LISA Welcome to Agenda, today a Budget special. We go behind the headlines to look at what this week's budget really means for New Zealand's economic future, Minister of Finance Michael Cullen joins us live from Napier, plus we talk to National's finance spokesman Bill English about his plans for Kiwi Saver, tax cuts and economic growth.

With Labour trailing National in the latest polls much was expected of this week's Budget however there were no tax cuts, even the minor chewing gum cuts proposed in 2005 were axed, instead Michael Cullen outlined two major initiatives to increase New Zealand's savings and investment, the expanded Kiwi Saver scheme with compulsory employer contributions and a multi billion dollar reform of business tax. Reaction to the budget has been mixed as the editorials show. In the Press –

'It is odd to find a Labour government lowering the tax rate to business on the ground that it will help growth and investment but denying it to everyone else who apparently are not to be trusted with tax cuts.'

While the Nelson Mail says –

'It's a Budget that shows courage both in resistance to outside pressure and its innovative changes to the Kiwi Saver plan.'

Cullen himself has described the Budget as bold, a Budget that will continue New Zealand along the path of economic transformation. Michael Cullen joins us now from Napier. Good morning Minister.

This budget might be a budget for the New Zealand economy but is it really a budget for all New Zealanders?

MICHAEL CULLEN – Minister of Finance
Oh absolutely so, don’t forget this is the budget which pays for the first full year of the Working for Families package, at 1 April there was a ten dollar per week per child increase in Working for Families covering a very broad range of lower and middle income families, it continues to put more money into health, it continues to put more money into reducing class sizes, it puts more money into areas like home efficiency programmes, there's a very broad range of measure in this budget, and the Kiwi Saver scheme is designed again for a very broad range of New Zealanders not just for a few at the top end.

LISA Let's look at some of those groups who might disagree with you though, what is in Kiwi Saver for beneficiaries and say stay at home parents?

MICHAEL Well for stay at home parents of course we've got the Working for Families package, presumably one of them is going out to work and that person when they take up a new job is automatically enrolled in Kiwi Saver, their deductions begin straight away and at that point if they can stay in Kiwi Saver they’ll get a big gain. Let's take the case of a person who'll be on the average fulltime wage at the time that Kiwi Saver comes into the full operation when the employer contribution rises to 4%. They put 4% of their salary in, in effect the government will put 4% in and the employer 2% because we cover half of the employer's 4% so their 4% translates into 10%, that’s an enormous boost to their capacity to save for their long term prosperity.

LISA But do you envisage at any point the scheme might be expanded so those people who can't make payments and like or aren’t getting worker employer payments in like beneficiaries or single parents staying at home, at any point do you expect the scheme will be expanded where the government would say make contributions on their behalf?

MICHAEL I think that’s most unlikely, for people who are say on invalid's benefit all their life, New Zealand superannuation's actually an increase in their income when they get to age 65, not a reduction in their income. So people who are at the very very bottom end the best we can do for them is to keep pace with inflation and to do things like raise the minimum wage. When we became the government it was seven bucks an hour, by next year it'll be 12 dollars an hour, that’s a 70% increase in the minimum wage while we've been the government.

LISA Do you think Kiwi Saver though is going to widen the gap between rich and poor in retirement, which is some of the criticism?

MICHAEL No I don’t think it'll do that at all, what it will do is, it'll close the gap between the very broad range of middle income New Zealanders and those who are very well off, because there's no reason at all why people on quite modest incomes shouldn’t stay in Kiwi Saver when they're automatically enrolled when they take up a new job.

LISA Can you clarify just one point for us, in terms of being able to divert some payments on to you mortgage, if people have an existing mortgage before they go into Kiwi Saver will they still be able to use that mortgage diversion part of the scheme?

MICHAEL Yes they can engage in that mortgage diversion, that’s designed to actually encourage people to continue putting some money into Kiwi Saver as opposed to taking a full holiday from contributions and putting all their money into mortgage repayment if that’s what they want to do, they can still do that, but that’s really the kind of flexibility that’s built into Kiwi Saver.

