Q+A’s Guyon Espiner Interviews Finance Minister, Bill English

Points of interest:

- English says part-floating SOEs “may or may not work”, refuses to support idea of part-selling state assets

- Wants New Zealanders’ money “back into investment”, not “sitting in the bank when it could be creating jobs”

- The gap between rich and poor matters to the government and got “quite a bit of attention” in planning, but remains “about the same” after the Budget

- Finance minister denies taking over $400m from the Early Childhood Education sector, says finding increased by $100m

- English “can’t guarantee” parents won’t pay more for ECE but says childcare centres are “unlikely to have to pass it on”

- “Difficult to believe” that Sam Morgan pays no tax – “that sounds fairly innovative”

- Post-Budget New Zealand will “stand out from many other developed countries dealing with fiscal crises”

- “No policies… have been put in front of me” that could lift growth faster than he’s done
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The interview has been transcribed below. 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

Q+A is repeated on TVNZ 7 at 9.10pm on Sunday nights and 10.10am and 2.10pm on Mondays.

BILL ENGLISH interviewed by GUYON ESPINER

GUYON Thank you Bill English for coming in and joining us this morning, we really appreciate your time. I want to focus on three aspects really of this Budget, in terms of the Budget's fairness, in terms of the Budget's impact on people, and in terms of the Budget's impact on the economy, and if I could start with that fairness aspect. Do you accept that for very high income earners, people on the sort of salary like your own of $276,000 a year, do you accept that giving those people taxcuts of $239 a week, you gave those people money they simply did not need?

BILL ENGLISH – Finance Minister
Well look people on those incomes will be paying more GST, there's various loopholes that have been shut down and the higher income groups tend to carry the burden of the extension of property taxes. But look we can't run the whole economy on a very small number of earners on quite high incomes. The big shift here is giving us the result that about three quarters of New Zealand earners now have a marginal tax rate of 17½%, so if they work another hour of overtime, they put another dollar into KiwiSaver, that’s now taxed at 17½%. So we're aiming at incentives right across the economy. We believe we have achieved a good balance of fairness between people lower and higher on the income scale, but in the long run it's about lifting the economic growth so they can all get ahead, not just about the one off cash on the day.

GUYON But you could have addressed that issue though, you could have lifted thresholds to where that top rate cuts in, left the top rate there and actually moved the threshold out further, and that way you wouldn’t have given those hundreds of dollars a week to people who already have very high incomes.

BILL Well that would depend on how they structured their affairs. I mean one of the problems of the last ten years has been a top tax rate out of line with trust and company rates, that’s allowed for a lot of restructuring. Inland Revenue tell us that among their wealthiest taxpayers only half of them actually pay the current top tax rate, which remember cuts in at $70,000. So there's people with millions of dollars of assets who aren't even paying 38 cents on income over $70,000. So look there may have been some kind of symbolism in it but we don’t believe...

GUYON Well let's pick you up on that symbolism because you were a part of a National Party in 2005, you set your policy then, you kept the top rate of tax at 39 as it was then and pushed the threshold up to $100,000. If you'd done something similar this time the Prime Minister says you would have had 450 million dollars more to play with. Now that’s more than symbolism, that would have stopped you having to rip into early childhood, or would have allowed you to double the amount of money that you put into health.

BILL Well look we've gone for a comprehensive tax package, we've decided to close as many of the loopholes as we can at the top end. We've made it clear that this is an aspirational ambitious government, we want to ensure we're competitive with Australia ...

GUYON Okay let's talk about that a bit later, but I want to pick you up on the loopholes. Quite infamously Sam Morgan, the founder of Trade Me, said recently, or was reported to have said, that he paid virtually no tax. What is it in the Budget in the way that you’ve structured this tax package that would ensure that someone like Sam Morgan pays more tax?

BILL Well it is difficult to believe that someone with, who knows, several hundred million dollars in the bank actually pays no tax, that does sound fairly innovative.

GUYON So what have you done to actually clamp down on someone like that. I know that the investment property has been looked at, but that affects a lot of ordinary Kiwis as well. What about someone like Sam Morgan, what is there to stop someone like that no paying much tax at all?

BILL Well I have no idea about Mr Morgan's circumstances and I'm not an expert on tax structure, but what I can tell you is that as a result of the changes we've made, for instance, there is not much point in channelling all your income through trusts to avoid the top personal tax rate, because now those rates are the same. And people like Mr Morgan will now be able to focus on how they're using that investment to grow the economy and create new jobs, and not so much energy on structuring their affairs so they don’t pay the top tax rate.

GUYON Sure you’ve aligned the top rate and the trust rate, but that’s in some ways rewarding tax avoidance with a tax cut, or as someone put it this week, it's a bit like tackling doping at the Olympics by ensuring everyone takes drugs.

