Speech: English - Auckland Chamber of Commerce
Hon Bill English
Minister of Finance
Speech to the Auckland Chamber of Commerce and Massey University
Heritage Hotel, Auckland
Embargoed until 1pm
Wednesday February 27 2013
Good afternoon. It’s a pleasure to be with you again today.
My thanks to Michael and the Auckland Chamber of Commerce, and Steve and Massey University, for inviting me back to this annual event.
This is the fourth time I’ve spoken at this forum since becoming Minister of Finance.
When I first spoke to you, the world was very much in a state of crisis. We are still seeing the aftershocks of that play out in Europe and the United States.
New Zealand was struggling out of a recession that started in early 2008 - well before the rest of the world.
We faced many years of large fiscal deficits and rising debt.
And, although we didn’t know it at the time, Christchurch was soon to be hit by a series of devastating earthquakes.
While the global economic situation still remains uncertain at best, here in New Zealand we are making good progress.
The economy is growing and we’re on track to surplus.
Business confidence is improving and our companies are becoming more competitive.
Wages are growing and inflation is low. Net household disposable income is around 20 per cent higher than it was four years ago.
Compared to mid-2009, over 60,000 more Kiwis have jobs – although the unemployment rate remains too high.
Interest rates are at 50-year lows and households are saving more.
And the $30 billion Christchurch rebuild is well underway, with considerable help from New Zealand taxpayers.
Over the past four years, the Government has embarked on a wide-ranging programme of sensible economic and fiscal management.
We’ve identified the ingredients needed to attract the productive investment required to support jobs and higher incomes, and help families get ahead.
And we have chosen a moderate but persistent rate of change. That has allowed us to take people along with us.
For instance, this year the Government will move to make significant change to the Resource Management Act, introduce new housing policies and implement a new framework for the use of water.
And, as you know, we’re awaiting a Supreme Court decision that we hope will allow us to press ahead with selling up to 49 per cent of our electricity companies.
I’ll come back to the outlook and the Government’s priorities for this year in a few minutes.
But first, I want to diverge and tell you a story about the New Zealand rock lobster industry.
Investing in high technology exporting
The lobster industry has invested heavily over the past two decades to improve the value of the crayfish harvested off the Fiordland coast.
Back in the 1980s, lobsters – or crayfish as we know them - were generally tailed, frozen and exported mainly to the United States. The bodies were discarded as waste.
The Fiordland Lobster Company is part of the industry-wide transformation that has happened since then.
The company is run out of a small office in Te Anau and has become a market leader in live crayfish exports to high-end customers in Asia, the Middle East and Europe.
It was set up in 1987 as a partnership between 15 Fiordland fishermen and seafood processor Mount Maunganui Seafoods.
The company now exports more than 800 tonnes of lobster a year and its annual revenue tops US$50 million.
Including casual workers, it employs up to 60 staff at the peak of each season.
This is not just a story about clever exporting.
It’s a story firstly about the company’s determination to manage the recovery of crayfish fisheries and then maintaining them at sustainable levels.
It’s also a story about careful and meticulous development of intellectual property and use of technology over more than two decades.
In the case of Fiordland Lobster, a key to its success is keeping the crayfish alive and in premium condition until they reach their overseas customers.
That is no small challenge. Over a number of years, it has invested heavily in research and development to produce holding tanks that are controlled to provide ideal water conditions, where the crayfish spend 24 to 48 hours before being packed for export.
They land at their destinations alive and command a premium price.
It shows that at a time of a relatively high exchange rate, there is no distinction between so-called commodity and high-tech exports.
All New Zealand exporters have to be smart to succeed – whatever their product or service.
We have hundreds more Kiwi businesses investing and growing like the Fiordland Lobster Company.
Becoming a magnet for investment
We need more of them. As the Prime Minister said last month, New Zealand needs to be a magnet for investment.
That’s how we’ll create new jobs and higher incomes.
That’s investment by individuals and small businesses, as well as big businesses. And it’s investment by people from overseas as well as Kiwis.
Real growth doesn’t happen until one more business invests another dollar, sells a better product or service, and hires another person.
New Zealand lost competitiveness in the mid-2000s, when growth was built on more debt, unsustainable consumption and housing speculation, and large increases in government spending.
So over the past four years, the National-led Government has taken action on a number of fronts to help attract investment and support business growth.
There is no single silver bullet that can achieve this.
Instead, we must literally do hundreds of things well, year after year.
