Sunday 14th February, 2010

Q+A’s Guyon Espiner Interviews Prime Minister, John Key.

Points of interest:

The interview has been transcribed below.

Q+A is repeated on TVNZ 7 at 9.10pm on Sunday nights and 10.10am and 2.10pm on Mondays. The full length video interviews and panel discussions from this morning’s Q+A can also be seen on tvnz.co.nz at, http://tvnz.co.nz/q-and-a-news

JOHN KEY interviewed by GUYON ESPINER

GUYON Thank you Prime Minister for joining us this morning we appreciate your time. I want to focus on two things which you have made integral to your leadership, that is your aspiration for New Zealand to become a wealthier country, and your determination that that be done in a way that is fair and equitable. Let's start with the aspiration and your government's goal to match Australia in terms of incomes and wealth. Alan Bollard said on our show last week that this was impossible, we simply weren’t going to catch Australia and key to that statement was the accessibility and volume of Australia's mineral wealth. That’s something that you addressed in your speech this week when you said, and I quote you 'we have extraordinary economic potential in the mineral estate residing in Crown owned land'. Mining that wealth, do you see that as a significant part of New Zealand's economic future?

JOHN KEY – Prime Minister
It certainly could be, let's go back to Alan Bollard's comments for a moment, no one's arguing that it's not difficult to catch Australia, that’s actually correct, and they do have a lot of minerals and as Alan Bollard said last week they're in places that it's easy to pick up, but one thing he actually forgets is that we have water in New Zealand, Australia actually doesn’t, Australia's agricultural production fell 9% over the last five years, ours grew by a quarter. So are we also minerally wealthy, the answer to that is absolutely, there's a lot of minerals across New Zealand and you know that includes parts that aren't in the conservation estate, whether it's petroleum or black sands and the likes – should we take that out and collect it and use it for New Zealand's economic value – well not if it damages our clean green image and our eco tourism and the likes, but we mine one one hundredth of one percent at the moment.

GUYON
Are you banking on this though for a significant contribution to New Zealand's future growth, are you thinking look we can get a lot more money and a lot more jobs out of this.

JOHN Well I think you need to do two things if you're going to grow the economy, the first is you have to grow you're revenue stream for the New Zealand economy, in areas where you're currently underperforming and there's enormous potential, mining is one example of that, so is aquaculture, actually so is an international financial centre, I could go through a list of them, but they're areas where we don’t make nearly as much money, or produce nearly as many jobs. So let's take the international financial centre. Commerce Minister this week is going to release greater details of where we're going, but the advice that I've seen, the preliminary advice, is that if we were to have a hub here for a financial centre providing back office facilities and the likes, we'd create between three to five thousand jobs, that'll be reasonably well paid job, so as a step change I think you put all that together, yes. The other side is the fundamentals of the tax system and the platform you build the economy on.

GUYON We'll get to tax but just before we leave the mining issue, are you expecting that the companies who would tender for those contracts, would they be international companies, or does New Zealand have the expertise to actually do this work and extract that wealth itself?

JOHN Could be a mixture, if you look at say for instance Pike River, that was one of the few companies that got a right to mine on the conservation state coal in the South Island, they actually are listed on the New Zealand stock exchange so they’ll have New Zealand investors, but they're an Australian company I think from memory, or at least a lot of their executives are Australian, so there'll be a mixture, but we certainly have New Zealand capability, I mean the Todd family's made a fortune out of the mining sector and out of petroleum.

GUYON Just before we leave that mining issue, in your own declaration in the MPs Register of Interest, it shows that as at January 31 2009 you had investments in the Australian company Jackson Mining. Is that something that you would have to or have already divested yourself of to avoid any potential conflict of interest situation?

JOHN I'd kinda like to I think, I think its share price last time I looked, I haven't looked for about a year, was about 13 cents, it's a very small Australian gold mine, I actually had a lot of shares in that company and I basically largely sold them, it's a remnant small amount, it's a tiny sort of thing, but it won't be mining in New Zealand, Jackson Mining has a small mine in Australia.

