BILL ENGLISH TALKS TO GUYON ESPINER ON TVNZ’s Q+A
Sunday 5th April 2009: Q+A’s Guyon Espiner interviews Finance Minister, Bill English.

Points of interest:

New Zealand’s need to “market itself to lenders” if it wants to raise $40 billion over the next three years

New Zealand “shouldn’t be stood over by credit rating agencies… I don’t think they will [downgrade us].”

We have seen some “immoral capitalism [in New Zealand] and we could have done a better job”.

2010/11 tax cuts and Super Fund contributions: no guarantees, no decision before the Budget.

Super Fund has invested in “riskier assets”.

John Key’s cycleway: “we won't be spending 50 million dollars on it this year or next year or the year after.”

“…one of the features of this recession is that we're unlikely to aggressively grow out of it.”

The interview has been transcribed below. The full length video interview with Bill English and Paul Holmes’s interview with Helen Clark & Peter Davis as well as ‘The week that was’ with Paul Holmes, Therese Arseneau, Mike Moore and Fran O’Sullivan can be seen on tvnz.co.nz at:

http://tvnz.co.nz/q-and-a-news

BILL ENGLISH interviewed by GUYON ESPINER

GUYON Well Bill English thank you very much for coming in and joining us on Q + A, we've us had the G20 Meeting the world's most powerful economies, now John Key wrote to Gordon Brown the British Prime Minister before that meeting outlining two factors that he thought may constrain New Zealand's borrowing He says with the increased numbers of state owned banks in the UK and the United States and the big stimulus packages that those economies are embarking on New Zealand may not be able to actually borrow. Are you concerned about New Zealand's ability to borrow in this environment?

BILL ENGLISH – Finance Minister
Well I think it could be more difficult and that is why we need to pay a good deal of attention to how New Zealand's marketing itself to the lenders, they need to believe that we are able to obviously repay the debt but we want to go further than that and have a distinctive New Zealand story.

GUYON What do you mean by that how are we marketing ourselves to the international credit rating agencies, the people who will determine whether we can borrow the 40 billion dollars that you're wanting to borrow over the next three years?

Well if you think about it the relative position of New Zealand, there's a lot of countries out there who have got much higher debt levels who have bigger deficits, it's our job to make sure that New Zealand is able to constrain its debt raising so that it's quite clear that we're a good credit risk to constrain our deficits so that it's quite clear that the New Zealand government has control of its expenditure, and then they can put us alongside other countries where like UK the US and any number of smaller European countries where they're in real trouble.

GUYON So that’s quite interesting, so a lot of this pruning back of government spending, this restraint that you're quite vocal about, is that aimed at the audience of the international credit rating agencies?

BILL Well no, first of all it's actually aimed at the problem and the problem is potentially that we have debt that gets out of control, if that debt gets too high it means the next generation has to have a lower standard of living in order to pay the bills that we're running up now, but the ratings agencies are I suppose the second audience, because now that the government guarantee exists for banks the government's credit rating has become everyone's credit rating, so it's more important than it used to be.

GUYON How important is it, we had the respected economic forecasters' BERL this week saying the international credit rating agencies have blood on their hands they are the people who gave the positive ratings to these financial instruments that are now listed as toxic assets on balance sheets, should we actually be paying heed to these rating agencies at all?

BILL I think we should take some notice of them but we shouldn’t be stood over by the credit ratings agencies, I mean the point her is to do what's good for New Zealand first and what's good for New Zealand is to borrow through the bottom of the recession, but be constrained about it so that we don’t leave for the next generation a big pile of debt. Now it happens that what's good for New Zealand is a story that we should sell to the ratings agencies simply because if they downgrade us then all our debt will cost more.

GUYON And are they listening, will they downgrade us?

BILL Look I don’t think they will but if we – the main focus though is to get the picture right for New Zealand.

GUYON I just want to take you back to that, you don’t believe that we will be downgraded now you seem quite firm on that?

BILL Well look the reason for that is that I believe we can put together a plan that is going to get us through the bottom of the recession that’s going to restrain the growth in our debt, get us ready to repay that debt, that is the right thing for the New Zealand economy and the right thing for future workers in the New Zealand economy. If we do that then that’s a good story to be telling to anyone who might lend money to us and a good story to be telling to the rating agencies.

GUYON Let me put to you something else that was mentioned at the G20, Gordon Brown said the world needed to move to a model of more moral capitalism. Do you agree with that? Do you believe that capitalism has been practised in a way which is immoral?

BILL Oh in some respects yes. Look a free market depends on people having underlying philosophy of fairness of transparency and of not taking advantage of everybody else.

