider to explore the utilization of next-generation information and communication technologies such as big data, blockchain, cloud computing and artificial intelligence to improve effectiveness and make fiscal policies more precise and direct.

Manqing Cheng is a doctoral researcher at the Department of Politics and International Relations, University of Auckland and visiting researcher, The New Zealand Centre at Peking University.

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