Q+A March 17: Corin Dann interviews Bill English
Q+A March 17: Corin Dann interviews Bill English
Sunday 17 March,
The Finance Minister told TVNZ’s Political Editor Corin Dann on Q+A this morning that the cost of the drought could double.
Finance Minister Bill English says the on-going drought could slash $2 billion off the national economy. That figure is twice the $1 billion estimated last week.
“Well, we’ll be getting updated advice over the next few weeks from the Treasury as we prepare the forecasts for the next Budget in the middle of May. But the latest advice is that somewhere between $1 billion and $2 billion will be knocked off our national income, and as every week goes by, the prospect of it being $2 billion instead of $1 billion grows.”
Bill English told Q+A that the drought could potentially knock 30% off New Zealand’s growth rate in a year.
“This underlines for us the importance of our primary production sector.”
The minister conceded that there is a need for our economy to diversity in the long run.
On the budget, Bill English says the government will be sticking to a fairly predictable direction and that there’s unlikely to be major tax reform.
English says essentially programmes like Working for Families and Student Loans will remain the same.
“No, we made a number of decisions a couple of years ago to trim those programmes. There’s some on-going tidying up been going on, particularly in the tertiary education sector.
But the substance of those programmes will stay in place.”
When questioned about Solid Energy, Bill English says he wants the banks to take some responsibility for the company’s debt.
“I think that’s really important. They’ve lent money, and as lenders, they take risks. And if they lend to a company that’s affected by a very sharp downturn in coal prices and then
loss of a quarter of their export sales, they’ve got the same risks as banks who lent to resource companies all around the world that have got in trouble.”
He concedes that in 2009, the government asked its taxpayer owned companies to contribute more cash to the coffers.
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CORIN DANN INTERVIEWS BILL ENGLISH
Finance Minister Bill English, you have heard what Professor Renwick has had to say about the future of weather and farming. Just on the issue he raised there, not enough leadership on the issue of the adaption, NZ’s adaption to climate change. What do you make of that?
BILL ENGLISH - Minister of Finance
Well, I don’t agree with that and for two reasons - one is that we have a very open, unsubsidised farming sector, and they have very strong incentives to adapt to short or long-term changes in the weather. And, secondly, right now we’ve got a national discussion going on, a public discussion about new rules for the use and distribution of water - something previous NZ governments haven’t confronted. That’s a discussion going on about a national framework for water, about getting the balance right between environmental and economic sustainability. And by the end of this year, we’ll pretty much have a new framework in place, and I think that’s a pretty good demonstration of leadership.
CORIN Do we have, though, a framework, do we have a national strategy, for example, on adapting to climate change?
BILL Well, we’ve got climate change policy built around the emissions trading system, which has bipartisan support. That debate’s going to go on. With respect to our primary production, though, the driver of that adaptation will be the incentives on the farmers, and the government is doing its bit with the new water framework.
CORIN Sure, but we don’t have a strategy, as such? Your government isn’t making adaption a big priority?
BILL Well, look, some of this is just about how you label things. I mean, we’re putting hundreds of millions into research around primary production that will include, for instance, new cultivars that are going to be more drought-resistant. As I said, we’re doing a water framework which is all about how to get water storage and how to get environmental sustainability and the use of water for farming.
CORIN But you are the leaders, and the point that Dr Renwick was making here was isn’t it about leadership? The message that is coming from the top down to New Zealanders about climate change and about the need to adapt? And there is a lack of that message.
BILL No, I simply don’t agree with that. I think New Zealanders right now, particularly the farming families who are dealing with the stock welfare issues, the financial issues, the issues of personal stress, they know what’s needed. What’s needed in the first place is rain. But, secondly, they’re quite adaptable, and I don’t think the government has got much it knows better than they to change the way they run their businesses.
CORIN But you in Parliament this week were essentially questioning some of the predictions from NIWA. You were saying that there is always uncertainty about these predictions. ‘I recall similar predictions made by scientific bodies in Australia just four or five years ago, and it’s not stopped raining since.’ Now, that was pretty dismissive, wasn’t it?
BILL Well, it’s a statement of fact about Australia. They were going through a discussion about how they’d run out of water for cities, and it hasn’t stopped raining since.
CORIN Yes, but it’s also been the hottest summer on record in Australia.
