'THE NATION'
JOHN KEY
Interviewed by DUNCAN GARNER

Duncan Last week on this programme the CEO of the BNZ Andrew Thorburn said the New Zealand economy wasn't actually doing too badly. But he argued that the government needed to do more to encourage savings if we wanted to continue to grow. And on the same programme a Chinese diplomat in Wellington talked about how China wanted to invest more in New Zealand, including controversially buying our farms. Just two signs that the government still has unfinished business if it wants to achieve the kind of growth rates it talked about in this year's budget. And that task has of course been made much harder with the slowdown in world growth coming out of the American and European debt crises. Prime Minister John Key joins me from the floor of the National Party Conference in Wellington. Prime Minister good morning.

I just want to firstly put to you this issue of youth unemployment. I mean you saw in Britain this week some of the youth riots and some of the riots there, and they’ve got a youth unemployment rate of 20%. Ours if you look at it is about 18%, 18 and a bit, could what happened there potentially happen here with the sort of growing resentment of young people?

John Key – Prime Minister
Well I think if we don’t deal with that issues that’s always a risk. I probably suggest having lived in the UK that’s been a more pronounced issue over there for a period of time. But it's not just the UK I mean I think if you look around the world what took place in Tunisia and Egypt and other countries in the Middle East in recent time in the Arab spring, has really been an example of ambitious but disaffected young youth who want to have that brighter future that all politicians talk about. Now different issues in the UK and there, but as you say it's an issue that we need to focus on here. And if you look at unemployment rates in New Zealand, what we know is that if you're aged over 25 the unemployment rate's actually pretty low, it's about 4.5%, what we see is much higher levels with young people and more pronounced in the Maori and Pacific communities. So we understand where to tackle the issue and tomorrow we'll be talking about how we intend to address that cohort and that group to get better results.

Duncan But if you look at Maori and Pacific Island unemployment in that 15 to 19 year olds, I was looking at a report this morning from the Human Rights Commission, Pacific Islands' actually up to 40%. This is on your watch Prime Minister, what are you gonna do about this? I mean I know you’ve got some announcements tomorrow, but how seriously are you taking this, and what are you gonna do about it?

John O yeah we take it very seriously. I mean I think the first thing it's important to understand is that if you have a recession, and we've had one, and that’s been true around the world, there are two groups that are the most pronounced in terms of the impact on them, and that is young people, and it's simply lower skilled workers, and that’s been the case in this recession, and it's been the case around the world. So partly it has been the recessionary conditions. I think secondly we've failed a lot of young people in our education system. National standard's a good starting point for that. That’s gonna take a generation to change, and I think we also have to work out how we make a better link actually between those young people who are in the schooling system but really starting to disengage from it.

Duncan But that's your youth guarantee Prime Minister, you had that youth guarantee that you talked about at the last election at least. Now there's about – and Annette King made this point in parliament this week, about 2,500 people aged between 15 and 19 on it, that’s about 6% of people. I could argue with you that that youth guarantee actually hasn’t been as successful as you would have liked?

John Well I think what I'd argue with you we need to put more money into it, and we're doing that, we'll be looking at those numbers to around about 7,500 people. We're also building trade academies around the country again, you know more places happening there. So I think there's a number of different factors, it's not just as simple as one particular thing, but we do know that we need to get around those young people, particularly those that are dropping out of the system. We know that we don’t have good data actually on what happens to 16 and 17 year olds that actually leave school, but don’t go on a benefit, although we do know that there's a very strong probability that those ones that are disengaged, not in training, not in work, they’ll end up on a benefit ….

Duncan Dale Williams, the Mayor from Orotohanga actually just said to us, and hopefully you were able to hear it, that the government's not prepared to take risks, not risky enough, and perhaps the problem lies with some of the officials. I mean what he's calling for is for you to be bolder.

John Yeah well I mean I think the first thing I'd say is let's have a look and see what we announce tomorrow afternoon, and then people can pass judgement on that, about whether we are being bold enough. The second thing is that I think Dale Williams has done a very good job in his community, it's a small community, Otorohanga, it's easier to get your hands around. I think what we do know is when you get into those bigger urban areas, you know South Auckland, West Auckland, parts of Wellington, it's not quite as easy. So it's gonna be a different approach. We've certainly gotta focus on the at risk young people, and we have to give them those skills. If we don’t give them that then there's real problems, and I think look we just can see what's happening around the world as we lift productivity unskilled jobs are disappearing from the economy. If you want to take an apprenticeship these days, participate in an apprenticeship, you really need NCEA level 2, and yet we know that there's a lot of young people, that don’t even have the basic foundation skills of literacy and numeracy, allowing them to go on to those NCEA qualifications. So yep there's a lot of work we've gotta do.

