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

Points of interest:

- Government surprised at how much people have clamped down on spending; there’s been no pre-GST spend-up

- The recovery “hasn’t stalled”… given the depth of recession, English says it’s “a pretty good recovery path”

- “There’s no doubt that unemployment has peaked”

- Business that put prices up more than the GST rise are “really taking a risk” of losing customers

- English claims “fuel and food prices have been dropping, not rising”

- The tax switch “is not a lolly scramble, it was never meant to be”

- “Short-term pain” is necessary for “long-term gain”

- New Zealand can afford tax cuts while other countries are putting up taxes

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 Thanks for joining us, Mr English. We’re short of time, so let’s crack into it. One scenario that was predicted when you announced the rise in GST back in the Budget was that we were going to get a pre-GST spend-up. Has that happened?

BILL ENGLISH – Finance Minister No, it hasn’t. In fact, almost the opposite’s happened. We’ve been surprised at the extent to which people have clamped down on their spending and focused on paying off debt.

GUYON That’s not a good thing for retailers, though, is it? And this is going to hammer retailers further, isn’t it? We had a survey this week showing that 80% of people expected businesses to suffer as people downgraded their spending I mean, are they correct? Is that going to happen?

MR ENGLISH This is about some short-short-term pain and long-term gain. New Zealand has this overhang of debt. Our households are mainly the owners of that debt, and they’ve really taken to heart the message that they need to get their debt down before they spend, and that is a bit tougher on retailers in the short-term. But as they get the debt down, then households will start spending again.

GUYON So this spending, this tightening up on the wallets, that’s going to get worse after October – is that the prediction?

MR ENGLISH Well, I don’t know if it’ll get worse. I think people are anticipating it. They’re being very careful right through this year more than we expected, and the government’s playing its part by continuing to maintain the transfers – the Working for Families, the interest-free student loans and so on – because that’s putting cash into households to allow them to pay off their debt while their holding back their spending.

GUYON One of the other worries is that businesses who can get away with it are going to put prices up by more than GST. I’ve seen a note from a cleaning company that said, ‘Our prices are going up from $75 to $80 because of GST.’ That’s a 7% increase, roughly – you know, three times the actual legitimate increase. Isn’t that going to be writ large across the whole economy, and people are going to get ripped off?

MR ENGLISH No, I don’t think that is. Businesses who do that are really taking a risk. When your consumers are being so careful, if you put your prices up, people are going to be very sensitive to that. They’ll just move to someone else who hasn’t put their prices up.

GUYON And is that the only weapon – the market? Or can you clamp down on these people?

MR ENGLISH Well, the market is the weapon that works, actually. The government can talk about it, but we don’t have price controls. You’ve just got to look in the…

GUYON Is it illegal, though, to do that?

MR ENGLISH No, well, look, it’s not illegal to set your own prices, and of course some…

GUYON It’s illegal to lie about the GST increase, though, isn’t it?

MR ENGLISH Well, they might get caught by some of the legislation. But, look, any retailer or service provider who thinks they’re going to rack their prices up I think is in for a bit of a fright, because people are going to shift elsewhere.

GUYON OK, you said the vast majority of New Zealanders were going to be better off under your tax switch when GST goes up and the income tax comes down. Is there any group of New Zealanders… You’ve crunched the numbers over the last few months – is there any group of New Zealanders who will be worse off?

MR ENGLISH Well, I think that will depend on some individual circumstances. For instance…

GUYON What are they?

MR ENGLISH Well, there’s some groups, for instance, who don’t pay any accommodation costs. Because for most people, the cost of their housing and accommodation – they don’t pay GST on that, so they don’t have GST going up on it. But there are a small group of people who don’t pay any accommodation costs. There may be other people who are living on borrowed money, for instance. So there’s a few groups who may. There may be some individuals who put their heads up. But in the end, this is not just about whether people are better off – they’ll believe that when they see it – it’s about the longer-term need to balance the economy to strengthen it.

GUYON We had a New Zealand Institute of Economic Research forecasting paper out recently. They say that 50% of households will see their tax cuts eaten up by the end of the year. Do you agree with that?

