How the government is affecting your money

Friday 7th July 2000

The government has a mandate to change the mix of social, economic and political policies. In this midyear survey PETER V O'BRIEN analyses the effects on business and investment

The government announced before the election it would implement specific policies - some impinging on investment and business - if it received an electoral mandate.

It has already given, or is preparing to give, effect to many policies (see box) but there is more to a government's performance than implementing policy. The words and actions of ministers and other MPs have an impact on the community and specific sectors, the latter including business and investment.

The government has shown a propensity to order reviews, inquiries and investigations since it took office, although many were foreshadowed before the election. The opposition, at the end of June, said the number had risen to 302, covering matters from a sports review through an examination of particular convictions for alleged criminal offences to competition in the electricity industry and safety issues in Tranz Rail's operations.

The range of committees and one-person authorities looking into aspects of the nation's activities gave some credence to the old yarn that the first thing New Zealanders do when they meet each other for the first time is elect a chairman, secretary and treasurer and make the rest of their group committee members. An update of that yarn would probably have them appointing a public relations officer or hiring public relations consultants.

Apart from providing work for consultants, lawyers and other specialists loosely or directly connected with the business community, the inquiries and reviews have a political advantage in passing sensitive and/or controversial matters to outsiders and taking heat off ministers.

Words and actions from a government's prime minister get the most prominence of any cabinet member. Business and investment people also closely follow what the finance minister says and, in the case of this government, what emanates from Deputy Prime Minister and Economic Development Minister Jim Anderton.

Finance Minister Michael Cullen has shown he is prepared to hit out at people in the private sector for actual or perceived criticism of government policies and decisions.

The late Sir Robert Muldoon was a master of that practice but Dr Cullen seems to lack Sir Robert's capacity to make king-hits, make the targets cower and avoid seeking a return bout. For example, attacks on bank economists critical of economic management, could have effects beyond the issue of the day. Ministerial comments are picked up in the local offices or agencies or of overseas organisations with interests in New Zealand or considering involvement in the country.

It is inappropriate to include direct comments from business and investment people in this survey, because they are usually predictable, but there seems an acceptance, albeit grudgingly, that Mr Anderton is consistent in his stance on matters within his range of activities. That was seen in his criticism of banks and their fees and his advocacy of the People's Bank.

The idea of the bank was dismissed initially in some quarters as being impractical, even unworkable, unlikely to get off the ground, unable to find sufficient skilled staff and open to the danger of failure.

But the proposed bank is more of a reality as the months go by, to the extent of the Reserve Bank's unusual action in saying the government did not guarantee banks or their deposits after Mr Anderton said it was inconceivable a bank could be allowed to fail. Mr Anderton later agreed there would be no government guarantees for the proposed bank but the skirmish did not slow down the scheme.

The proposed superannuation fund is also still on track. It has attracted considerable adverse criticism, including articles in The National Business Review. The proposed fund's potential impact on investment markets cannot be underestimated. It is supposed to grow eventually to $50 billion.

There is no way a fund of such size could be invested totally in low-risk New Zealand investments, unless compulsory investment rules are issued. The alternative is to adopt the practice of most fund managers and spread the money across other countries and their asset classes.

In either case, the fund would still be subject to the same risk factors, including fluctuating returns, that affect all investment unless it is government-guaranteed.

Government policies and day-to-day administration decisions influence trends in investment markets. It is often assumed a non-regulated currency is among the most sensitive economic indicators in terms of reaction to government action.

That is partly true but overlooks the currency's link to interest rate movements and other indicators, such as GDP growth, the trade deficit/surplus and the wider balance of payments. Even if the government had to take all the blame or credit for currency realignments, Table I shows things were not too bad when the overall situation since the election was taken into account.

There were ups and downs and changes within months, the latter being omitted from the table for conciseness' sake. The final percentage changes were relatively modest compared with fluctuations in other designated periods.

The change in the trade-weighted index (TWI) was the most important of the four shown, because it gave a total picture of all trade patterns. Individual commodities priced in US dollars saw the biggest advantages (exports) or disadvantages (imports), subject to whether traders hedged the currency exposure. Hedging carries opportunity costs but also has high risk when the currency moves against the unhedged trader.

KEY MEASURES AFFECTING INVESTMENT

New Employment Relations Act, now in bill form
A new bank, popularly referred to as "the People's Bank"
Changes to accident compensation legislation, effectively re-nationalising the system
Top marginal individual tax rates increased from 33c to 39c on incomes of more than $60,000, with consequential amendments in areas such as superannuation funds
Superannuation fund financed from general taxation and ringfenced
Introduction of new rules governing takeovers
Amendments to the Commerce Act regarding competition and higher penalties for anti-competitive and collusion offices
Ministry of Economic Development created with increased emphasis on regional development

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