LISA Alright, let's look at the business sector, you have lowered the corporate tax rate but what does that offer for people who are say in partnerships or unincorporated businesses, sole traders or small partnership, there's nothing in that for them.

MICHAEL No, the corporate tax rate cut doesn’t affect those and I fully admit that fact, but actually a very large proportion of single traders, self employed people for example, actually have a taxable income under $60,000 a year, they don’t pay the 39% tax rate, that’s often not well understood in New Zealand, and for them a major change in Kiwi Saver is that they will qualify for the employee tax credits, so if they can put money into Kiwi Saver they’ll qualify for that $20 a week tax credit as well, which previously there was nothing for them in Kiwi Saver along those lines.

LISA But Dr Cullen what about the criticism that there has been some bracket creep, for example people making over the $60,000 mark up from 5% I think it was up to 12%, how to you counter that?

MICHAEL Yes indeed, there has been some bracket creep as obviously so, but nobody has come out after this budget, certainly not the National Party and outlines areas where they would cut the proposed spending by any large amounts in all the main areas, indeed when I was reading the Budget some of them were saying oh is that all there is extra in certain areas. So if there was to be anything substantial by way of personal tax reductions that was on top of what's in the Budget and obviously that would have led to higher interest rates and a higher exchange rate, people paying more by way of their mortgage, businesses paying more by way of their business borrowing. Well Kiwi Saver does over the long term and the Treasury report makes that clear yesterday is that it will lead to lower structural interest rates and a lower structural exchange rate over the long term, that’s got to be good news for New Zealand business along with the corporate tax rate cut and the R&D tax incentive and the doubling of spending on the Market Development Assistance Scheme.

LISA Do you believe that Kiwi Saver will push some small businesses to the wall?

MICHAEL No I don’t. Look let's just run through those numbers. A full operation in four years time employers will have to pay 4% into a Kiwi Saver account where their employees opt to be in. We're estimating maybe 50% that’s a very high estimate if we get to 50% of employees in by that stage so it's actually 2% and we're covering half of that from government so it's 1%, it's a 1% addition to the total wage bill over the next four years and if there's the very smallest amount of trade off in terms of wage bargaining even one half of 1% that will halve that again, now we really seriously saying that a half a percent, maybe 1% movement in the total wage bill over the next four years is going to put lots of Kiwi businesses out of business when at the same time businesses are long term gainers out of this, many will have that more than offset by the corporate tax rate reductions, some will be getting more assistance with the Market Development Assistance Scheme, some will be getting the R&D tax incentives.

LISA Dr Cullen you talk about transforming the economy and this is a phrase that Labour uses all the time, when will we know that we've been transformed what will be the measure?

MICHAEL Transformation is not a finite process Lisa, it's a continuous process, the world is continuing to change and we have to continue to change in response to that. We've gotta be very nimble and adapt to small economy because we're a long way a away from any other developed economy, so transformation is not something that happens and then we like back in the deckchairs on the cruise liner, it's something we've got to be continuously and continually engaged in.

LISA But presumably you must have some measures or should there be some measure to know that we're meeting certain benchmarks like OECD where would you like to see us in that ranking?

MICHAEL Well obviously we would like to climb up that ranking and indeed we have actually grown faster that the OECD average, the problem was of course the one that was just about the same level as us, Spain, has been the fastest performer in Europe over the last few years, largely because of outside investment in housing in Spain, the British and the Germans have been flooding into retirement homes in Spain and that’s heated their economy up enormously, but actually we've done better than the OECD average and much better than the European Union average over the last seven years, so we are catching up in that sense.

LISA So what's your budget then going to do to raise productivity and achieve the magic 4% growth that Labour has talked about?

MICHAEL Well firstly of course this is the biggest taxing – sorry saving and investing budget – that was a Freudian slip – the biggest saving and investing budget in New Zealand history, and saving and investing is about how we improve productivity. One of the reasons Australian productivity is much higher than ours is they have far more invested per worker than we do, they're much more capital intensive as economists would put it. We're putting a lot more money into skills development and next year we start a big change in our tertiary education system which is designed to produce more appropriate skills for New Zealand, we're putting more money into export market development, we've gotta bulk up overseas if we're to lift our productivity within New Zealand, we can't simply grow off if you like taking in each other's washing which we've done too much of over the last 25 years, we haven’t lifted our exports as a proportion of GDP as fast as many other developed countries.