MR ENGLISH No, I don’t, and I don’t know how they calculated that.

GUYON It’s a pretty credible outfit, though, isn’t it?

MR ENGLISH Well, the fact is that forecasts for inflation are actually coming down, so while six months ago there may have been some concern that GST would give inflation a kick and then it might kick on, in fact forecasts for inflation are coming back. So after-tax incomes are going to grow faster than inflation.

GUYON They say, though, that they estimate that 50% of households will be worse off after a year, at the end of the year, given rising food prices, GST and other one-off charges. I mean, there are a lot of costs in the economy going up.

MR ENGLISH Yeah, but when you add them all together, there’s actually some prices going down – like fuel and food prices have actually been dropping, not rising. When you add them up in the round, inflation is relatively low. Look, there’s no free lunch here. This is not a lolly scramble. It was never meant to be. It’s about changing the incentives in the economy so in the long run, we’ve got more savings and exports and investing and less property speculation and excessive borrowing.

GUYON Yeah, and that may well be true, and that’s the theory of it, but for a lot of people, it’s going to be what’s in their pocket, and that’s fair enough for those people. And it isn’t much, is it, when you’re on the average wage of around $45,000. Your tax switch gives them $12 a week – three cups of coffee, really.

MR ENGLISH Well, it’s something. Well, it’s $25 a week for family; $15 for an individual on average. Compared to all other countries who have gone through a fairly deep recession… And remember, New Zealand’s started back in 2008. We had one of the longest recessions we’ve had for a long time. It’s actually a fairly innovative policy that is going to switch the incentives, give them a bit of extra cash in the pocket, but give people a bit of confidence that the economy’s recovering in a way that’s going to give sustainable jobs and sustainable incomes. In a whole lot of countries, governments are just sticking taxes up. That’s it. Everyone’s worse off.

GUYON But when they look at someone on your salary gets $143 a week after this tax switch, and, say, someone starting out as a teacher on $37,000 gets $13 a week. Is it really fair?

MR ENGLISH It is, and we put a lot of information out around the budget.

GUYON What’s fair about that?

MR ENGLISH Well, it’s because we’ve increased the effective tax rate on property in particular. When you average it out across the income groups, most of the property tends to be owned by the higher income groups. We’re losing depreciation there, tightening up on the eligibility for social assistance. There’s increases on the effective tax on foreign owners of New Zealand assets. When you add all that up, it’s about a pretty even incidence right across the income groups.

GUYON OK, in the last couple of minutes that we’ve got, I want to talk more broadly about the economy. We just saw the latest statistics come out that the economy grew only 0.2% in the three months to June. I mean, this is an economy that really has stagnated and the recovery has stalled, hasn’t it?

MR ENGLISH Well, it hasn’t stalled. What’s happening is that it’s growing in the right places, and it’s come under pressure with households more than we expected. So if you look at the make-up of that growth, export performance is actually pretty good and continues to increase. Households have been clamped down. They are more careful about their spending than we expected, so we’re getting the right kind of rebalancing. We’re probably getting it a bit faster than we expected, but there’s no doubt that unemployment has peaked, the economy has grown over the last three or four quarters and will continue to grow.

GUYON So unemployment will start coming down now?

MR ENGLISH Well, it’s coming down slowly – not as fast as we would like.

GUYON And will the tax cuts help this?

MR ENGLISH I think the tax cuts will help confidence a bit, and they will shift the incentives around savings and exports.

GUYON It’s a pretty small impact, though, isn’t it? 0.9% I think Treasury predicted over about six years. I mean, that’s really only the ground that you’ve lost this year.

MR ENGLISH But, look, the alternative is that the government does nothing and leaves us with an unbalanced economy which was driven by excessive government spending and housing speculation. We’ve got a considered and consistent rate of change going on here. There’s not a massive restructuring. People’s incomes are holding or rising slightly. And given the depth of the recession and the uncertainty in the world economy, it’s a pretty good recovery path.

GUYON Good place to leave it. Thanks very much for joining us, Bill English. We appreciate your time.

MR ENGLISH Thanks, Guyon.

ENDS

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