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Scoop IV Transcript: John Key TalksTax Cuts

Audio 'N' Transcript: Scoop Talks To Key About Tax Cuts

National's John Key in his office – a fan of tax cuts and modern art

Following the recent budget Scoop thought it would be worthwhile to go and have a chat to National's finance spokesperson John Key and see what, if any, of the plans National had before the election were still on the table. Interestingly National's plan to cut tax was still seen as a viable option by Mr Key. Scoop also discovered that Mr Key - who had slammed Labour's student loans' policy as a 'bribe' - had been fortunate enough to avoid paying a single brass razoo on fees during his time at Canterbury University. Mr Key informed Scoop that when he was at University there were no fees.

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Transcript: John Key Answers Questions On Tax Cuts

Kevin List: John, I see National has put out a comprehensive alternative budget in the form of a postcard that has been dropped into Kiwis' letterboxes. The postcard says that National would borrow wisely to pay for roading and infrastructure. Would you like to explain who we'll borrow the money from?
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John Key: Yeah, sure. The government borrows anyway. You've probably noticed that the current government has a borrowing program undertaken by Treasury, which is essentially undertaken by the Debt Management Office on their behalf. So essentially, it issues government stock. They're largely bought off-shore, though some NZ fund managers, clearly, buy them.

KL: How much will we be borrowing, in a hypothetical universe?

JK: We did some calculations prior to the election. You may remember we originally had said we thought over the term of the first, or over the period of the first term of the National Government, we were likely to borrow $3 billion more than what the current projections had been for the Labour Government.

What we hadn't actually done, was taken into account the additional revenue that the, at that point, pre-election update had told us would be there. We took a very conservative approach. There's probably a strong argument to say we shouldn't have been quite so conservative and should have just taken it to the bottom line.

When you add that in and you actually--which is around about $2.2 billion--and take into consideration that this government, through its student loan policy, has had to write off about a billion and a half dollars, my argument would be, I think under the policies that National entered the last election with and policies that the Labour Government ultimately are rolling out, our borrowing programme probably would have been pretty similar over that period of time.

KL: : So in our hypothetical universe, last year's tax... is last year's tax plan still on the table?

JK:: : Totally. In terms of what we would have done had we won the elections, no doubt we would have rolled out that tax plan. It was phased in over three years, as I'm sure you're aware. It was phased in in a way to take into account that there was some inflationary pressure there, already put in place by previous budgets by Dr Cullen, and was fully funded in terms of where the money was coming from to pay that.

There's obviously a different question too--whether that would be the same tax plan that we'd have going to 2008. Clearly that is likely to be different, but we're very committed to the overall principle of tax cuts.

KL:: What level of debt is acceptable, then?

JK:: Well, the government of the day has to put out a fiscal strategy report, and we essentially replicated those parameters when we rolled out our tax plan last year. What we indicated is we're sort of comfortable with a notional debt to GDP of around about 25 percent, so that's gross debt.

That doesn't actually take into account our net debt position. The difference between the two is fundamentally just adding... taking off our nominal debt--which is around about $36 billion as a country--any financial assets that we hold. Now, that position actually sees New Zealand positive, and it would have remained positive under us. So our debt position would have been pretty akin to what we're seeing on the books at the moment.

KL:: Are there any dangers you can see in borrowing to pay for roading? Or tax cuts?

JK:: I think we wouldn't certainly borrow for tax cuts. It was never our intention to do that. Nor are we required to do that. Actually, our surplus that we were projecting to run was large enough to fund basically not only all of our day-to-day expenses of the operating surplus, but also enough to fund the entire contributions to the NZ Super Fund and a portion of our capital payments.

Like anything, you have to be mindful of the overall amount of gross debt you have, simply because you need to pay the interest bills on those. But NZ holding gross nominal debt of say 20-25 percent of GDP is extremely conservative, actually. I mean, it's well below most other countries. And I think, like all things, there can be good debt and bad debt. It depends enormously on what the debt's being used for.

If you're building roads or energy infrastructure or things that are going into the productive sector of your economy, then over time, you're actually building capacity which allows you to have more tax revenue, in fact, for the country to grow. Really no different from a company actually taking on debt to build a stronger infrastructure for their business.

So long as it's intelligent spending, I'm pretty comfortable with it.

KL:: What if the economy's heading for a soft landing and the baby boomers start retiring? What then?

