'The Nation' - Bill English Meets the Press
Bill English Meets the Press
PANEL: BRIAN FALLOW, PATTRICK SMELLIE, COLIN JAMES
Moderator - SIMON SHEPHERD
Simon Welcome to The Nation, I'm Simon Shepherd, and welcome to the programme. Finance Minister Bill English is our guest, thanks very much for coming in, and we have our expert panel – New Zealand Herald Economics Editor Brian Fallow – Pattrick Smellie from Business Desk, and Political Commentator Colin James. Thanks very much for coming in this morning. Before you all start asking questions I'm gonna get the first one in to Mr English. And that is – one commentator has said that this budget is like squeezing the last drop of toothpaste out of the tube. You can't get any more tax out of the New Zealand population. Does it really have to be that tight right now?
English – Finance Minister
Well look it's pretty moderate actually this budget it's reasonably tight, but we're not going down the road of some of the more dramatic cuts in public spending around the world. Just last week the Victorian government announced 4000 redundancies in its public service. The Australian budget was the biggest fiscal contraction they’ve ever had with quite significant cuts. So look this is moderate changes dealing with the circumstances that we find ourselves in, on a longer term track, to get back to surplus, and we've been able to do that by putting a bit of pressure on right across the system, rather than any dramatic push anywhere in particular, and it enables us to get on with the job of focusing on growing the economy and providing better public services.
Simon We'll be talking about growth soon, but is it a moderate budget? Brian Fallow what do you think?
Brian Fallow – NZ Herald,
I'm interested to know why you feel it necessary to hit the brakes at all at this point in the cycle, because we've just come out the year where the economy just eked out growth of slightly more than 1%. Since then commodity prices have continued to fall, so that tail wind has become a head wind. Unemployment is stubbornly high. No one knows how Canterbury rebuild will play out. Did you need to be this tough this soon in the cycle?
Bill Look I think if you look at the economy as a whole we've got the balance about right. So if the economy was not to grow as far as moderately or as fast as anticipated, then the Reserve Bank's got room to move on monetary policy. In fact the markets are picking that to some extent. And alongside the budget we've got actually a massive stimulus project in place, not one we chose but it's there, called the Christchurch Rebuild. So I don’t think that the fiscal policy will have a significant dragging effect.
Brian Alright but I mean there are some risks with monetary policy. We've got mortgage rates already at 47 year lows, some dangers in leaving them that low for an extended period in terms of what it will do to the housing market, and we don’t have any experience of fortunately having anything like the Canterbury Rebuild, and we can't really tell at this point what it will do to other regions than Canterbury, or other sectors in construction, or even when it will start in earnest, after the quake just yesterday. There's a lot of risk.
Bill Yes there are risks and we're balancing off those risks around growth with the risks around being a highly indebted country where at the moment it's the government component that’s growing the fastest, and in markets that are grumpy about growth we want to get government debt back under control. And that’s a contribution the government can make. I don’t think there is any magic about having a bit looser fiscal policy that’s going to make a significant difference to growth. I think that’s a bit of a wish rather than a reality. So look it's about the balances. We think we've got that balance about right. There are factors that are going to contribute to growth, and I think both the general public, in fact all the political parties across the board have signed up to getting back to surplus in the next few years.
Simon Okay you just mentioned the Canterbury Earthquake and you pin a reliance on that, about 1% of growth on that rebuild. Well we had the shake last night, I mean what does the panel think? is the government relying too much on a rebuild that we don’t know exactly when it's going to happen? Pattrick.
Smellie – Business Desk
Well I wouldn’t mind asking you Bill what your view is of the size of that quake last night 5.1, are we looking now at another setback to the rebuild timetable do you think?
Bill Well it's possible. I mean there would be not a lot of physical damage from it, but a critical issue in Christchurch has been the confidence of the insurance companies. We've been working with them, or Gerry Brownlee has to get some collective solutions to quite complex insurance problems, and part of the challenge of getting those solutions has been insurance companies are preferring to be insuring people again against a backdrop of no quakes, so that they're not taking obvious risks. I think that’s yet to be seen. In Christchurch you have got a very resilient attitude, and I think they are willing to go as fast as they can given the risks, but this earthquake is a reminder that it's not just a matter of policy or process to get the rebuild going. There is the ongoing concern that there can be further earthquakes, and each one of them has some effect on confidence.
