Restructuring the Economy – Part 1

For the next few weeks I want to focus on things that the government has to do to reorganise the budget and central government.  These two items make up more than 90 percent of the budget and now meaningful reform can take place without addressing these areas.

Currently, interest rates are still too high and the government needs to be more aggressive in reducing these rates.  The central bank cannot be allowed to operate independently of the Government and to pursue policies that are not in the interest of the country.  All parties admit that lower rates are needed and it is time for the BOJ to reduce rates dramatically in order to stimulate production.  The role of the government is not restricted to controlling inflation but also is to encourage the economy to expand. An expanding economy will provide more jobs, more foreign exchange and more revenue for the government.

However, borrowing money with no objective in mind will not ultimately help the economy.  In addition to borrowing at lower rates in order to pay off higher cost debt, the government should consider borrowing to finance projects that will add to the country’s GDP.  Government should be looking to increase agriculture production ten-fold.  We need to set a target to produce 75% of the food that we need or alternatively items that are available for export.  With the current global climate problems there is no assurance of being able to purchase sufficient supplies.  If we were to grow cotton or bio-diesel crops they would be fairly resistant to pradial larceny as they can’t be eaten or sold in their original growing state.

The financial sector needs to be encouraged to cut loan rates.  This might be achieved through fiscal policy by applying different tax rates to different types of income.  Thus income derived from holding government paper might be taxed at 50% whereas loans to the agriculture, tourism and manufacturing sectors would be taxed at 20%.  This would encourage the banks to reduce interest rates in order to pay lower taxes and discourage them from pursuing the policy of only buying Government papers.

In the next part of this series we will look at the need for alternative energies.