GUYON So in what respect has it been immoral, you said in some respects?

BILL Oh I think the aspects of the banking system that have brought us down in combination with some bad policy, like in the US housing market the government passed legislation that virtually guaranteed anyone could get a loan and then the banking system exploited that.

GUYON In New Zealand have we had immoral capitalism?

BILL I think we have had some and we could have done a better job, the collapse of the finance companies I think shows that our regulators were not assertive enough and that allowed individuals who didn’t have the risks and the concerns taken by their investors in mind.

GUYON But what are you doing about that, haven't you just now guaranteed them all?

BILL Well we have and that is a second best option there's no doubt about it. If the government hadn’t put a guarantee in the previous government and National share the same view, then the impact on the confidence of depositors could have led to instability in the financial system, so the guarantee is a second best option, but now it is there the government is now directly involved with the credibility of a lot of our financial institutions and we are beginning to take a more assertive view about it, these are risks the taxpayers are taking...

GUYON What do you mean a more assertive view?

BILL Well if you think the government has now guaranteed the banks, it's guaranteed up to 60 or 70 smaller financial institutions and we need to be sure that those institutions are being managed in a way that is minimising the risk to the taxpayer because if anything goes wrong there the taxpayer gets the bill.

GUYON Let's follow that moral theme, let's talk about fairness, about sacrifice in the recession. You said in parliament this week that times have changed, that some of the things that were nice to have we can't have any more, what sacrifices are we gonna have to make in this recession?

BILL Well first the government's gotta constrain the growth in expenditure, we are borrowing to fill a gap maintaining entitlements, maintaining public services but we can't keep feeding them at the rate of new money, that was the case ...

GUYON And how are people gonna feel that, how is that actually going to affect the average person when you talk about reducing that government spending?

BILL Oh I think in a couple of ways, one is they can now be more assured that spending's gonna be on top – on high priorities not low priorities. I think the other way for most people is going to be through their pay packets, so in the state sector we'll be looking to government departments to be funding the pay rises that they want to negotiate with their staff and with people out providing public services that would bring public sector wages more back in line with the reality of what's happening in the private sector. If people are in the public sector they have a degree of job security that the private sector doesn’t necessarily enjoy just because the government can borrow money to fill the gap.

GUYON Let's talk about pay packets, your tax cuts kicked in this week, the tax cuts for 2010 and 2011 do they fall into this category of luxuries that we can no longer afford?

BILL Well that’s something we have to consider over the next month or so.

GUYON Well you must have been considering it what are you gonna do with the tax cuts, are you gonna bring in tax cuts in 2010 and 2011?

BILL Well that’s a decision we'll make in the budget. We would like to carry through with lower taxes, we think lower taxes are good for the long run benefit of the New Zealand economy.

GUYON But you can't afford it?

BILL Well we have to look at whether they are affordable?

GUYON Do you think they are affordable?

BILL Well that’s a decision that'll be made in the budget.

GUYON Do you think they are affordable?

BILL Well we'll make that decision in the budget.

GUYON So you haven't made a decision yet?

BILL No we haven't made a decision yet.

GUYON But personally you haven't got a view on it yet?

BILL Well I get to see all the numbers and the budget's all a matter of balance, it's the balance between the short term and helping us through the bottom of a recession, and the longer term which is getting New Zealand into a distinctive and strong competitive position coming out of this recession.

GUYON What about the Super Fund, the Crown accounts that were just released show that it lost more than 6½% over February. When you look at its annualised returns, its inception in 2003, it's got a rate of return of about 1.9%, now if you put that money into risk free Treasury bills you're getting 6.8%. Are you concerned about the way this fund is actually being managed?

BILL Well it's turned out in the shorter term significantly different than anyone expected, it was set up in surpluses in high returns, in the market now we've got deficits and low returns, look I think the management of it is pretty professional.

GUYON They're pretty awful numbers though aren’t they?

BILL The numbers are pretty awful but I think the real problem here is that that Crown hasn’t said to the Super Fund just exactly what degree of risk it wants that fund to take because the fund has had choices about the balance of risky assets and less risky assets and it turns out it's been in riskier assets, so one of the jobs over the next wee while is for the government to be much more explicit with the Super Fund about what risks it expects a fund that’s going to last for 60 or 70 years, to be taking.

GUYON What bout contributions to that Super Fund you must surely now be going to suspend the government contributions to the Super Fund?

BILL Well the Prime Minister has signalled that that’s another issue he wants us to consider in the budget. The fund was set up at a time of in surplus when there was a view there would always be surpluses, now we don’t have surpluses so yeah it's something we'll be having a pretty close look at.