LISA In terms of the Kiwi Saver fund itself what's to stop all that money that’s squirreled away being invested in overseas companies?

MICHAEL Some will be invested overseas and that actually makes sense for our long term prosperity and our retirement incomes because it means we're not betting only on our own economy, in exactly the same way that a lot of the Australian funds are being invested overseas. What it does create for us is much stronger capital markets in New Zealand, it means we can provide more of our own capital for investment within New Zealand rather relying upon overseas borrowing, it means that we can get less worried in the long term about more and more control of our economy shifting off overseas but successful economies like Australia's and like many others have significant offshore investment, that’s one of the way in which they succeed.

LISA In terms of the tax cuts we understand that you are not wanting a lolly scramble as you put it but can you give an indication, the next budget will you be giving any kind of personal tax cut, or will you just be giving us a forewarning of a tax cut to come?

MICHAEL That will depend entirely on how the economic circumstance unfold over the next year. I mean only silly people like the National Party promise large tax cuts when they don’t make sense in the way the economy needs to be managed at that time, and that’s why you’ve have this argument between Bill English and John Key over the last couple of weeks about those particular matters. What I'm intending to do with the full backing of my colleagues is to lay out our long term programme. When dividends by way of reductions in tax can be afforded what kind of shape will they take, what will they look like and obviously laying out a programme a timetable around that in the light of the circumstances next year, but don’t forget we're well away from next year's budget, literally a year away from next year's budget and we can't make absolutely 100% predictions about what the economy's going to do over that period of time, will we see demand growth slackening off, will we see ….

LISA Have you not expected the changes that you might hope from this budget to have kicked in by then to enable you to give personal tax cuts?

MICHAEL Look Kiwi Saver is a long term programme, it's not a programme where next year we'll say heck we've righted the imbalances in the economy, our 9% current account deficit has now become for the first time in our history a current account surplus I mean economists don’t work that way, they are like large aircraft carriers which tend to change direction relatively slowly.

LISA Turning now to our panel for their questions, going first to Deborah Hill Cone.

DEBORAH HILL CONE – Columnist
Hi Dr Cullen, I'm a bit confused. You're telling us that we all should be saving and you're wanting to transform our saving habits, but at the same time the government is spending, it spent an extra 21 billion dollars since the year 2000 and even more than that if you look at it as a percentage of GDP. It seems to me to be a case of do what I say not what I do.

MICHAEL No not at all, I mean first of all government spending as a proportion of GDP is actually pretty much the same now, core government spending, as it was when we became the government round about 33% of GDP, it's gone down and up and down and up during that period of time. Certainly during that period of time there's been a very big shift in spending away from spending on benefits which I've substantially reduced because of the fact we've got 150,000 off the benefit rolls into areas like spending on roading and infrastructure and education, obviously health has taken a fair share as well. So government spending's actually been fluctuating around pretty much the same level and there's been quite a strong compositional shift in spending away from benefit spending into education and capital spending because basically for many years we were under investing in capital spending at the government level.

DEBORAH Yeah but I don’t know that that really would cut much ice with someone who is on a very low wage and being told that they ought to be saving and they also see that the spending in the government sector and the wages for example for public sector employees has actually gone up, so you're not being as frugal as you're asking us to be.

MICHAEL Well actually I have been, I've been accused of being overly frugal almost every year for the last four years running according to most of my critics too large a surplus. Let's take that low income person. First of all if they're in a state house they’ve moved on to income related rentals as opposed to where they were previously. As I said before we substantially lifted the minimum wage which has probably had an effect across the lower end of the wage sector, if they’ve got kids they’ve had Working for Families which has substantially increased their incomes over that period of time. If they have any health problems we've reduced the cost of going to the doctor and the cost of their prescriptions. If they’ve got kids going to tertiary education we've reduced the cost of student loans and greatly moderated the increase in the cost of tertiary education compared with 10 to 15% annual increases that we had under the National government. This is a government that’s done a great deal for people on lower incomes, and finally of course we've halved the rate of unemployment. So we've got household income has grown very strongly over the last seven years, particularly because of that growth in employment.

