Sunday 2nd October, 2011

Q+A interview with Finance Minister, Bill English.

Points of interest:
- English talks down compulsory Super, citing “high fiscal cost” and the need to borrow more, but says no decision yet made.
- English on whether interest rates will go up as a result of the downgrade:
- “…pressures around the world are bringing interest rates down... On the other hand, the conventional wisdom is that the downgrade will tend to push our interest rates up”
- “We don’t know where it will come out”
- “No, I don’t expect it [the downgrade] will” increase mortgage rates 1-2 percentage points
- “It will put some upward pressure on interest rates, but bear in mind the context here. Interest rates around the world are headed down”.
- On the need to take the heat out of the property market: “We’ve already done the job there. This year we’re taking out $800 million from the speculative property sector”.
- English says claims credit for tax increases cutting spending:
- “If you go and buy something now, you’ll pay 20% more tax on it than you did two years ago… So the policy steps we’ve taken have been significant.”
- The difference between dealing with New Zealand ’s household debt and household debt in the US and Britain “is not policy; the difference is fear”.
- Government and ratings agencies at odds: “We’re pretty positive about the plans. They’re a bit less optimistic”.
- But insists agencies still see a credible path to surplus for New Zealand .
- Won’t accept credit downgrades damages his reputation as an economic manager.
- “…There may be some slow down [in Australia and China ], but we don’t think it’s a serious risk for our growth prospects”.
- New Zealand should be “positive” about Australian mining boom even if it means more New Zealanders heading over for work, as it creates opportunities for New Zealand .

The interview has been transcribed below. The full length video interviews and panel discussions from this morning’s Q+A can be watched on tvnz.co.nz at, http://tvnz.co.nz/q-and-a-news

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BILL ENGLISH interviewed by GUYON ESPINER

PAUL These are troubling times. The IMF says the global economy has entered a dangerous phase – their words. So it was a relief this past week when the German parliament finally voted in favour of a more powerful bailout fund and ensured that the Greeks will get the next instalment of their rescue package. But at best it buys time. Fears now centre around Italy , Spain and another global recession. There is also growing concern at home because, as I mentioned, we had the double downgrade. Ratings agencies Fitch and Standard & Poor’s both gave us the thumbs-down. And the latest ONE News Colmar Brunton poll to be released tonight reveals a slide in business confidence in New Zealand . In the two months since July, those who think the economy will get better has dropped – or have dropped – from 52% to 45%, pessimism has risen four points to 35%. You can always count on there being pessimists. Finance Minister Bill English is now under immense pressure. And just eight weeks from the election, Bill English is live with Guyon Espiner. Guyon.

GUYON Thanks, Paul, and thank you, Minister, for joining us this morning. We appreciate your time.

BILL ENGLISH – Finance Minister
Good morning.

GUYON Look, I want to start with this credit rating downgrade. In 2009, the Prime Minister said a credit rating downgrade would ‘mean lenders would no longer see us a good credit risk. They would be reluctant to lend us money, and when they did, they would charge us ever higher interest rates. I don’t want to see New Zealanders weighed down by that burden,’ he said. Now they have been weighed down by that burden, haven’t they?

BILL Well, at that time in 2009, he was quite right. The world financial markets were still quite brittle. New Zealand had had to deal with an actual shutdown where our banks couldn’t borrow at all in financial markets, and a downgrade then would’ve had a very significant impact.

GUYON And what about now? Is it not a problem now?

BILL Look, we’d be better off without a downgrade, no doubt about that. In terms of how it flows through into interest rates, you’ve got pressures around the world that are bringing interest rates down, so the New Zealand government is paying less than it has in many decades for its debt on the one hand. On the other hand, the conventional wisdom is that the downgrade will tend to push our interest rates up. Now, on any given day, we don’t know where it will come out.

GUYON Well, let’s talk about that, because at the time, John Key said that it could add one to two percentage points to mortgage rates and cost the government an extra $600 million a year in interest costs on the money it borrows. I presume that you can confirm today that that’s the sort of impact that this downgrade will have?

BILL No, I don’t expect it will. I think back in 2009 it would have. We were really under the test then. Now I think because of the progress that we’ve made, because the market sees us as having a credible path back to surplus and sound economic policy, there may be some upward pressure on rates, but bear in mind the interest rates currently are at a 45-year low.

GUYON You said as recently as March in Parliament in answer to Russel Norman that you would expect a credit rating downgrade would push up interest rates.

BILL Yeah, and, look, it will put some upward pressure on interest rates, but bear in mind the context here. Interest rates around the world are headed– still headed down, and currently we’re paying the lowest interest rates on government debt that we have for many decades.

