Q+A: Gabriel Makhlouf interviewed by Corin Dann

Treasury Secretary and Chief Executive Gabriel Makhlouf told TVNZ 1’s Q+A programme that ‘probably the biggest risk for us at the moment is what we are seeing as growing protectionism around the world.

‘And a small open economy like us needs to really focus on that, because, I mean, if it happens, we would be the first to be hit quite hard by it.’

When asked about immigration numbers dropping back at the rate they thought they might, Gabriel Makhlouf told Corin Dann, ‘we’re now wondering whether, actually, we need to change that assumption.’

‘ ..Our forecasts have an assumption that we’re going to revert back to the mean.

CORIN Which is 12,000, isn’t it?

GABRIEL Which is 12,000, and we’re now wondering whether, actually, we need to change that assumption. It’s not a forecast; it’s an assumption.’





Q + A
Episode 930
GABRIEL MAKHLOUF
Interviewed by CORIN DANN

CORIN This week the head of the International Monetary Fund, Christine Lagarde, warned that protectionism was on the rise, threatening an already weak outlook for the global economy. Calls for protectionist policies have been a feature of the US presidential contest. Donald Trump has argued against free trade deals and suggested he would introduce tariffs against imports from China and Mexico. This sentiment is not just found in America and worries New Zealand’s treasury too. The Treasury is the Government's key advisor, working towards higher living standards for New Zealanders and improving our economic performance. Secretary and chief executive Gabriel Makhlouf has just returned from Canada, where he met with treasury heads from Canada, the UK, Australia and Ireland. Political editor Corin Dann began by asking what he'd learnt.

GABRIEL What a strong position New Zealand is in relative terms. We’ve got good growth, we have actually got the government’s books under control, so we have got a good platform from which to withstand shocks and which to build from. But it is a risk. I mean, probably the biggest risk for us at the moment is what we are seeing as growing protectionism around the world. And a small open economy like us needs to really focus on that, because, I mean, if it happens, we would be the first to be hit quite hard by it.

CORIN What would that look like in New Zealand, if we did see a Trump victory or something triggered a growing protectionism? How would that materialise in New Zealand?

GABRIEL Yeah, I mean, I am not going to comment about the politics of any other country, but what we might see is just reluctance for countries to want to enter into free trade agreements with us. At the moment, our priority is negotiating one with the EU. But generally, just a mood around our trading partners towards protectionism, and we would see it ultimately impacted in our ability to export. I mean, one of the good things is the fastest-growing part of the world, Asia, we are not actually seeing that, so those signs of protectionism. So from my perspective, one of the things we should be absolutely focused on is deepening our connections to Asia, deepening those connections, whether cultural or economic so that, you know, if bad times come, we have actually got some roots, where I expect there is a lot of middle-class growth to come in China, but also in Vietnam and Philippines and Malaysia and Indonesia.

CORIN So do we give up on the TPP, and waiting for America to sort itself out and put renewed effort into those Asian countries?

GABRIEL No, TPP actually is part of Asia. I mean, you know, we absolutely do not give up on it. I mean, I reminded someone the other day that the president of the United States supports it. So we should just continue to work towards ratifying it.

CORIN Looking ahead, you say protectionism is a growing risk. Could that hurt New Zealand’s growth in the future? Could it mean reduced living standards if we don’t see a world that continues to embrace free trade?

GABRIEL Yeah, I think it could. I mean, I think it could. And a small open economy like ours actually can’t get rich by just selling to itself. It needs to trade with others. And one of the big things that has happened over the last twenty to thirty years is that growth in free trade, is trade barriers coming down, and fantastic access for New Zealand exporters. And if the world starts to close in on itself, that will hit us.

CORIN Do you worry about the root causes, perhaps, of that protectionist rhetoric, the populism that we are seeing? Because putting aside the politics of Trump, as you said before, but the root causes seem to be a dissatisfaction amongst middle classes in the West that they are suffering low wage growth, that there is rising inequality. I mean, many would argue we have similar problems in New Zealand. What is Treasury’s view about that?

GABRIEL I think we can do a number of things. I mean, it is interesting to just observe that actually a lot of the dissatisfaction, I mean, we are not seeing it in Asia. But we are seeing it, obviously, in the United States and in a lot of OECD countries at the moment. I think we can do two things. One – we can actually make sure that the narrative as to why free trade is good for community at large, I mean, why we think that, and just make that clear. But secondly, just recognise also that globalisation has had impacts on communities. And let’s not pretend that they don’t exist, and just address them head on. And that will vary from country to country. I mean, the really important from my perspective and the Treasury’s perspective, is making sure people have skills that are transferable and that can move from industries that may be impacted by free trade to new industries, to new opportunities that free trade actually creates.

CORIN If we could talk about housing - you had a reasonably hard-hitting speech not too long ago on the issue of housing, Auckland housing, in particular, the amount of debt New Zealanders have racked up on mortgages, $215 billion or so and how that was a risk. How much of a risk is that to New Zealand, that amount of money?