JK:: I think, in terms of the baby boomers retiring, we're really talking about major demographic changes that New Zealand will have. They'll actually take some time to take place. One of the things we're actually seeing is voluntarily New Zealand workers working longer. Around about 1 in 4 of them now aged over 65 have some form of employment. So I'm not quite sure they're retiring in the old historical way that we thought of. I mean, they certainly are at some point, but maybe not quite so quickly.

Secondly, this level of debt is very modest. Far less, actually, then we've ever had, and in fact in nominal terms--because interest rates are quite low--obviously very, very manageable. But the main aim of the game is obviously to build, like a company, build an infrastructure which allows that to be more productive. It's been one of the big issues for New Zealand.

So you can sort of fool yourself if you don't spend on your infrastructure--however you finance that--that somehow you're doing yourself a great favour. I probably would argue with you, you're doing yourself a tremendous disservice. Many of these assets are long run. They're hugely important in terms of getting our economy to a point it can grow.

So I'm pretty comfortable that, as I said, as long as it's for the right thing--it's not some sort of wasted expenditure--then by and large it makes sense.

KL:: I say that because I'm a little bit younger than you, I just noticed that you didn't quite grow up in a State house. You did live in a State house, though.

JK:: Why didn't I grow up in one?

KL:: I thought you moved when you were about seven.

JK:: No, no, no, no. I moved into one when I was seven. I probably moved out when I was fifteen.

KL:: Sorry. You went to, obviously, public school--

JK:: I did.

KL:: And then university? Did you pay any fees at university?

JK:: No.

KL:: You didn't pay any fees at university?

JK:: I was in the period when there were no fees.

KL:: And then you sort of found yourself work in a time of low unemployment.

JK:: Probably, arguably, actually... I guess in '82, when I first started working, it was relatively easy. And anyway, at that point--I mean, I've got what I would describe as not an overly spectacular degree. I've got a bachelors degree. I've done some postgraduate studies, but nothing, nothing of great note. Not in the form of a--

KL:: And you had no market rents on a State house with it. In the Seventies.

JK:: No, I wouldn't have thought so. In fact, you're rolling around with 3 percent government loans. But I mean, at that point, being tertiary-qualified put you in a league of being able to get a job pretty much where you wanted. It's a little different today. A lot more people go to university.

KL:: Sorry, getting back to my point. Sort of like say if you had tax breaks now--and obviously your generation is a little bit older, again, than mine, you're before university fees--would you like me to pay more taxes later in life, or would you like the state--mainly health and social welfare--to be cut back for my generation or the generation to come?

JK:: I think the answer is you don't need either, actually. I think the first thing is, there's no real great reason to believe necessarily that you'll be paying more taxes in time. In fact, I think there's a pretty strong argument to say, if you really look at the fundamental...

There are two fundamental issues around New Zealand. One is around productivity, and we have an economy that's not productive in the way that it could be. Certainly there's a lot more to eke out. If you can develop productivity, then wage rates actually grow. That's the really driving issue for New Zealand. We're fundamentally quite a low-wage economy, and that's the gap which you'll quite often hear Don Brash and myself talk about.

That, you know, we used to be around about 20 percent less than the average Australian worker, and now it's 33 percent. On our calculations, it's likely to be not far away from 37-38 percent by 2009.

In a sense, if you invest in infrastructure and if you invest wisely with the right policies in your economy, then I think you grow productivity and you actually grow wage rates, and that has a tremendous impact. Both in terms of not only the tax you collect, but actually in terms of the ability to attract people that will pay taxes to you.

I mean, fundamentally, if you have a look at it, in the last six years I think there's been something like 25 sawmilling operations that have been started up in Australia; zero in New Zealand. Why is that? Well, there's a number of reasons, but one of them is our planning rules haven't allowed it easily, and the second is our infrastructure hasn't been able to cope with it.

So that's an enormous amount of tax revenue that we don't collect as a country. Just as when we lose businesses offshore. So I don't think it's a simplistic argument that somehow by giving tax cuts today, that you're robbed of something in the future. Otherwise you'll create a counter-argument of saying, Well, if the model has no impact on behavioural outcomes, then let's just raise taxes dramatically today and you'll pay less tomorrow.

KL:: Actually, getting back to your thing about people having incentives through, I guess, paying less tax, is that about them working more? Working more hours?

JK:: No. We work the second-longest hours of any country in the developed world, actually, behind Iceland. So in fact New Zealanders work pretty long hours. The main issue around--

KL:: What's the incentive then?