GUYON When you talk about this credible path back to surplus, etc, obviously the money men internationally – Fitch and Standard & Poor’s – the ratings agencies – they don’t believe you.

BILL Oh, they do, and they pointed that out. We are getting the government finances under control. They point to two things. One is the historical build-up of external debt by New Zealand , particularly private sector debt that’s occurred over the last 10 or 15 years, accelerated pretty seriously in the last four or five. And the world markets are much more sensitive to debt, so any small country with debt is under the microscope. And we have among the highest levels of external debt in the world.

GUYON And let’s talk about that, because we can’t do much about the international environment, but we can do something, presumably, about our exposure to the amount of money that we owe overseas and our level of household debt. What, if anything, have you been doing about that? Because if you look at savings, you’ve twice smashed into the KiwiSaver scheme and made it less attractive to save, so have you actually been doing anything at all to increase our level of savings?

BILL Yes, we have. The tax package last year was a $4 billion package. It cut taxes on investment and work and savings and increased taxes on spending, so if you go and buy something now, you’ll pay 20% more tax on it than you did two years ago. The result of the tax package and other measures in there, such as the 800 million we’re taking out of property speculation, is that household savings rates are now rising quite significantly. So the policy steps we’ve taken have been significant. They’re having a very positive impact on household savings.

GUYON Why aren’t, again, the ratings agencies convinced with that? Because they single New Zealand out in saying unlike the United States and the UK , both who also have large amounts of household debt, New Zealand hasn’t done nearly enough to bring this down. Do you accept that?

BILL I think the difference is not policy; the difference is fear. In the US , house prices have collapsed, unemployment is 9%. People are deeply anxious about their futures. In Britain , they’ve had 20% public spending cuts. Now, we have taken a much more considered and rebalanced approach to the adjustment this economy needs to go through. That adjustment is well underway. The ratings agencies don’t contest that, but they are concerned that New Zealand will revert back to its bad old habits of the last 10 years. We’re much more optimistic than that.

GUYON What are you doing to ensure that they don’t do that? Are you, for example, going to change your savings policy to automatically enrol the one million New Zealanders who are in work but not in the KiwiSaver scheme? You’ve been looking at that potentially. Are you going to go ahead with that policy?

BILL Well, it’s got a very large fiscal cost, because the more people who go into it, if you put the greater cost to government, then we would have to go and borrow that money. Bear in mind we’ve already got an increase in KiwiSaver contributions in the pipeline. In 2013, your KiwiSaver contributions will increase. Now, that will help reinforce the direction New Zealanders are going in, but, really, the important thing there is a shift in attitude, where I think New Zealanders now understand they need to be careful with their spending, not borrow excessively and pay off their mortgages.

GUYON So that’s a no. You’re not going to do that.

BILL Well, look, we’ve been looking at the idea. The main problem with it—

GUYON Well, what are you going to do, Minister? What are you going to do with this?

BILL Well, we’ll let you know when we’ve made a final decision, but the main problem with it is the high fiscal cost. Just step back a bit here. Household savings are increasing significantly in New Zealand . Next year we will have for the first time since the mid-‘90s a positive household savings rate. The only question is whether that behaviour will be maintained for a period like five to seven years that is long enough for New Zealanders to get their mortgages paid down to more reasonable levels and to help our current account position.

GUYON You mention mortgages there, and a lot of this, obviously, household debt is people borrowing from banks for mortgages. Isn’t Labour right to put a capital gains tax on and try to discourage that investment in the property market?

BILL Well, look, we’ve already done the job there. This year we’re taking out $800 million from the speculative property sector, and that has had some impact, along with the tax changes that we made last year. So we’re already— we’ve already got the balance shifting away from property and in a reasonably considered way so that we’re not deliberately trashing people’s property values on the way.

GUYON Can you explain why when you take $800 million out of the property market it’s fine, and when Labour proposes it, it’s a dagger through the heart of the economy?

BILL Oh, because the capital gains tax is a different beast. It’s going to be levied on all small business and farms. And, actually, it’s hard to see where the capital gain is going to come from. More tax and spend is what got us into the difficulties New Zealand ’s dealing with. More of it in the future isn’t going to work, and I think the public know that.

GUYON Fitch – the rating agency Fitch – mentioned questions about whether we can deal with our ageing population as one of their factors that they were considered. Doesn’t this again highlight the folly of ruling out raising the age of entitlement to superannuation?