BILL Well, look, I don’t think there’s much to be gained by some argument about climate change or how it works or not. The fact is we’ve got a very high-impact drought right now. As a country, we are reliant on the people who actually manage the environment, which is the farmers, to adapt in the very short term to the severe impact of this drought, and, in the longer term, if we’re going to go through a drier cycle. And as I think you quoted earlier, farmers have been doing that for decades.
CORIN But doesn’t it matter what the government thinks? Doesn’t it matter whether you think this is different, that this is climate-change induced, that we’re not just going through the normal cycles of droughts? That this time it’s different, whether you think that or not?
BILL Well, look, I think what matters is that the government does what it can to ensure the economy can be adaptable, that people who are running the farms, people who are running the businesses off-farm that are going to be affected by this drought right through provincial and rural NZ are able to be adaptable and they make the choices that do it. I think the government is doing a good job of it.
CORIN So what you’re saying is you’re not going to take leadership on this issue.
BILL As I’ve said, we have taken leadership on this issue. For the first time ever, the NZ government is addressing directly policy framework around water to ensure that we can enhance its storage and that we can get the right balance between economic and environmental results, and that is a discussion we’ve never had. We’ve invested three or four years in getting to this point. There’s a large amount of good will and enthusiasm for progress, and by the end of the year, we will have achieved something no other government has achieved and that is a direction and framework around our use of water.
CORIN All right, Mr English, if we could move on to the Budget. What sort of impact will this drought, do you think-? Well, firstly, what’s your latest advice on the impact to the economy of this drought we’re seeing at the moment?
BILL Well, we’ll be getting updated advice over the next few weeks from the Treasury as we prepare the forecasts for the next Budget in the middle of May. But the latest advice is that somewhere between $1 billion and $2 billion will be knocked off our national income, and as every week goes by, the prospect of it being $2 billion instead of $1 billion grows.
CORIN So that’s new. So earlier in the week you were saying $1 billion. You’re now saying it could be $2 billion.
BILL It could be. The context for that is about $200 billion of GDP, which we would expect to grow by $4 billion to $6 billion in a year, and that’ll be pegged back by somewhere between $1 billion and maybe $2 billion if this drought continues. And there’s really nothing else that can knock 30% off NZ’s growth rate in a year. This underlines for us the importance of our primary production sector.
CORIN Does it also underline the fact that perhaps we need to diversify a little bit more?
BILL Well, yes, in the long run, I suppose it does. We are a fairly weather-dependent economy - whether it’s our electricity or our primary production or the cash flowing through our provincial cities.
CORIN So what is your government doing to help diversify this economy? Because with the high dollar the way it is at the moment, it’s certainly not going to be manufacturing that fills the gap.
BILL Well, manufacturing continues to grow. In fact, with these circumstances over the next year, maybe manufacturing will grow faster than primary production, which will be a bit more diversification.
CORIN All right, on the Budget, we’re only six weeks away or so. So you’re starting to think about that. Are we likely to see any major tax reforms, any major programmes in this Budget?
BILL Well, there’ll be further steps in the government’s programme of on-going, moderate and consistent change both to get our public spending under control and get back to surplus, but also to improve the competitiveness of the economy. So we’ll be sticking to a fairly predictable direction. There’s unlikely to be major tax reform.
CORIN What about spending? I mean, you do have some money allocated for spending. Are you going to spend all of that? $1 billion or so?
BILL Well, we’ll probably be spending all of it. Look, the public service has done a very good job of dealing with quite small increases in spending. We had a couple of Budgets where it was a net zero. This time it’ll be a bit higher than that. But the focus will stay on improving public services, even though a lot of public services won’t be getting more money, but, you know, health and education and welfare will.
CORIN What about the big programmes - Working for Families, student loans? I mean, my understanding was you were asked by Treasury late last year to look at putting interest back on student loans, for example. Will you touch any of those biggies?
BILL No, we made a number of decisions a couple of years ago to trim those programmes. There’s some on-going tidying up been going on, particularly in the tertiary education sector. But the substance of those programmes will stay in place.
CORIN All right, if we could move on to Solid Energy. Can you give us an update on where things are at with the banks? When will we know whether the government is going to have to bail out Solid Energy?
