A fascinating idea
Don Brash has floated a fascinating idea. To give the Reserve Bank Governor a second tool for fighting inflation, apart from raising interest rates. It is to increase and decrease the petrol tax as a way to take the heat out of the economy without impacting exporters so much through high interest rates leading to a high dollar.
I’d love to see some economic modelling on this proposal – how much does a change in petrol prices affect consumption and spending etc.
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February 6th, 2008 at 10:31 am
Doesn’t the Gummint owned electricity companies already do that with electricity? except it is never decreased?
February 6th, 2008 at 10:44 am
Interesting idea, certainly worth debating, but with a few problems. Will the petrol companies reduce their prices when the tax is reduced (they don’t have a particularly good record on competition after all)? The requirement that the money not be returned to the economy – how could this be ensured? Interest rate increases are criticised as being an unfair way of reducing inflation, but this doesn’t seem to make much progress in that regard.
I liked the idea of varying GST more, but the infrastructural issues are likely to be unsurmountable.
February 6th, 2008 at 10:47 am
Thats odd, I don’t recall voting for the governor of the reserve bank.
Typical sort of solution that you would expect from an undemocratic, colourless technocrat like Brash though.
February 6th, 2008 at 10:49 am
Yeah Toms – better to leave changes to the petrol tax as things to use to offset tax cuts.
February 6th, 2008 at 10:51 am
It would be impossible to vary GST, too many players, too many entrenched systems.
There are only a few players in the petrol market.
February 6th, 2008 at 10:52 am
Toms don’t be a complete prat.
Petrol prices have one of the biggest direct and indirect effects on the calculation of inflation. This idea has merit and it would be interested to know what effect dropping 10 cents (effectively 12.5% because of GST) would have on not just petrol, but also transport, food and services.
February 6th, 2008 at 11:10 am
A better idea for the long term.
Let Treasury take over the functions of the Reserve Bank. We don’t need them.
February 6th, 2008 at 11:16 am
A better idea would be to calculate the inflation figure the reserve bank works to based on ‘internal inflation’ only and exclude external or imported inflation like the increases in the price of oil.
It simply does not make sense to increase the cost of my mortgage because a massive global oil industry decides to raise its prices.
February 6th, 2008 at 11:35 am
do you think brash will ever ‘own-up’ to the fact his ‘cheap money’ policies..(echoing americas’ greenspan)..
are/were a prime cause of our ‘bubbles’/upcoming economic woes..?
phil(whoar.co.nz)
February 6th, 2008 at 11:38 am
At a $1.70/litre petrol price at the pump the total tax component is about 70 cents … including GST which is a tax on 5 other NZ component taxes/levies. Refer http://www.aa.co.nz/about/issues/Pages/PetrolTax.aspx
[The $1/litre delivered petrol cost puts the current price of milk in perspective....or bottled water]
Given annual petrol sales of about 3200 million litres, the 18.7 cents per litre (pre-GST) component paid each week by the oil companies into the General Crown Account yields about $600 million pa alone. Enough to make the idea interesting??
Of course a rise (fall) in the OPEC-generated crude oil price is equivalent to another tax (rebate) …. on the world.
February 6th, 2008 at 11:43 am
DPF said…
I’d love to see some economic modelling on this proposal – how much does a change in petrol prices affect consumption and spending etc.
The following freely downloadable PDF paper is probably what you’re looking for DPF.
Retail Energy Prices and Consumer Expenditures
I haven’t read the whole paper yet, I just scrolled thru to see what algorithm they used in their analysis. They used VAR (Vector Auto-Regression), which is an econometric multi-variate time-series analysis technique. There are a few variants of VAR (such as SVAR, VARMA, VARMAX, etc). I have implemented the VARMA for an application that I am writing at the moment.
The NZ Reserve Bank is already using VAR (SVAR variant) as a tool in econometric modeling, which is stated in the following discussion paper:
Estimating potential output for New Zealand: a structural VAR approach
The paper was published in 2000 when Don Brash was still the governor, so he must be aware of the related work done at NZRB at the time. I think that all that is needed for researchers at NZRB to do, is to apply the VAR to change in petrol prices and how it affects consumption and spending etc.
February 6th, 2008 at 12:04 pm
Phil said.. “do you think brash will ever ‘own-up’ to the fact his ‘cheap money’ policies..(echoing americas’ greenspan)..”
You’re making stuff up Phil. I think the most common critisism of Brash’s time as RB Gov was that he cranked UP rates too early and/or too much.
February 6th, 2008 at 12:07 pm
It is a fascinating idea and pries the lid off the tax control panel. Once in there, it would be much more possible to tinker with other things that need adjusting.