GUYON So that’s not an issue of conflict of interest at all, that’s a small mining company, so this is not the company that merged with Scimitar to create Cauldron Energy?

JOHN I don’t think so, I don’t know much about it, but it's in my pecuniary interests, I can go and look at it, but if I sold it, it would be a very tiny amount of money.

GUYON Okay so that’s not something you’ve looked into because it looks like that Jackson Company has significant interests in mining uranium in Australia and Argentina, in the new guise of the company which is called Cauldron. I mean is that something that you – as the leader of a nuclear free country would be concerned about, or is this not something you’ve looked into?

JOHN It's not something I've looked into since I bought it back in 2001 or whatever when I was in Australia, so as I say I was a reasonable shareholder at the time, I actually sold the vast bulk of shares I owned, it was a very small amount, and the reason I didn’t sell them was their value was so low, if they’ve done a merger that’s the first I know about it today.

GUYON So you don’t need to divest yourself of mining interests if we're looking into this whole issue of mining, is that not an issue for you?

JOHN Well I could do it if people want, but the whole purpose of the pecuniary interests is that people know its there, it's in the public domain and it's been listed in my pecuniary interests ever since we've been required to have one.

GUYON Let's turn the major element of your speech and that is tax, and I want to look at this both from an economic growth perspective and from an equity perspective as we said at the beginning. If we're about encouraging overseas investment and about growing jobs, how important is it that the company tax rate come down from 30% where it is now?

JOHN Well it might be important. So if you take a step back in tax, this is what we're trying to do. We firstly want to lower personal taxes right across the board, so that’s a very important characteristic. Why? Because tax is pervasive, it's all across the economy, it's the thing that everyone faces and the incentives that the tax system present are hugely important about whether people stay here or leave. So go back and have a look, one in four people who are tertiary qualified, been to university in New Zealand now live overseas. Why? Because the skill strategy Labour had under their regime was actually to send them offshore. So we need to change that mix. Now is the company tax rate the most important thing? It's a very complex issue in New Zealand, because we have what's called imputation tax credit, which means if you're a New Zealand shareholder you pay your personal rate not the company rate on any distributions you get. Also if we have a double tax agreement with countries, if they pay less tax in New Zealand they may pay more tax in their home jurisdiction. So it depends, but to us the personal rates are our primary focus, but maybe we'll change the company tax rate, that hasn’t been decided yet.

GUYON So on the personal tax side, I mean if you're going to raise GST and cut personal income tax, I mean isn't that a giant money-go-round, how will that actually create any jobs, which is the most important thing, we've got over 7% unemployment. How will this tax scheme and these tax changes actually create jobs?

JOHN Yeah, so the first thing I think of the unemployment rate, is worth acknowledging that we're not losing jobs out of the economy now, we have well over a few million jobs, we're losing a very very tiny amount in the last quarter, we're not creating jobs fast enough for those that are coming in the workforce, for a variety of reasons, migration and the likes. So we do need to create more jobs. Secondly, it's about the right incentives. Let's take someone out of Australia, someone in Australia who earns up to at the moment I think it's 180,000 Australian dollars, let's call it the better part of a quarter of a million New Zealand dollars, they pay a tax rate of 30 cents at the top rate, that’s what they pay. Now they do pay a 45% rate, but it's much much higher up. So we're taxing our doctors at 38% at the moment, it has been 39%, starting from $70,000 and we're wondering why they're packing up and going overseas. So New Zealanders have a choice, do they want those sorts of skills in our economy, and they're the skills, whether they're engineers or doctors or accountants or lawyers, you can name them, but ultimately entrepreneurs that create jobs.

GUYON And this is your focus then isn't it, I mean I know you’ve said all the rates will be cut and that this will be fair and that no one will be worse off and the vast bulk of people will be better off, but it seems to me that your logic is and your economic logic is it's at that top rate that has to come down because that’s where the aspiration to earn those higher incomes is, and they are the wealth generators, and they are the high skilled people that you want to stay. Is that why your focus is from cutting that top rate from 38 to 33 or perhaps 30 cents in the dollar?

