NZ Election 2020: Why this economist thinks 'Wall Street's gonna be okay, and Main Street's not'

An economist has called on the Government to do more of the heavy lifting when it comes to the economy, saying too much of the decision-making has been left to the Reserve Bank.

"Both have got very strong roles to play in regard to supporting the economy through a very different economic climate," Cameron Bagrie told The AM Show on Tuesday morning.

"Your monetary policy is obviously doing an awful lot of work in regard to putting money into people's pockets as interest rates come down. But a side-effect of monetary policy is it pushes up asset prices, it pushes up the housing market. That's creating a bit of a gap between the haves and the have-nots."

The Reserve Bank's monetary policy this year has seen it drop the official cash rate (OCR) to a record-low 0.25 percent, with expectations it'll go negative next year - the effect being to vastly drop the cost of borrowing.

The effect has been to keep the housing market afloat - earlier this year there were predictions values would plummet 10 percent, but they've gone the other way instead. 

"The Government has been doing an awful lot - $62 billion worth of relief through the COVID package," said Bagrie. 

"But it begs the question at the moment, if I look at PREFU economic forecast last week, they're still telling us we're expecting to have around 250000 people on the Jobseeker benefit four years out. But over the next four years the housing market is still expected to go pretty well - that tells me Wall Street's gonna be okay, and Main Street's not. 

"I'm not sure the mix is right. I'd like to see Government policy stepping up and deploying more and the Reserve Bank easing off a little bit." 

That means potentially more borrowing - money has never been cheaper, after all. While that's more up Labour's alley, there's an ACT policy Bagrie thinks could work wonders too - cutting GST.

ACT has proposed cutting GST from 15 to 10 percent for one year at a cost of $6 billion.

"You're going to get direct economic impetus then, you can crank up infrastructure spending, you can give more broader-based tax cuts, there's other spending increases you could do," said Bagrie, saying a GST cut would be superior to National's proposed temporary cuts to income tax.

Cameron Bagrie.
Cameron Bagrie. Photo credit: The AM Show

National wants to raid the $14 billion COVID rainy day fund to pay for its tax cuts. Bagrie says spending the money is a no-brainer - but perhaps not as income tax cuts. 

"The problem with tax cuts... is you tend to get a bit of a diluted effect because the money can often get wasted, or the money can get saved... 

"I'd be trying to get that money out into the economy pretty quickly and get the economy up and running, back on a steady keel. Now that's still a pretty big ask given the uncertainties we've got around the globe at the moment - we're seeing another flare-up of COVID particularly across Europe and markets haven't taken to that very kindly overnight. 

"But right here and now, the right policy response is for the Government not to be afraid of borrowing more." 

New Zealand's debt as a percentage of GDP is expected to hit 55 percent over the next few years - high by New Zealand historical standards, but still lower than many of our peers before the pandemic began.