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

Points of interest:

- English points to Deposit Guarantee Scheme as means of government support for South Canterbury Finance

- Government has $8-900m budget for potential finance company collapses, so minister offers assurance that “the interests of depositors and the taxpayers are well protected”

- English says it’s “highly unlikely” government will stop foreign investors buying New Zealand farms

- Espiner: Hubbard “too big to fail?” English: “That’s not really the primary consideration”

- Tough message: 160,000 unemployed part of “rebalancing” the economy, businesses struggling are mostly those that were dependent on unhealthy credit binge

- Minister upbeat about recovery, promising jobs in export sector and pointing to more growth in the past six months than the previous four years

- Describes recovery as “orderly and steady” move away from “credit-fuelled economy” but admits “it’s going to be a bit of a grind”

- Tax switch likely to prompt more saving, not spending, and that’s a “sensible decision” – warns against “sugar shot recovery”

- Predicts credit won’t be available like it has been for 20 years

- Government wants to “have a good look” at helping people save, potentially tax breaks on savings

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 Finance Minister for joining us we really appreciate your time. Can we start with this developing story about Alan Hubbard’s finance company, South Canterbury Finance? It seems to be on the brink of collapse. Is the government going to bail it out?

BILL ENGLISH – FINANCE MINISTER Look the Deposit Guarantee Scheme’s been in place for some time. It's pretty clear that South Canterbury are dealing with a few challenges there, but we're not going to comment on any particular company. I think the interests of both the taxpayers and the depositors are probably best protected if the government's not part of the speculation

GUYON But the government is working on a proposal to either bail the company out or to actually stump up with the cash in terms of the government guarantee?

BILL Well there's been quite a bit of speculation around what might or might not be happening.

GUYON That’s what I'm asking you, is the government involved in working on a package?

BILL Well look I'm not willing to comment on that. The important thing is that the taxpayers’ interests are looked after, and secondly that the government has already provided for anything to do with the Deposit Guarantee Scheme is built into the budget, and we've dealt with the series of finance company events over the last couple of years.

GUYON I can respect that there's some commercial sensitivity and you can't lay out the exact plans this morning. But it would seem that either the public has to stump up under the government guarantee scheme, or the government directly bails it out. Either way there's going to be a significant public liability here isn’t there?

BILL Well again I wouldn’t want to speculate on it. What I can say is that because of the government guarantee, 18 months or so ago the government put aside around eight or nine hundred million dollars as a provision against the collapse of finance companies. So the interests of depositors and the taxpayers are well protected.

GUYON So that sort of sum of money could be involved, up to sort of 900 million with a collapse of – we're talking about a very large finance company, larger than Hanover or Bridgecorp that have already fallen over?

BILL Well again that’s speculation, I mean the amount that was put aside was the best guess of the experts about the whole finance company sector, so I wouldn’t want to attribute that dollar amount to any particular company.

GUYON Can I ask you this way then? I mean is it simply too big to fail? It's a major part of the South Island economy in many respects, is it too big to fail?

BILL Well that’s not really the primary consideration. The primary consideration is to fulfil the purpose of the Deposit Guarantee Scheme for anyone who's been invested in any finance company covered by it. So we've made provision for that, and of course we've been keen to make sure the taxpayer’s interest is protected all the way through, and look I really do not want to speculate about South Canterbury Finance.

GUYON Before I leave this, will Cabinet discuss this tomorrow? Consider it?

BILL Well in the light of the publicity I'm sure that Ministers might want some kind of update or whatever.

GUYON You're not going to delay your trip to Asia because of these considerations?

BILL No.

GUYON Can I move more generally to the general economy because people have been calling this a phantom recovery, the economic forecasters BERL used that phrase this week. Is that how you see it?

BILL Well no it isn’t, I think we need to keep things in perspective here. At the depths of this recession this economy was shrinking at about 3.1 – 3% per annum. Now we're looking at 3% growth, so that’s quite a turnaround. We've had more growth in the last six months than we had in the previous four years, so the economy is on the road to recovery. But as we've been saying for some time it's going to be a bumpy road. We're getting the kind of adjustment that we need in the long run. So if you look back, this is an economy that went on a credit binge, we had a housing boom, we had a surge in government spending. All of those things are unwinding, and that’s where the pressure is. The people feeling the pressure now are those who've been completely dependent on a domestic economy that was fuelled by borrowing.

GUYON And that’s interesting analysis, but it doesn’t help, and it's cold comfort for the retailer who's closing his store or discounting his stock because people aren’t spending. I mean out on the street things are pretty tough aren’t they?

BILL Yeah and it is tough for that part of the economy, because it was being fuelled by – households had a credit boom. I mean, there's a few years there where our credit growth was about 20% per annum, more than four or five times, six times what the economic growth actually was. Well that was unsustainable. On the other hand we are seeing the export sector pick up, we've had trade surpluses for six months.

GUYON I want to talk about that in a little minute, because I respect that there is a bit of a two-sided thing here and the exports are doing quite well. But how long to you expect people to have their wallets closed and the retail sector, which can account for 20% of jobs, to be so flat? How long will this last?