JK:: Don't forget, tax goes across a range of issues. I would describe tax in four fundamental areas. One would certainly be business tax. One would certainly be around investments. The third would be around personal tax. And the fourth is families.

If you had a look at cutting, for instance, taxes in the corporate and investment area, you're likely to see a tremendous amount of in-flow. I mean, you only need to go and look at Ireland and Finland and all the other people who have run that model hugely successfully.

KL:: Higher unemployment though, haven't they?

JK:: They have higher unemployment for a variety of reasons, actually. I mean, we've actually historically had pretty low unemployment.

KL:: If tax cuts are the engine for growth, how come tax cuts didn't do the trick in 1988, and how come Bill Clinton triggered the boom of the 1990s--allegedly triggered the boom--by raising taxes, not lowering them?

JK:: I think there's a few things. Firstly, I've always argued and will continue to argue that tax is one of the instruments you need to fix your economy and to fix productivity. I've never actually argued it's the be-all and end-all of life. There's clearly a lot of emphasis on that from the public, and we understand that, because they're grossly overtaxed by this Labour government, and because they've had years of essentially being ripped off through inflation.

KL:: It's a bit of a chicken and egg thing , with the advertising campaign. That might have helped the public.

JK:: Well, we were simply pointing out the blindly obvious to them that they were getting done over and we think that's our job to do that. But we also point that out in a huge variety of areas. So, as the finance spokesman I'll tell you that tax fits in my top five, but it's one of the five things that I think we need to address. I don't see it as that sort of thing.

In terms of one-off tax cuts, I mean, there are a number of reasons... I think you have to accept that there are huge... you know, economies go through cycles. They're tremendous cycles and they have tremendous external influences. I mean, for instance, at the moment--

KL:: The external influence of oil. How do you feel about giving tax cuts with oil prices...

JK:: That was really going to be my point, actually. If you have a look at influences, something like inflation that's occurring at the moment, much of that's coming from the external world. From oil prices, and partly from a lower exchange rate, and that's certainly feeding through into higher wage rounds.

So I would sort of say to you that--

KL:: You don't think it might be a bit inflationary?

JK:: I guess what I'd say, just going back to your original point about... You can't say: I give a tax cut today and my economy booms tomorrow. If it was as simplistic as that, sure, we would all do that. I think you have to accept that these things are about setting your fiscal policy for the medium-term, actually, and allowing it to flow through. And I think that it's very important that you take a medium-term's perspective.

Is it inflationary? Well, it depends. Don't forget we have always argued that tax cuts, you know, you can't spend dollars twice. We've argued, largely, that New Zealanders should be able to keep more of what they earn and spend more of what they earn. We've never argued that we have tax cuts of the proportion that we proposed in the 2005 election on top of everything else that Labour's doing.

And on that basis, I actually think some of it gets saved, to be perfectly honest.

KL:: Something came up in the House a wee while ago. Do you think it's ridiculous that Heather Roy of ACT could have been getting payment of 23 bucks a week, from Working For Families? If her husband stopped working, I think it was.

JK:: Yeah. That's right, there are always those things. I personally think, of Working For Families, it seems far too high up in the income bracket. Not because I don't want those families who earn more to have more income. It's very important to understand that.

KL:: She has got five kids – that's quite a lot [of children]

JK:: Five kids , yeah. I think the much more important issue is, I think you should use the tax system where you can. It doesn't work when people are not paying tax because they're very low-income New Zealanders. And if you go back to the 2005 election and look at our policy, for the vast bulk of families, they were better off under National with a combination of Our Families package and tax cuts.

I don't agree with basically turning three out of four New Zealanders into welfare beneficiaries and delivering something to someone earning $142,000 through the welfare system, when you can deliver it through the tax system. To me, it makes a lot more sense to deliver it through the tax system.

KL:: Because it was roundly pointed out by David Benson Pope that---not picking on Lockwood Smith in particular, but I noticed a single chap like Lockwood, an MP, would have been getting about 90 bucks. Heather with her five kids, if her husband--God bless him--died, would be getting 23.

JK:: Yeah. Actually, under our policy, by far the biggest payout was to people with low-incomes with families.

KL:: But Lockwood would still have been getting $90.

JK:: No, no. Because she was earning... she would have got a tax cut as well.

KL:: But Lockwood Smith, a single person--does Lockwood have kids?

JK:: No, Lockwood doesn't have kids, no

KL:: A single MP would have been getting 90 bucks.

JK:: Under a tax cut.

KL:: Yeah.

JK:: Yeah, but don't forget, under our model, they would have got more under it, if they'd had families.