We’ve reduced tax on work, savings and company profits, while increasing taxes on property investment and consumption.
We’ve introduced voluntary 90-day trials and a new starting out wage as part of a labour law package that makes it easier for businesses to employ new staff.
We will invest significantly in welfare reforms to support more beneficiaries into work.
We will invest billions of dollars more in modern infrastructure such as roads, rail, ultra-fast broadband.
We will finish the metro-rail replacement and the Waterview project in Auckland, and get underway with Transmission Gully near Wellington.
We will continue our relentless effort to cut red tape and improve regulations that were getting in the way of businesses and households – such as reducing warrant of fitness requirements and reducing the cost of passports.
We’ve demanded better public services and a $1 billion dividend over three years from government agencies. For example, last year ACC reduced levies on households and businesses by more than $600 million.
We will ensure young New Zealanders receive relevant, future-focused skills through National Standards, and improved transition for teenagers from school to work and training.
We will invest in in 14,000 more apprenticeships over the next five years.
For the first 10,000 apprentices who enrol, the Government will pay $1,000 towards their tools and off-job costs, or $2,000 if they are in priority construction trades.
We will continue to invest record sums in science and innovation, and we will tackle some of the biggest challenges facing New Zealand through the new National Science Challenges.
We will pursue high-quality trade agreements to improve global market access for New Zealand’s goods and services.
We are currently negotiating free trade agreements with the 10 other countries in the Trans-Pacific Partnership, including the United States, and separately with a number of other countries including India, Russia and Korea.
And the Government will commit around $13 billion to support the rebuilding of Christchurch.
So this Government is strongly committed to creating an environment that encourages investment and business growth.
And we will continue working to move the economy away from excessive borrowing, consumption and housing speculation.
We have pulled all of this together in the Business Growth Agenda work programme.
Working closely with businesses, ministers have issued progress reports detailing a large number of initiatives across six areas:
• skills and safe workplaces
• natural resources
• and capital markets
I would like to acknowledge the contribution business, local government and unions have made to policies set out in these documents.
I also invite further ideas we can pick up to support investment, jobs and better incomes.
This morning here in Auckland, I was joined by colleagues Steven Joyce and Craig Foss to issue the sixth and final Business Growth Agenda progress report, covering capital markets.
It sets out 50 measures that will help support well-functioning capital markets, which go hand-in-hand with attracting productive investment.
One of the most important contributions the Government is making to improve capital markets is the sale of minority shareholdings in its energy companies and Air New Zealand.
Subject to a decision from the Supreme Court on issues around water rights, Mighty River Power will be the first share offer in the programme in the first half of this year.
This will be a significant shot in the arm for New Zealand’s capital markets.
As we’ve promised, New Zealanders will be at the front of the queue for shares.
Including the Government’s majority stakes, ministers expect 85-90 per cent of the shares across the programme to be held by New Zealanders, after the IPOs.
We will make it as easy as
possible for New Zealanders to get access to information,
register their interest and buy shares.
Providing financial system stability
I now want to talk about another important area where the Government is working to help give businesses the confidence to invest and grow.
This is the area of financial system stability. It is about protecting the economy from periods of excessive growth in credit and asset prices and also about protecting the system from institutional failures.
In recent years, we have seen the damage these periods of credit growth have caused through excessive household borrowing that created house price bubbles.
This is not unique to New Zealand.
Excessive credit growth, and a subsequent bust, was at the heart of the most recent Global Financial Crisis.
In many ways, New Zealand was fortunate. While we experienced a large credit cycle, our core banking sector did not suffer from the kind of bust seen in other countries.
But we cannot be complacent. We need to learn from the experiences of other countries and ensure we are doing all we can to preserve the stability of our financial system.
Over the next several weeks, the Reserve Bank will consult on its proposals to use more tools to help ensure financial stability.
They will not be the answer to all problems created by excessive credit cycles. But they will certainly help at the margins.
Under these proposals, the Reserve Bank will have a greater ability to influence the amount of lending done by banks and other financial institutions.
This might include
requiring lenders to:
• Hold additional capital on their balance sheet as a buffer during an economy-wide credit boom.
• Hold additional capital against loans in specific sectors if risks emerge in those sectors.
• Adjust their funding ratios to use more stable sources of funding to avoid the impact of short-term funding shortages.
• Restrict high loan-to-value ratio lending in the housing sector.
I don't want to prejudge the consultation process today. But I will explain why the Government is considering formalising the use of these tools.