BILL Look, this is a government that has stuck to what it said it would do. Back in 2008, we made a number of undertakings, not just about national super, but about a range of other government transfers to households, and we have stuck to those undertakings, and that’ll continue to be the case with National Super. We’re focusing on the other big impost on government and the taxpayer, which is the cost of longer term welfare and all the misery that goes with that, and that’s what’s driving our welfare reforms. It’s very much focused on reducing not just the future costs, but also increasing the future opportunities for 300,000 people on welfare.

GUYON Do you expect those welfare reforms to significantly reduce the amount of government spending on welfare?

BILL I think in the long run they will. I mean, the core idea is investing more up front to ensure people don’t get caught into the poverty trap. And when we do that, we avoid a lot of future cost and also improve their opportunities.

GUYON Okay, what are you going to do, if anything, to win back the confidence of the credit rating agencies? Or are you just going to stick to the path that you’re on and ignore what they’ve said on Friday?

BILL Of course we’re not ignoring what they say, but the plan that is involved – long-term investment in increasing our competitiveness, focusing on the productivity of the different sectors of New Zealand, changing the tax system, getting the government debt under control – these are all— these are an approach the ratings agencies have endorsed. They have a different view than we do about where it will end up. We’re pretty positive about the plans. They’re a bit less optimistic.

GUYON So will anything change as a result of this? Are you going to change any policy setting as a result of this? Or are you going to continue on your path?

BILL We’re going to continue to implement the policy settings we have. Of course you’ve got to be open to change. If the world changes, then we may have to shift ground. But the fundamental policies we’ve got in place are credible. They’ve been effectively endorsed by the ratings agencies. They, again, are focusing on the historical build-up, which is quite long-term and is going to take a while to turn around, and on the fact that the rest of the world has become much more sensitive to debt.

GUYON Do you accept though Minister, that this is a blow for your reputation of economic management and politically it looks bad for you?

BILL No, I don’t accept that. I think it shows— it underlines the necessity to get on and implement the kind of changes that we’ve been talking about for two or three years. I mean, these aren’t new issues. We’ve been talking about these issues day after day, week after week for the last three years. And in the context of an election campaign, it makes it pretty clear that the alternative plans from Labour which involve borrowing six or seven billion over the next five years are simply irresponsible.

GUYON Can we look at the international environment? With such problems in Europe and America , are we effectively relying on China now to see us through this?

BILL Well, most of our trading is with China and Australia , and that is pretty good news because they are among the better-performing economies in the world at the moment. Now, there’s always some risks around an economy like China , which has been growing – double-digit growth – 10%, 12%, 14% growth. Even if it slows down, though, we believe there’s still a pretty positive story for our food-related exports. And in the case of Australia , they’ve got part of their economy that is struggling – the domestic part – but the infrastructure and the export side of their economy is still looking very positive. So there may be some slow down, but we don’t think it’s a serious risk for our growth prospects, and we’re still expecting moderate growth of 2% to 3% over the next two or three years.

GUYON You mention Australia there. I saw BHP Billiton are coming out this week and saying that the Australian resources industry is going to need 170,000 in the next five years and that many of those are going to have to come from overseas. Look, many of those people are going to come from New Zealand , aren’t they, and go and join that resources boom in Australia .

BILL Yes, some people will, depending on what skills they have and how they see those opportunities. But I think we should be positive about that boom. New Zealand has a range of skills which we can use to service the big infrastructure investment in Australia . That’s our design and engineering skills, not just our labour. And we should be grabbing that opportunity rather than worrying about it, because it will be a source of profit, of new jobs and growth for New Zealanders.

GUYON But you do admit that many of those jobs will be filled by New Zealanders who are going across the Tasman for better pay and better prospects?

BILL Well, I think that’s pretty obvious. If you can earn $120,000, $130,000 in a relatively unskilled job in West Australia , then you might go and look at it. But rather than be worried about sitting next to a high-performing—

GUYON Well, what are you doing to ensure that those people are trying to get those kinds of jobs in New Zealand ?

BILL Well, in the case of our mining and oil exploration, we’ve been promoting that pretty strongly for the last two or three years.

GUYON But you backed off it when the march went down Queen Street . It’s another example of the government backing away from hard decisions, isn’t it?

BILL Look, that was an argument over some very small parts of the national conservation estate. The programme is continuing otherwise, particularly the offshore oil and gas exploration programme. I think that’s been a very positive step forward for the government, and we hope that it will bear fruit, that we will actually find oil and gas, that we’ll be able to continue to expand coal mining in New Zealand, because this will bring jobs and incomes to New Zealand.

GUYON All right, we better leave it there. Thank you, Finance Minister Bill English. We appreciate your time.

BILL Thank you.

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