Sunday 22nd May, 2011

Q+A interview with Finance Minister, Bill English.

Points of interest:
Sees a need ‘for number of prison beds in NZ to drop’
Insists NZ needs 1000 more prison beds despite his comments that prisons are a ‘moral and fiscal failure’
Hopes Wiri Prison will be last new prison to be built
Wants fewer young people imprisoned
predicts economic growth and wage increases over next 3-4 years, says this will satisfy impatient Kiwi families
economic inequality in NZ likely to remain the same unless economy grows
admits job growth in last year has been lower than predicted in 2010 budget
confident Treasury’s predicted growth figures are accurate
predicts generalised lift in retail and construction spending
admits spending growth to this point has been lower than expected
claims budget will keep interest rates lower for longer
claims foreign lenders now ‘bundling NZ’s govt and private debt together’ to determine NZ’s international credit rating
Kiwisaver cuts just ‘govt bringing its behaviour into line with behaviour of NZ households’
Would rather pay dividends to private Kiwi owners of SOEs than have govt own them and continue to borrow to operate them
Labour would have to borrow $10 billion more than National

The interview has been transcribed below. The full length video interviews and panel discussions from this morning’s Q+A can be watched on tvnz.co.nz at, http://tvnz.co.nz/q-and-a-news

Q+A, 9-10am Sundays on TV ONE. Repeats at 9.10pm Sundays, 10.10am and 2.10pm Mondays on TVNZ 7

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BILL ENGLISH interviewed by GUYON ESPINER

GUYON ESPINER
Thank you, minister, for joining us on the programme.
We appreciate your time.

BILL ENGLISH – Finance Minister
Good morning, Guyon.

GUYON Can I start back at the last election and this from John Key. I’ll quote it to you. ‘National wants to offer NZ families certainties about the future of the Working For Families system. That’s why we intend making no change to it. A large number of NZ families get Working For Families. National understands this. I know it is particularly tough out there for families with kids. We don’t want to make it more difficult for them.’ So, fast-forward to now – why are you making it more difficult for them?

BILL Well, in the first place, we’re setting out to make this programme, which is so important to many NZ families, sustainable. Since 2005, it’s gone up almost three times in cost to the government. Clearly, that can’t keep going, and this is against the background of a recession, a very large deficit. We’ve trimmed this programme to make it sustainable, and we’re committed to it.

GUYON Ok. People probably accept around the country that cuts need to be made, and it’s a matter of burden sharing. Why is it that those people on $65,000, $70,000, $75,000 with one or two children have $20 taken out of their pockets per week under these changes? Why is it that they are bearing so much of the burden to return the books to surplus?

BILL Well, look, the pay-off for all of us, including the families you’re talking about there, is that if we get this deficit under control, we can keep interest rates lower for longer, and interest rates are the single biggest component of their cost of living. Looking out ahead over the next few years, it’s one of those costs which could rise. We’ve taken action which has been confirmed by the ratings agencies on Thursday. Keep interest rates lower for longer, and in the long run, those families are best served by an economy that delivers them higher incomes. Many of those families have been impatient. They haven’t had significant wage increases for a number of years. The prospect of 2%, 3%, 4% growth in the economy over the next four years and wage increases will give them some hope that they can get on top of their debt, that they can get more security in their job and that they’re going to get their incomes up.

GUYON We’ll talk about the credibility of those forecasts in a second. We asked you last Budget about inequality and what impact those tax changes had on the gap between rich and poor. You said it had stayed about the same. I’m wondering what impact this Budget has had on that gap between rich and poor

BILL Well, I think it would have about the same kind of impact as last Budget, and that is it’s pretty evenly spread across the board, with the exception that at the lower end of incomes. Benefits – the full indexation has gone through there. National superannuation had a significant increase on the 1st of April.

GUYON So it stays the same, roughly, the gap. You’re not moving, or you don’t put it as a priority to close that gap at all? Because in two Budgets, you haven’t moved it.

BILL Well, what will close it is a vaster growing economy and more opportunities for people on lower incomes to get their incomes up. We changed the incentives in the tax system last Budget so that there is more incentive to get ahead, to increase your income, to increase your savings, to invest and to export. That is the key to reducing inequality – more opportunities and faster rising incomes

GUYON Ok. What about another gap that the government’s fond of which is the gap between NZ wages and Australia? Presumably, if you take 20 bucks a week out of people’s pockets, you’re going to have increased the gap between NZ and Australian wages. Is that the result of this Budget?

BILL Well, look, in that context, your $20 doesn’t make a lot of sense, Guyon, because the Australian system has 9% of wages coming out of their pockets to go into their super scheme. So greater contributions to KiwiSaver aren’t cutting people’s incomes.

GUYON So what impact does this Budget have on the wage gap, then, between Australia? Have you closed that at all?

BILL I think that over the last three Budgets we’ve been operating to a plan to reduce this economy’s reliance on borrowing as a way to get wealthier – either through housing speculation or just buying things – and move to exports and savings and investment as the drivers of our wealth. Now, we’ve had to undo some real damage from the last decade that is at a time where Australia’s had the resource boom. But we think we’re laying the platform for stronger growth in the future, and we think NZers actually understand that, because NZers have been saving more, they’ve been careful with their spending—

GUYON And it’s all about jobs, isn’t it? I mean, this is what you’re promising. If you go back to your last Budget, do you remember how many jobs you promised in the 2010 Budget?