JOHN Well the focus isn't solely the top rates, that’s the important thing.

GUYON No, but can we clarify that this morning, is that top rate going to come down to 33 or 30, it seems as though that’s a logic step from what you’ve told us?

JOHN Well assuming we put together a tax package, which we've clearly signalled in our speech, and I might point out in the speech it was really an indication of where we're going this year, but you know it's clearly our intention to do that, which is to cut personal rates, that would include the top rate but not exclusively the top rate. So we think that’s very important in terms of the skills, but if you go and have a look at the tax system, it's very interesting, about three million taxpayers in New Zealand, about a million of them earn between 0 to $14,000 so you could say well they're very low income earning New Zealanders, that’s not necessarily correct, they’ll be dominated by children's accounts, people who have got a small amount in the bank, children for instance, they’ll be dominated by maybe a partner that earns a small amount relative to the overall household might earn quite a lot, and they’ll be students, of which we have thousands and thousands, who do a part time job, they're not necessarily low income New Zealanders, in fact most beneficiaries, super annuitants are those that work the minimum wage, they earn considerably more than that, certainly those on the minimum wage, I mean 40 hours at $12.75 is $25,000. So it's the mid rate and the top rate where we want to make people better off, but it's very difficult at that lower end to make them a lot better off.

GUYON But at $50,000 a year the analysis that’s been done shows that when you factor in the rise in GST, those people are perhaps going to be around about $12.00 a week better off. Is that the sort of ball park that we can reasonably expect?

JOHN Well I don’t want to define the numbers today.

GUYON But ball park in effect, I mean they're not gonna get rich off this are they?

JOHN Well let's sort of understand a couple of things, I mean firstly we haven't done the package to date, so we don’t know how much they’ll be better off, but one thing Maxine said before that 90% people are worse off, will pay more tax is nonsense and absolute rubbish. Actually what is going to happen is that there's two bits to this package, one is we are essentially, properly in our view, going to tax the rental property market, and that brings in amongst a few other changes, our estimate's around about a billion and a half dollars. Now changes to GST if you could put those two together, give you around three to four billion dollars to move, but if you look at the implications of all that, because in fact higher income earners pay more GST, they nominally consume a lot more, when you look at that overall package from middle to higher New Zealand, in my view on a straight GST income split they’ll be much better off or they’ll be better off or much better off, lower income New Zealanders, those between 0 and $14,000 won't be worse off, they’ll be a little bit better off but not a lot better off because they don’t pay a lot of tax there.

GUYON But at $90,000 you potentially get $50 a week, at $50,000 you get $12.00 a week, so you’ve got twice the income four times the gain, you're gonna face a criticism that this is tax cuts which disproportionately favour wealthy New Zealanders.

JOHN Well firstly, what incentive do you want – firstly I wouldn’t actually accept your numbers because that’s based on a package that the New Zealand Herald put together, it may not be the final package that we put together, we've given no suggestion of that yet, we certainly do want to get rid of all the games that are in the system, so some sort of alignment of the top personal rate, potentially with the trust rate.

GUYON So that will occur at 33 or 30 ...

JOHN We're gonna do that package and we'll announce that in the May budget, but the point here is, you’ve got a lot of games going on where people are not – the system's not fair, they're not paying the top personal rate even though they should be paying it, because they can use structuring, and we know that roughly half the people on the rich list actually didn’t pay the top personal rate.

GUYON Well do you pay the top personal rate, you’ve got two family trusts yourself, when you sell shares or investments and make money from that, do you pay the 33 cent rate or the 39 cent rate?

JOHN I pay the 39% rate because I don’t structure my affairs in that way, but the vast bulk of New Zealanders on that rich list don’t pay that rate.

GUYON And you will close those games and close those gaps?