Pattrick Mr English how long does there have to be no earthquakes or earthquakes of a limited nature before that confidence is there to rebuild?
Bill Well look I think that’s a question best directed at those who are making the actual decisions. We're trying to facilitate that. From the government's point of view we just want to push on as far as we can, because there are so many people there who want to get their lives back together, and we can push as far as the people of Christchurch and the businesses and insurance companies concerned. They have shown remarkable resilience so far.
Simon Okay so we're relying on average growth forecasts of 3%. I think Colin James was interested to know how credible are these forecasts?
Colin James – Political
Well in particular you have quite bullish productivity growth figures compared with what's gone on in the last decade or so. are they sustainable? Are you really confident about those or do you just say well Treasury's produced them and so you have to go along with them.
Bill Well Treasury does give us their best professional judgement, that’s what's required by statute. The politicians don’t determine the forecasts. I think our confidence is more around the attitudes and shifts that we've seen in behaviour in New Zealand households and businesses. They're very realistic, they increasingly understand there's going to be a semi-permanent cloud on the horizon from Europe, US and the UK, that’s just going to go on and on, and they're adjusting to the idea that there isn't going to be a wave come past that they can climb on. They have to reorganise their own businesses and affairs around better productivity, better value in the products that they're selling, and so that’s where our confidence lies.
Colin Yes but much of the commentary in the last 24-36 hours has been that your downside scenario, or Treasury's downside scenario looks more realistic than the central scenario. So are you quite comfortable with the scenario that you're operating on?
Bill Well look we have the same uncertainty as everybody else, and if the Treasury forecasts are you know too optimistic, then most people's forecasts are too optimistic, they were pretty much in line with the OECD who came out just the day or two before the budget. But the forecasts in the end are just people sitting in a grandstand watching what's happening. We're trying to get on and alter the rules of the game to support businesses making growth decisions.
Colin But you’ve made that surplus a sort of holy grail haven’t you, you’ve nailed your political flag to getting back to surplus in 2014/15. Is that an overriding goal, so that whatever happens you're gonna get there? Is that what you're saying?
Bill Well it's an important goal but it's not going to be one where that whatever happens we have to hit exactly the 2014/15 target. We'd demonstrate and we're willing to take a number of steps to show a credible path back to surplus by 2014/15. Sure if there's some major meltdown then we would look to revise that, but we aren’t going to gear our whole policy to major meltdown.
Brian So what gives – I mean Treasury has a tradition almost in recent years of being too optimistic two or three years out. Say it's the same again and as you get closer to 14/15 you're looking at substantial deficit instead of the tiny little surplus that’s in the books at the moment. Do we get another zero budget, do we get a sub-zero budget, or do you let the surplus target date slip, what's the priority?
Bill Well look it depends a bit on the circumstances, you know if some major event happens somewhere then you might expect automatic stabilisers to take their effect whether it be more spending on unemployment for instance it that went up. But that’s a judgement that you’ve just gotta make as you go, and I think the government has now got a track record of being able to make judgements that are appropriate to the circumstances, so if there's a bit of slippage we've got some buffers ahead of us to be able to get to a surplus. If there's a lot of slippage then we might have to make different judgements. But in the long run we've gotta focus on the growth, because that’s what guarantees the surplus.
Colin Can I just take you out a little bit further, because you’ve mentioned this is a long haul, and you’ve talked in the past this isn't just a three year thing, this isn't just a six year thing, you're looking out to about 2020 of continual tight budgets aren’t you, or constrained budgets. Is that your message?
Bill Yes that is a message. You’ve just gotta look ahead to what decisions any government would have to make once it gets to surplus, and it's gotta contribute to the Super Fund. There's a question about whether to replenish the EQC Insurance Fund for future earthquakes, and getting debt down to levels where we would feel comfortable running into another significant recession, because they tend to happen roughly every ten years in New Zealand.
Colin So we're looking out to 20/20 aren't we with this sort of approach.
