SPEECH: Paul Goldsmith to Canterbury Chamber of Commerce
SPEECH: Paul Goldsmith to Canterbury Chamber of Commerce
Paul Goldsmith - Finance
2 October 2019
Our primary message is a positive one – New Zealand has a lot going for it.
We just think that we could and should be doing a lot better. The Government thinks everything’s fine – we compare well with the rest of the world, Grant Robertson and Jacinda Ardern say.
But on a per capita basis that’s simply not the case. We’re growing at 0.5 per cent.
Why? This Government has been irredeemably complacent about the sources of growth and is undermining several of them. It has driven down business confidence by adding costs, creating massive uncertainty and, I don’t mean to be harsh, by demonstrating incompetence, most famously with KiwiBuild.
A re-elected National Government would set out to restore confidence, to revive the economy and lift our aspirations, not just about what we can earn, but also about the long term social and environmental challenges we can overcome.
There is no question the economy has slowed sharply in the last year or two.
You all know the numbers.
Grant Robertson will blame everyone else.
It’s Donald Trump, the Iranians, President Xi, Brexit, and Hong Kong.
Of course, international sentiment and risks have some impact.
But our terms of trade, the prices we are currently getting for exports, are still at historically high levels, and exports are still growing solidly. We should be doing well right now.
Meanwhile, this Government inherited big surpluses and has been spending them. This should have provided some stimulus. They spent an extra $2.8 billion in Budget 2018 and committed another $3.8 billion this year.
Sadly, much of that spending has been very poor quality. They have been slack, confused and lazy in their spending choices.
Think of the money spent on fees-free, which has led to no new students, and on Shane Jones’ slush fund.
Meanwhile, business confidence has collapsed – as two new surveys this week have shown again – because this Government continues to add costs to businesses. Think of the industrial relations space, particularly for smaller businesses.
It has created massive policy uncertainty – just think of the impact 18 months of uncertainty over a capital gains tax had on investment. And we have had more than 200 working groups.
Think of the impact of the oil and gas decision – not just directly on Taranaki, but indirectly following the way it was made, without any analysis or consultation. If they can do that to one industry, they can do it to others next time the Prime Minister needs a speech.
Think of the ‘Wellbeing’ Budget. Does anyone really know what it means? If you want 10 minutes of entertainment, watch Deborah Russell MP, Chair of the Finance and Expenditure Select Committee, explaining it in Parliament.
Third, as I said, the Government has demonstrated incompetence in critical areas, starting with KiwiBuild, but also in the administration of immigration – which has ground to a halt – and perhaps most importantly with transport infrastructure.
Perhaps you can say it was a rookie mistake to walk into Government and on day one cancel or delay a dozen major roading projects – all over New Zealand – several of which were ready to go, and replace them with projects that were not ready and won’t be for some time yet.
But actually it was an unforgivable mistake that is seeing a massive hole open up in our infrastructure pipeline as the old National projects expire. It was entirely predictable.
We now see them scrambling to direct money not spent on the slow tram down Dominion Road to roads, but they’re in a philosophical shambles. Julie Anne Genter does not want to give into the ‘car fascists’ and Phil Twyford thinks we’ve overinvested in roads.
More generally, the Government has been far too complacent about the sources of growth in our economy.
We know all the industries this Government doesn’t like, doesn’t appreciate, but there is a tendency to think critical industries can be replaced by slogans and wishful thinking.
Our approach would be different.
National’s Economic Plan
In August we released our Economic Discussion Document.
We are unashamedly focused on growth. Not because we think money is everything, it isn’t.
As Warren Buffett, one of the richest men in the world, put it: it doesn’t matter how much money you’ve got, if you’re not loved by the people you want to love you, life is a disaster.
It’s similar with countries. Good government is just as much about preserving and enhancing what is special about this country. That, to me, is the quality of our environment, our social cohesion, our relatively high trust, low corruption traditions, our commitment to the rule of law, freedom and tolerance of different views, our sense of security – all these things are incredibly important and should never be taken for granted.
So the economy is not everything, but it’s important. It’s a means to an end.
The economy is about people. It’s about you, me, our families, our neighbourhoods.
To me, the point of a strong economy is to enable New Zealanders to do the most basic things in life well.
A strong economy improves our chances of finding satisfying and good paying work so we can look after ourselves and our families. The most fundamental task each of us have.
And work itself, in its countless varieties, brings the opportunity to make a contribution to our world and the people in it. Whether we’re providing someone with a new hip, a new app, or a cup of coffee with a smile.
Last but not least, if we do well, we can afford to have some fun in our leisure time, and maybe if we have some energy left do something in the neighbourhood, on the barbecue for the school committee, or whatever.
That, to me, is the good life to which we aspire.
As well as generating work and opportunities, good economic management and a strong economy enables the country to have better public services that improve our lives. A quality education, access to world class healthcare when we need it, decent transport infrastructure so we can get home on time and the reassurance of superannuation when we’re old.
There are times in everyone’s life when we need help. At certain times of their lives, some people can’t look after themselves and their families. The stronger our economy is, the more we can help.
So we break our economic plan into three priorities.
Firstly, responsible economic management delivering world-class public services.
We have made it clear we think New Zealanders deserve to keep more of what they earn.
