New Zealand’s Monetary and Fiscal policies
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Published: Mon, 23 Jul 2018
- (a) (i) Inflation Targeting
An inflation targeting is a monetary approach used by government as a strategy to maintain the interest rate at a certain level. This normally involve up to two parties which are a government and a central bank that are responsible in keeping the price within a specific range. They would alter the interest rate in order to achieve favourable level of interest rate to keep away inflation in an economy. In New Zealand, the targeted inflation rate was 1 per cent to 3 per cent as desirable range (Reserved Bank of New Zealand, 2007).
However, this policy able to protect the business sectors in New Zealand especially the University education sector. Education was as crucial contributor to increase living standard of New Zealander. The University education sector was not much differ from other sector because it is like a business to offer employment and increase production growth. The goal of Reserved Bank of New Zealand set an inflation rate range of 1 per cent to 3 per cent is to maintain the equilibrium of price and avoid fluctuation (Parliamentary Library, 2002). As the price is stable, it will attract more foreign student to study in New Zealand and the demand of the New Zealand dollars would be increasing since the education system is comparable to world leading education.
(a) (ii) Policy Target Agreement
Policy Target Agreement is the mutual agreement between the Governor of the Reserved Bank of New Zealand and New Zealand Government. This agreement goal is to keep economy from minimum inflation and maintain the price stability. The Reserved Bank of New Zealand was also responsible in monitoring and measuring the level of prices. There is various way of measuring the inflation and Consumers Price Index (CPI) was one of the measuring tools used in the Policy Targets Agreement (Reserved Bank of New Zealand, 2007).
This tool will record the transaction of prices change from buying goods and services by New Zealand household and the percentage of the change will be the CPI inflation. Using this tool, the price of the currency would be under control and services price from University education sector is under supervision of the Reserved Bank of New Zealand. Reserved bank would maintain the inflation rates of 1 per cent to 2 per cent to avoid any inflation occur. The qualities of the New Zealand Education system itself are already famous among education system among the world, if the prices of the education services are low, it will attract more and more foreign student. Such agreement not even beneficial to education system itself but also bringing advantages to economy whereby the education system in New Zealand is comparable and competitive to other countries in term of services price.
(a) (iii) Official Cash Rate
Official Cash Rate was first introduced by New Zealand government in year 1999, it is the monetary policy used by Reserved Bank to control the inflation rate. Through Official Cash Rate method, the Reserved Bank able to control the short and long term of interest rate as well as the foreign exchange rate. As in Policy Target Agreement (PTA), both government and the Reserved Bank have obligated to meet the 2 per cent of inflation in future. However, the range defines in Policy Target Agreement which was signed during September 2012, should be achieve the price stability between 1 and 3 per cent average per midterm (Reserved Bank of New Zealand, 2007). In future, the Reserved Bank will increase Official Cash Rate if necessary aiming for 2 per cent rate of inflation in future.
(a) (iv) The overall impact on the economy and consequently to University education sector
In a nutshell, government and the Reserved Bank adopted the monetary policies to control the supply of money, it can be also saying that to manipulate the fluctuation of the interest rate and in the same time balancing the market price. In context of University Education sector, by set up a targeting inflation method through Policy Target Agreement could be beneficial.
The University education sector in New Zealand is moving toward to contribute more in growth of economy. As the University education sector growth is mainly depends on the quality of the education and also the attractive fees rate offered to student. When the Reserved Bank of New Zealand applying the monetary method, the interest rate will be maintaining in a stable range of 1 per cent to 2 per cent to avoid inflation occur (Reserved Bank of New Zealand, 2007). As these price of education is low, it attract foreign student from other countries to enroll into the local university of New Zealand. Such price make the universities of New Zealand a target country for foreign student that providing an A class education system in the same time offering affordable rate of fees. It will influence the demand of New Zealand dollar to be increase in the same time raising the value of the currency.
(b) (i) Explain the objectives of government
Basically, fiscal policy involves the choice made by government either spending the revenue or collecting the revenue through the tax imposed. It is mainly about how the government and manage its budget in order to stabilize the economy growth.
The main concern of fiscal policy is the price stability. In order to maintain the economic growth, a desirable level of price in New Zealand should be achieved because expensive good or services will not be affordable by consumers where this encourages in decrease of the demand level. The price should be remained in a reasonable level of acceptance by consumers to avoid any fall in demand where it discourage business to generate goods and services.
High rate of employment is also the main objective of fiscal policy. The high unemployment rate will lower the rate of production and it will influence the level of economic growth to drop. Hence, the government of New Zealand tends to increase the spending such as allocating budget invests in University education sector. The government is rooting for the universities to further expanding New Zealand economic by allocating budget invest in the tertiary education to increase number of graduates with skills required and rate of employment to boost the economy. About $42 million invested for the next 4 years to increase the tuition subsidy to selected courses (Tertiary Education Commission, 2012). Indirectly, it generates more employment by expanding the University education sector because it requires large number of workforce to run the sector.