Bill I think there’ll be a bit more room than there's been in the last couple of budgets, over the next few years. I mean you’ve gotta weigh up the extent to which you can maintain public services over time. You can't just keep squeezing them. We're making big investments in this budget which we think will give us more headroom later, three four years down the track, and you know there’ll be different choices to be made, but it is going to be constrained, and I think that’s just a matter of shifting out of the mode where you can only get things done if you’ve got new money, and getting into the mode where if you focus on getting results then you can find money from the places where you're not getting results
Simon Minister, just before we move on. In the executive summary is that the balance of risks is still to the downside, and the downside is a 25 billion dollar hole that’s being forecast. You mention buffers, what are those? Are those buffers depending on Australia and China in terms of trade. If Europe does you know go down the toilet and burn a 25 billion hole what are you gonna do?
Bill Well as I said, if there's some major meltdown well the government would have to shift strategy.
Simon And what are those buffers that you just mentioned?
Bill Well there's some fiscal buffers, cos we've allowed, we've spent zero extra money in the last two budgets, and …
Simon And does that mean you'd spend zero again and zero again like that forecast that Colin James has been saying?
Bill Well we've allowed for 800 million and 1.2 billion over the next couple of years, so there's some choices there. But look the key here is to do everything we can to build the growth side of the economy because we are reasonably happy that the government spending is now under control, and the system's getting better at making good choices with the spending, but the uncertainty is around the revenue line, some of that we can influence with growth orientated policy, and some we can't. That’s the reality of where we are.
Simon And does that growth orientated policy depend on our trading partners, Australia and China?
Bill Well they will have a significant influence that’s right, and I think it's important to keep Europe in context. Europe is 10 or 11% of our exports. If you add the US and the UK that’s getting up to 20-25%. The rest of it is in the faster growing Asia Pacific region, and that is why part of lifting our growth prospects is an intelligent approach to developing those markets.
Brian That’s not the only risk that your opposes to us if once again as with the global financial crisis of the US three or four years ago, funding markets that your banks depend on, if they freeze up again, how resilient is the New Zealand economy and the New Zealand banking system to another event of that kind, because we are still living beyond our means, we're still spending more than we're prepared to fund through our own savings. That structural problem is still there.
Bill It is still there, and that’s one of the reasons we've been focusing on government debt, but it's one of the reasons households have focused on their own debt. So what you’ve seen over the last three or four years is an improvement in our resilience, so New Zealand is in better shape in 2008 in its ability to handle one of those financial market shutdowns.
Pattrick It's not really what the external accounts forecast say though is it? You know we're doing alright on the fiscal front perhaps but the external debt to GDP ratio blows out to around 80%, 85% if the balance of payments doesn’t go above 4½% of GDP over the longer term. How do you see that playing out, when are we going to get to a point where we stop actually having Greece style levels of external debt?
Colin Yeah the Prime Minister made a point yesterday of we've got to earn more than we spend and we're clearly not, and you’ve got a track in the budget which takes us back up to the sorts of numbers that were running under Labour, 6.7% of GDP balance of payments is current account deficit. This is surely not the rebalancing you’ve been talking about?
Bill Well you know it's been a long term build up of a problem, and it's gonna take a while to come right, but actually in 2006/7/8 where the worst current account deficits we'd had in a long time, at 8% plus, were driven by excessive consumption. So we came from a very bad position to now a not so bad position. People have got the message.
Colin Yeah but it's going to get worse from here on. Your numbers say it's going to get worse from hereon.
Bill Well if the question is are we making progress, the answer is yes we are. Are we making enough the answer to that is no we're not, but to make faster progress household's businesses and government need to save more, and actually curb their investment intentions. Now we do want stronger investment right now. Investment is going to grow faster than savings, so it will increase our external liabilities but for the right reason.
Simon Okay it's an interest point that Colin's made but we're gonna have to take a short break now.
Simon Minister I just wanted to read something to you from David Skilling who's the Ministry of Foreign Affairs Strategy Adviser, former New Zealand Institution boss. He says that we're viewing the rest of the world in simple terms of market access and it has not moved on from the approach of Muldoon. Now Pattrick Smellie raised this point with us. Pattrick is that what you think?