DEBORAH But one thing you haven’t done is just let them hang on to their own money.

MICHAEL Let's go back we're talking about people on low incomes, they would never get much out of tax cuts anyway, because tax cuts are very difficult to structure in a way that doesn’t give more to those on higher incomes, that’s one of the reasons why we want to think more about the long term programme of how dividends can be paid out by way of tax reductions, in a way which is fairer than simply knocking it off rates at the top end or even threshold changes which do very very little for those people on lower incomes. We're talking about the people on 25 or 30 thousand dollars a year fulltime income, they do get very very little out of tax cuts.

LISA Alright let's bring in Bernard Hickey I can see him raising an eyebrow as you're speaking there.

BERNARD Dr Cullen, thank you, it's clear that the increase in that top tax rate early in your term was one of the factors in driving the real estate market up very sharply and that a lot of people decided this was a way to get around that higher tax threshold. Wouldn’t next year be the fantastic opportunity to cut that top tax threshold by putting that money into Kiwi Saver giving yourself the third leg. You’ve got a government contribution, employer contribution, now make it a employee contribution as a tax cut into Kiwi Saver, non inflationary and you get the tax cut.

MICHAEL You’ve been saying that those over $60,000 only will be forced to save in Kiwi Saver?

BERNARD What's wrong with compulsion you seem to have gone almost …with these moves in the budget.

MICHAEL Are you saying only for those over $60,000 or across the board?

BERNARD Well the problem is that the …

MICHAEL Could you answer the question Bernard it's quite an important question.

BERNARD Well surely it's for those on that top threshold and this is a way to improve the problems with the real estate market, by making sure that those people….

MICHAEL Oh I think that is wildly wildly overdrawn as the reason for the boom in the real estate market. Firstly, other countries have also had a boom in their real estate markets. Over the last ten years real estate prices in New Zealand have actually moved less than the United Kingdom and Australia and Ireland and a range of developed countries around the world. The big change was in 1991 when the National government abolished the ring fencing of investment property income. At that point people started leveraging borrowing and losses on property income started rising dramatically for tax purposes against the income on rental property, and that’s an issue which I think needs to be looked at and it's part of what I hope the select committee inquiry will look at on monetary policy. You certainly can't blame the top tax rate for being the primary driver of the growth of the property market, they other big issue of course has been strong migration flows and strong growth in the New Zealand economy and strong household income growth which helped drive that.

BERNARD Getting back to the point though, will you use Kiwi Saver next year before the election as a tool to give a tax cut in a non inflationary way?

MICHAEL I think it's almost impossible to design that, it's a very cute idea that people some up with, it's actually a great deal more difficult than people seem to say because it then becomes a compulsory scheme for people across the $60,000 a year income boundary but a non compulsion scheme for those below, that’s an extraordinary complex suggestion to put into practice.

LISA On the question of compulsion Dr Cullen it's estimated that perhaps there'll be 50% uptake of the Kiwi Saver scheme in this new form, if you don’t reach that kind of level is compulsion on the agenda?

MICHAEL Well actually I think that would be a very very ambitious target for the next four to five years, if we got there I'd be extraordinarily happy, in the longer term it may well be higher than that as people continue to stay in Kiwi Saver as they take on a new job. The problem with compulsion is of course that for many people on very modest incomes it could be difficult for them to be forced to save at a particular time in their life. So it raises real issues about the New Zealand Superannuation being paid as a non income, an asset tested payment and I am absolutely in favour of continuing the consensus around that, it also raises issues about if we force people to save then do we have to guarantee their savings and what kind of massive regulatory framework we put around those savings to ensure that they can't possibly fail, if they can't possibly fail they probably won't make very much money either, because nobody would ever take any risk on any element of investment. It's pretty hard to find any form of investment which is totally totally totally totally risk free.

BERNARD Dr Cullen it was clear in the Reserve Bank's rate hikes earlier this year that the Reserve Bank is concerned about increased government spending, what has this budget done to reduce the spending growth in core government spending?