John Key Answers Questions On Peak Oil

KL:: Getting back to oil. The PM, I think, said that we are near to a peak oil situation. Do you agree?

JK:: Not necessarily. It depends. I mean, look, you're dealing with a whole lot of sort of undefined sort of issues here. We probably have a sense of oil supplies, but there may well be lot more oil out there that we don't know. It depends on the price of it. My own personal view is that, for instance, New Zealand probably has reasonable oil reserves, but they're tremendously expensive to pull out of the ground.

Peak oil, as I understand it, is where you start running out of oil, essentially. I'm not sure we're necessarily at that point. I tend to think that there'll be replacements to oil.

KL:: Water cars - that's why we're building the roads?

JK:: Yeah, I think... across a whole lot of areas, fundamentally, around the world. We don't use oil for energy supply, but it's pretty clear that most countries around the world are going nuclear, and I think you'll see them reduce their reliance on oil for heating, and they'll increase their usage of everything from wind technology to nuclear, to be perfectly honest.

KL:: Treasury based its budget projections on a $65-a-barrel oil price, even though it was already $73. Is that acceptable?

JK:: Unfortunately they do their planning, I think, quite a reasonable distance out. It's just not possible to be perfect on the day, and you can argue they were a lot more realistic than the Reserve Bank, who've done theirs at $45 a barrel.

KL:: Do you support the idea of large companies paying millions of dollars to support the concept of tax cuts in advertising?

JK:: In what way do you mean that?

KL:: I mean, I just noticed that your old employers Merrill Lynch in the United States, just spent millions of dollars supporting the idea of tax cuts that will assist them.

JK:: Well, I haven't seen them doing it.

KL:: They definitely did do it.

JK:: How did they do it?

KL:: They put ads in newspapers saying, Good on ya, George, you've had another tax cut.

JK:: Oh, sure! Well, look, I think it depends on the thing. I'd have to see the ad. Generally, certainly when I was at the firm, it never took a partisan view. I think it was probably fair to say there were more Republicans than Democrats, but there were an enormous number of Democrats in the firm.

In terms of... I think that the new CEO, who wasn't CEO when I was there, Stan O'Neal, has had a close relationship with Bush. I suspect he may well... I'd need to see the ads to properly comment on them, but I suspect if he's arguing around that they're good to drive growth in the US economy, then they may well have put them in. But it's not normally their style.

John Key Answers Questions About The Media

KL:: A couple of weeks ago, Dr Cullen was in a bit of an unfortunate incident regarding tax cuts. Some media commentators did say that the way the tax cut debate was being framed, the media was in some ways the Opposition rather than reporting the Opposition. Do you agree with that proposition?

JK:: Not really. Look, I think that's the position Dr Cullen has chosen to take. That he wants to shoot the messenger. That somehow, you know, various members of the parliamentary press gallery have a personal agenda and are driving it. I think that--

KL:: Commentators weren't saying that. The commentators were saying, We disagree with Dr Cullen saying that individual journalists are driving it. But the way it's been handled is a bit sloppy. A bit lazy.

JK:: No, I think the press gallery is just doing their job and reflecting on what they see, and they're probably responding like most people to the surveys that we see out there where the overwhelming bulk of New Zealanders feel as though they're paying too much in tax and getting too little for it.

KL:: Leaving aside individual journalists, do you consider that the overseas owners of, say, Fairfax, the Herald, and TV3 would have no interest whatsoever in tax cuts?

JK:: They clearly have an interest. Funnily enough, actually, I suspect with overseas owners that the benefits to them are slightly less actually, simply because of the way they've constructed their balance sheet. They're in a stronger position than New Zealand companies to change their tax position.

All businesses clearly have a vested interest in tax and so do all individuals. In the end we all pay it. Like all businesses, you have to decide what you think is in the... ultimately in the best interest for you. But what we know from business universally around the world is--and probably from individuals--as a general rule, they want to pay the least tax possible. That's normal.

Why is that? Well, simply because tax is a cost of capital. It reduces their investment returns and it makes more projects less likely to take flight. Most businesses want to grow as much as they can. So do I think they spend their whole life focused on an agenda, a hard-core agenda of trying to push tax cuts? No. I think they leave that to us.

KL:: Okay. And just finally on that particular topic, would you have been happy if comments you made in a pre-interview situation to have gone out live on the news? Would you perhaps have shot the messenger?

