Q+A interview with Secretary to the Treasury, John Whitehead.

Points of interest:
New Zealand's future growth "has to be driven by exporting".
Treasury is increasingly worried about the gap between rich and poor in New Zealand.
Believes GDP is not a good measure but it's the "best measure we've got".
Over time, state assets will perform better in the private sector.

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

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JOHN WHITEHEAD interviewed by GUYON ESPINER

PAUL John Whitehead’s final day as the head of Treasury is Tuesday, then he’s off to be executive director of the World Bank in Washington DC. Mr Whitehead has been secretary of the Treasury for eight years, advising this government and the former Labour government and the government before that on how to achieve higher living standards. Last week on Q+A, political editor Guyon Espiner quizzed the Finance Minister, Bill English, about the accuracy given to him by Treasury, whether, for example, the 170,000 jobs promised in the Budget will eventuate, where will they come from, and is the deficit really going to be gone in four years. Political editor Guyon Espiner is in Wellington with John Whitehead.
GUYON Thanks, Paul, and thank you, John Whitehead, for joining us on Q+A. We appreciate your time.

JOHN WHITEHEAD – Secretary to the Treasury
Good morning.

GUYON 170,000 jobs promised in the 2010 Budget – never happened. 170,000 jobs promised this time. Are you really confident that your forecasts for economic growth and for job creation are credible?

JOHN Well, those 2010 forecasts, Guyon, were for three years, of course, so it’s a bit soon to say they haven’t happened. Yeah, no, look, I think they’re credible forecasts. Forecasts are forecasts. They’re never exactly right, because they’re forecasts, but, actually, Treasury has one of the best records on its forecasting.

GUYON In terms of international comparisons, you think Treasury measures up pretty well?

JOHN Well, domestically, what we’ve done suggests we’re first or second most accurate over a period of about 10 years in New Zealand, and internationally we compare pretty well, yeah.

GUYON Who’s the most accurate?

JOHN I think it was Treasury up until 2009. We’re just redoing the figures at the moment, but it depends a bit how you measure it, but, broadly speaking, we come out very well.

GUYON So where are these jobs going to come from?

JOHN Oh, a range of places, I think. And I think one of the things people haven’t appreciated about this sort of economic strategy is that part of actually reducing the rate of growth in the public sector is to actually free up resources to flow into the export sector, to flow into areas that can compete with imports and services, particularly.

GUYON So what’s the thinking there? I mean, just brutally and pragmatically for people, what is it? So is it that if you let a hundred people go from Inland Revenue, that they might set themselves up as accountants and generate private wealth? I mean, how does it actually— how does it actually work?

JOHN Well, it’s never as simple as that, of course, but, yeah, a lot of those people that do end up moving out of the public sector into the private sector often do very well. They have skills that are applicable, there’s a bit of relearning to be done and so on, but part of the issue there is if you can reduce the pressure of the government on the rest of the economy, actually, you keep interest rates lower, and that helps growth.

GUYON Now, there’s been obviously quite a bit of pruning in the Budget – big cuts dollar-wise to KiwiSaver, Working for Families, student loans and to the public sector, which you’ve just been talking about. Did Treasury argue for deeper cuts?

JOHN We argued for something pretty close to what’s happened. We were arguing that we needed to go faster than we had been doing.

GUYON So in terms of KiwiSaver, Working for Families, those big programmes, you didn’t advocate for deeper cuts than actually what transpired?

JOHN No, it was all about pace, and the issue there, I think, is that if you look back over the last few years, the fact that we put aside money – we ran those surpluses for quite a long time, built up a buffer for us – has really stood us in good stead.

GUYON So Michael Cullen was right not to cut the taxes back then?

JOHN Well, I think if you remember, there were very few that were arguing about, you know, keeping that surplus there. Now, there’s a good political debate to be had about whether you cut taxes or you increase spending. We were arguing as the Treasury for— to get that debt down and to make that buffer, and I think in the end it served us very well that we did.

GUYON We’ve been talking about the economic future and about job creation, etc. We interviewed you on this show a year ago, and unlike Alan Bollard, the Reserve Bank governor, you do believe that we can close that 30% income gap with Australia, but you also say that that will take 4% economic growth a year to do that. Now, 4% for one year in New Zealand is pretty remarkable. Where on earth is this 4% each year growth going to come from?

JOHN Well, there’s a variety of places it can come from, but fundamentally it has to be driven by exporting, by competitiveness internationally. And there’s some things really going in our favour in that regard. I mean, we’re seeing commodity prices being very positive at the moment, but there’s more we’ve got to do to make this country really competitive to make that happen.
GUYON Are we competitive when our dollar is so high at, what, 81c against the US? Doesn’t that completely negate those export gains that you’re talking about?

JOHN Well, no, it doesn’t completely negate—

GUYON It makes it a lot harder.