GUYON So you must though be in a position where you can't simply afford to borrow to save.

BILL Well again it's weighing up short and long term, in the longer term this fund starts paying out in 2025, it to some extent underpins the longer term future of National Super, 20, 30 years out, in the shorter term we don’t have much money.

GUYON What's the Treasury telling you? You’ve asked for Treasury advice on this, what's the Treasury telling you?

BILL Well the Treasury tells me lots of things, Treasury are very focused on you know getting the budget back into balance as quickly as possible, keeping the debt down, getting it back down ready for the next shock because if you let debt build up it can take 15 years to get it back down again.

GUYON So all those signals are pointing to the fact that you are going to suspend contributions at least for a short time?

BILL Well I think you can take it Treasury's advice is consistently hard line which is that the government should spend less and borrow less.

GUYON Does that mean you're going to have to make that money up in the longer term or are you prepared to actually change the law so that you don’t actually have to do that?

BILL Oh no the formula, there's no free lunch here, the formula that’s in the law won't change, we will leave it as it is, and the way it works is if you don’t pay in this year or next year then you have to make higher payments later, but that’s all part of the automatic stabilisers of getting through a recession. If you don't make a payment now then when the economy picks up then you would be in a better position to do it.

GUYON We've been talking about what we can afford, what are luxuries, what are sacrifices, a national cycle wave, how much are you prepared to spend on that?

BILL Well that’s a matter of discussion between myself and the Prime Minister but what's fascinating there is just how it's caught the imagination of so many people, so it's not going to be a big expenditure item, it's not going to – the national cycle wave is not going to happen in a hurry, but if you see the examples that are in existence now they’ve been quite successful. Look again it's a matter of keeping a balance, the government wants New Zealand to remain aspirational, to be about improving our performance, listing our profile in the world and even through a recession there is room for initiatives that are going to demonstrate that.

GUYON Sure but 50 million dollars was the back of the envelope calculation, are you prepared to spend much more than that on this project?

BILL Well we won't be spending 50 million dollars on it this year or next year or the year after.

GUYON So it's years away this idea is it?

BILL Oh no it'll get started, I mean there's any number of things that the government has undertaken to do, we made a lot of undertakings in Opposition, we will be implementing all of those, we'll be implementing a national cycle network but it'll start smaller and as confidence builds and the economy improves it can grow bigger.

GUYON But you said you wouldn’t be spending 50 million on it within three years.

BILL Well the question was are we going to spend 50 million this year – no, we'll get started.

GUYON Can I just ask you finally whether you think we'll be out of this recession this year and quite aggressively growing out of it by early next year?

BILL I wouldn’t want to guess, I think one of the features of this recession is that we're unlikely to aggressively grow out of it, we won't have the opportunity coming out of this recession to grow off the back of readily available credit, this is a recovery that'll be based on exports and on savings. New Zealanders have a pretty poor record on savings although it's increasing significantly now, people are saving money, that will help as we come out of the recovery, and growing the export base is a lot harder than borrowing money to go and buy flat screen TVs, so all the advice around the world is coming out of this recovery will be relatively slow.

GUYON See that’s quite a contrast to the Prime Minister's view which is that we will aggressively come out of this, I mean he seems a lot more optimistic, you seem a lot more gloomy.

BILL Well look the Prime Minister has always had a very positive view about New Zealand.

GUYON Is he wrong?

BILL Let's see, I certainly wouldn’t want to say he's wrong but he's setting a high hurdle here and it's our job as a government to meet those expectations, that’s a feature of John Key's leadership, I mean he is saying to me we want the policy settings that are going to get us aggressively out of here, and a big focus there for the government is replacing the jobs that have been lost, a slow recovery means it'll take a while to get unemployment down, we want to do everything we can to get unemployment down, that’s driving the Prime Minister.

GUYON The Finance Minister and the Prime Minister though, that’s at the core of any government, should New Zealanders be concerned that he has a very positive view about how we're gonna come out of this and you have a very negative one?

BILL No not at all, what we've got here is the elements of a plan that's set the objectives high, the aspirations high, to replace those jobs that are lost, to make New Zealand distinctive come out of this recovery stronger and more competitive than other countries, and the need for the government, for the Cabinet to deliver the policy settings that are going to achieve that and John Key's style of leadership within the Cabinet I think is really lifting our sights.

GUYON Alright, let's see how it transpires, thank you very much for coming in and joining us on Q+A, Finance Minister Mr Bill English.

End of interview

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