BILL Well, that will be some months yet. There’s discussions going on with the banks now about stabilising Solid Energy. Some of the information around its cash flows is a bit more positive than we might have expected. But we will get a period of two to three months through to the end of June where we can look at all the options for recovering value for the taxpayer in the first place and, secondly, to decide whether there is an on-going viable business in the middle of this-
CORIN Are you saying it’s making a bit more money than you thought now and that it might be able to get itself out of trouble?
BILL Well, I wouldn’t go that far. All I’m saying is the cash flow numbers are just a bit more positive than we expected. I mean, if you look back, Solid Energy made some very substantial investments in some of its mines. Some of those worked out, such as in Stockton; some of them didn’t, such as in Spring Creek. But where they have invested, they’ve got capacity for production and for value, and if coal prices are at some kind of reasonable level, then there is a business there.
CORIN Do you want the banks to take some of the heat on this?
BILL Yes, I think that’s really important. They’ve lent money, and as lenders, they take risks. And if they lend to a company that’s affected by a very sharp downturn in coal prices and then loss of a quarter of their export sales, they’ve got the same risks as banks who leant to resource companies all around the world that have got in trouble.
CORIN You can see the irony in that, though, because you told them to borrow more.
BILL Well, and you were talking about it as a revelation. We did a press conference back in 2009 about the need for our SOEs to take on-
CORIN But you know that timing is everything with these things, and that was a revelation coming at this time, given your government had tried to distance itself from this issue. You even blamed Labour for it, for what they said in 2007.
BILL No, I don’t agree with that. In 2009, the government was facing a decade of deficits because of the Labour Party and the recession. And we quite reasonably said that our taxpayer-owned companies should contribute more cash to the coffers. That’s the point of owning them. And Solid Energy had paid barely- had paid almost no dividends for the previous five or six years, and they had very low levels of debt compared to their asset value. So, look, in retrospect-
CORIN But there was a good reason for that, wasn’t there? Because they were a coal company.
BILL That’s right. Look, in retrospect, they would have been better off with lower levels of debt, but as I think Don Elder and John Palmer said at the Select Committee, the board is there to make the decisions about what the actual levels of debt are. Bear in mind, in 2011 their debt had peaked and was declining, and then they got hit by the perfect storm in 2012.
CORIN But you were telling all SOEs to raise their debt to a 40% gearing, and Solid Energy told you they were not comfortable with that, and there was a good reason: because they were a volatile coal company. Surely that was too much pressure you were applying to them.
BILL Well, clearly not, because their debt peaked at under 35%, which was the level the board set, which was lower than what the government was expecting. And in 2011 their debt levels were actually declining from that, and then they got hit by the perfect storm. So, yes, would they have been better off with no debt? Yes, just like lots of businesses and households would be better off with no debt. Then they got hit by these circumstances which may well have put the company into trouble even if it had no debt.
CORIN The issue also, of course, has been around their investments. Now, your government must take some responsibility, surely, for the oversight of what they were investing in. You were the one down in Southland turning the first sod with the lignite plant. You knew what they were up to.
BILL Well, and it’s yet to be seen just whether that particular investment has on-going potential or not. Clearly, some of them don’t. Some of them may do. That’s what’ll happen over the next two to three months. But what you’ve got to keep in mind here is that under the SOE model, politicians are not there to run the companies. We do not make the investment decisions. The boards make the investment decisions, and the weakness in the model is that there’s no market scrutiny of those board decisions, and that is why the partial sell-down of the electricity companies will help with the monitoring and the performance of those companies.
CORIN And are you confident there will be much better decision-making, that these MOM companies, in general, are going to have better board making decisions?
BILL I think mixed-ownership companies will, but there’s a real challenge for government with the lessons from Solid Energy. When you look ahead, the companies that the government will own all have their challenges - NZ Post with the shrinking postal market, TVNZ and the digital media environment, a coal company if there is still a coal company. And we are going to have to change the way we work with these companies to ensure that we don’t lose taxpayers’ money. Because the taxpayers’ money in these companies doesn’t come out of the sky; it comes from the PAYE and the GST paid by NZ households. And we have a strong responsibility for the stewardship of that money.
CORIN Finance Minister Bill English, thank you very much for your time.
BILL Thank you.