Hon Bill English - Capital Business Show Address
Address to Capital Business Show
Hon Bill English
Opposition Spokesperson on Finance
23 August 2000
Last week we lost $1.5 billion off the New Zealand economy. That’s $1,5billion fewer goods and services, jobs and opportunities.
How did it happen?
Three months ago the Reserve Bank forecast that from June to December, the economy would grow by 2%. Last week Don Brash said it would grow by 0.5%. the difference is $1.5b – the NZ economy will be $1.5b smaller by Christmas than we thought it would be.
The Bank puts this loss of growth down to low confidence, and the low confidence is directly linked to the Government’s economic management, and to Minister of Finance, Dr Michael Cullen.
Business confidence slumped because the Government has passed a range of policies which were unexpectedly tough on business, particularly small business. Confidence was also undermined by the Government’s defiant and contemptuous dismissal of anyone who criticised policies like renationalising ACC and the new Employment Relations Act.
This attitude is best summed up by Dr Cullen’s explanation for the ERA in parliament as “We won, you lost, eat it.”
So confidence matters. The most obvious effect of lower confidence has been on employment. For the first six months of this hear, the economy lost 10,000 jobs – about 300 per week. That’s before the RB revised its growth forecasts down. So where’s the jobs machine? It’s in reverse gear, scything through what was a strongly growing economy this year.
We can and should have sustainable growth and the conditions for it have been within our grasp – a rising exchange rate, stable interest rates, rising net exports, low inflation expectations and credible fiscal policy.
Looking ahead, the Reserve Bank outlines two scenarios. This is interesting in itself. Until now they have given weight to the widely accepted scenario that the economy would grow consistently and broadly through this year and on into 2002. The fact that they have now outlined a pessimistic scenario shows they too have lost some confidence in the Government’s economic management.
I hope the positive scenario is right. It is based on the idea that the $1.5b growth we have lost is simply deferred and will be added back to the economy next year.
That depends in part on the economic confidence bouncing back. I hope it does but events already this week point to worsening rather than improving confidence. The NZ dollar has this week dropped well below 45c on a separate track from the Australian dollar. A dropping dollar means the domestic consumer is getting poorer. It means further windfall gains for the export sector, eventually when their foreign exchange cover runs out.
It also means real cost pressure across the economy. Importers have absorbed price pressure generated by a low dollar. If the dollar drops further they are unlikely to continue to do so.
The chance of negative outlook is growing – inflation pressure, declining consumer incomes, flowing into pressure for higher wages. The wage round has started badly. The ERA debate has made all parties very uneasy about the new dynamics in our labour market. The law itself creates huge uncertainty about how to negotiate. First up are strong state-oriented unions – the junior doctors and the firemen claiming 20 and 30% respectively. And we have heavy political involvement in both disputes. Why does this feel so suddenly like the bad old days? Industrial unrest, political settlements and the beginnings of a wage – price spiral.
The State wage round will put real pressure on Dr Cullen’s surpluses, as will the flat growth this year. Those surpluses depend on strong growth in tax revenue, and very tight expenditure control. I contend they are no longer credible. This also makes his superannuation pre-funding scheme less credible. Pre-funding depends on permanent surpluses around $3.0 – 3.5 billion. His own surpluses aren’t big enough, and even they are at risk, and this is the top of the fiscal cycle.
It doesn’t have to be this way. Dr Cullen, the Minister of Finance, given the best economic outlook any incoming government has enjoyed, has blown it. He has allowed the political requirements of his party to over-rule sound economic management.
The economy has gone flat. We are relying now on further growth, not actual growth. We have already squandered a flying start to what could have been sustained higher growth recovery, such as enjoyed by our Australian neighbours in recent years.
The challenge now is for Dr Cullen and the Labour Alliance Government to unwind the decisions that have already wiped off 10,000 jobs and $1.5b dollars of growth, and I suspect more to come.
The Government has a hard job to restore good economic management because of the background politics.
Hardest hit by Labour’s mismanagement will be low and middle income working households. Unlike beneficiaries and superannuitants, they will not be compensated for rising costs of living, and as inflation eats into their pay packets, they could also be hit with higher interest rates. Smaller business in particular, their owners and their staff will be hard hit.
Other parts of the Government’s support base – those in bigger unions supporting better paid full time workers, now have the tools to get wage increases to cover costs of living increases. But the Government doesn’t want them trying too hard for economic and political reasons. The Government may be forced into some sort of agreement with unions on wage restraint. That’s what any other Left-wing Government would do in current circumstances.
Can the export sector rescue us from all this?
I hope it can, because any optimistic view of where the economy goes hinges on strong export performance. Bear in mind this current strength is based on three positive factors which only ever line up occasionally – higher commodity prices, a low dollar and good weather. The first looks likely to persist because other countries are growing strongly. The low dollar costs naturally reflect the effect of a low dollar and wage pressures.
Exporters can see a positive short term picture, but they too lack confidence in the government’s economic management, and as they look ahead, they see the government building a tunnel at the end of the light. They will behave accordingly on investment and employment. The exporters are our best bet, but not a sure bet.
I could have spoken today about what’s over the horizon, because for New Zealand it’s challenging and exciting. However events in recent weeks, and the record lows our dollar has reached, are a real cause for concern. Dr Cullen’s elegant edifice of economic management is falling apart. So soon and so needlessly.