MICHAEL This hasn’t reduced the growth in core government spending because in fact to do that you'll have to hack into the big areas, that is education, health, superannuation and then you get down to areas like defence and police. There are no quick easy short term savings to be made in government spending, and none of my critics have actually come up with any convincing answers at all how to make money to savings in government spending.

DEBORAH Yeah but Dr Cullen what about that three billion dollars you’ve got sitting sort of for non allocated spending, I mean why do you need that there?

MICHAEL Not for non allocated spending. What you're talking about is next year's budget allowance is 2.1 billion plus a billion. The billion is already allocated that actually is the business tax package, that’s the full year impact of the business tax package, so come back to 2.1. of that you're going to need about 750 million or more for health, because of the onward pressure in health spending, new drugs, new procedures, increases in salaries and doctors and nurses, and you may notice that’s the area where we face the greatest weight in salary pressure in the public sector.

DEBORAH And not the greatest increase in productivity either.

MICHAEL Well yes but how do you get productivity in an area which is highly resource intensive and where we keep inventing new things to do which cost more money, and the government is attacked by the National Party for not funding a number of new drugs. Those new drugs add to the cost of the health system not subtract from the cost, they don’t improve efficiency in the health system, what they do is they enable us to address some new ways of treating people, that’s the thing about health systems around the world, they become more expensive over time not less expensive because of new procedures, new drugs, and of course the ageing of the population, we have more and more very elderly people who obviously cost more in the health system than people in the years say from 20 to 60.

BERNARD But Dr Cullen isn't one of the basic problems with this economy right now that we are not growing productivity and it's clear from various studies that it's public sector productivity that is restraining the economy, we are spending much faster in the public sector than in the private sector and that spending is not driving the productivity growth we need.

MICHAEL I'm sorry, that is simply not true, in the core public sector wages have risen at the same rate as the private sector year on year throughout the life of this government, there've been two areas where wages and salaries have risen faster. Education somewhat faster as we've been moving to improve conditions in schools, and particularly in the health sector, and that’s been driven by the fact that the health sector is particularly exposed to international competition, we have to retain high quality doctors, high quality nurses, and I'm usually attacked again by my political opponents for the fact that we actually try to moderate wage growth in those sectors. I've never heard a single National Party spokesperson call for reductions in doctors' and nurses' salaries.

LISA Alright, we are sadly going to have to leave it there. Thank you very much for joining us this morning Dr Cullen.

PANEL COMMENTS

LISA Well this morning we're taking an indepth look at this week's Budget so let's go now to our panel. We just spoke to Michael Cullen there Bernard Hickey, do you think that he's answered the questions about the government spending?

BERNARD Absolutely not, and when the Reserve Bank Governor comes out, remember the Reserve Bank Governor works for Dr Cullen they come up with the ….at the start of the term, and when the Reserve Bank Governor comes out and says the government is growing too fast and Dr Cullen has said just there that he doesn’t think it is and he also denies the productivity problems within the government, it just doesn’t make sense and it doesn’t stack up with what we're seeing in Wellington. Wellington right now is boom town as rents for central city office space skyrocket, as wages grow much faster in Wellington than the rest of the country, and he's simply wrong when he says that wage growth for the public sector is not growing faster than the private sector, it is.

LISA So you would argue we're getting a mixed message you're sposed to save and not spend but it's okay for the government to have inflationary spending in New Zealand?

BERNARD Well exactly the government is spending like it's going down a drain right now.

DEBORAH And wouldn’t you love to have been able to ask him what about the consultants fees which have all been going up which is exactly the kind of spending that Bernard's talking about. So how he can say all the spending is going on all these do-gooder you know useful things like education and improving education that’s just not true. I mean I think he's not giving really good answers to quite a few questions about this budget, the bracket creep question he doesn’t really seem to have answered that.

LISA This is more people who are in the $60,000 plus, 39 cents in the dollar.