BILL I think it's a bit hard to tell. In this case, because we're recovering from a recession caused by debt, then the process of recovery goes along with that debt being reduced. That’s why households are being so careful with their cash, and we don’t quite know how long that process is going to take. What we do know is that the rebalancing that’s occurring is the kind of rebalancing that we need, and if people were rushing back to the shops and to the housing market, frankly I'd be a bit concerned that New Zealanders hadn’t got the message.

GUYON But if you look at the real impact of that and that is jobs, I mean that is the key thing in any economy. You’ve got 159,000 people who are unemployed, I mean is that just part of the rebalancing story?

BILL Well to some extent it is, because a lot of those jobs were dependent on this credit-fuelled economy that we had, particularly from 2005 onwards, and we are going to see a shift of jobs into the export sector. Now the government is cushioning that effect quite considerably. This year we're going to run a 13 billion dollar deficit. We're pumping 13 billion dollars into the economy which is supporting jobs both by putting cash into people’s pockets through the income support system, Working for Families etc, and by direct investment in infrastructure. So we're getting an orderly and steady adjustment underpinned by that big government expenditure.

GUYON It's pretty brutal though isn’t it? You're effectively saying that 159,000 people out of work, they're the collateral damage in the rebalancing of the economy?

BILL I don’t think it is brutal at all. I think we're getting a pretty measured and considered adjustment, particularly when you compare it to other economies that have had similar levels of debt, such as the UK and the US.

GUYON Well when we drill down you talk about an export-led recovery, but our manufacturing jobs are significantly down on where they were, in fact 18,900 jobs lost in manufacturing. That doesn’t sound to me like an export-led recovery?

BILL Well manufacturing is picking up off a pretty low base. We've had an export recession for five years. One of the fundamental issues in the economy has been that for the last five years our earning capacity has been shrinking, manufacturing shrunk by about 20%, and our spending capacity got out of control. So now they're coming back. Now, we wish it was a smooth transition, and that the export sector would just pick up rapidly. There's a couple of reasons why it's taking a bit longer across the economy. One is just that credit is not going to be readily available the way it used to be. In the next 20 years I don’t think it’ll be like it was in the last ten, and the second reason is that the exchange rate hasn’t dropped, and normally at this part of a recession in New Zealand the exchange rate’s down, and that really does boost manufacturing. So it's going to be a bit of a grind, there's no doubt about that.

GUYON Are you doing enough though to protect jobs. I mean we've had the Savings Working Group, we've had the Tax Working Group, we've had the Welfare Working Group. Months and months of expertise on this, we had a Job Summit for what was it – a day? I mean are you doing enough to try to get those 159,000 people back into work?

BILL Yes we are.

GUYON What are you doing?

BILL Well in the shorter term the government is pumping 13 billion into this economy this year. So that is a very significant support to jobs and to the economy.

GUYON Thirteen billion?

BILL Thirteen billion cash deficit this year. We're borrowing that offshore, pumping that into the economy through infrastructure investment, through cash into people’s pockets through all the income support schemes that are around. So that is a significant support in the short term. And in the longer term we've got a programme ranging from infrastructure investment through regulation, better tax system and so on, which is designed to get the confidence back. Because new jobs happen when businesses decide to invest and employ another person. So our policy programme’s focused on rebuilding that investment side.

GUYON You mention the tax system. What effect do you expect the tax switch when GST goes up and income taxes come down on October 1 – what impact do you expect that to have on the sort of spending constraints that we're seeing now. Do you expect that to stimulate the economy and people to go out and spend again?

BILL I'm not sure they’ll go out and spend again. In fact I think we're seeing some of the effects already, and that is a drop off in people returning to the housing market, so the housing market going sideways, partly because of the tax changes.

GUYON But you don’t expect them to increase their spending because of the tax cuts?

BILL Not necessarily but there may be some.

GUYON But isn’t the point of tax cuts, to stimulate the economy, isn’t that the economic benefit?

BILL Well I think a lot of them are going to use it to pay off debt. So in the short term if they go out and spend, well, that would help with some of the retailers you mentioned before. But given the overhang of excessive credit and debt in this economy, I think a lot of New Zealanders will use it to get on and reduce their debt, and in the long run again that’s a good thing. I mean we have the choice here between a sugar shot recovery that you can't sustain, that is people rushing back to the shops and the housing market. Or New Zealanders doing what I think they're doing already, which is being careful about their spending, working on getting their debt down, thinking pretty hard about, particularly in the younger New Zealanders what they're going to need for skills and qualifications to get their jobs. And those are sensible decisions and government policy, particularly with the tax changes, is just pushing in the direction people are already going.

GUYON Which leads us nicely to the transition to the next segment of this interview, which is the savings scheme. You talk about people making some more sensible decisions, people rebalancing their affairs. Do we need a Savings Working Group if that’s what people are doing?

BILL Well again if we can push in the direction that people are already going and push it a bit further, that would help, because New Zealand has a significant issue with its national savings. There's no easy or obvious answers to that, but we want to make sure we have a good look at it.