JK:: I don't know that it would be...There's always... I don't know the scenario under which that occurred. I think there are... I mean, I think as a general rule, it is preferable if journalists make it clear when the interview's starting and they make it clear when the interview's ending. But, I think we've come to learn to accept as politicians that the rules of the game are pretty wily and it is possible that sort of almost anything's on the record.

I personally treat everything as on the record. Simply because I think "off the record" doesn't mean it's not reported. It simply mean, it generally means it's not attributed. I'm happy for my comments to be reported, so I have a general rule that says everything I say is on the record.

John Key Answers Question Regarding State Houses

KL:: Okay, and just a final topic. I was listening to RDU this morning, and you were on there with Wammo.

JK:: What channel is it on? I never hear him, actually.

KL:: You can listen to it through Scoop.

JK:: He's good, yeah.

KL:: Do you still hold that State housing in Hobsonville is economic vandalism? I didn't see those two words appear this morning.

JK:: Yeah, no. Absolutely it's economic vandalism, and for the reasons I pointed out. Which is, if you believe in State housing being an important form of housing for New Zealanders that can't afford a home--and I would support that view--then what I'd say to you is that the imperative here is about providing the most number. Because what we know at the moment is that there's a huge waiting list of people.

Now, I think we can have an immense debate about why that waiting list is there. To me, to build a State house on a $500,000 section when you can sell it and build three State houses is crazy. And I think it would be far better and a far stronger argument, actually, to sell the land and to build State houses.

As I said the whole way through, I've--right back from 2003--been prepared to, and offered to work with Housing NZ to build State houses in my electorate. And they do it.

KL:: What about pepper potting, though? You were talking about pepper-potting.

JK:: No, I support it.

KL:: In Hobsonville? But not as many?

JK:: The main issue is... Look, there are two fundamental issues. One is, I think they can get more value for money and sell it, right? And actually use it to build more.

KL:: So you would have some state houses?

JK:: I tell you what I think I'd prefer to see there, and that is... I mean, ultimately of course there'd be State houses because in the way it works now, Housing NZ rent houses anyway, that are owned by the private sector. I have dozens of them in my electorate that they're renting on 10-year deals.

So it's not about some sort of elitist view that says, We don't want State housing tenants in our electorate, type of argument. As I said, we've got dozens. I'd rather see that land where there would be a spread of housing for it to actually to go into low-income housing rather than State housing. I think the government actually does have a unique position there, if it chose to, to actually help finance some people in, by maybe having a time delay on payment of the sections, or whatever.

But I don't think Housing NZ have the skills to carry this off. I think there's a tremendous risk they'll get this wrong. And I think there's a tremendous risk that what could be a spectacular sort of development ends up becoming a ghetto because a few people decide they want to play guinea pigs with a big piece of land at Hobsonville. And in the end, I for one, personally think we should be challenging them on it because I don't think they have the skills to carry it off.

KL:: Okay. I've got your bio here from July 28, 2002, and it's the official National Party bio. It says you grew up in a State house. That's disappeared from your 2006 one. Is that just an oversight or a rewrite of the bio?

JK:: No, it's still on.

KL:: Not on the website.

JK:: Oh, is that the National Party site?

KL:: Yeah.

JK:: They rewrite their own. It's on my site. It's on my site. I look at it as a great marketing ploy for me. I'm very happy and very proud of my background.

KL:: Oh, no, I was just wondering if you might be sick of those Herald on Sunday articles about growing up penniless. Not a penny in the house!

JK:: No, no. I'm not at all. Not at all. And I'm not opposed--as I said to you, I'm not opposed to State housing. I don't think it's the best form of housing as a long-term process. I'd much rather see New Zealanders... I like the idea of home ownership. I think it's hugely important that people have a stake in the ground and feel as though they have a part in society.

I think if you go back, the National Party is founded on the principle of home ownership. It's a ownership democracy. And I think, in a sense, with State housing, there's actually an argument that says if they build them on very expensive houses, they can never buy those either, because they simply get locked out of it.

Providing some rental state housing, that's part of the solution of the problem. But I for one do not think that it's a long-term solution of just bundling more and more people in State houses. I'd much rather come up with creative schemes to help low-income New Zealanders get a stake and get their own home.

And I think that's actually, for society, a far stronger model because everything I know and every bone in my body tells me that people actually care about an asset that they own. Some people will trash it, but most people don't. And it's actually big State housing ghettos where people do feel locked out of society that they don't go forward.

KL:: Thank you very much for you time, John.

JK:: Thanks very much.


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