DEBORAH In the top bracket yes. Also I'm really confused as to how he's got let off so lightly over what was called the chewing gum budget, I mean he sold that as being this is our economic transformation, this is the way we're going and then all of a sudden oh no, no that isn't actually the way we should go, we've just dumped all that and now we're doing something different, and you know where's the loss of credibility, he ought to suffer for that.

BERNARD And he simply has not addressed this core issue of 5% of the population paying the top tax rate when Labour started and now well over 12% and people only have to look across the Tasman to see what governments can do when they do move those brackets up, and it is clear now that if you move to Australia you're better off after tax than you are in New Zealand regardless of the fact your wages are higher in Australia as well, and this is something not addressed in the budget and it's an area that the National Party can no doubt jump on. Although to give credit to Dr Cullen and he should be given a lot of credit for what he's done for the savings industry in New Zealand and for our long term savings outlook. He has been the most responsible Finance Minister for decades in building our savings record up, but on this issue of government spending he has dropped the ball, according to his own Reserve Bank Governor.

DEBORAH And also I can't help wondering because he's obviously a man of principle and whether the brand of Cullen, Cullen brand is so tied to no tax cuts, he almost can't go there, he can't reneg on that.

LISA Thank you very much, after the break National's finance spokesman Bill English and what he would do about tax cuts.

NATIONAL ECONOMIC PLAN
Will they deliver tax cuts?

LISA On Thursday National Leader John Key launched a stinging attack on Michael Cullen's budget, criticising it for failing to deliver to ordinary Kiwis, but talk is cheap and if National is going to succeed at the ballot box next year it will have to come up with a viable alternative. So just what is National's economic vision for the nation and how would the party make it happen. National's Finance Spokesman Bill English joins me now from Wellington. Mr English the criticism was that this budget didn’t deliver to ordinary Kiwis so how would you deliver to those people?

BILL ENGLISH – National MP
There's only one way to deliver to every ordinary Kiwi and that’s to lower their tax rates or increase the thresholds in the tax system. Dr Cullen has specialised in picking off particular groups and the effect of that is that after eight or nine years, or eight years there are now a significant number of New Zealanders who've had no benefits because they didn’t have a student loan, they don’t have children or their children are too old and now their incomes are probably too low to be able to get any benefits from Kiwi Saver, and that’s quite a large proportion of our workforce and now they're worse off because they’ve lost the chewing gum tax cuts that Dr Cullen promised for two budgets in a row. So lower tax rates and higher thresholds are the way to deliver them some of the benefits of growth.

LISA` Alright well let's look at some of the specific areas that were criticised and see what you would do. Given the same economic environment would you have gone ahead with tax cuts?

BILL Well look that’s hypothetical question, we would have been on a different track from four or five years ago.

LISA Yes it is a hypothetical question but what would your answer be to that, if you were given the same economic environment would you have gone ahead with tax cuts?

BILL Look, we wouldn’t be in the position of a budget where Dr Cullen is caught between the rock and the hard place that he's been caught with, our process would have looked more like the Australian one where over a period of time and a growing economy they’ve been able to give significant tax reductions year on year, they’ve been able to spend more on infrastructure, they have been able to increase their public spending and we wouldn’t be caught in the same high government spending high inflation corner that Dr Cullen is in which has meant that he's had to come up with something like Kiwi Saver to get rid of big surpluses without pumping up inflation.

LISA On this show John Key said that he would keep Kiwi Saver if National was in government but you would tinker with it, so in what way. Now that there are these compulsory employer contributions would you keep them?

BILL Well we're concerned about that, I think particularly small businesses felt ambushed by the compulsory contributions, you know the big end of town can handle it they’ve probably got – a lot of them have got work based superannuation in any case, but there are a large number of New Zealand businesses that aren’t companies so they don’t get the company tax cut, they're charities they're proprietors, sole proprietors, partnerships, and they have no benefit of the company tax cut, they’ve been ambushed by this compulsion and we're concerned that it will make employers quite negative about Kiwi Saver if they are pushed into it, so we'll be looking at that aspect but that’s not the only aspect we'll look at. I mean this is now a very complex scheme compared to the Kiwi Saver we supported which was a fairly simple scheme and it'll take some time to digest all the implications.