We have announced our plan to index tax thresholds to inflation, and we hope to come back with further proposals next year. When confronted with surpluses, a government has a choice of lowering taxes or more spending. This Government has made it clear they’ll spend the lot. We would be more balanced.
We recognise New Zealand businesses pay some of the highest taxes in the OECD, so we raise the idea of reducing corporate taxes, accelerating depreciation or targeting relief for small businesses. I’d be interested in your views on that.
We will reintroduce meaningful targets in health, education and law and order and continue the Social Investment Approach.
We’ve taken the long term approach on the age of super.
We will also require Treasury to be more focused on identifying wasteful spending and driving higher productivity in the public sector.
Our second priority is to deliver a more productive, competitive economy that lifts household incomes.
We need to significantly lift our productivity levels – our output for every hour worked – if we are to sustainably lift household incomes.
With regard to infrastructure, we’ll get on with it. We’ll set a clear pipeline in place. We will be balanced and conscious that not everything needs to be funded off the Crown’s balance sheet. We can innovate.
We can make use of private capital to build the infrastructure that will get our country moving.
We’ll look for ways to increase the flow of investment from around the world into New Zealand businesses, with more practical overseas investment rules.
We will introduce more flexible employment laws, starting with reintroducing 90 day trials.
As Simon Bridges has already indicated, a priority for new spending will be education – to the extent that we can generate the skills we need for the 21st century – where workers will need to be adaptable, above all.
Our tertiary sector needs to be genuinely world class and much more responsive to lifelong learning.
It will take a generation to shift mind sets so that we value technical skills and the contribution skilled tradespeople make to a productive economy, but we have to make a real start.
We recognise, of course, that alongside public investment in infrastructure, education and other areas, it is private sector investment that will drive productivity growth.
It is businesses and individuals who are willing to put their money on the line and invest in a new business, new plant or machinery, new technology and new ideas, that will make the difference.
In this context, we are worried about the Reserve Bank’s proposal to effectively double the level of capital that banks need to hold for every dollar they lend, from eight cents in the dollar to 16 cents.
There has been some controversy around the proposals.
Most people agree that it’s a good idea to increase the capital our major banks hold, and there has been a worldwide trend in this area.
But the debate starts thereafter about how far it should be increased, and how fast.
The Governor assures us everything will be fine if the Reserve Bank’s substantial increase is carried out.
As we saw yesterday, the three international academics that the Reserve Bank’s asked to review the proposals largely agree.
The four main banks are, not surprisingly, less enthusiastic.
Meanwhile, there has been a large number of respected economists and experts who have spoken out against the Reserve Bank’s proposals.
For example, Former Secretary to the Treasury Dr Graham Scott, Associate Professor at Victoria University Martien Lubberink and Managing Director of Sapere Kieran Murray argue that “the costs New Zealand society would pay by requiring banks to maintain higher capital ratios would greatly exceed the benefits of reduced risk of a banking crisis”.
The major banks are being asked to hold roughly twice the capital currently required against their lending. Logically, that will lead them to look for higher interest rates on their lending and to be a bit more reluctant to lend.
How much higher and how much more reluctant is the million dollar question.
One outcome could be that the rural and small business sectors might find it significantly harder to access capital.
In combination with a whole lot of other regulatory changes currently proposed or underway, this would make it much harder to increase investment across our economy, and much harder to make progress on improving our productivity.
We’re hearing stories that this is happening already in anticipation of the capital requirement changes – that lending criteria is tightening.
I have no special insight into what the likely outcome is, but it worries us that the Reserve Bank hasn’t published a comprehensive cost-benefit analysis to support their claim that the benefits will exceed the economic costs.
The only point I’d make is that the Government, advised by Treasury, should have a view on the proposals and Grant Robertson should be assuring himself that they stack up.
Reserve Bank independence on setting interest rates is clearly outlined in statute and understood.
That independence is not so clear-cut when it comes to the regulatory side of the Reserve Bank’s remit.
The Reserve Bank has decided that a one in 200 year risk of a banking collapse should be our benchmark.
Ultimately, that is a judgement about the risk tolerance of the Crown, which might in practice be on the hook in such an event.
It defies belief that the Crown, represented by the Government of the day, shouldn’t have a significant say in determining that risk tolerance.
The Treasury have advised Grant Robertson that he should “be comfortable that financial stability interests are being served by the capital regime without undue costs being imposed on participants in the economy”.
We agree. It’s not good enough for the Minister of Finance to wash his hands and say this is purely a matter for the Reserve Bank to decide.
He should insist on clear evidence that the pace and extent of increases to capital requirements are appropriate.
Our third priority is lowering the cost of living for all New Zealanders
We recognise competition is the best way to keep prices low and affordable. We will focus on systematically identifying and removing barriers that prevent new players entering critical markets.
We’ve signalled our intent to push back against the tide of regulation.
We are not saying all regulation is bad, of course not, but we should strive to have regulations that are simple, clear and rigorously enforced.
We don’t claim we were perfect in government. We’re signalling a fresh determination here.
The challenge for the next National Government is to translate the level of discipline we’ve shown over fiscal policy to the regulatory side of what governments do.
So it seems to us the challenge is to restore confidence and revive our economy, by letting business, large and small, get on with it, and by being disciplined and effective in government.
We should still being doing well.
We’ve got a lot going for us. If we can get the settings right, there’s no reason we shouldn’t do well.