Since the Global Financial Crisis, the Reserve Bank has laid out new requirements to encourage banks to strengthen their balance sheets, in terms of both capital and liquidity buffers.
Consistent with the new international rules to hold more capital, the Reserve Bank is already implementing some of these measures.
After several years of discussion against the background of an international debate on the same issues, the Government will formalise the policy and ensure the decision making process is transparent.
As I’ve said, it is intended to help manage excesses in credit cycles, as occurred in the lead up to the Global Financial Crisis.
In particular, we want to avoid a strong upswing in asset values and any unsustainable growth in borrowing well in excess of economic growth.
The Government’s interest in slowing this sort of cycle is underlined by the experiences that other countries continue to face as a result of the GFC.
The effect of the cycle unwinding can be devastating. We see economies around the world that have not yet recovered to the same level of economic activity as before the GFC.
Millions of people have suffered from real income reductions and significantly reduced public services.
Some economies face many more years of difficult adjustment to reduce debt and reignite income and job growth.
The social and economic costs of credit excesses are very high and we should take practical measures to avoid them.
Another area the Government is interested in, with regard to improving financial stability, is minimising the potential cost of bank failures.
Other economies have been crushed by the burden of bailing out financially stressed banks during the GFC.
New Zealand has a particular concentration of financial activity in a handful of large banks.
The actions of governments through the GFC may have created an assumption that banks under threat will always be bailed out.
This attitude in itself could make banks less worried about taking risks if they expect the taxpayer to step in when needed.
Bank owners can collect the profits and pass on the losses to taxpayers.
This is an unfair burden on taxpayers and a distortion of sound incentives in our financial system.
The ‘Too Big To Fail’ problem also represents a large contingent liability for taxpayers.
In my view, we should do as much as we can to reduce these risks to taxpayers, and hand more of the costs and incentives back to the financial system.
Banks and other lenders will then take more care if they face all the consequences of their decisions.
Effectively dealing with
this issue will firstly mean more safety buffers for banks
and therefore less risk. This is where financial stability
instruments can play an important role.
Secondly, it means having effective structures in place for dealing with any bank failures.
The Reserve Bank’s Open Bank Resolution - or OBR – mechanism is designed to quickly spread the losses of a failing bank across shareholders and creditors. This allows it to stay in business without a government bailout.
This is an important mechanism, and will reduce the likelihood of taxpayers having to bail out a failing bank.
There will be plenty of discussion about how the new financial stability tools will affect monetary policy.
They are not a replacement for interest rates as the principal tool of monetary policy, although the two policy frameworks will interact.
In the same way the Reserve Bank takes into account Government tax and spending policy in setting interest rates, the Bank will also take into account any effect of using these tools.
The credibility of these tools will hinge on their use by an independent Reserve Bank.
As you know, benchmark interest rates are set independently by the Reserve Bank.
Decisions about loan-to-value ratios and bank funding and capital requirements should also be made by an independent Reserve Bank.
The temptation for some politicians to fiddle with the economy for short-term gain at the expense of long-term pain would be too great.
In terms of the next steps, the Reserve Bank will publish a consultation paper next month and invite submissions and comments on the proposed financial stability framework.
I invite all interested groups to provide feedback.
The Reserve Bank and Treasury will finalise arrangements and I expect to sign of a memorandum of understanding with Reserve Bank Governor Graeme Wheeler by the middle of this year.
There are some expectations that these tools will be used immediately to dampen the Auckland housing market. Those decisions will be in the hands of the Reserve Bank.
The greatest influence on the housing market will remain interest rates and supply constraints created by the planning system.
Later this year, the Government will have more to say about how the financial stability tools will work alongside policies on more flexible supply in the housing market and social housing reform.
So you can see that the Government is busy, focused and taking action across the many areas needed to boost growth, investment and jobs.
We’ve set out a clear programme and we are delivering on it.
Budget 2013 will be about taking the next steps in that programme – and particularly in areas that help build the business growth and investment needed to support more jobs and higher incomes.
We are making good progress. Many other countries, struggling with too much debt and little growth, would value being in New Zealand’s position right now.
Now is not the time to put that progress at risk by changing direction in some misguided search for simplistic quick fixes to our challenges. They don’t exist.
Now is the time for sensible economic management and strong, stable leadership.
John Key’s National-led Government is providing that.
stick to our plan, I’m confident that we will build the
brighter future New Zealanders deserve.