BILL Uh, no, I can’t recall that—

GUYON Well, I can help you out here. I’ll quote you. This is 2010. ‘Treasury forecasts show steady growth of around 3% over each of the next four years. This growth will raise income of the average household by $7000 a year and create 170,000 jobs.’ That’s you from 2010. I mean, do you just keep repeating this number and hoping it will happen?

BILL Uh, no, that’s not correct. Clearly, there’s been less in the last 12 months than what was expected in the last Budget. But in the 15 years from 1990 to 2005, this economy generated 35,000 jobs per year. So we’ve done it before; it can happen again. There are good reasons to be confident—

GUYON Would you stake your reputation on these forecasts, minister?

BILL Well, the Treasury’s forecasting—

GUYON Yes, and would you stake your reputation on them?

BILL The Treasury’s forecasts are done independent of the government. They’re about middle of the pack, and I do share the sense of confidence behind those forecasts. We’ve got the highest export prices in a generation, we’ve got the Canterbury rebuild ahead of us, we’re going to see a generalised lift in spending—

GUYON It’s pretty optimistic, given you promised 170,000 jobs last year, with respect, minister, and people forgot about it. You’re now saying 170,000 more this time, and you’re now optimistic about it.

BILL I’m just explaining to you the reasons for that optimism if you would let me finish. We’ve got the highest export prices in a generation. We have the rebuild of Christchurch coming. There’s $15 billion to $20 billion that has to be spent. Those are real jobs that will employ people and pay them real wages. You’re going to see a generalised lift in spending and retail and the construction sector around housing. At once, people feel like they’ve got their debt under control. Now, that process has been a bit longer than we expected, and that is because the people have reacted pretty sensibly, actually, to the fact that they accumulated too much debt in the last decade. So we think people are getting into a more confident way of thinking, and over the next couple of years, this economy is going to lift. Now, whether it exactly matches a forecast – well, forecasters don’t make the economy grow. What makes it grow are the people sitting in their homes and their businesses, building their confidence, and one of the things they can be confident about from this Budget is that interest rates will be lower for longer, and that will help growth.

GUYON Two of the main drivers of growth in the shorter term are the rebuild of Christchurch, which you’ve mentioned, and the Rugby World Cup – obviously a stimulus. Isn’t it a bit sad that we’ve got to rely on disaster recovery and a once in a lifetime sports tournament to get economic growth?

BILL No, we’re not relying on them, and three months ago, no one was expecting the impact of the earthquake, which has been one of the reasons for much lower growth in the short term, and it will be rebuilt back in the long term. What we’re relying on is a longer-term plan which we’ve now been executing over three Budgets to shift the focus to exports and investment. That’s involved a massive long-term investment in road, rail, energy and a $1 billion announced in the Budget for the rollout of ultra-fast broadband. The biggest shift in the tax system in 25 years—

GUYON OK. You’ve stated those. Can I move to debt, because this is a key part of the whole Budget. You’ve predicated the whole thing on basically saying, ‘We’ve got too much debt. We’ve got too big a deficit. We need to cut to make that work.’ I take you back again to 2009 when you said to the house that government net debt will peak at around 36% of GDP by 2016. You went on to say that that Budget would ensure that NZ retains one of the lowest debt levels and one of the strongest balance sheets in the OECD. How can it be that at 36% debt of GDP we can have one of the strongest sets of books in the world, yet you’re panicking and saying, ‘We need to cut back to get debt down to 30% of GDP’? They can’t both be right, can they?

BILL Well, we’re certainly not panicking. What has changed since then is that the people who lend us the money – people in overseas financial markets – increasingly bundle the government debt and the private sector debt together, and so by international standards, we have a very high total debt to foreigners – one of the highest in the world—

GUYON We do. It’s now 78%, and it’s moving, with respect, to interrupt you again, I’m sorry. But 78% now. It’s moving to 85% by 2015, the total debt that you’re talking about, so how is that you’re reducing that? I mean, if anything, the government’s moves actually clipped back KiwiSaver which was forcing NZers to save.

BILL Well, what’s been driving it up has been government borrowing, and we’ve been borrowing in the last 12 months $380 million per week. That is now going to drop to $100 million a week, on average, over the next three years. We’ll be borrowing $10 billion less than we otherwise would, and what the government’s doing there is just bringing its own behaviour into line with households. Households have stopped increasing their borrowing. They’re starting to drop it a little bit. The government’s been making us more vulnerable to those foreign lenders, and in this Budget we’ve done something fairly decisive about it by getting back to surplus. So in four years’ time we should be repaying a little bit of debt rather than borrowing.

GUYON Just to go back to that point – not to labour it, but just to spell it out for people because they are relatively complex terms – you did say just a couple of years ago that 36% of debt to GDP gave us one of the strongest books in the Western world. Is it really credible now to say that we needed 30% or else we’re doomed?