LISA Well New Zealand First Leader Winston Peters has said that he won't work with a party who takes away the compulsion factor, where would that leave you after an election if you were to tinker with it in that way?

BILL Well look we'll make our policy – Mr Peters has always had his own views about savings, but what we're looking for is a more balanced approach to managing the economy, savings are important but savings isn't everything and I think there's a bit of a cargo cult developed around the idea that savings will fix the whole lot. I mean Dr Cullen mentioned a current account deficit, well Australia's current account deficit is a bit better than ours and in a couple of years ours and theirs will be about the same and they’ve got this massive compulsory savings scheme, so it's not an answer to everything. Alongside savings you need policy that is lifting your productivity, re-energising the dynamism of the economy otherwise there's nowhere to invest all those savings that will earn the return people are looking for.

LISA So how would you do that how would you raise productivity, how would you deepen our capital market say?

BILL Well we'll be rolling out our policy over the next 18 months but we've indicated already areas where we believe change needs to be made like raising educational standards. With infrastructure there's enough political commitment for money including from the current government, but a dreadful process that means the bottlenecks are getting worse not better. On environmental policy there's a real risk there that if environmental policy's not well considered and climate change policy we could damage the economy by getting a bit too carried away.

LISA Alright, well let's bring our panel in on the discussion, turning first to Bernard Hickey.

BERNARD Mr English, in a poll yesterday by Shape NZ of 799 people shows that most businesses, most employers actually like the idea of contributing to Kiwi Saver, they think it will help them keep their employees and the idea of deepening our capital markets is a good idea, so they like the contribution. What do you say to those people who actually would like a much stronger Kiwi Saver scheme maybe even compulsory?

BILL Well look I think we've gotta get this in context, savings aren’t everything, you need an economy where you can invest for a decent return and we need to focus on – we need to re-energise the process of micro economic reform that is going to produce an economy that generates profitable investment. There's a lot of equity issues around compulsion which create all sorts of difficulty and as Dr Cullen pointed out himself it undermines the consensus that we've just reached on universal super, Winston Peters has said himself that it would probably undermine the Cullen Fund because you'd have to individualise the accounts. Look politicians have spent 30 years reaching a consensus on super they're not going to overthrow it that quickly.

DEBORAH Hey Bernard that study which is by this group called Shapes NZ is actually the council for sustainable development or something so they're not – you know they're not necessarily going to be the most representative kind of poll.

BERNARD No this is a statistically valid poll of 799.

DEBORAH Alright, sorry, I should ask Mr English a question. If you're trying to stop people spending and trying to keep inflation within our targets does National look at GST as a way of doing that, I mean surely that’s the obvious way of trying to incentivise people to not spend so much?

BILL Look everyone's getting obsessed with how the voters in the community are overspending, I mean the panel's been right the government's actual overspending is one of the big problems. There's an obsession about housing. Why wouldn’t people invest in an asset that’s working for them, it's no different than a bull run on the stock market, you know eventually it runs out and fixes itself and this is the trick with Kiwi Saver, it has the effect for people who go into it of a GST increase in the sense that you can only save more if you consume less, and Dr Cullen's gotta get out in the next 18 months and explain particularly to low and middle income voters that his plan is that they cut their consumption, pull back their spending and this is to people who lost the chewing gum tax cuts, who face rising interest rates and an employer who's going to say no you can't have a pay increase Dr Cullen has already put it in your Kiwi Saver account for you, get lost. So look we're not on this school of thought that says we've gotta knock back household consumption hard, the Reserve Bank Governor he has the job of controlling inflation, that’s his job, our job is to make sure the economy runs properly for productivity.

BERNARD Are you saying there that there is no problem with our housing market and the way it's distorted our savings system and that you wouldn’t therefore do anything to try and even up the playing field in an investment sense between housing shares and other investments?