Duncan What about the young minimum wage Prime Minister, what about the youth minimum wage? Would you look at bringing something like that back, because business have said to you in some areas, we don’t want to pay the adult minimum wage to 18 year olds.

John Yeah we generally haven’t finalised our policy going into the election on that yet. I mean obviously we're going to have to in the next months or so, and firm up exactly what we want to do there. I mean what I would sort of say is the Treasury's written a report on this. Their findings aren’t conclusive, they have said yes you know youth unemployment rose pretty much at the time when you took the minimum wage or youth wage off, but there are a lot of other factors.

Duncan So do you rule out a return to some sort of lower rate to encourage employers to employ young people?

John No I'm not gonna rule it out at the moment. What I'd say to you though is that we will make a decision on that prior to the election, but actually you know just having a lower wage, I mean that is you know a factor that might encourage people into employment, but I think if that was just it on its own, it's actually probably not the right way to go. I mean I think in the end if we're just discounting the labour markets in that regard it's not really sustainable because eventually they're gonna go on to that higher wage anyway. I think there's other things you’ve gotta do. I mean for instance the 90 day probationary period in my view is a policy that helps young people, because a lot of employers want to give a young person a go, but by definition they have very limited experience. We don’t really know. So we'll look at all of those and we'll put them in the mix, and we'll come out with exactly what we're gonna do closer to the election.

Duncan What about this global meltdown that we've seen over the past week or so on world markets and also the sovereign debt crisis as well? What kind of impact does that have on your budget forecast from this year which next year has a 4% growth rate, 170,000 new jobs, which has been questioned you know here, even by people like Andrew Thorburn from the BNZ, that you were too positive a few months ago, and this global meltdown may have to get you to rethink in the pre-election update that comes out of Treasury. Do you agree with that?

John Not really actually. Look you have to accept that New Zealand is you know one small cog in a global economy, and of course if the United States and Europe are weaker, by definition that has an impact on us. But let's understand a few things, first of all we've diversified our markets, so China are a much bigger market for us and growing rapidly as is the rest of Asia, obviously Australia as well. That’s the first thing. The second thing is that there was nothing terribly bullish actually about the Treasury forecasts. I mean they were fairly much middle of the pack, and actually if you have a look at it Treasury predicted growth in the first quarter would be minus .5 – actually it was plus .8. So we did a lot better than Treasury actually thought, we've created 43,000 jobs in the start of the year, and there are a number of factors which are gonna help our economy which are quite unique and distinct from what's happening around the world, and that is obviously Rugby World Cup, you know big stimulus for the back end of the year, and obviously over time the Christchurch rebuild, adding you know …

Duncan What about that slowdown in world markets though? I mean if you look at Australia, and I spoke to Bill English about this during the week in a bit of a chat with him about world markets. Australia is look like at a 2% growth rate. That would have an impact on our 10 billion dollars' worth of exports there surely. I know commodity prices come down and the dollar comes down, it cancels each other out. But if China and America and Australia aren’t buying as much of our products aren’t we in more trouble than we thought a few months ago?

John Well that’s a possibility and look we have to accept all that, but the forecasts are over a four year period. You know a lot changes. If you want my view, this week doesn’t feel like 2008 and 2009 to me. I've been saying that from Monday. I know people say I'm just putting a you know kind of sunny optimistic perspective on it, but actually I think I'm right, and you know the way the DOW's moving around had sort of somewhat proven that. It doesn’t mean that there's not going to be a period of volatility over the next three or four months, America eventually has to work out how it's gonna pay …

Duncan You seem overly optimistic about our trading partners, when our big three trading partners, and in that order, Australia, China and America may buy less of our products. I mean surely that has got to make Treasury think hang on are we going to get as much of our product over there, are exporters going to face some problems?

John They may be, but there's lots of different factors in there. I mean for a start off if you start seeing China buying less, commodity prices would come back, but our exchange rate if quite commodity driven, so that would come back a bit. The demographics in China and the overall growth rates, which are still sitting around about 9.5% are really arguing that more and more people are becoming into that category of middle income Chinese and middle income Asian people, and so therefore the demand is growing, even if their economy's slower. But I mean the factor to look for in China is inflation. Now I know inflation this week was a little higher than they thought, but overall the good China watchers that we look at, the Australian Reserve Bank, some of the best economic commentators in this area, are still overall actually pretty optimistic about China. And as I said at the start of the week, the factors are just a bit different. Our corporates are in much better shape, their balance sheets are strong, they’ve restructured their businesses, they're making money. If you look at the government we don’t have that funding crisis that we had in 2008, 2009. We've got these domestic factors. We have other levers we can pull. Our interest rates are not at zero like the rest of the world.

Duncan And some of those corporates are actually asking you to do a little bit more, and I refer back to Andrew Thorburn. I want you to have a listen to him in a minute, but what Andrew Thorburn talks about is he wants more movement for disincentives in housing. Do you believe you’ve done enough because people like Thorburn who I know you talk to at times, wants more movement in that area, and he wants more movement in compulsory savings.