JOHN It does make it harder, that’s right, and there’s international events that are happening at the moment that reinforce that, the pressure on the US dollar and so forth.

GUYON Well, put it this way, are you worried about the dollar being that high, and is there an argument about economic strategy to get that dollar lower?

JOHN I think there’s quite a debate about how you do that, and we’re not in— we’re not in any doubt that, actually, that is not the right— that there is a long-run equilibrium rate for New Zealand. But the dollar goes up and down, and the really important thing is where it heads over the medium to long term, because people can actually manage it to a degree around variation.

GUYON But it used to be, didn’t it, that fair value was considered 50c, and when it got above that, exporters started to scream, and if it got below that, importers started to get worried. Now we’ve been living in an environment where 70c, 80c against the US is kind of the norm. Is that where you see the New Zealand dollar staying over the medium term?

JOHN I think if we can reduce our fiscal deficit and keep the pressure off monetary policy for longer, that will help the exchange rate, and I think it will get to a more competitive rate eventually, but it will take some time.

GUYON OK, we’re talking about the creation of wealth, but there’s also obviously the distribution of wealth. Now, I was interested to see in your document that you released this week, ‘living standards and how to get better living standards’, that you quote Wilkinson and Pickett, of course, the authors of The Spirit Level, a book which argues that unequal societies are societies that have poor social and economic outcomes. I was fascinated to then read in that document that Treasury says it has been investigating that whole area and whether there’s a relationship between those two things. What have you found about inequality and whether that actually produces a society that has poor economic and social outcomes?

JOHN Well, the Wilkinson and Pickett argument’s a very interesting one, I think, and in terms of the attempts to replicate those results, people haven’t been able to do that for countries in all circumstances. But I think the general point is right – that if you get highly unequal societies, it becomes really difficult to sustain your economic performance, so that is something I think most New Zealanders would want to think about.

GUYON And we’re a highly unequal society. You say in that document we’re the seventh most unequal country in the developed world.

JOHN In the advanced economies, yes, but the world’s much larger than that.

GUYON So we are a highly unequal country?

JOHN Well, I think the issue for New Zealand is that there are some people who are caught in a trap, and they’re caught in some senses between generations as well, so I think most Kiwis would be pretty concerned about kids that go to school without breakfast, for example. And it’s that kind of thing that we need to focus on as a country. There’s so much that’s positive about this place, but there’s a few things we really need to tackle.

GUYON So you’re worried about the gap between rich and poor at Treasury.

JOHN Absolutely, yeah.

GUYON When we spoke to Bill English after his 2010 Budget and his 2011 Budget, we asked him that – has your Budget increased, decreased, done nothing on the gap between rich and poor – and he said it hadn’t changed. So on that measure, the government and the Treasury advice is failing.

JOHN Yeah, but I think there’s a more medium and long-term strategy to tackle those things, and those are what will count.

GUYON Well, what are they?

JOHN Well, I think the thing that is particularly important is the whole skill issue in that regard. That’s what will actually help people to really have sustainable incomes that actually begin to close that gap over time, getting people into jobs off welfare and so on.

GUYON Because I wonder whether the sort of advice that Treasury has been giving for decades hasn’t actually increased inequality. You say in your document that income inequality in New Zealand increased faster between the mid-1980s and the mid-2000s than in any other country in the developed world. Now, for most of that time, Treasury has been advocating the kinds of policies – privatisation, of income-tax cutting, of public-spending reduction that were again seen being advocated now. Why won’t it have exactly the same result as it did last time?

JOHN Well, I think when you look at that period, too, it was also a period where there was a huge amount of expenditure redistribution through government, and, you know, you had issues like Working for Families and so forth like that. Now, I’m not arguing that some of that isn’t essential. I think it is. You really do need a safety net for the most vulnerable, but actually helping people to develop the skills to get into jobs, to sustain their own situation is really important, and I think the work of the Welfare Working Group was very interesting in that regard.

GUYON That living standards document seems to— in that you seem to have found a bit of a new voice in terms of not always arguing about money and material well-being; that there needs to be other measures. Now, I know that you claim that you’ve always thought that, but it’s a bit of a new emphasis for Treasury, I think that would be fair. Are you now saying that gross domestic product, GDP, is not the most appropriate measure of our economic progress?

JOHN I think it’s actually about the best measure we’ve got of our income growth. It’s actually not even conceptually, theoretically a good measure, because it measures production rather than income, but, actually, it’s the easiest one to measure, so it’s a proxy for a lot of those things.

GUYON So it’s useless, but it’s the best one we’ve got?

JOHN Something like that, yes.

GUYON Really?

JOHN Well, I think the point, really, that we’re trying to make in that document is that you actually need to look at a range of things. Now, income measures are really important, and GDP is a proxy for that. But you also— there are issues about social cohesion, income equality, the environmental standards. All of those are part of living standards in New Zealand.

