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Time to Ditch the Kiwi -- Richard Prebble

Time to Ditch the Kiwi

Wednesday 3 Dec 2003
Richard Prebble
Speeches -- Economy

Speech to Karori Rotary Club, Wellington
Hon Richard Prebble
Leader ACT NZ
Tuesday 2nd December 2003

On Monday the Kiwi dollar hit 64 cents. The Kiwi started 2003 at 52 cents. Exporters are hurting.

Manufacturers normally work on a profit margin of just 6 per cent.

How can you export when the currency is so volatile? I have stories of manufacturers who have products that their overseas customers just won't now accept.

Yesterday I spoke with a successful yacht maker. He is one of the America's cup successes. He told me of a luxury yacht part that costs $3 million dollars to make and over six months to produce.

He said, "I am looking at a big loss on the sale and I have workers who I have now just three weeks work. The British firms that 40% export to will no longer accept my price." Of course, with any rise in the value of the dollar there is a corresponding benefit.

Tourism is looking at a boom year. Air New Zealand's profit forecast is being recast optimistically every week.

The price of imports for example and fertiliser is falling.

Fertiliser prices fell 10 per cent last week.

The drop in exports and the import boom is resulting in a flood of imports. For example, the Parliamentary library says there are 2,500 new car registrations a week in Auckland.

To put the exchange rate into personal terms. I have just returned from a trip to the USA.

The change in exchange rate means that my American Express bills are lower than I budget for - the first time that has happened to me. I predict kiwis are going to travel overseas in record numbers. So it is encouraging not just the country but ourselves to live beyond our means.

We cannot do what Dr Cullen has done. He has a surplus by over taxing us. By not adjusting tax rates he has put 18 per cent of the work force into the top tax bracket.

The cheap imports lower the CPI to below 3% but internal inflation is now serious just look at house prices.

We are financing this by increasing our mortgages. It is a crash waiting to happen. On a household basis, related to our GDP, we have never been more in debt, New Zealand has the most indebted households in the world in relation to our income.

On Thursday Governor Bollard has a very tough decision whether to increase interest rates. Each week we do a poll in ACT's email newsletter, which goes to many of the countries opinion leaders.

Interestingly the "Letter" readers are evenly divided with 52% being against an interest rate rise and 48% being in favour. The business press say it's a no brainer. Inflation is below 3%. Increased interest rates might increase the value of the Kiwi by attracting speculative capital.

So no increase.

If Governor Bollard believes the house market overheated, then jawboning won't work. It's the baby boomers that are driving up the price of housing, having been burnt in the 1980's in the share market; my generation now invests in property. Well not me, but I do understand why.

A 10% rise in Wellington house prices in a month is a bubble.

If Dr Cullen and Dr Brash won't say that - then I guess that ACT's role is to tell it as it is. Then we have Dr Cullen, `musing' that the government has options to lower the value of the Kiwi.

In Parliament today, in response to my challenge to name one of the options, the government claims to have to lower the dollar, Dr Cullen said the Reserve Bank could intervene.

In laymen's language, that is a suggestion that the Reserve Bank buy and sell millions of dollars on the currency market to drive the Kiwi down.

I am the only finance minister left in parliament who has held office when the Reserve Bank used to intervene to protect the currency.

Hundreds of millions of dollars was lost, some times in just 24 hours.

The fact is that currency speculators have more money than the New Zealand government.

Speculators love it when the Reserve Bank intervenes because the bank by holding the dollar to a value means the speculator cannot lose.

Under a floating exchange rate, a speculator who for example bets on the dollar rising, could lose a great deal of money.

If Dr Cullen is going to order the Reserve Bank to risk the taxpayer's money on currency speculation, then this is an issue that deserves public debate.

The fact is 87% of business leaders do not believe the government can do anything. Most business leaders realize that all options to lower the Kiwi dollar cause more harm than good.

"Stop all immigration", New Zealand First suggested today.

"A capital tax on Equity", the Greens suggested in parliament today.

New Labour laws making it even harder to employ staff seems to be Labour's option this week.

Any measure can only lower the dollar by doing economic damage to the economy. Business believes that the volatile dollar is a fact of life.

All we can do is be more productive. Fortunately there is still much upside. New Zealand can be more productive. Unfortunately the government is working to make us less productive. Trade union laws, ACC monopoly, RMA, compliance costs and local government is just legalised terrorism and extortion.

ACT's pro-business proposals of low tax and a pro-business environment will help keep the country competitive.

But there is an answer to currency volatility.

Both old parties know the Kiwi is not a viable currency.

The Kiwi is the OECD's smallest currency. Actually it's Iceland's currency but as they are in the EC, Iceland does not count. The Kiwi's volatility is increasing. The average movement is 20 per cent a year.

So if the Kiwi finishes the year at say 64 cents, then by next year it will be in a band from a high of 75 cents to a low of 53 cents. Who wants to be an exporter with that sort of risk? Some of the world's biggest currencies, the Deutschmark, the Franc, the Lira, have all been abandoned for the Euro. If Germany, the world's third largest economy thinks it is too small to go it alone, then why do we think New Zealand can go alone.

Here are some facts.

New Zealand has only had it's own currency for 70 years.

For our first 90 years we used Sterling and did very very well.

A hundred years ago, using Sterling we had the highest standard of living in the world. Next fact. A study by Treasury has established that running our own currency adds a 2 per cent risk premium to every loan. I mean every loan. So the government pays an extra 2% on its loans.

Every business on their loans.

We all pay 2% extra on our mortgages and every credit card charges an extra 2%. The actual cost is billions of extra cost on taxpayers, businesses, homeowners and consumers. If we adopted the US dollar or the Euro, this currency risk would go, and interest rates would fall 2%. Adopting the Aussie would not help because they are the next smallest currency.

The volatile Kiwi is damaging the export sector.

Having our own currency is an issue we should be examining.

Neither of the two old parties have the courage to do so, even though I believe both Dr Cullen and Dr Brash think the Kiwi is a failed currency. Is having a Whio on the ten-dollar note worth increasing our mortgage costs? I think not. ACT is the party of new ideas and says lets have a real debate over the real value of having our own currency.

For more information visit ACT online at or contact the ACT Parliamentary Office at

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