In the other hand, fiscal policy encourage in foreign exchange earnings through exportation of goods or services such as tertiary education. The New Zealand government is enhancing the tertiary education system through Budget 2012 by focusing to improve the educational performance in order to expand this sector (Tertiary Education Commission, 2012). Through the focus given by government, the level of New Zealand education is increased and it attracts quite a number of foreign students from China for approximate 25,345 students and an increase of 2% from last year (New Zealand Education, 2014). These numbers prove that the higher number of foreign student the higher income could earns from foreign countries.
(b) (ii) Fiscal policy fine-tuning and its limitations
Through fiscal policy approach, government able utilizes this tool to adjust the interest rate and control the spending rate in order to boost the economy (Chirantan, 2014). This policy had its own limitation even though using fiscal policies could stabilize the economy.
Inflexibility of fiscal policy can be seen during changes in taxes or spending by government. The objective of fine tuning is to minimize the negative implication by apply the right policy at the right time depending on the state of economy during the different level of economy such as contraction or expansion (Pavlina R. Tcherneva, August 2013). A period of lengthy time could be taken when both political and moral reason to be taken as consideration. By boosting the aggregated demand would lower the rate of unemployment may contribute to inflation as the right shift of aggregate demand would cause rise in price. In the other hand, by shifting the aggregate demand to left would contribute to the increase of unemployment when there is inflation would rather cause dilemmas too.
The time lag in applying the approach could be one of the limitations of fiscal policy. It may take up a considerable amount of time to implement unlike monetary policy able to influence economy growth rate easily and time saving by adjusting the interest level. Besides, the fiscal policy implementation involves a comprehensive research to make sure of the economy conditions. The state of the economy might be not the same anymore when the policy is finally ready to be implemented. Government might be gathering the wrong and inaccurate information in such a short period of time and hence economy would suffer from deficit or inflation when the prediction went wrong.
(c) (i) Budget deficit
Budget deficit in an economy is an situation whereby the federal government spends more than it earn in revenues and causes a budget deficit. The reverse situation will generates a budget surplus as the government earns more revenue than spending. Both fiscal and monetary policies share the same goal which is maintaining the economy rate and achieve a steady economy growth. In fiscal policy, government will increase the tax to decrease the spending because when the goods are expensive, the aggregate demand shifted left and would cause the country to run a deficit. Monetary policy would use to control inflation as well as deflation by manipulating the interest rate. Unlike fiscal policy, the monetary policy will not enlarging the national debt by applying the approach to tune the interest rate to stabilize the economy (Expansionary Monetary Policy Does Not Raise the Budget Deficit, 2013).
(c) (ii) A Fully Funded Deficit
A fully funded deficit occurs when government expenses is fully funded by tax revenue. This is applicable in theory when there market is perfectly healthy in which the economy is in stabilize state. There are few options, government will either issuing bond or security for a time being to fund the economy. Such options will reduce the spending and boosting the economy. However, during deficit period government will adopt an expansionary fiscal policy to influence the aggregate demand such as supplying money to the economy to lower the currency value. Such move might result in inflation when the demand is higher than supply.
(c) (iii) Monetized deficit
Monetizing deficit approach is to finance the economy when there is a fiscal deficit in the economy. The government would sell bonds or security by financing the fiscal deficit. Implication from such approach will increase the debt of government. In monetized deficit scenario, the bank would be financing the government debt by producing extra banknotes. Inflation will be happen when the supply of the money is increase in the market and the value of the money will fall. This will help bank to keep targeted inflation rate in ideal range.
- (a) Trading internationally could of benefit and/or a disadvantage to the business sector.
The objective of the international trade is to maximize profits between the interchange of goods and services internationally. The international trade is not only involving the exchanging goods and services across the border, it also creates opportunities for the market to the whole new level. The supply and demand of the goods and services will be created along the international trade occur. In this fast growing economy, the University education sector is no doubt developing an important qualities and criteria on next generation in order to raise the economy level. To ensure producing more competitive and high quality next generation, New Zealand is one of the countries moving towards to achieve the top class of education among the world. The more foreign investments the higher opportunities to stimulates the economy through foreign direct investment.
Attracting more foreign investment opportunities will increase the number of universities by expanding the classes and branches worldwide. The government of New Zealand made an effort to attract foreign students such as offering US$2,000 to fund their flight to New Zealand through Education New Zealand Study Abroad Travel Awards (ENZTA) program (New Zealand Education, 2014). Thus, expanding the tertiary education sector will produce much more employment to meet the demands in the market. Higher number of lecturers and administration personnel will be needed to operate the sector. By the times, it could help government to achieve full employment goal.