Pattrick Well I guess I wondered Minister what's the budget for these days, you know there's more media attention, more analyst attention on that one document and it's almost always now completely about fiscal policy and what's happening at home. I guess the question is broader as to say what is the wider strategy, shouldn’t we be using the budget for a more strategic approach to economic policy generally, than simply focusing on the budget deficit and leaving it almost at that?
Bill Well I mean the whole media cycle's changed in the last 20 or 30 years, so there's a number of platforms through a year to outline strategy and actually it's referred to in the budget. The government laid out its priorities early in the year and in the budget we refer specifically to a significant new spend in the research and innovation area, which is one of the factors that we need to continue….
Brian Can you tell us just what our advantages are and what money you're putting to back that view, in the budget or anywhere else?
Bill Yes we do have a view about what our advantages are to the extent that a government can pick those, bearing in mind that one of the features of – there's a couple of features of the New Zealand economy that matter. One is the biologically based production system, so we've got a big focus for instance on sorting out the rules for our natural resources and the balance of economics and environment, and that’s working itself through in terms of the mineral and resources sector, and particularly the use of water. You know over the next couple of years we're gonna be making some significant decisions there. The other feature of our economy is what Sir Paul Callaghan called we're good a weird stuff, and that is small unexpected but deep pools of expertise where you get businesses and often hitech businesses built around the expertise of a couple of individuals or a particular historical relationship offshore. And so we're not going round picking individual winners, but we're backing better rules around, and better regulation around natural resources, and the innovation and research to support those businesses that have been doing well despite the head winds.
Pattrick But is that really a large enough strategic vision. I mean if you look at the forecasts or projections out to 2026, we're still looking at 2% growth on current predicated on current settings. That doesn’t sound to me like a reason for your or my children to stay in this country.
Colin And you mentioned a significant increase in science and innovation. I'm not sure what you mean by significant but it's still a very low spend compared with say Singapore, Finland, Denmark, a number of other small countries that David Skilling refers to. You're not really pushing that, you're just dribbling stuff in.
Bill Well I disagree with that. I think that the limitation there is not government funding, the limitation is the people with the skills to turn science into business. And to get back to Pattrick's point. I think we've gotta be careful not to mistake grand vision for real growth. You know growth isn't something that just happens because politicians choose to talk about it. It happens because individual businesses and families take risks, they invest more of their cash, they borrow a bit from the bank, they employ another person, they sell another widget on the other side of the world at the end of the longest supply lines that you can get on the globe, and so our policy is focused on supporting those decisions. Getting up and saying well in 2025 we're gonna have 3% growth, well big deal, who's actually going to do the growing. Well the growing is going to be our businesses and organisations who make those risky decisions and in the world these days it is risky to try and grow. We think New Zealand's been doing pretty well in difficult circumstances and we're confident that we can build on that.
Brian Okay but they understand that sometimes you have to spend money to make money. One of our big advantages is that the seabed around our shores is equivalent of two western Australias, what are you spending to actually explore what's out there and that might make our fortune on an Australian scale over the next say 30 years? What's in the budget for that?
Bill We're very focused on that, and the government has had ongoing subsidies for information provided to explorers, oil and gas explorers. We're dealing specifically with the regulatory issues be New Zealanders want to know that you can look them in the eye and say yes we're exploiting resources in our exclusive economic zone, but with high standards of environmental protection. And that legislation is going through the House right now, will be completed in a few months.
Brian Do you think you know what the resources are? I mean it's a lot of real estate and there are minerals other than oil and gas to consider. How about spending a few bob looking for that?
Bill We know there's a lot out there but actually the oil and gas companies and mineral exploration companies are in the best position, so we do what we can including providing significant tax concessions, providing free information and most importantly making sure New Zealanders feel comfortable about our drive to exploit those resources, cos clearly some of them don’t. A lot of them want to see it happen but subject to reasonable environmental standards. So we believe we've got a broad based approach that is certainly going to encourage and build that sector, but it needs to be done with public support, not just with public money.
