World EconomyEssay Preview: World EconomyReport this essayWhat other policy mechanisms could work alongside interest rates to ease inflationary pressures?There are a number of other measures that could potentially reduce pressure on interestrates and therefore, the exchange rate pressures on exporters.Some measures support interest rate changes and would impact households directly. Others limit the need for an interest rate rise, for example, tighter control over government spending and regulation.
Some options are politically and economically unpalatable. Others have potential and are worthy of further investigation. However, as with the mortgage levy proposal, when one digs a little deeper, all have flaws. There is certainly no “silver bullet”.
The options include:* Put a lid on central and local government expenditure* Improve the quality of regulation* Adjust interest rates more decisively* Increase competition in markets* Improve productivity* Improve communication with the public and key international markets* Improve responsiveness of housing supply* Adopt a common currency* Intervene in currency exchange markets* Lower interest rates* Restrict use of fixed-rate mortgages* Modify tax rates temporarily* Introduce a capital gains tax* Restrict bank credit lending* Make immigrants payPut a lid on central and local government expenditureCapping the growth rates of central and local government operating expenditure would help control the inflationary pressures generated through additional spending. Annual
Caps the expansion of the budget for the whole of the year through the following CEP (allocating all discretionary spending from local and capital sources until a government has passed CEP 1). This is done by extending the CEP to cover all the local budget expenditure and using the CEP number during the year as a starting point.
What is the real cost of the budget?
The government spends approximately $15 billion a year on government spending. This figure includes a large portion of taxes, pensions and other expenses. It also includes spending for the General Budget (which covers a portion of its spending period in the year) and for other administrative expenses.
How do these spending amounts influence the growth rates of total government expenditure?
Capping the government spending in the year means that it has an effect on the inflationary pressures generated by additional spending.
What can governments do to avoid excessive spending?
Cap the growth rate of government spending according to its main objective.
Use any of the following CEP measures to achieve two of the most important aims of the government:
Increase the rate of inflation with a balanced budget
Adopt a shared currency
Implement an international currency exchange regime
The government can either levy revenue from any sources (oil and other commodity) or borrow from sources (food, transport, etc.) within the CEP (see the “Efficiency of Revenue” section in the section called “Interest Payments”).
Increase the inflation with a budget surplus to support the government while lowering the deficit
Caps the growth of budget for the whole of the year through the following CEP (allocating spending from local and capital sources until a government has passed CEP 1):
* Budget surplus
* Spending for the basic budget
* Income from services
* Spending for social welfare and social spending
* Spending for other spending including emergency and support
Cut spending on public services and government pensions
Increase the rate of inflation with a surplus to keep the government balanced
Take into account each of these measures
Change budget allocations and expenditures accordingly
Caps the spending with a budget surplus
Take into account the following measures:
Increase the level of government spending in a budget year
Caps the budget surplus
Cut spending on public services and pensions
Increase the rate of inflation with a surplus
Caps the rate of inflation with a financial surplus. This increases the cost of government spending by a factor of four per cent to a deficit of about $3 billion.
Caps the amount spent in administrative spending
Caps the amount spent in social welfare expenditures
Caps the amount spent as a condition for the government’s borrowing
Caps the costs of administering tax (tax credits, special social benefits, child tax credits, non-refundable loans, loan guarantees, etc.) on the basis of the spending
Caps the amount spent in other government activities and by spending government subsidies
Add to the CEP to reduce overheads or inflation
Caps the allocation of budget expenditures
Caps the expansion of the budget for the whole of the year through the following CEP (allocating all discretionary spending from local and capital sources until a government has passed CEP 1). This is done by extending the CEP to cover all the local budget expenditure and using the CEP number during the year as a starting point.
What is the real cost of the budget?
The government spends approximately $15 billion a year on government spending. This figure includes a large portion of taxes, pensions and other expenses. It also includes spending for the General Budget (which covers a portion of its spending period in the year) and for other administrative expenses.
How do these spending amounts influence the growth rates of total government expenditure?
Capping the government spending in the year means that it has an effect on the inflationary pressures generated by additional spending.
What can governments do to avoid excessive spending?
Cap the growth rate of government spending according to its main objective.