GABRIEL It’s absolutely a risk. I mean, the reality is that we’ve got the lowest interest rates, perhaps forever. And we’ve got levels of household debt that are now close to where they were before the GFC started. If interest rates start to go up, I mean, some people may have borrowed money at-

CORIN Is that likely, though, interest rates going up?

GABRIEL Not in the short term. Not in the short term, but, you know, you don’t know what shocks are round the corner. You know, just before the GFC, people did not believe that things were all going to go bad.

CORIN It’s almost too big to fail, though, isn’t it now? I mean, if there was a jump in interest rates, nobody could cope, could they?

GABRIEL Oh, I don’t think that’s the case. But I think it’s absolutely a risk and it needs to be focused on and we need to make sure that our housing market actually works well.

CORIN How do you actually get those levels of debt down or reduce the growth? Does Treasury have a view? Are you advising the government that it’s time to reconsider demand side measures, whether it be a stamp duty or a land tax or taking away negative gearing?

GABRIEL I think our main focus is advising the government to make sure that we get supply working, that fundamentally what’s happening, in Auckland in particular, is that we spent a long time not building enough houses and we’ve now got a big demand for houses. We now need to get on and make sure we do build the houses that we need, that will make a difference. And ultimately, that will play a massive role.

CORIN Do you worry too about the social impacts of this housing bubble? I mean, first-home buyers, nurses, you know, teachers aren’t able to buy a house in Auckland.

GABRIEL Yeah.

CORIN And we’ve heard business leaders start to complain about this, because they’re worried that the middle class is going to start leaving Auckland.

GABRIEL I do worry about it. I mean, I worry about the economic impact of it. I mean, I worry about the fact that increasingly, attracting skilled labour into Auckland is going to be difficult; and absolutely, the, sort of, social impacts. When I was in Dublin a few weeks ago, I mean, one of the interesting features of the discussion we were having is that every single country was reporting the same phenomenon. In Ireland, it was Dublin’s housing problem. In the UK, it was London and the south-east’s. You know, in Canada, it was Vancouver and Toronto. And in Australia, it was Sydney. It’s partly fuelled by the fact that interest rates are so low around the world. You know, some money’s cheap. It’s also fuelled by the fact that people want to live in attractive cities.

CORIN What can you actually do to help a teacher or a nurse in Auckland get a first home? There’s not much that can be done, actually, is there?

GABRIEL Well, I mean, I think we need to make sure – I’ll just keep coming back to my point – I think we need to keep making sure that supply is working, whether that’s supplying rented…

CORIN Eventually, you’re saying, that will see prices come back to some sort of a, what, equilibrium?

GABRIEL Yes. Yeah. It should. I mean, with the one consensus – well, I think it’s a consensus – is there’s no magic bullet that’s going to fix the housing problems quickly. But they absolutely need to be fixed.

CORIN The issue of immigration – is it coming off as fast as you perhaps thought in the budget? I mean, it seems to be pretty elevated, up around that, sort of, 70,000 mark.

GABRIEL It is pretty elevated.

CORIN Is it dropping off at the pace you thought it might?

GABRIEL Not yet. It’s sort of slowed a little bit, but it’s still at pretty record levels. I think immigration, it’s really important to be clear when we’re debating immigration, that we’re clear about what we’re talking about. Because some of those headline numbers, you know, around a third of them are Kiwis and Australians, actually, coming, you know, back to New Zealand. About a fifth or just over a fifth are students. And around a third, roughly, are actually work visas. And certainly, those migration numbers are having an impact on our growth. I mean, growth being driven by a number of things, migration’s one of them. Our forecasts have an assumption that we’re going to revert back to the mean.

CORIN Which is 12,000, isn’t it?

GABRIEL Which is 12,000, and we’re now wondering whether, actually, we need to change that assumption. It’s not a forecast; it’s an assumption.

CORIN That has implications, though, for New Zealand, doesn’t it? Because it’s putting pressure on housing, it’s putting pressure on hospitals, it’s putting pressure on schools. You know, is the government simply going to have to spend some more money here to deal with this?

GABRIEL The government has spent more money to deal with it. I mean, it has. You know, the last budget, the government put more money into schools and into health to just cope with the extra demand coming from the bigger numbers, absolutely. 43% or so of migrants go to Auckland. I’m not an expert on the points system, but I think you get a few more points if you actually want to go elsewhere, out of Auckland. And we need to make sure that the work visas, absolutely that the system is working well, to make sure that we’re getting the people that our businesses tell us they need the skills. Because at the end of the day, you know, these people come in to help businesses grow, and growing businesses create jobs.

CORIN But one of the arguments has been that we’ve just brought in a lot of low-skilled workers and that’s suppressed wages. So how does that fare for the worker on the minimum wage busting their gut at the supermarket?

GABRIEL We need to make sure that the settings for the work visas are absolutely right and that we’re not bringing people in to do the sorts of jobs that actually New Zealanders-

CORIN Have they been right? Do they need fixing?

GABRIEL I mean, I think at the margins, absolutely, that some tightening does need to happen. I mean, the system needs to adapt quite quickly and flexibly, and perhaps it’s just taken a bit longer to do that. But I would caution against people jumping to the conclusion that we don’t need immigration. Our businesses do need skills and capabilities with which to grow.

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