BILL Well look everyone – the people who run this economy, the Reserve Bank Governor, the Minister of Finance, have been talking about this now for 15 months. In the Budget there was no new measure to have any impact on housing. I personally – I think they’ve got too carried away with it, the mums and dads out there have been right, they’ve bet on the housing market, it's worked for them, it will run its course because their debt levels are getting too high and the economy's flattening out, and then they will diversify into other forms of savings. So the experts have turned out to be wrong, the mums and dads have been right. But what's wrong with people getting wealthier? Dr Cullen is creating this environment where there's moral panic because households are getting wealthier and that’s why I don’t rate the savings problem is that large, sure there's a bit of a composition problem, people will need to diversify away from housing but they’ll do that for the right reasons which is to manage their risk, not for the wrong reasons which is because financial markets prefer cash savings to housing.

BERNARD But surely this explosion in housing debt is the reason why we have such high interest rates and a high exchange rate which is killing off our export sector?

BILL Well look it's one thing that’s had an impact but so has the government spending binge had an impact, non tradable inflation, that’s the domestic economy that’s not exposed to the world, inflation there has been running 4% high, over 4% for the last four or five years and ratepayers see that with local bodies forecasting 10% compound rate increases for the next ten years. So we've got a lot of work to do at home and blaming the housing market hasn’t worked and I think that’s the point, doesn’t matter how much these guys go on about it, they’ve got the levers but they're not pulling them because in the end they know it won't actually change much.

LISA Alright, thank you very much for joining us this morning, that’s Bill English.

FINAL THOUGHTS – GUEST COMMENTATORS

LISA Well there you have it, overall from what you’ve seen Cullen described this as a bold budget do you think it's won him any Brownie points with their traditional supporters or has it ostracised them in some way>

BERNARD Well this was a strange budget in a way for a Labour government to give, their tax cut on the business side is good for big business, but it's not good for small business, and Kiwi Saver on the face of it will deliver some benefits for the lower paid but not an awful lot, so really this was a budget that tended to favour big business and wealthier people which you wouldn’t expect from a Labour government, and Dr Cullen should be given quite a lot of credit and in fact the Dominion Post this week described him as Dr Who and he was putting all this money into the Tardis for later on, very effective and there obviously is quite a wellspring of support for Kiwi Saver out there in the community and in the business sector, the challenge now for Dr Cullen is to quench this desire for tax cuts in a way that doesn’t boost inflation. The challenge for National is to do it also in a way that doesn’t boost inflation. The solution for both of them really is to make the final leg of Kiwi Saver compulsory for everyone and delivering tax cuts into it. Neither of them seem to want to do it right now.

LISA Do you agree Deborah?

DEBORAH I know that Bernard thinks that a lot of business people are actually loving the idea of people being compelled to save, but a lot of the business people I talk to see more of a big picture and long term are just too focused on productivity because they see that as being what matters most, not their own personal circumstance and in that sense I don’t see you know and such jargon of economic transformation, but I don’t see anything there that really you know Cullen didn’t really give us any answers on burgeoning government spending and there isn't really much that I can see that’s going to actually get us what 22 out of 30 in OECD rankings. Did you feel convinced by that answer when you asked him where we wanta be, when was that, yay get up and go we wanta be up in the top 10 of the OECD.

LISA But what's National offering up as an alternative?

BERNARD Well I just think they're keeping their cards close to their chest now ahead of the election, sensible thing to do if you want to get into power, and they’ll do it probably until the last minute, whether they deliver genuine tax cuts straight into your hand and then it goes straight into the till and into our interest rates and we're not better off at the end of it, that will be the question. How they manage to rein back core government spending in a way that doesn’t hurt education and health in particular will be very interesting and we'll see in the next year or so whether National can rise to that challenge.

DEBORAH Well if I were National I'd just keep hammering that comparison with Australia because it seems to me there's very little compelling answers that Cullen can give when you say I'd be better off in Australia, and so you know I'd hold out as long as possible just pointing out that – I don’t think Cullen's done anything to answer that criticism.

LISA Was there anything in the Budget to stop people going to Australia Bernard?

BERNARD No, he didn’t do anything to the thresholds in fact he took away the tiny thresholds improvements that he gave a couple of years ago, and that is a real problem for the economy. I have three brothers who live in Australia and it is one of the hot buttons that Brash managed to push during the last election campaign.

LISA Thank you very much for joining us this morning.

ENDS

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