February 6th, 2008 at 12:10 pm
More perspective. At NZ 70 cents per litre total tax on petrol – that equals about US$87 per barrel oil-equivalent at the current US$/NZ$ rate.
The current ‘world oil’ price is about US$89 per barrel.
NZ Govt is another OPEC in taxing and cost inflation-generating capacity!?
February 6th, 2008 at 12:16 pm
Obviously Mr Brash does not own a Courier company or trucking company.
I’ve heard some dumb ideas, but this one is pretty much up there with the best of them.
It confuses RB independent economic policy with taxation in a particularly nasty way, the only reason he’s not suggesting changing GST dynamically is because that would be to hard, certainly it’s where he’s going.
Whilst such desperation does reflect the difficulty in managing inflation with RB interest rates because of external global factors, I think this one should go in the let’s think of something else category.
February 6th, 2008 at 12:20 pm
Toms wrote:
There you go, people: Toms believes that no-one should be allowed to raise an idea or express an opinion until they have been elected. Its no surprise that he supports the EFB.
February 6th, 2008 at 12:23 pm
Yes varying the GST rate means retailers have to reprice every item in stock which would be an ongoing logistical nightmare for them.
Much better to do it with a commodity that almost everyone buys which doesn’t have that problem. Electricity is another as someone pointed out but it’s more painful and difficult to go without electricity and there is no alternative whereas with transport you can go without using your vehicle if you need to do and use the public system. I expect the Green’s will congratulate Brash for his brilliant suggestion any day now.
February 6th, 2008 at 12:25 pm
Varying GST would also be a nightmare for people doing GST returns – having to work-out what the GST rate was when they conducted various transactions, or having to predict it when they are paying provisional returns.
February 6th, 2008 at 12:29 pm
phil, just out of interest, are you criticising the use of monetary policy to manage inflation per se, or are you criticising the way it’s been applied by Brash, Greenspan, Bernacke etc)?
I don’t want to start debating the issue on this thread, just would be interested in what your perspective is on it.
February 6th, 2008 at 12:38 pm
Variations in GST apply at the register, not as part of pricing. GST revenue is only collected at point of sale, not factored in as part of inventory management. GST returns are receipt-based, so fluctuations are not a necessary problem for those filing returns.
February 6th, 2008 at 12:48 pm
I had lunch with Don last year and ran the fuel idea by him.
It is regarded as unorthadox and various economic types have thought it interesting, but would not publically support it.
I am surprised he went public with it.
It would work, as the New Zealand economy has responded by slowing and speeding up as the petrol price has moved. It would be a levy over whatever the free market price in New Zealand of fuel was set by the feul companies.
It has the appeal of taking moneuy out of peoples pockets immediately, unlike interest rates that can be protected by fixing the morgage.
The funds raised would flow to the RBNZ (the system is already in place) and this would be available to subsidise fuel costs in times of recession.
It has the great appeal of not affecting the NZD and therefore would be a more direct way of controlling inflationary pressures.
It would apply to all forms of fuel including aviation gas and diesel.
February 6th, 2008 at 12:57 pm
francis I was talking about manually changing all the price tags on the items on display, as much as anything else. You would also have to reconfigure the accounting systems, and in addition as someone else pointed out, your cashflow forecasts would change all the time as well, given that you hold the money in trust until you file the return.
February 6th, 2008 at 1:02 pm
And Spam also raises a very good point, especially for all of those on six-monthly returns. To get around that issue, you might need to synchronise everyone’s return dates and that would affect the govt’s cashflow, and deny people the ability to choose the return period that most suited their business.
February 6th, 2008 at 2:52 pm
Thanks FF.
February 6th, 2008 at 3:02 pm
“and this would be available to subsidise fuel costs in times of recession.”
Mmmm, I think if it was ever implemented, the taxation would never be negative, just varying degrees of positive.
February 6th, 2008 at 4:30 pm
its a good idea from don brash.
February 6th, 2008 at 6:35 pm
So you allow people to take lout N.I.N.J.A (No Income, No Job, No Assets, No ability to repay) loans and borrow against thneir inflating house prices and then tax people to help them pay it back, so that the income earners have to take out loans to help their kids through uni, and then we wonder why all the hard working people are deserting the country.
I still think a better way would be to tighten up borrowing so that we didnt spend more than we earned and have to pay it back selling our land and companies.
February 6th, 2008 at 7:53 pm
I’m astounded to find myself agreeing with toms but I think he has a point.
The Governor of the Reserve Bank is not elected, yet he (or rather, the Board as a whole) could be argued to have more direct, and certainly more easily exercised, power over the economy than do our elected representatives.