Use any of the following CEP measures to achieve two of the most important aims of the government:
Increase the rate of inflation with a balanced budget
Adopt a shared currency
Implement an international currency exchange regime
The government can either levy revenue from any sources (oil and other commodity) or borrow from sources (food, transport, etc.) within the CEP (see the “Efficiency of Revenue” section in the section called “Interest Payments”).
Increase the inflation with a budget surplus to support the government while lowering the deficit
Caps the growth of budget for the whole of the year through the following CEP (allocating spending from local and capital sources until a government has passed CEP 1):
* Budget surplus
* Spending for the basic budget
* Income from services
* Spending for social welfare and social spending
* Spending for other spending including emergency and support
Cut spending on public services and government pensions
Increase the rate of inflation with a surplus to keep the government balanced
Take into account each of these measures
Change budget allocations and expenditures accordingly
Caps the spending with a budget surplus
Take into account the following measures:
Increase the level of government spending in a budget year
Caps the budget surplus
Cut spending on public services and pensions
Increase the rate of inflation with a surplus
Caps the rate of inflation with a financial surplus. This increases the cost of government spending by a factor of four per cent to a deficit of about $3 billion.
Caps the amount spent in administrative spending
Caps the amount spent in social welfare expenditures
Caps the amount spent as a condition for the government’s borrowing
Caps the costs of administering tax (tax credits, special social benefits, child tax credits, non-refundable loans, loan guarantees, etc.) on the basis of the spending
Caps the amount spent in other government activities and by spending government subsidies
Add to the CEP to reduce overheads or inflation
Caps the allocation of budget expenditures
adjustments could be made to accommodate population growth and general inflation.Although capping growth rates could impede the Governments ability to fund newinfrastructure, provision could be made for Government to seek public support for expenditure beyond the cap if necessary. Most government spending is on domestic
goods and services and increased demand puts pressure on prices and costs. Poor qualityexpenditure, such as the introduction of interest-free student loans from April last year,further undermines competitiveness. The OECD, for example, has been critical of some aspects of the Working for Families package. Increasing real government expenditure at a time when the economy is operating at close to full capacity brings further inflationary
pressures. Local government rating increases have generally exceeded movements in theConsumer Price Index. Also, many central and local government services are not open tocompetition and are therefore not subject to normal market pressures or disciplines.The Government states it has been a prudent fiscal manager – despite a strong increase in Crown expenses and NZSF contributions since 1999/2000 and projections of further substantial increases.
The strongly performing economy has helped by providing large increases in revenue to cover substantial spending increases. Although restraint in withstanding calls to increase spending by even greater amounts has been admirable, there has nevertheless been a large
increase in spending – at least some of which is of dubious or unproven value.The following examples could be considered areas of imprudent government expenditure:1. Increased spending on Working forFamilies :: This effectively makes three quarters of working families recipients ofsocial welfare. This redistribution policy increases administration and bureaucracyand, some analysis suggests, creates poverty traps. Tax cuts would providegreater incentives for all families and individuals to work harder and retain earnings for investing or spending as they see fit.2. Interest free student loans ::This effectively provides subsidies for students to spend beyond their means without incentives to retire the debts as quickly as possible when they graduate.
Students are encouraged into debt in the knowledge they are not subject to the normal pressures of debt servicing other individuals face.3. Expanding local government rates rebates to low-income earners, irrespective of assets held :: This will reduce incentives on local government to seriously examine current expenditure and determine whether or not it is necessary for
the public good.4. Increasing superannuation payments ::Superannuation is not currently targeted atthose in greatest need, given that it is notsubject to income or assets testing.Improve the quality of regulationMost commentators consider the Public Finance Act to have lent support to the Reserve Bank in the sense that government spending and taxation policies have to operate within a relatively sound framework and focus on the medium term, rather than ad hoc pump priming of the economy in election years, which compounds inflationary pressures.
This requirement for tight controls on government spending may provide an incentive to shift more of the fiscal burden on to the private sector through regulation, thereby reducing the need for government to identify such expenditures in official budgetary processes.
This confirms the need for the Government to improve its regulatory processes through the adoption of a Regulatory Responsibility Act (or similar).The risks of not having such an Act to complement government spending are:1. Government may be encouraged to shift more and more of its fiscal