GUYON Because you say in this document that income displays an interesting paradoxical relationship to happiness. You say that for most countries, happiness is increased little, if at all, over the last few decades while real incomes have risen dramatically. So should the government and the Treasury be agonising about the levels of our wealth if it doesn’t make us happy?

JOHN Well, I think, from my point of view, I suppose, income gives you choices. It enables you to invest in the environment, it enables you to invest in some of your social objectives, so it’s important from that point of view. And I guess the other point to make, Guyon, is that if you don’t maintain your income, if it dropped, then people get pretty unhappy fairly quickly.

GUYON Let’s look at an area where Treasury does retain its teeth – asset sales. You’ve been advocating for full or partial asset sales for some time now. When we spoke to you on this show a year ago, you said you were doing research into why it was that people in New Zealand are overwhelmingly against asset sales. What did you find?

JOHN Well, research was too grand a word. We were doing some thinking about that and talking to people about their views.

GUYON And what did you find?

JOHN What we found was that, I think, people are often nervous about losing control of those assets, because they felt that that would actually end up making New Zealand less secure or that the prices would go up faster and so forth. Now, actually, we don’t think that the proposed mixed-ownership model will have that effect.

GUYON No, but the polls show that people still don’t like it, do they?

JOHN They do, yeah.

GUYON Because we’ve had a disastrous experience with it.

JOHN Well, I think you’ve got to look at the overall situation. I mean, there’s a lot of evidence around the world to suggest that on average, in the right kind of areas, the private sector will perform better. There’ll be some disasters in the private sector as well as the public sector. You get them in both sectors, but on average, over time, you will get a better performance from those assets out there in the private sector.

GUYON Really? I mean, the ones that you’re looking at selling down produce massive dividends for New Zealand – $802 million in dividends from the four energy companies and Air New Zealand. Why would you sell businesses that are doing so well?
JOHN Well, looking forward, we’re pretty clear that, actually, the dividends and the retained earnings we’d get would be less than the cost of capital, and you’ve got the risk as well on top of that, so there are arguments such as that for moving forward.

GUYON One of the things the government wants to do is to have widespread and substantial New Zealand ownership, even if it’s sold into the private sector, so that, as they put it, Kiwi mums and dads can get their hands on these shares. You say that significant participation by foreign investors will be essential if this is successful. Why is it essential for foreign investors to have significant participation in this buy-up of shares?

JOHN Well, I think it’s likely that there will be foreign participation, because also you want to attract some of those skills, some of those connections, some of those networks which will help these companies do well in longer run, because they will have an interest offshore as well as domestically. Also, we need that capital, and the amount that you can get from Kiwi mums and dads is limited, but we want more of that. There’s no doubt.

GUYON So do you mean having foreign people on the boards of these companies, for example?

JOHN Well, potentially, but certainly having those connections and networks that enable you to do what some of the state-owned enterprises have done a bit of already. But that’s risky stuff for government, so sharing some of that risk I think makes a lot of sense. Sharing some of it overseas is good for New Zealand.

GUYON I guess sale of assets is probably one of the real defining lines between left and right when it comes to economics. The left thinks that the public sector can do it better, roughly, and the right thinks that the market does it better. You’ve been advocating for a long time those market solutions and more private involvement. Can Treasury really credibly claim to be politically neutral when, frankly, you have a right-wing attitude to economics?

JOHN Actually, I think we have a pretty broad attitude to economics.

GUYON Well, can you name any left-wing policies that you advocate?

JOHN Oh, I think some of the issues that we’ve advocated around student loans and so forth, you could argue—

GUYON You think that’s a good policy?

JOHN Yeah, well, if—

GUYON Interest-free student loans?

JOHN No, that’s my point. I mean, we’ve actually argued that, actually, that is overly generous. And what you’re getting is a lot of middle-class churn there. You’re taking off the middle classes to put money back into the middle classes, and that’s one of the things Treasury, I think, has advised against over time.

GUYON It must have been harder working with Labour, though. I mean, I remember when they returned to government in 2005, you advocated your normal prescription of state asset sales, cuts to public spending. Michael Cullen described it as an ‘ideological burp’. I mean, they ignored you, didn’t they?

JOHN Oh, I think over time. I mean, we had to build, like with any government coming in, the public service funds – you know, you need to rebuild their confidence in you. They’re been in opposition and so forth. We had to do that. That was probably particularly the case for Treasury. I think we did do it over time. The Clark-led government used the Treasury a lot in different ways, but it did use us.

GUYON All right, that’s pretty much all we’ve got time for. Best of luck with your venture at the World Bank.

JOHN Thank you.

GUYON And thanks very much for joining us on the programme. Appreciate your time.

JOHN Thank you very much.

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