BILL Well it isn't, because it's part of a package that is about improving the incentives right across the board. I mean let's look at what's happened for someone who's earning around say $48,000 just under the average wage. Their marginal tax rate has now halved. So whatever's happened with Mr Morgan, tens of thousands of New Zealanders are now in a position where two or three years ago they were paying 33 cents in the dollar, now they're paying 17½ cents in the dollar, and we happen to think that the incentives for those Kiwis, which is the vast majority, are more important in the economy than a handful of people at the top end.

GUYON On avoidance you’ve given IRD extra resources to go after people who aren't paying their fair share of tax, and you’ve estimated that will get you 210 million dollars a year. Where do you get that figure from, is there any robustness at all, or is that plucked out of thin air?

BILL No, that’s a pretty robust figure, and you need to talk to IRD about the detail. But in recent years they have built up a track record of getting around five dollars of revenue for every one dollar of extra compliance effort that they put in. So we tested that’s number fairly hard, we're satisfied that enforcement of existing rules, particularly around things like property, and entitlement for social assistance, is going to yield significant revenue.

GUYON Before I leave the issue of fairness, you spoke on Budget Day about the importance of growing the size of the cake, not just how the cake was divided up. Can I ask you whether it matters to you, do you think it's important the gap between rich and poor, is that an index that you are worried about?

BILL Yes it is, and right through this exercise starting with a tax working group last year, we paid quite a bit of attention to the various measures of fairness and equity, and the background papers will show that all those measures have been applied. We've produced a new measure of that in the Budget, which showed that right across the income scale, people get between half and 1% increase in their real disposable income...

GUYON What impact Mr English does this budget have on the gap between rich and poor, does it increase it, does it decrease it, or does it stay about the same?

BILL Oh it's about the same, given the shortcomings of the various measures...

GUYON So it's important to you, but you haven't done anything about it, with respect. That’s what you’ve told me, you’ve told me that it's important to you, but you haven't done anything about addressing that in this budget.

BILL No, well I think we have achieved a significant shift in the incentives in our ...

GUYON No Mr English I'm sorry, we can talk about incentives that’s fine, I just want to get you on this point specifically. You’ve told me that it's important for you to close the gap between rich and poor, and then you’ve told me you’ve done nothing about it.

BILL No, what we've done is we've achieved a shift in our tax system without making that problem significantly worse in a static sense. But more importantly, we've given people on middle and lower incomes stronger incentives to save and to get ahead, better opportunities to get into home ownership, it's the ability to move up through the income scale that in the end deals with the fundamental problem of inequity. And by the way the forecasts include 170,000 new jobs.

GUYON And we'll talk about those new jobs in just a second. I want to talk about some of the things that potentially could erode some of the games that people have seen through these tax cuts. Inflation, 5.9% you predicted next year, wage growth 2.6%. Now for a lot of people these gains are going to be eaten up by increased costs of living aren't they?

BILL Well look with respect to inflation, if you look at this over the next four years, the average inflation would be about 2½% in the forecasts with a spike when the GST impact hits...

GUYON But Paul Holmes made the point in the introduction when inflation goes up 6%, I mean if I've got a can of Coke and it costs a $1.00 and it's a $1.06 next year, it stays at a $1.06 and then keeps going up. So it's not as though that inflation doesn’t stay in the economy is it?

BILL We've been quite explicit about the compensation for the GST component of that inflation. We've made sure that people on income support all get direct compensation on the day and we've quite explicitly said that the tax reductions are partly designed to compensate for the increase in GST, so the tax package deals with the GST impact on inflation.

GUYON Okay what about one of the other areas that, for people with small children, could erode some of these gains. You're taking 400 million dollars out of the early childhood education sector, could you not in 70 billion dollars worth of government spending, find a better area than small children to actually take money from?

BILL No we're not taking 400 million dollars out of the early childhood education sector. What we're dealing with there is a sector where for roughly the same number of children, expenditure has gone up 300% in five years from 400 million to 1.2 billion. When we came into this budget, it was going to go up another 200 million dollars of roughly the same number of children and same number of centres. So what we've done is, the increase is still 107 million, so it's going from 1.2 billion to 1.3 billion, we're not taking money out.

GUYON Okay so parents Mr English will not have to pay more? Because the fear is, and I want to get a straight answer on this, the fear that we've heard in the days after the Budget is that parents might have to pay between $20 and $30 a week more. Are you telling this morning that parents won't have to pay any more money as a result of the changes you’ve made to this sector?

BILL No I can't guarantee that, what we can guarantee is we've put in another hundred million. There will be some changes in the subsidy regime and it depends on how early childhood centres – whether they pass it on.

GUYON Yeah but you must have done the research Minister and figured out whether you thought that they would need to pass it on. What is your estimate of the increased costs if any, for the average parent under the scenario? You must have looked at that before you took this money out.

BILL Well I wouldn’t put an estimate on it, what you can say is that the early childhood centres have got three times as much government money now as five years ago, it's my personal view they're unlikely to have to pass it on.

GUYON Can I look at the economic impact of this budget now. Treasury estimates, the Budget document itself, says that economic growth will have an additional 7.9% or nearly 1% over seven years as a result of this tax package. I mean that’s hardly transformational growth is it?

