Labour Plans RBNZ Changes as Central Bank Becomes Poll Issue

New Zealand’s Labour Party can widen the central bank’s mandate without jeopardizing the control of inflation if it wins this year’s election, finance spokesman David Parker said.

Details of how Labour, the main opposition party, plans to change the Reserve Bank’s mandate will be announced within two months, Parker said in an interview in his parliamentary office in Wellington yesterday. Labour would force the central bank to focus on more than just inflation to help exporters, who are being hurt by an overvalued New Zealand dollar, he said.

“We’re not soft on inflation, but we think there are some systemic problems in the New Zealand economy that we can’t overcome without broadening the objectives of the Reserve Bank,” he said. “We’re not a radical bunch of loonies. We believe in an independent, full-service Reserve Bank.”

Monetary policy is shaping as a key battleground for the Sept. 20 election after RBNZ Governor Graeme Wheeler raised interest rates this month and said more increases are likely. While Prime Minister John Key’s National Party is the most popular in opinion polls, there’s a chance Labour could form the next government in partnership with the Green Party and the support of a smaller party such as New Zealand First. All of those parties advocate changing the central bank’s remit.

Parker and Labour leader David Cunliffe have pledged to upgrade the Reserve Bank Act, saying it gives Wheeler a “tunnel-vision mandate” to control inflation that ignores the damaging side effects for exporters. They have yet to explain exactly what changes they’re proposing and Parker refused to be drawn on details yesterday, citing political timing.

Price Stability

“We have price stability as the primary objective,” RBNZ Deputy Governor Grant Spencer said in response to questions after giving a speech in Hong Kong today. “The bank is happy with that framework.”

The 1989 Act says that the RBNZ’s primary task is to achieve and maintain “stability in the general level of prices.” The Policy Targets Agreement signed by the governor and the minister of finance currently states that the bank will focus on keeping future average inflation near the 2 percent midpoint of its target range.

“Monetary policy wasn’t written by Moses on a tablet of stone which is somehow sacrosanct and shouldn’t be changed forever,” Parker said. “It has changed through time and should change through time.”

Wheeler has said that adding objectives to the RBNZ’s mandate wouldn’t result in lower interest rates. Finance Minister Bill English, in an interview on TVNZ’s Q+A program on March 16, said Labour is searching for a “magic solution” through “jiggery-pokery with the Reserve Bank Act.”

‘Not Clear’

“It’s not clear what exactly they are proposing,” English said in an interview in Hong Kong yesterday. “We haven’t seen any convincing arguments that they have made for significant change.”

The proposed changes are part of a range of policies Labour would introduce to rebalance New Zealand’s economy, Parker said. They include making the state-sponsored retirement savings plan KiwiSaver universal, introducing a capital gains tax on assets such as investment properties and raising taxes for the highest income earners.

While the party hasn’t announced its final tax policy yet, Parker cited as a guide its policy for the last election, which was to raise the marginal tax rate to 39 cents in the dollar for people earning more than NZ$150,000 ($129,000) a year. The current top rate is 33 cents in the dollar.

‘Super Profits’

“We’re committed to having a higher tax rate for the highest income earners,” he said. Other than that, “we’re not envisaging major changes to corporate or individual tax rates.”

Labour would lead a fiscally responsible government committed to running surpluses, including in the coming fiscal year, Parker said.

Another key policy plank for Labour is its proposed restructuring of New Zealand’s electricity sector in response to the government’s partial privatization of three state-owned power generators.

The plan, spearheaded by Parker, is to introduce a regulator that would set the wholesale price of electricity, replacing the current market that prices power at the highest marginal bid to meet demand. That means hydro generators, which can produce electricity very cheaply, get paid a price set by higher-cost producers.

Parker said that’s fine as long as the “super profits” generated from public rivers go back to taxpayers via dividends to the government. That has now been compromised by the government’s share sales, he said.

“It’s not fair that there are billions of dollars of value being taken out of our rivers and put into the pockets of the few people that own those shares,” Parker said. “We philosophically think that’s wrong.”

Too much of the rewards from the New Zealand economy accrue to too few people, Parker said.

“We want a fairer distribution of income and assets.”