Matt Nolan

December 07 MPS – OCR unchanged at 8.25%

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The December quarter monetary policy statement was released today. Alongside this they announced that the OCR would remain unchanged, as they believe “current level of the OCR remains consistent with future inflation outcomes of 1 to 3 percent on average over the medium term”. This times they give the feeling that tax cuts are incorporated in their view of inflation outcomes, however they still view the emissions trading scheme and financial market uncertainty as risks to their forecasts.

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Matt Nolan

Australian cash rate on hold – December 2007

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The Reserve Bank of Australia kept their target cash rate on hold yesterday. In a push to increase transparency, they now release a statement with every decisions, which is awesome. Yesterday’s statement was relatively neutral, however as my esteemed colleague CPW says, there is nothing to compare it too so its hard to tell exactly what the statement means. My guess is that the Bank is happy to stay on hold, until the risks associated with subprime worries in the US calm down.

At the same time the September GDP result came out, with a 1.0% seasonally adjusted increase in the September quarter, taking average annual growth to 3.4%. Although 1.0% for a quarter seems high, CPW informed me that this is what the market expected, and furthermore the growth in previous months had been revised down.

Will Taylor

Thoughts on the Warehouse Decision

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I found this point particularly interesting

“it is not possible to conclude that the relevant markets would be more competitive if the Warehouse Extra concept is pursued by the acquirer than if the Warehouse is not acquired”

I have always been of the opinion that the Extra concept would be much more effective in the hands of Woolworths or Foodstuffs due to the massive scale they have in the wholesale market. One of the supermarkets could then use the “halo” effect to the benefit of their grocery operations. I think this would lead to more competition than the status quo.

Another really interesting point is that the high court ditched the 5% price effect threshold in favor of 2% and still found that the acquisition wouldn’t substantially lessen competition. While this is interesting in it self, it also has profound implications for future mergers as the commission will have leeway to use different thresholds depending on the situation now that there is high court precedence for doing so

Matt Nolan

Are supermarkets too uncompetitive for Warehouse Extra?

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So the High Courts documents on the Warehouse merger ruling have been released. After skimming a couple of things I thought I would say something, then when I’ve actually read the document I can join in the criticism of it 🙂

It seems that the High Court overturned the Commerce Commissions decision as it felt that the Warehouse Extra concept would fail. As it would fail, it doesn’t matter whether one of the supermarkets purchases the company. Ok, thats cool, however they also go off and accept that there is probably tacit collusion between the two supermarket owners, Woolworths Ltd and Foodstuffs.

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Matt Nolan

Fat tax?

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Following the discuss on lower GST for healthy foods I feel it is appropriate to discuss the other side of the coin, a tax on inherently unhealthy food, a fat tax.

You know the type of foods I’m talking about, chocolate bars, chips, V’s (I can see all this on my desk, looks like this tax will hit me pretty hard 🙂 ). If there is a social cost to the consumption of these types of goods we should tax them, and send the funds to the place where the externality will fall.

In this case, drinking too much V will lead to me needing to use health services more than I would have with no V. In order to ensure a socially efficient outcome, V needs to be taxed, and the money needs to be sent to the hospital. This will lead to me reducing my consumption of V (not likely) or paying the value of the negative externality I impose on society (my health care bill) or a mix.

Now this tax is on the consumption decisions of people, so the level of the tax will depend on how much we believe the consumption of V’s adds to the cost of running health care in NZ (or any other externalities it may cause). If we are so keen on taxing smoking, fuel, and alcohol, then why aren’t we taxing Moro bars and V’s?

Update:  Here is an article that goes into (marginally) more detail about a fat tax.

Matt Nolan

Cut GST for fruit and veg?

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Over at Kiwiblog, Mr Farrar noticed a newspaper article on removing the GST tax from fruit and veg. I agree with him on both his points,

1) that the response of consumers to a 12.5% reduction in the price of fruit and veg will likely be small (items that only take up a small part of your household budget are inherently price-inelastic), and

2) that it is better to have a flat GST rate, as you are ensuring that the relative price of goods remains the same and minimise the cost of implementing the policy

However, the Massey Researchers also have a point (there is something I never thought I’d say 🙂 ), and it has to do with situations where the second point doesn’t hold, specifically when we don’t want the relative price of the goods to stay the same. This occurs if we have an externality.

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