Jan 20, 2009
Peter Lyons
Peter Lyons
Mr Key's recent announcement that his tax cuts and the ability of the Reserve Bank to further cut interest rates should mitigate some of damage provides little assurance. Tax cuts are unlikely to provide a great deal of stimulus to the economy for several reasons.
If the cuts are used for spending, much of it will be on imports, therefore helping other economies rather than our own. More likely the loss of business and consumers' confidence will mean the cuts will be used for savings or reducing debt levels as people fear for their job security.
The Reserve Bank's ability to stimulate the economy through interest rate cuts is also limited and questionable. The idea is that interest rate cuts will allow the banks to increase their lending, but as mentioned there is a lack of suitable borrowers and sound collateral. Given that much of bank lending is for housing, it is difficult to see how further debt-fuelled house buying will help us out of the current situation. It may make matters worse as more Kiwis become indebted to buy an asset that is declining in price.
If the cuts are used for spending, much of it will be on imports, therefore helping other economies rather than our own. More likely the loss of business and consumers' confidence will mean the cuts will be used for savings or reducing debt levels as people fear for their job security.
The Reserve Bank's ability to stimulate the economy through interest rate cuts is also limited and questionable. The idea is that interest rate cuts will allow the banks to increase their lending, but as mentioned there is a lack of suitable borrowers and sound collateral. Given that much of bank lending is for housing, it is difficult to see how further debt-fuelled house buying will help us out of the current situation. It may make matters worse as more Kiwis become indebted to buy an asset that is declining in price.
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