BILL Uh, well, yes, it is credible because what the foreign debt markets are doing is adding up government debt, which, as I said in 2009, is relatively low, say, compared to the US or the United Kingdom where it’s 60%-plus of GDP, and household debt, which, by international standards, is very high. So our government debt’s been relatively low, our household debt has been relatively high, but our credit rating and our interest rates are determined by the two added together—

GUYON And what are you doing, with respect, minister, about household debt? What are you doing to shift that incentive?

BILL Well, we made the tax changes in the first place, discouraged consumption and the borrowing that was funding that consumption in the last decade, raised the effective tax rate on investment housing, which has had some effect on helping to calm the speculation that was in the housing market. In the end, those decisions are made by households, and the good news is NZers understand now that too much debt is bad, and they’ve been holding back their borrowing. In this Budget, the government has simply been following the same path that our households and businesses started on two or three years ago.

GUYON Ok. One of the ideas you’ve got to manage the debt situation is to sell down partial chunks of the four energy companies and Air NZ. They generate, as you know, those five companies, $800 million in dividends a year. You’re looking to get $5 billion to $7 billion from a partial stake. Hang on to them for 10 years, and you’ve got $8 billion, haven’t you? Where’s the logic in this?

BILL Well, the logic here is that the government has very large capital requirements. So, over the next five years, publicly owned assets will grow by about $35 billion, and that’s to maintain the core state infrastructure – schools, hospitals, government departments, prisons, defence forces. Now, we have to source that money from somewhere, and we’ve been borrowing a lot of it. I would rather pay dividends to NZ owners of those shares than pay interest to foreigners lending us debt.

GUYON Ok, well, let’s look at how you’re going to keep those shares in NZ hands. Treasury’s got a few ideas in the papers that were released late last week, including some free domestic shares. Would you be willing to entertain the idea of sweetening this a little bit by giving NZers a small parcel, presumably, of free domestic shares?

BILL Well, look, we haven’t gone into the detail of how to make this attractive to NZers. Over the next few months there will be some work done on that, and, of course, nothing will happen until after the election. But the government intent is clear – majority government ownership of all of these enterprises and NZers owning the shares. So the discussion over the next few months is how to make that happen. That’s one idea. There are a number of others. I think NZers, given the choice between the kind of investment they were making a few years ago in finance companies and shares in a reasonably solid energy company, then it’s going to be a pretty straightforward choice. People who are doing saving want some good options for long-term investment.

GUYON Ok. Just before I leave asset sales, you say nothing’s going to happen until after the election. How come you’ve banked the $5 billion to $7 billion?

BILL Well, we’re counting those proceeds in our forecast—

GUYON How can you do that when you haven’t sold this on a market and you haven’t got a mandate from the people?

BILL Uh, because it’s prudent in the management of our government finances looking ahead. We need a three to five year view of what’s going to happen with our capital investments. We believe we can get these kinds of proceeds from the SOEs. If we get less, of course we’d have to go and borrow a bit more If we get more, then we can borrow less. If it’s a different government doing it, well, they will have to explain to NZers that it’s a good idea to go out into these difficult financial markets and borrow another $10 billion. I’ve noticed the Opposition have criticised all the savings and the mixed ownership model. They will have to borrow at least $10 billion more than we are planning, and if they have contributions to the super fund, it’ll be another $10 billion on top of that, so that’s $20 billion more debt.

GUYON Ok. We’re going to get to Phil Goff a bit later in the programme and probably put some of that to him. Just in the last couple of minutes we do have, I know that one area of state spending that you are worried about is law and order and the growth in that Budget – $3.5 billion out of the $73 billion-odd that the government spends. In fact, you’ve recently called prisons a moral and fiscal failure. Are you going to stop building prisons now? Are you still going to build the 1000-bed prison at Wiri?

BILL Uh, yes, we are. That’s well through the process, and we need the extra thousand beds because it’s been part of this government’s policy and public pressure for tougher sentences and a safer community—

GUYON Interesting choice of words there – ‘public pressure’. Do you think this has been sparked by public pressure and populism by government and not actually realistic policy-making?

BILL Oh, no, I think it’s been realistic policy-making, but the need for the thousand beds has been building over the last 10 or 12 years going right back to the Norm Withers petition back in the late ‘90s. But prisons are expensive, and everyone in the law and order system – from the police, though the courts, through to the prison and probation service – has been working pretty hard on trying to understand how to make that system more cost effective—

GUYON So is that the last prison, then, in your government’s tenure? Because you can’t say it’s a moral and fiscal failure and then keep doing it, can you? That’s just not credible.

BILL Well, I’d hope it’s the last prison because they’re very, very expensive. $250,000 a bed, $90,000 a year to run it, and when we’re tight for money, it would be good if we could have less recidivism, less reoffending, less young people coming into the whole pipeline where they start with a minor offence and end up with a 10-year sentence. And the public service has done a lot of very smart work on this, and over the next two or three years, we’re going to see the need for prison beds drop a bit at least.

GUYON Ok, that’s where we pretty much leave it. Thank you very much, minister, for joining us. We really appreciate it.

BILL Thanks, Guyon.

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