- Current balance of payment figures for New Zealand and evaluate the implications of the figures
As we can refer from chart 1 and chart 2 from the Appendix A, Statistic New Zealand published the latest seasonally adjusted current account balance of $2 billion deficit in the quarter of June 2014. The amount of deficit is increase for further $1.4 billion since quarter of March 2014. The export of goods and services shown a fell for amount of $1.1 billion and was the main reason contributed to the total deficit value. Referred to chart 2, the balance of goods remains a surplus of $1,250 million in quarter of June 2014. For the year ended of June 2014, the current account shown deficit of $5.8 billion which is 2.5 per cent of the total GDP causes by the fall of export of goods and services. This is can be comparable to 2.7 per cent of GDP from the quarter of March which shown an recovery. New Zealand’s net international liability was recorded at $149.7 billion which equivalent to 65.3 per cent of GDP during 30 June 2014. There is slightly reduction of $1.4 billion from last quarter of March 2014. The external debt shown from the chart was increased by $2.0 billion to total of $142.3 billion to the latest quarter.
The high interest rate in New Zealand suspected contributed to the fall in exports of goods and services. This might explain that the fall in export is causes by the low demand of currency. When the currency is expensive, it tends to lower the demand and hence affected the currency value to shoot up. When this applies to New Zealand University education sector, the tuition fees would be relatively expensive than other country. However, the budget 2012 supports Government’s effort on improving the educational performance of students in tertiary education. Through the effort in budget 2012, they invested approximately $42 million to subsidy selected engineering courses for over 4 years (Tertiary Education Commission, 2012). Even though the falls in balance of payment are mainly contributed from the export of goods and services, the effort from government such as allocating the budget to subsidies the tertiary education sector will prove that the sector will continue to benefit to the economy.
- (i) ) The impact of exchange rate on the demand and supply of New Zealand dollars
The demand and supply was the variables to determine the exchange rates of currency. Shifting the aggregate demand to right will affect the price to rise and shifting supply to right will lower the price. Thus, higher demand of currency will contribute to high price of currency while excessive of supply contributed in low price of currency.
It is applicable to University Education sector and can be seen through budget 2012, government provides subsidies and incentive to enhance the education system and bring opportunities to attract foreign students. When there is certain reputation of New Zealand education system among the foreign market, it attracts more foreign to study in this country and the demand for New Zealand dollar will be increase. Since studying in New Zealand requires its currency as fees, it definitely attracts higher investment from the other country. Consequently, the demand of education in New Zealand market from foreign countries will raise the demand of New Zealand currency. The higher of the demand of education, the higher value of the currency
- (ii) ) The impact of exchange rate on the exports and imports
The aggregate demand of the exchange rates is influence by the effect if export and imports. If the exchange rate undergoes a rise, the exports will be cheaper and imports will be more expensive in other currencies. This could be inflationary situation in an economy if the price of import experience rises and make export is cheaper. This effect would increase demand of currency from overseas since the New Zealand dollars is relatively cheaper than other currency because they will find beneficial to their business. The demand is mainly depends on the price elasticity of demand for exports and hence influencing the exchange rate of currency.
- (iii) The impact of exchange rate on the balance of payments
All the payments receipt or pay from other countries is recorded as the balance of payments in a financial account. The financial account records all the transaction either from an individual to a size of business internationally. It involves the inflows and outflows of money for foreign investment in an economy. Generally, the currency value in a balance economy will be more attract more demand for it and hence leading an increase value of currency. When the balance of payment was in negative state, the economy accountability of the balance payment will decrease and it will influence the exchange rate to experience a falls. The scenario happens when there the supply of currency is higher than demand in the market.
- (iv)The impact of exchange rate on the monetary policy
In generally, monetary policy is used to maintain the economy level by manipulating the supplies of money and altering the interest rate. When facing inflation, the approach is used by central bank to increase the interest rate. Such attractive interest rate will attract foreign investor when the return is high and profitable. Hence, it increases the demand of the currency and boosting the level of exchange rate simultaneously. In short, the monetary policy influences the price of money by altering the interest rate to increase the demand. Such exchange rate is simply a reflection of foreign demand for a country currency.
Expansionary Monetary Policy Does Not Raise the Budget Deficit. (2013, October 15). Retrieved September 23, 2014, from Monetary Vs. Fiscal Policy: http://blog.supplysideliberal.com/post/64090184528/monetary-vs-fiscal-policy-expansionary-monetary.
Chirantan Basu. (2014, August 31). Business & Society. Retrieved September 24, 2014, from What Are the Four Most Important Limitations of Fiscal Policy: http://www.ehow.com/info_8512661_four-important-limitations-fiscal-policy.html
New Zealand Education. (2014, September 17). New Zealand Education. Retrieved September 22, 2014, from Market & Research : China: http://www.enz.govt.nz/markets-research/china
Pavlina R. Tcherneva. (August 2013). Reorienting Fiscal Policy. A Critical Assessment of Fiscal Fine, 1-27.
Reserved Bank of New Zealand. (2007, July). Monetary Policy. Retrieved September 23, 2014, from Reserved Bank of New Zealand: http://www.rbnz.govt.nz/monetary_policy/
Tertiary Education Commission. (2012, May 24). Tertiary Education Commission. Retrieved September 22, 2014, from Budget 2012 : Universities: http://www.tec.govt.nz/Funding/Budget/Budget-2012/Universities/
Source : Statistic New Zealand
Appendix B ; Source : Statistic New Zealand
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