JOHN Well that’s our aim, but the other important thing here is, think about it from this perspective. What you do when you cut personal taxes, let's say even if you raise GST, even if the gap of how much they're left is – you know you can argue about what that number might be – by giving people more money in the hand you give them much greater choices and face much greater incentives to want to transition to earn more. Say for example let's take the young family in Auckland, the average wage is $60,000 – around the country it's $50,000, it's not impossible for a couple of young people to be together, married let's say or in a relationship where both of them are earning 50 or 60 thousand dollars. No we cut their personal taxes, just forget the GST just for a moment, the amount of money they have to service a mortgage, to pay off debt, to buy their first home, dramatically increases. Now it's their choice whether they ultimately consume it, but there's no question they're in a much better position for home ownership, or to pay off debt. Let's think about their incentives, if we can get their rate down, and I'll give you a good example of that. The previous government at $33,000 and above you faced a rate of 33%, sorry $38,000 and above you faced an income tax rate of 33%, we've cut that to 21% and that rate is going lower on our budget. So you know the basic point here is, people are all of a sudden going to be facing potentially half the tax rate that they were.

GUYON Just in the couple of minutes that we have got left, I want to switch to those at the very low end of the socio economic status and that is people on benefits, because you are promising some fairly major reform in that area. You said in that speech you gave on Tuesday that you were going to include a strict reapplication rules to prevent people languishing on an unemployment benefit for more than a short period between jobs. Are you talking about cutting people off the benefit after a year?

JOHN Well what we're talking about is putting a bit of fairness back into the benefit system, so the first thing is New Zealanders support a welfare system where it's used appropriately and where it's honestly applied. What they don’t support is their taxes going to abuse of the welfare system.

GUYON Does that mean cutting people off after a year?

JOHN Well if they can work they should work.

GUYON So what do you do though? After a year on the dole and you're clearly not looking what happens?

JOHN Firstly, people after 12 months will need to reapply for their benefit if they're on an unemployment benefit, it doesn’t mean they won't get it, but firstly let's see how many people are actually applying for a benefit, receiving one and actually aren't real people, can't actually turn up to reapply, there'll be that sort of fraud in the system.

GUYON Do you think it's realistic that anyone could spend a year looking for a job and not find one?

JOHN Oh that’s possible, what we know is the vast bulk of people on the unemployment benefit are actually on and off it within six months.

GUYON Sure but would you cut their benefit off if it was shown that after a year that they weren’t properly looking for a job, is that what you're saying?

JOHN Well there's gonna be that sort of intensive case management that’s gonna go on, it's the same thing for sickness and invalids' benefits.

GUYON Your are ultimately going to be faced with that choice aren't you Prime Minister, what do you actually do, do you cut the benefit off, would you be prepared to do that?

JOHN Oh well if they're abusing the system and they weren’t genuinely fulfilling their obligations to other taxpayers to actually go out there and look for a job and do things properly. One of the reasons why all this is important, whether it's work testing those on the DPB when their youngest turns six, whether it's basically saying to sickness and invalid beneficiaries if you can work you should take some work. The reason for all of this is, our welfare system is potentially unsustainable. To give you an example, those on the sickness beneficiaries are likely to increase by 50% in the next 15 years, if we could just get 5% of those people on the DPB into work, as opposed to staying on the DPB, just 5%, we'll save 200 million dollars over ten years. So we've gotta get to a point where that system is sustainable, and the kinds of increases with no mutual obligation responsibility will not work, and part of the reason for that, to support that argument, is we're gonna set up a task force, just like we did with the tax working group, that I expect to come up with some creative solutions to get New Zealanders off benefits, and the reason for that is, that will not help their lifestyle if they stay there, it's not a passport to prosperity as Michael Joseph Savage once said, it'll leave people in a very bad position, both economically and I think in terms of the way they view their lives and the way that others view them.

GUYON Alright that’s pretty much all we've got time for this morning, but thank you very much John Key for joining us we appreciate it.

ENDS

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