I’ve always felt the monetary policy agreements in place in NZ, Australia and other places allow politicians to abrogate too much responsibility and to then blame the Reserve Bank when things go horribly wrong (as they are heading at present).
No one should have power without responsibility, yet this is precisely what the RB Governor has. So I’m uneasy from a democratic standpoint.
From an economic standpoint (an area in which I know just enough to be dangerous) it has always seemed to me that trying to control an entire economy by pulling just one lever is always going to be the crudest of instruments, subject to overswing at both ends of the economic pendulum.
February 6th, 2008 at 8:19 pm
Kevin, from someone who lived through the credit rationing environment that was NZ in the 70s and early 80s I’m 100% sure we don’t want to go back there.
You don’t get NINJA loans from major banks. We’re probably well on the way to less people giving their funds to Finance Companies to pass on in the form of NINJA loans.
February 6th, 2008 at 8:29 pm
“The Governor of the Reserve Bank is not elected, yet he (or rather, the Board as a whole) could be argued to have more direct, and certainly more easily exercised, power over the economy than do our elected representatives.”
Is that a lot different to the relationship between a CEO and the board of directors?
I doubt the BOD running a company directly would be a success (though a strong chairman working closely with a CEO can be a formidable team).
February 6th, 2008 at 8:43 pm
What a dumbfuck idea from a tunnelvisioned, narrowminded `clever bloke,`so will freight and cartage rates decrease and increase–yeah right not to mention commodaties with high freight/fuel inputs such as most primary products, timber,sea food etc.. Instead of dicking around trying to be clever, the powers that be should be trying to encourage productivity. The bloody central govt is starting to act like local govt in continually looking for ways to screw money out of everything that moves or breathes or even dies, and for what ? to fund bullshit propaganda to support their crap agendas of carbon credits and the like, including of course overpriced consultancy or wage charges for the so called experts.
February 6th, 2008 at 10:38 pm
It’s inconsistent withn development of any long term sustainable energy policy or encouragement to use of public transport etc.
I still prefer GST on new or floating rate mortages (exempting existing fixed rate mortages) – this would decrease the OCR and reduce the value of the dollar.
February 6th, 2008 at 11:04 pm
Sure, I agree, I don’t want credit rationing, but I dont want a lot of things I’ve got like high taxes. So lets have a true free market – the government undertakes to NEVER bail people out of debt, compensate them for dumbass investments etc and then they would have to be careful instead of relying on good old middle income taxpayer to underwrite their financial activities or fly by night business ventures.
February 6th, 2008 at 11:21 pm
yeah zero income tax. No money to subsidise one groups investments over another. Reduction of government size so public worker pay rises don’t drive up wage costs. True freemarket with no minimum wage and shorter welfare support with more self reliance through work insurance.
Current policies are great for a muldoon economy but with an economy exposed to the world trying to control inflation will always be a mess.
Couldn’t the markets determine interest rates just like they do with the dollar and milk? As for inflation the markets would determine this as well if it is allowed to be free.
February 7th, 2008 at 10:46 am
NZ Herald:
Well if Dr Brash was PM, like he should be, then we wouldn’t need to hand over more control to the reserve bank.
It’s a nice idea but what Dr Brash is really saying is that Labour are utterly clueless on financial matters. The domestic inflation rate of over 4% must be like finger nails on a black board to him.
I think the GST idea makes more sense to me.
February 7th, 2008 at 12:55 pm
TomS has an interesting point about the calculation of inflation. External inflation is totally out of our control, and probably shouldn’t fall under the mandate of the Reserve Bank to try to control.
February 7th, 2008 at 3:40 pm
“External inflation is totally out of our control, and probably shouldn’t fall under the mandate of the Reserve Bank to try to control”
The Bank does ‘look through’ tradable inflation, however it has to take it into account as far as it influences ‘inflation expectations’ (the part of inflation that just happens because people believe prices will rise, and so will act in a way that is consistent with them increasing). That is why the Bank’s target is ‘medium term’ – so that it has the ability to just ignore external shocks to the inflation rate, insofar as this is consistent with keeping inflation expectations in a reasonable range. [Note that inflation expectations are currently 2.7%, which is why the RBNZ has to react so strongly to any form of inflationary pressure]
Tradable inflation isn’t completely out of our control though, as by lifting interest rates we lift the exchange rate, which in turn reduces tradable inflation.
February 7th, 2008 at 4:59 pm
The other really fascinating idea from Don and his colleagues, is to free up the zoning of land for housing. Nothing would alleviate the squeeze on household costs, particularly those trying to get started, than this would.