RICHARD PREBBLE'S

Letter From Wellington

Monday 30th September 2002

4 Percent Plus Growth

The latest GDP figures showing 3.5 percent growth caught Labour ministers by surprise. National's finance spokesman, Dr Brash, put out a gloomy statement headed "4 Percent growth still a long way to go" and saying "GDP result should disappoint Minister of Finance". But Cullen can't believe his luck. He has absolutely no idea why the economy is growing so he was not disappointed. Our readers were not surprised by the growth figures as The Letter has been pointing out that indicators like Tranzrail's freight volumes predict an economy which is growing strongly. The Letter believes the economy is now at 4 percent growth.

The Kiwi Dollar

With the Kiwi dollar at less than 50 cents to the US dollar, NZ exports are very competitive. While the sudden increase in the dollar early this year affected its standing the Kiwi dollar's rise was moderated by the fact that the currencies of all our trading partners have also risen vis-à-vis the dollar.

Agriculture

· Dairy - While Fonterra's performance is reason for serious concern, the lower milk price still gives a positive return to most dairy farmers. · Apple - The deregulated apple industry is predicting an excellent year. It's hard to see how long the kiwi fruit industry can remain regulated.

Tourism

The country's largest employer has bounced back after September 11. Excellent snow has helped. While the America's Cup's international appeal is a myth, it has helped internal tourism.

Immigration

Growth is being underpinned by historically high immigration. Despite raising the points needed for immigration, the department is overwhelmed by applications.

Economically Positive

Research by economists, here and overseas, shows that while immigration in the short and long term is economically positive, the benefits only just outweigh the costs. New immigrants need housing - hence the Auckland housing boom, Each house needs furniture, etc, so new immigrants boost retail. In the longer term they bring new skills and entrepreneurialship. But new immigrants increase the costs of education, health, and infrastructure. Evidence that the government is not meeting those costs can be seen in Auckland's growing health, education and road problems.

Hard to Get Right

Labour is continuing with National's policy to have net positive 10,000 immigrants a year. This is very hard to achieve in practice. There are 800,000 NZ citizens overseas, including 250,000 in Australia. It is impossible to predict how many Kiwis will leave in any year and even harder to say how many will return. Many who say on their immigration forms they are leaving for good, return. Historically, the best indicator of Kiwi migration is the economy and trans-Tasman migration is most affected. 4 percent growth should trigger a Kiwi return. While that would be great news, the Immigration Service is slow to adjust. If a large number of Kiwis return on top of new immigrants it will cause problems. So immigration will remain a hot topic.

It Could Turn to Custard

All the positive economic predictions could turn to custard. As a small trading economy New Zealand is very vulnerable to external international shocks. Here are some possibilities:

· Middle East -If the Middle East goes wrong, oil reaches US $50 a barrel, New Zealand will be affected.

· The US Economy - The Economist believes the US may be in "de-inflation". Falling prices are even worse than rising prices as consumers stop buying, expecting lower prices in the future. A de-inflating US economy would have worldwide ramifications. It's The Letter's experience that external economic shocks usually come from a source not predicted - e.g. September 11, the Asian Crisis, etc.

Wasted Opportunities

When the next shock comes Labour's years will be looked back on as a wasted opportunity. Now is the time for real tax reform, to cut red tape, and to review governments own spending and investment.

A Window of Opportunity

Labour has realized it has a window of opportunity to resolve the GE issues now that it no longer needs the Green vote. It is determined to proceed with GE. Labour strategists thank that GE won't be an election issue. The government appears to be wasting the opportunity to reform the Resource Management Act (RMA) which is imposing huge costs on the country. Indeed Labour's two RMA Bills will make the problems worse.

U is for United or is it U-Turn?

United Future MP Judy Turner on 24 September issued the following press statement: "United Future defends support for Social Security (Development and Employment) Amendment Bill." "Mr Dunne was an opposition MP in the last parliament and it was perfectly reasonable for him to oppose the bill then...I have consulted closely with the government ...as a result...I have concluded that it is not...anti-family...and therefore I have persuaded my colleagues it is legislation worth supporting." The full press statement is on ACT's website at http://www.act.org.nz/u-turn . Far from promoting the family, Treasury has said this Bill will result in an extra 1,000 Domestic Purpose Beneficiaries every year - and at an average 1.8 children each, this means an extra 1,800 children on state dependency per year.

ENDS

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