LEADER’S OFFICE 16TH FLOOR

Rt Hon Winston Peters Speech –

An address by Rt Hon Winston to the Wellington Branch of the Institute of Financial Planners' Legal and Financial Forum on Thursday 10 May

Crisis, What Crisis?

Thank you for invitation to again speak to your Forum.

Yours is a critical industry grappling with issues that are at the cutting edge of our economy.

New Zealand's economy effectively operates at two levels.

On one level we have an economy that has some positive macro indicators.

Unemployment is low, growth has been steady, if not spectacular, inflation is within the acceptable band of zero to three percent, wages are headed in the right direction and a slue of other indicators would suggest all is well.

This often acts as a façade for those aspects of our economy which are reaching crisis point and threaten our long term sustainability.

Our current account deficit is now at frightening levels.

As Statistics New Zealand notes, at the year ended December 2006, our current account deficit was $14.4 billion or 9% of GDP.

And the reason for this huge deficit and its continued growth, Statistics New Zealand tells us, is "mostly due to higher earning by foreign investors on their New Zealand investments".

In other words, we are helping make other countries rich, while weakening our own economy.

In fact the situation is even worse when you consider that it is the savings of foreigners which largely make up these investments.

We are working to ensure that the Australians, Canadians, Japanese and others can have a secure retirement.

And you can't blame them for doing it because our economy is geared towards promoting this type of imbalance.

In the absence of any large scale savings regime or any meaningful controls over foreign investment, foreign interests have embarked on a systematic takeover of our economy.

There is a term for what we have allowed to occur – it is called economic subservience.

We are enslaved by debt to foreign investors.

And this debt is seductive.

The cheap big screen TVs, and new cars.

The cheap holidays and access to entertainment.

All propped up by easy money and credit cards.

The façade becomes even greater when we indulge further because of rapidly rising house prices which create an artificial sense of prosperity.

Of course we all want a first world lifestyle.

But when it is increasingly based on debt, it is an illusion which is destined to disappoint in the long term.

This position is simply not sustainable.

The same economic statistics show that New Zealand's international liabilities in December 2006 were $143 billion – and growing.

Now to put that debt into perspective, our GDP – how much we earn as a nation – in the same December quarter was $160.2 billion.

We are barely making enough to cover our debts so it is little wonder we aren't growing as fast as we should be.

This debt is like a huge handbrake on the economy.

If we were to ask ourselves why it is that foreign investors find New Zealand so appealing, given that they are not resident here and so aren't in it for the lifestyle choice, a few further economics statistics provide at least some of the answers.

The most obvious are interest rates – the highest in the developed world.

On 26 April the Reserve Bank Governor raised interest rates again to bring them to 7.75%.

These rates are simply too good to resist for foreign investors and currency traders.

The net result, as we have all seen, is that in an effort to take advantage of these rates our dollar becomes more and more valuable and is now, again, reaching record high levels.

Now, to be fair, interest rates alone are not the sole factor influencing our high dollar. The relative strength of our economy and currency compared to other economies is also a critical factor.

But interest rates are the primary driver.

Now the governor of the Reserve Bank tells us he is raising interest rates in order to dampen the housing market.

Great in theory.

However, again, a quiet review of the evidence highlights that it is having minimal impact.

Why? Because it is factors beyond interest rates which are driving up house prices.

As Auckland's Mayor noted recently, immigration is the primary driver of demand for housing, not interest rates.

The net effect of all of this is plain to see.

By only providing the governor of the Reserve Bank with one blunt instrument – interest rates – to tackle one facet of the economy – inflation – significant and detrimental side effects have eventuated.

Now let's go back to where we all started – the current account deficit.

There are really only two long-term policy solutions which will redress this huge imbalance and the associated debt ratios.

The first is a comprehensive long term saving strategy aimed at building a substantial savings and investment base.

New Zealand was so timid and so slow to embrace this concept that we now lag behind so many developed nations in building our own savings base.

One need only consider the oft-recited story of the Australian compulsory savings policy.

Had we gone down that path in the 1990s, we too would be the envy of the developed world as it would be our money looking for quality investments in offshore accounts rather than the other way around.

