RESERVE BANK SUGGESTS GOVERNMENT START SPENDING IN AUCKLAND

FrontPage: Reserve Bank Governor Graeme Wheeler yesterday suggesting more Government spending in Auckland.
 

A broad hint yesterday from the Reserve Bank that the Government should consider accelerating expenditure on major infrastructure projects in Auckland.

Those could include the Central Rail Loop.

The suggestion, from the Bank’s Governor, Graeme Wheeler, comes just ahead of next Tuesday’s revision of the Government’s economic and fiscal forecasts which is expected to include new fiscal and debt targets.

It is expected those targets will loosen constraints on some Government spending.

Mr Wheeler’s comments came as the Bank dropped its official cash rate by another 25 basis points to 2.5% amid concerns that current inflation rates were too low.

The reason for that is that the economy has slowed down --- or “softened” --- as Mr Wheeler put it, over this year.

“Combined with increases in the labour supply from strong net migration, the slowdown has seen an increase in spare capacity and unemployment,” he said.

He did qualify his review of the economy and his forecasts by saying that they contained a number of risks:

  • Dairy prices could remain weak longer
  • The current El Nino could be stronger and last longer
  • Net migration could stay high longer
  • Household expenditure could pick up on the back of strong house prices.

But one of the big concerns the Bank highlighted both at its media briefing and then later before Parliament’s Finance and Expenditure Select Committee was low inflation.

Mr Wheeler said there were dangers in having low inflation.

He said there was nothing magic about 2% inflation.

“If you have low inflation and you get adverse shocks then that could put you into deflation in terms of negative inflation,” he said.

“You can also have concerns that there are issues of fairness.

“The fact that interest rates are very low does affect the return to savers for example those that are dependent on retirement incomes for their future, they are certainly affected.”

Mr Wheeler said that partly because of the current very high migration the economy had more capacity to absorb demand side pressures.

Conventional monetary policy theory would suggest that those pressures could be stimulated by the Bank lowering interest rates thus encouraging firms and households to take on more debt.

But he said central banks around the world had found it was very hard to move inflation expectations upwards once they became unstable and had started to decline.

“It’s been very hard particularly in an economy that has high levels of household debt and borrowers are reluctant to take on more debt.

“This makes the job of monetary policy much harder.”

He said that a lot of the focus tended to be on momentary policy to try and get some demand growth and output growth.

“One of the issues is what role could fiscal policy play,” he said.

”One could mount a case for saying that there’s the potential to have infrastructure spending, for example, around Auckland.

“This is an economy of roughly $230 billion so some capital expenditure by the Government could well be helpful to try and reduce excess capacity in the economy and reduce the output gap and from our point of view build inflation pressures.

“That would also be something that would be helpful.”

Given that the Government’s Future Investment Fund which was established with the proceeds of the power companies’ privatisations has now run out, any big infrastructure spending in Auckland would have to come from borrowing.

Finance Minister Bill English is expected to announce a relaxation of Government borrowing targets on Tuesday when the Treasury releases its Half year Economic and Fiscal Update.

Mr Wheeler’s statement may well be connected to Mr English’s statement.

There are two immediate candidates for spending in Auckland --- more housing developments and possibly the bringing forward of the start date on the Central Rail Loop from 2020 which it is scheduled for now.

Immediate reaction among politicians who attended the Select Committee that an earlier start on the rail loop seemed more likely.

However the Government has setup a process to review Auckland’s transport needs which is not expected t to report till towards the end of next year.

Back in July, in response to the first signs of the dairy downturn, the Prime Minister, john Key, said the Government was not so ideological in its view that it said it couldn’t change its spending parameters.

Spending on infrastructure, such as roads and other public works, was how the Government responded to the Global Financial Crisis in 2009-11 and it would "absolutely" do it again.

"It's seen as reasonably immediate and also has a positive impact on our long term growth outlooks, but there are lots of options," Key said.

"We certainly wouldn't want to be spending additional resources over and above the $1 billion."

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