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Salient: Victoria University Students' Paper. Vol. 30, No. 1. 1967.

Economy not cured

Economy not cured

Q: Will the Government's recent economic measures be sufficient to curb inflation and alleviate the balance of payments difficulties?

A: At this stage one cant tell precisely what the Government is doing. The reductions in subsidies and increased charges for government services alone are not, I believe, sufficient to curb inflation and certainly will not solve the balance of payments problem.

However, the Government is also taking action to restrain the growth of its own expenditure, but I don't know how far this restraint will go, and it will not be clear for some time yet.

If the Government does as it says and permits the money value of Government spending to rise by one per cent in 1967-8 compared with 196G-7, then, this, plus reduced sub-sidies, increased charges, the fall in farm incomes, and restrictions on credit, may well be sufficient to curb inflation. But I doubt if it will cure the balance of payments situation.

Q: What further action should the Government take?

A: The measures so far have not been aimed directly at the balance of payments problem, but I would like to See the Government impose more direct restraint on expenditure of overseas, exchange. This would mean stricter import licensing and higher taxation on purchases with a high overseas exchange content.

Professor F. W. Holmes talks to Nevil Gibson about the state of New Zealand's economy.

Head of the Economics department at Victoria, Professor Holmes was the first chairman of the Monetary and Economic Council.

The Government should enunciate a co-ordinated programme to boost overseas exchange earnings by offering more incentives through taxation and giving credit and import licences to the most efficient industries even if at some cost to less efficient industries,

Q: What do you consider the major weakness of New Zealand's economy?

A: The cause of the present problems is mainly the result of the Government's shortsighted budgetary policies. It has been unwilling to curb our desire to increase spending very rapidly and incomes in 1963-6 when export receipts were buoyant.

We have spent all the proceeds and more of these "boom years" leaving a low reserve of overseas exchange and reduced capacity to borrow.

The fall in wool prices late last year has greatly aggravated the balance of payments problem, but the problem was already serious before wool declined.

The basic concern of the economy in the short-run is the control of domestic inflation; in the long-run, future spending as a nation must be kept more closely in line with our long-run capacity to produce.

We must not slavishly follow upwards any short-run increase in overseas export prices. New Zealand must industrialise if we are to maintain employment and living standards, but in contrast to past policies we should pick winners, not losers, in secondary industry.

That is we must gradually remove protection from industries requiring high tariff protection or stringent controls on competitive imports, in order to give more help to industries able to earn overseas exchange or substitute for imports with very little protection.