Simon Minister you say in the budget that we are well placed, and in fact you have a graph which says that we're going to sort of trade better than Australia by 2013. Resources obviously plays a big part of that. Do you really think that we're going to outstrip Australia by 2013 in this?
Bill Well look the graph just shows the sort of consensus forecasts about what our trading partners are going to be doing, and it's simple a matter of showing that while we get pretty concerned here about the pressures on our economy and that’s understandable, we're in better shape than most, and in fact we are increasingly competitive with Australia. That’s shown up by some movement of business and investment from Australia to New Zealand, and that’s a positive. We should be competing with them.
Simon We should and obviously it's been a goal to try and drag up our boot straps to equal Australia. Does the panel believe this graph? Do you think that we're going to make it? What do you think? Pattrick.
Pattrick Well I guess if I can put that as a question. There are a couple of things that would concern me. How confident can we really be that that Christchurch Rebuild is gonna happen on the timeframe that you expect, cos an awful lot seems to pile into 2014 which is after all an election year? And how confident are you about the notion that for example you only get 1½% housing inflation over this period? I mean is there a number of elements in the budget forecast which leave you thinking there's some heroic assumptions, with particularly the amount of labour shortage we're going to experience in Christchurch?
Bill Well you know labour shortage would be a good thing wouldn’t it you know on the one hand, people saying there's not enough jobs and on the other hand that we're underestimating labour shortages. Look there's any number of uncertainties and we can argue the toss about the bits and pieces. We have confidence in the general direction and that’s confidence that we're rebuilding our productivity growth with better micro economic policy, that we're getting government in shape with better use of taxpayers' money and a better contribution to productivity across the economy. That we've got sectors of the economy where we're pushing hard to get growth such as the discussion we've had about minerals and resources. The need to get our biggest strategic advantage, water, into a framework where we can make better economic and environmental decisions. And provided we stick with that direction consistently over time and avoid two traps in New Zealand – one is wishful thinking, which particularly in the early 2000s you know, light GDP and all that, didn’t come to much, and the other is massive restructuring for a short period and then putting our feet up. And this government has set out on a longer term consistent track, and that’s actually the Australia model from 20 years ago, and if we stick to it and don’t get too caught up in the shorter term fluctuations, and get worried about them, then we're quite confident that we can build those longer term prospects.
Brian What's your vision of what the economy should look like in ten years' time, and how it would be different from what we've got now.
Bill Well we will see an economy where there is fast productivity growth, where we have a good and a deep understanding of the Asia Pacific markets most of which we don’t understand that well right now, and where we're able to accumulate the capital in New Zealand to invest in those markets in a way that means we've got the kind of high paying attractive opportunities here in New Zealand for the people who want to stay here.
Colin You’ve left out one element and a number of people are bothered about this, and it seems to becoming an increasing bother. Budgets used to redistribute resources to some extent. We have high inequality now in New Zealand. Is this bothering you? You know do you want to reduce that inequality? If so what is the budget, and what will our future budgets do about that?
Bill Look the key to dealing with inequality in today's world is mobility. How do you get people moving from a situation of low income and deprivation into a better situation? And the budget actually includes the biggest investment for a long long time, biggest I can remember in mobility for New Zealanders under pressure, and that’s through the welfare reforms, where we've allocated over quarter of a billion dollars over the next three or four years, bearing in mind a centre right government under fiscal pressure, finding money to put into moving people out of welfare dependency, and actually we've got a similar type of approach to ours justice system, which has been as very fast growing cost and not that successful. So yes we are concerned about it. Mobility is where we want to go and we've got a range of reforms going on, on quite a large scale across housing, welfare and law and order, and it's interesting that even though this is a tight budget, the community groups who would normally be criticising the government in tight budget, are supporting the policy direction, and that tells you we're making progress.
Colin So in three years we'll have some measurable yardsticks will we?
Simon Sorry Colin, we've run out of time with Bill English now. They're probably not complaining cos they're used to not complaining any more cos it's just too many tough times Bill.
Bill Well and that’s the great thing about New Zealand at the moment is people are getting on with it, they're not complaining that much.
Simon Alright, thank you very much for coming in, that’s Bill English, Finance Minister.