BILL Well it's a pretty conservative estimate, the IMF have put out some recent work that shows that you might get about 1% lift in the level of GDP over four or five years, so a bit sooner. I think what's important here is that there aren't too many – there aren't any other mechanisms actually, certainly no policies that have been put in front of me as a finance spokesman for a long time, that would lift growth by that much. That is actually quite a big impact, that’s tens of thousands of extra jobs.

GUYON Okay let's look at those jobs, 174,000 jobs, you quoted it to us earlier in the interviews, it's in those budget documents, how much of that from the tax package – 10,000 jobs. I mean, so a fraction, maybe 5, 6, 7% of those new jobs have been created by your tax package, I mean it just doesn’t seem that on its own it has a major impact on the economy and on jobs.

BILL Well that is a pretty major impact, and as I've said if you look around for tools that are going to give you more than 10,000 jobs, I haven't been handed any of those yet. The reason tax makes a difference is cos it's pervasive right across the economy, it affects everybody. You can come up with any number of schemes that subsidise something or co-invest the government with someone else, but none of them are going to produce 10,000 extra sustainable jobs, and if you look at it in the round, we're coming out of a recovery, New Zealanders have shown a great deal of resilience. I think they have confidence about the future, this package is backing that resilience and that confidence, and I think we'll get a pretty positive mind shift, and New Zealand has a special opportunity here to really stand out from the many other developed economies that are dealing with fiscal crises, with public service cuts, with very high rates of unemployment. So we're in pretty good shape.

GUYON Okay well let's talk about the future in the last few minutes that we've got in this interview, because I know you’ve ruled out asset sales in this term. You said that in the election campaign, you’ve said you won't break your word on that, but what you did do on Friday was float the idea of partial floats for state companies such as KiwiBank. That’s a message that you’ve been saying for a number of years now, so presumably you favour the policy of floating some partial stakes in our state owned companies?

BILL Well look it's an option that may or may not work, actually the government hasn’t done any work on that.

GUYON Do you favour it though Mr English, do you favour it? Because you’ve said it a number of times. Have you changed your mind, or do you still believe that we should give New Zealand investors some stake in those state companies by floating them on th4e sharemarket?

BILL Well look as I said the government hasn’t done any work on that. What we've been focusing on is managing the 200 billion dollars of assets that the government owns, and as I pointed out in the Budget, they're going to grow by 35 billion over the next four years, the government is investing about six billion a years, our focus has been on doing a better job of managing that 200 billion of assets.

GUYON Yes but you floated that idea on Friday. I mean you're an intelligent and considered man, you wouldn’t have done that for no reason. You floated that idea, do you believe in it? That’s what I'm asking, a straight simple question. Do you believe in it?

BILL Well it's not a matter of whether you believe in it, that was a bit of speculation, the government hasn’t done the work.

GUYON Well it was your own speculation though Minister, it was your own speculation. You said if I went out into the market, I'd have a lot of people who are keen on this idea, you said KiwiBank needs capitalisation, needs money, a good place to find that is from Kiwi mums and dads. I'm asking this morning whether you agree with yourself.

BILL Look the government simply hasn’t done the work, certainly hasn’t done the work on that proposition. I get asked all the time by people when or if they're going to have good opportunities to invest somewhere, anywhere, because finance companies have been in trouble, they're not sure about the sharemarket, they see the housing market now going sideways, it doesn’t look quite the sure bet that it used to. And actually the more important issue there is getting financial market regulations sorted out, so that as the economy recovers people have the confidence to get back into investment, so we don’t have all this cash sitting in the bank when it could be creating jobs.

GUYON And will they get a chance to invest in those state owned companies? It's a pretty simple question Mr English, you can talk about a myriad of other things, I'm just asking you whether you will seriously consider… we know that you're not gonna do it this cycle. Are you seriously considering the partial floats of state companies?

BILL Well the government has… as you’ve outlined, the government position is pretty clear, no asset sales at all in this term, and if we're going to change it, that has yet to be considered let alone decided. If we're going to change it then we'll let the electorate know, and campaign on it. In the meantime we're doing what I think is actually a much more important task, whether a few assets at the edge are sold or not sold is less important than the government showing the proper stewardship of $200 billion of public assets, which have been funded by people paying their power bills, giving up their PAYE every week, and frankly the management of that has been very patchy. So if we can get 10% better performance out of 200 billion of assets, that’s worth a lot to the economy.

GUYON Will you be advocating that policy yourself, as Finance Minister?

BILL Well as I said the government will consider that option no doubt and others, come to a decision and then take that to the electorate.

GUYON Have you done any work on it at all, has Treasury been asked to do anything, have there been discussions with other ministers about this idea of potentially partial stakes in SOEs?

BILL There's been no work done by Treasury on it, they’ve been too busy you'd have to say trying to lift the standard of management of the 200 billion dollars of assets that we've already got.

GUYON Alright, that’s pretty much all we've got time for from me this morning Mr English, but thank you very much for your time, we appreciate it.

ENDS

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