It was eminent US economist John Kenneth Galbraith who said: "in economics, the majority is always wrong".

While it is a stretch to claim that his statement is always right, it has certainly been the case until very recently in relation to compulsory savings.

If we in New Zealand First could receive a dollar for every time people now lament to us "if only New Zealand had adopted compulsory superannuation in 1997". If we had then, we could probably match and pass all the secret money that came the National party's way at the last election.

But alas, the sabotage effort by Shipley and co worked against this serious initiative meaning that we are now left with the "if only" scenario.

Now to give credit where it is due, the Cullen fund, with the built in potential to shift to individual accounts, and the KiwiSaver initiative are steps in the right direction.

But neither really quite goes far enough.

Australian workers, as a bare minimum, are now saving at least 9% of their incomes in compulsory schemes.

It is now an accepted part of their economic psyche.

Until we can replicate that type of record we will always lag behind.

Given a recent Herald poll highlighted its growing acceptance here, with 63% support, now is the time to be bold and take further steps in that direction.

The second pressing matter is the need for a substantial rewrite of the Reserve Bank Act.

If we do not arrest the negative impact of interest rates on our dollar, and therefore our export potential, then we deprive ourselves of much needed income to address our current account deficit.

Put simply, economically speaking, we export or we die.

The Reserve Bank Act is a relic of the Douglas/Richardson era which must be brought into the 21st Century.

You see, when your criteria is to satisfy interests from outside New Zealand and is couched in ideologically pure terms, you cannot act in the country's best interests.

This was always the fundamental failing of the Douglas/Richardson reforms – many weren't in New Zealand's best interests.

The Act itself was promoted by former Douglas protégé David Caygill and was imported as part of the monetarist mantra of the Washington consensus.

With their origins in a totally different economy, they were never our own ideas and they were never fully suited to New Zealand.

Now before anybody gets the notion that we are endorsing high inflation here we are not.

But surely the Reserve Bank Act can be updated to ensure that other critical economic indicators are factored into monetary policy decisions.

For example, the Policy Target Agreement within the Act sets a range of 0 to 3% as acceptable inflation.

Why can we not set a range for the New Zealand dollar, for growth, and for employment, for manufacturing and exports, which ensures those critical factors are not ignored when setting monetary policy?

We must also give the governor of the Reserve Bank more tools, such as enhancing his capacity, which already exists, to intervene when the currency reaches unacceptable levels.

This would avoid the situation where the impact of monetary policy on foreign exchange is so pronounced and so detrimental that the side effect of seeking price stability creates a crisis within our critical export sector.

We must also recognise the interdependence between monetary and fiscal policy. They should be working in harmony, not against each other.

Now this will mean being innovative and bold – being prepared to step outside the status quo.

It was the French social commentator André Siegfried who described New Zealand as a social laboratory in the early 1900s.

It is a tendency which we have never really abandoned – sometimes to our detriment, such as in the 1980s and early 90s.

We are a nation which has not been afraid to adapt to change and to modify as our circumstances have required it.

Well if we are to compete internationally we will have to change again.

We must be courageous and take the concrete steps of building a long-term savings base and amending the Reserve Bank Act to ensure our monetary policy is in New Zealand's economic interests.

Now in conclusion, it is worth making two critical points here. While National and Labour have long recognised these issues, neither has been prepared to take the strong steps needed to address them.

Bill English has come out and said that National will not be participating in talks over monetary policy. This is no great loss. National has never had an open mind on this matter or the ability to find constructive solutions.

The second point is this. One party has had the policy solutions to these problems for some time.

The commentators are only now recognising the sense of compulsory savings and some are even tentatively recognising the need for a rewrite of the Reserve Bank Act.

Only one party has been patient and prepared to wait while others caught up with our thinking.

Well now more than ever this country needs New Zealand First and its economic prescription.

And we will be singing from this song sheet long and loud in the lead up to the next election.

These are ideas worth fighting for, just as this country's economic future is worth fighting for.

And so fight we will – to 2008 and beyond.

ENDS

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