Don't Buy Inflation Bollocks

With the reserve bank raising interest rates again yesterday to a level now of 8.25%, it is simply amazing that some people seem to be buying into Dr. Cullen's argument that tax cuts are inflationary. After eight years of Labour government, seeing minimal wage growth and little improvement in our economic prospects, alongside continued growth in state expenditure, how can we expect that the current high tax/high central expenditure road will fix the problems of inflation and the dollar.

On the contrary to our beloved finance minister's belief in the inflationary qualities of tax cuts, high taxation and government expenditure are by far the biggest pressures on inflation. This is for several key reasons:

1. We now have 190 000 civil servants in a labour force of around 2 million, earning an average of $28 an hour. These public sector workers are largely unproductive economically - driving down the productivity of our labour force while putting pressure on a tight labour market - a key ingredient for major inflation.

2. With middle income earners shouldering a tax burden which can only be considered irresponsible and inconsiderate on the part of the current policy makers, its never been harder to save. With morgages also reaching new heights, it is entirely safe to assume that tax relief on middle income earners would see a sharp increase in both savings and debt repayment, dampening the over-heated debt market and giving much needed relief to the exchange rate.

3. The rapid expansion of the welfare state over the past eight years has also driven inflation and our exchange rates over the edge. Lower and middle income earners relishing in government payouts have pushed consumer spending and imports through the roof, driving inflation and our current accounts deficit.

4. A heavy tax burden on high income earners, that can be matched off against mortage repayments, has also made investing in property increasingly attractrive. The increased demand, combined with a general upward trend and heavy regulation preventing the construction of new homes, has pushed housing prices skyward. The result of the housing boom has been an increased reliance on foreign investment capital, flooding the economy with cash and again forcing inflation and the dollars value sky high.

The only viable long term solutions to New Zealand's inflation and currency problems are: a steady decrese in middle and high incomes tax, seeing savings increase, debt decrease, a decreased reliance on foreign investment, and a dampening of the propery market; a relief of labour market pressures by steadily reducing the size of the public service; and a decreased regulatory burden allowing for increased productivity and real wage growth.