GUYON One of the answers that has attracted a lot of media attention is the compulsory KiwiSaver. Can we look back? Was National wrong in hindsight to cancel the compulsory super scheme that we had in 1975?

BILL Well look I think 35 years on it's a bit late to be speculating about that. They might or might not have been, who would know? We've got to deal with the issues as we find them, and the issues as we find them is that national savings …

GUYON Well you must know whether we would have been better off, I mean this is a constant thing that historians and economists talk about. Do you think we would have been better off if we'd had a compulsory savings scheme for 35 years? Australia is.

BILL Well look I honestly don’t know the answer to that question. The sort of academic literature is a bit ambivalent about it. What we do have at the moment is a universal national super, which is strongly supported by the New Zealand public, and that’s why the government has said that that’s not going to change in the Savings Working Group.

GUYON Do you back a compulsory scheme?

BILL Well we'll get the Savings Working Group to give us some advice on that. We've had a 25 year debate about compulsory super since 1975…

GUYON About time to make a decision then isn’t it?

BILL …In New Zealand, and the one thing that has changed over that time is Kiwi Saver has got up and going, there's about 30,000 people a month still joining KiwiSaver, which has changed the atmosphere a bit.

GUYON I can see you're not going to back or reject a compulsory scheme. Treasury’s going to release a paper on this soon. Is Treasury recommending that you consider tax breaks for savings?

BILL Well what they're doing is they're just putting out a discussion document so we can have an open debate about it.

GUYON Is it their view that you should consider that though? It's my understanding Treasury thinks you should consider tax breaks for savings.

BILL Well they’ll be setting out some options.

GUYON Is that true?

BILL They’ll be setting out some options for…

GUYON Is that true?

BILL They’ll be seeing out some options around the taxes.

GUYON Could you answer that please, is it true?

BILL Well no, they're not recommending anything.

GUYON They're recommending you consider that though?

BILL Well what they will look at is whether there's further changes we can make to the tax system with respect to savings.

GUYON To encourage savings?

BILL Yeah, there's a couple of propositions that have floated round for a while. One is a dual income tax system, where you just tax returns on savings lower than returns to work, and another is to adjust the tax system for the effect of inflation. Because for people who are making long term cash savings the effective tax rate is very high, and we have some unique aspects of our tax system that other countries don’t have. So we want to have a good look at those to make sure we're not penalising people who for instance save instead of borrow.

GUYON In the last few minutes that we've got I'd like to talk about overseas investment, because it's another thing that the government is considering. You essentially are of the belief aren’t you that we rely heavily on foreign investment and it should be easier for foreigners to invest in New Zealand.

BILL Well it's a matter of fact that we rely heavily on foreign investment. Just the Australians own 45 billion worth of assets in New Zealand.

GUYON And should it be easier for foreigners to invest? That was the original intention of your policy changes in this area.

BILL Well no it's not quite right. The original intention was to reduce the bureaucracy in making the decisions around foreign investment, so that investors knew yes or no more quickly and less expensively than the previous system. Now we've made a number of administrative changes which have shortened up that process.

GUYON But then this all got caught up in the politicisation over the Crafer Farms didn’t it essentially. You're worried aren’t you politically that foreigners buying up farms is going to hurt you politically. That’s why you’ve put a brake on this review. True?

BILL Well no again, I wouldn’t agree with that. We've always said it's important to get the balance between our need for foreign inflows and the need to protect those things …

GUYON But with respect, we were told that this review was coming out about six weeks ago, and then suddenly this controversy came up, and you’ve put the handbrake on. I mean you can't claim that that had nothing to do with it?

BILL Oh look I'm not disagreeing with that. There's been widespread concern about it. What I think is quite a legitimate strategic issue, I mean New Zealand has – one of its comparative advantages, as the world demands more food, is water and farmland, and our cultural capacity to produce.

GUYON That’s a competitive advantage for us.

BILL That’s right.

GUYON Okay, so according to a New Zealand Herald investigation, 24 countries have been given approval to invest in the agriculture sector covering about 155,000 hectares of land. So I mean aren’t we tenants on our own land in respect of those farms already? What's the change? What's the difference?

BILL Well no I don’t think that’s quite correct. I wouldn’t say that we are. As the Prime Minister has said there's a risk that we could become tenants in our own country.

GUYON And so what are you going to do then? Are you going to stop foreigners buying farms?

BILL Look we're just working through the issues around that concern and whether there are reasonable or reasonable and predictable changes that we could make.

GUYON Are there?

BILL Well we'll let you know when we've got an answer to that.

GUYON Well with respect to the audience, I mean we buy land in Uruguay and farmers buy land in South America, Central America, all over the place. Are you going to stop foreigners buying farms in New Zealand?

BILL I think it's highly unlikely that we would actually stop them buying farms, because that’s not what people are most concerned about. I think they're concerned about large, very large scale aggregation, and I think they're also concerned about tightly integrated, vertically integrated systems where foreigners own a whole lot of land and all the production, and the pathway to the market. And those are legitimate concerns.

GUYON Final question. When will we see that review?

BILL Oh some time in the next couple of months.

GUYON Alright, look thanks very much for you time this morning Bill English, we really appreciate it

ENDS

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