Bernard Hickey: Now there's work to be done.

The winners of this weekend's election must answer some big questions being asked by investors and borrowers. Here are the top five questions as I see them:

What can be done about high mortgage rates?

The fixed mortgage rates that more than 85 per cent of New Zealand home borrowers rely on are unlikely to fall nearly as much as the official cash rate. The banks still depend on high international borrowing costs to set these rates. The government guarantee used to help refinance that debt will add to the cost. This will keep the interest rate pressure on homeowners and small businesses, meaning a quick

economic turnaround is unlikely. There is little the Government can directly do about this in the short term. Limiting the size of deficits to keep the pressure off interest rates - and making fundamental changes that increase productivity and reduce inflation - will help the country over the longer term.

How can we increase economic growth and pre-tax incomes?

New Zealand's core problem is GDP growth and incomes are too low. The only sustainable way to fix that is to increase productivity growth, which means increasing the output of goods and services per hour worked or dollar spent on capital at a faster rate. That requires better infrastructure, better education, better health, a more entrepreneurial approach to business, less wasteful spending on government

(and corporate) bureaucracies, and much larger businesses selling to a global market. Neither major party has proposed significant changes in economic policy to achieve this.

How can Kiwis be encouraged to spend less and save more?

One way is to get us saving automatically. KiwiSaver does that admirably and any new Government should be reinforcing and building on KiwiSaver's strong start, rather than undermining and tinkering with it. New Zealanders have to cut spending by about $1.5 billion a month to reduce our current account deficit to sustainable levels. Any Government should be talking about encouraging less spending, particularly on imported consumer goods and services, and more saving and spending on local infrastructure and capital investment. One way would be for the Government to offer infrastructure bonds to the retail investing public with relatively high interest rates.

What can be done to strengthen our capital markets?

Labour has started on this (way too late) with its taskforce. Fundamental questions about the strength and attractiveness of our stock and bond markets need to be answered. Can and should the NZX survive as an independent, locally owned stock market? It is a tool of our sovereignty and New Zealand investors and companies desperately need access to a broad, deep and easily accessible way to invest in
our companies and raise money from savers. But is the NZX the right vehicle?

What should be done to reduce greenhouse gas emissions?
The issue of how to reduce greenhouse gas emissions has gone quiet in recent months because of the immediate threat of a financial market meltdown and global recession. Many countries desperate to keep growing will put this on the backburner, including developing and developed economies. The expiring Kyoto agreement may be replaced with something more nebulous and easily ignored by many.

Should New Zealand be handicapping its growth to achieve a greenhouse gas reduction that will have no noticeable effect on the global climate and may be unnoticed by the rest of the world?

* Bernard Hickey is the managing editor of www.interest.co.nz, a website for investors and borrowers wanting free and independent news and information about interest rates, banks, finance companies and the economy.

Source: www.interest.co.nz

Posted: 9 Nov 2008