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Wednesday, September 9

OCR Cuts No Longer Enough

Further cuts in the Official Cash Rate (OCR) tomorrow will not be enough to return our economy to a more prosperous and economically sustainable future, said Green Party Finance Spokesperson Russel Norman today.

"We need more tools than changes to the OCR to respond to the complex set of economic challenges we're facing," said Dr Norman.

The Greens support further reductions in the OCR as a means to lower interest rates and take some of the heat out of our currently over-valued exchange rate. However, lower interest rates will also encourage further speculation in the housing market to the detriment of the tradable sector, and this will weigh against the Reserve Bank making further cuts.

The Official Cash Rate by itself does not work to promote a vibrant, diversified, and productive economy," said Dr Norman. "Our current tax system encourages a disproportionate amount of our wealth to be invested in non-productive assets like property. A capital gains tax on any property investment excluding the family home would help restore some balance to the way New Zealanders are encouraged to invest."

"We also need to look at putting limits to the tax write-offs property investors are able to claim through loss-attributing companies and the like." Losses on LAQCs, used to offset tax, have increased from $750 million in 2003 to $2.3 billion in 2008.

The productive sector in New Zealand has been in recession now for the last five years due to an overvalued exchange rate and difficult borrowing conditions.

"We need new tools to revitalise this sector to enable us to earn our living by what we produce rather than by what we borrow," added Dr Norman.

"We may even need to consider more specific measures targeting the bank lending behaviour at the root of this all. For example, by increasing the amount banks need to hold in reserve for lending in asset bubble prone sectors like housing, you effectively limit the amount of borrowing in that sector." (See reference below)

"This is a more direct way to encourage lending to small-to-medium sized businesses than further cuts in the OCR. Evidence provided to the Parliamentary Banking Enquiry showed that lending to business has dropped $3 billion in the first nine months of this year while lending to housing increased by $3 billion. This is the exact opposite of what's needed and we need to look at tools we can use to incentivize bank lending towards the productive sector and away from the unproductive sectors."

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