John Yeah well I mean the first thing we'd say is that we've got 1.7 million people in Kiwi Saver and we're adding about 20,000 a month. Now the government is looking at compulsory opt in of everybody in the workforce. There's about a million people currently employed in the workforce not in Kiwi Saver. Now there's a variety of reasons why they're not in. So we have sought advice from IRD and I think from Treasury as well about the merits of that. Now of course if we automatically enrol everybody in the workforce quite a lot of people are gonna drop out because their current circumstances don’t…

Duncan But do you favour personally as Prime Minister automatic enrolment. I mean I asked Bill English this question earlier in the year and he said it was too expensive, but it seems like you've re-evaluated your thinking on this.

John Yeah I think the more people you can have in Kiwi Saver frankly the better, because I think what actually happens is inertia is the most overriding actor and determinant in Kiwi Saver. Most people go into Kiwi Saver, they actually forget about the fact that the money's going in there, they learn to live within the disposable income they have in their pay packet each week.

Duncan That’s a yes is it Prime Minister? Is that a yes that you will?

John Look I like auto enrolment, the issue is just simply whether we can logistically do that, and that’s the advice we've been getting from IRD at the moment. How much impact it'll have on corporations, can they cope with it – and as I say all million won’t stay in, and I wouldn’t want to hazard a guess on how many would stay in, but it'll be quite a few I think actually.

Duncan I just want to finish the interview by looking at China and some of its intentions, investment intentions here in New Zealand. We did an interview last week and I've got a clip here to play to you with one of the diplomats from the Chinese Embassy, about investments here. Have a listen to this Prime Minister.

Clip: 'We know there has been some sensitivities in this regard such as when the Chinese enterprises are particularly interested in buying the socalled strategic assets in your country, like Crafer Farms.'

Duncan What he was trying to say there also, what we picked up there is that the Chinese are starting to believe that perhaps this trading relationship has become a little bit uneven, not on an even keel. They want more investment here. Are you willing to look at them getting into joint ventures perhaps as a way around that farm issue, buying farms in New Zealand, joint ventures with New Zealanders?

John Well let's look at the overall issue of investment in China. Firstly it's totally logical that they will want to invest in New Zealand as indeed they're investing around the world. So the Chinese position is they have around about four trillion US dollars in cash. Primarily they're pouring that into US treasuries. They are starting to look around the world to buy hard assets. So that’s the logical thing. Secondly their motivation's very clear. They’ve got an emerging middle class that we've just been talking about that they need to feed, and of course they look at New Zealand as a great supplier of high quality good product in volume. So there's no doubt that they want to invest in New Zealand. Should we be wary of that? Well I think it's about getting the balance right. I mean probably they're not in a very different position to the one that New Zealand found itself with Japan 30 years ago, where they were cash rich, where they were looking to invest. So my view is where the investment is of a quality nature, where it's gonna add jobs and add value to the economy, we should welcome it, and there's some real things we could do with China in that regard.

Duncan Do you think New Zealanders are in a sense racist about it. I saw David Carter said this last week over at our competitor. Do you think New Zealanders are racist, because we have Russians, we have Germans, we have the Dutch, we have the British, we have the Australians, all here owning farmland, what's wrong with the Chinese?

John Yeah, no, there's nothing wrong with the Chinese. Look I think the position there is that New Zealanders are conscious of the fact that the Chinese have a lot of cash and a great capacity to buy a lot. So I don’t think they're overly bothered about them buying the odd farm or making the odd investment. I think what they're saying is we don’t want to be swamped by what's going on. And I think that’s about that balance, as I said to you, I mean I personally would favour Chinese investment in New Zealand if it's coming in the form of things like Sinlay, if it's building infant baby formula plants, if it's adding value, lifting productivity. If it's just a purchase of land, it's not really a matter of China, I mean I don’t think that’s doing a lot for New Zealand per se. Now we've got German investors, and American investors, as you say Koreans and others buying farmland. Not in massive quantities. Actually if you put it in perspective less has been sold under our government than the previous Labour government. But the reality is that probably doesn’t add a huge amount of value to New Zealand. But if we can put together some JVs in other areas, well then you're talking a very different picture, and I think you're creating jobs and productivity. Look all I can tell us is I had lunch with the former Secretary of the Australian Treasury as he was actually retiring earlier this year, and I asked him about what we could do to lift productivity, lift growth in New Zealand and ultimately lift wages, and the very clear message was get more capital investment coming into your companies. Get those companies investing, even if you do it in joint ventures, get them investing, build that capital yourself as a government in terms of infrastructure build. That’s what lifts productivity and opportunities.

Duncan Alright Prime Minister, thanks for joining us and making time for us this morning from the National Party Conference.

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