AGENDA Transcript - Espiner IV's Cullen

AGENDA Transcript - Guyon Espiner IV's Michael Cullen

©Front Page Ltd 2007 - TVOne and “Agenda”

Presented by RAWDON CHRISTIE

RAWDON This week David Skilling, the Director of the think tank the New Zealand Institute, said the country still had a lot of economic catching up to do if we wanted to match Australia.

He said we were still being passed by other countries, Greece was the latest to move ahead of us on the GDP per head table. Mr Skilling warned that unless we improved our economic performance we risked becoming another Fiji but with snow, very nice to visit, but you wouldn’t want to raise a family there. So how can we improve? Finance Minister Michael Cullen talks to Guyon Espiner now.

GUYON ESPINER – TVNZ One News

Well Dr Cullen I want to talk more broadly about the economy in a minute but first to tax, and I want to take you back to something that you said in an opinion piece for the Otago Daily Times back in 1999 when you said voters are not fools, dangle promises of tax cuts in front of them in an election year and they will think you are trying to buy their vote. Is that not what you are going to try to do next year.

DR MICHAEL CULLEN – Finance Minister

I think we've reached the point clearly Guyon where people are expecting some movement on the revenue side in personal taxation, we've moved on savings, we've moved on business taxation, we've moved in terms of the family tax credits for people with children, but we haven’t moved on the personal tax side and Treasury's reasonably confident at this point that there would be room to do that.

I emphasise reasonably confident because of course they still haven’t locked in the kind of estimates we'll be using in next year's budget.

GUYON I thought we had established that these were structural surpluses though.

MICHAEL I think it's likely that there are going to be structural surpluses big enough to make moves on the personal taxation side, they will be producing figures in the half year update which will have a pretty wide range to them.

They still feel there's a degree of uncertainty about the size of that structural surplus moving forward, over and above what we need of course in order not to see debt lifting as a proportion of national income, and we expect to run some level of surplus on the operating balance side.

GUYON What I'm interested to hear from you is do you believe there is an economic argument for personal tax cuts, will these be good for the economy?

MICHAEL I don’t think it's as strong as many people make out because whether the changes are changes to rates or thresholds they're not big, and when we brought in the 39 cent tax rate we were told that people would stop working, we'd see economic growth fall right off etc etc. In fact none of that happened, we've had the strongest period of economic growth in a generation within New Zealand.

I think often particularly the commentators on the right exaggerate the impact of tax as a matter of stimulating or preventing people working, but yet because we don’t have extraordinary high marginal tax rates in New Zealand for the great majority of people, I mean we used to have 66 cents in the dollar, our maximum rate now is 39 cents.

GUYON Can I take one of your four tests and that is that these tax cuts won't increase inequalities. Is that good enough from Labour, I mean shouldn’t these tax cuts be about reducing inequality, has Labour abandoned its goal of trying to reduce inequalities?

MICHAEL Well Working for Families is very much about doing that, indeed we've got 100,000 fewer children living in poverty now than we had just a few short years ago, partly because there are more people in work. It's very very hard to actually aggressively reduce inequality through the tax system itself, that’s just the way the tax system is structured makes that very very hard.

GUYON But isn't there so much more that you could do that you're going to lose in terms of an opportunity cost on delivering on tax cuts, in the social area, I mean look at health it's been increasing what 8% a year since you got in, you’ve basically doubled health expenditure since 1999. You’ve said that you're going to have to rein in that spending, what do you see health spending increasing at now, given that you're going to have to reduce revenue and cut taxes.

MICHAEL Well we've already built in for a forecast around the growth in health spending, we've got an allowance of 750 million extra for budget 2008, that will actually grow budget 2009/2010 on current forecast. Over the medium term we do need to slowly wind back the percentage increase in spending because that current level is not sustainable over the long term.

What it has enabled us to do of course it to lower the cost of going to the doctor, the cost of pharmaceuticals, a very strong vaccination programme including things like adding the meningococcal vaccination so more than halved the number of new cases in that respect.

So we've got a lot of things in there, but I think we do have to get used to the idea that the rate of growth won't be quite as strong as we've seen the last three or four years. The British government's been forecasting the same thing I might say.

GUYON Can you tell us what it is? Can you tell us what it will go to? It's been 8% increase in health spending what do you foresee it being?

MICHAEL I think you'll see that wind back to the 7% and may about 6½%. In the medium term we'll have trouble getting it much below that kind of level because obviously we continue to see new drugs, we continue to see new surgical procedures, and of course an increasing proportion of very elderly people, we're not seeing so much the growth of the young elderly that’s in the next 20 years, but we are seeing the sort of 85 plus population growing quite a lot and of course they do tend to consume a significant part of the health budget.

GUYON Okay let's take another one of your tests and that is that tax cuts won't exacerbate inflationary pressures, how is that actually even possible?

MICHAEL Well that’s the hardest one to make sure we get right. We're normally forecasting at the moment as far as we can see stronger revenue than we have been anticipating at budget time in May, is basically that stronger revenue that we're looking to be able to put back into the system by means of tax cuts, so where were aiming to get to is the same position in terms of the net outcome than we were forecasting at budget time this year.

So I'm hoping we can do this in a way which won't be adding to that fiscal stimulus as the Reserve Bank and Treasury and the economists would call it. We'll be basically paying back that dividend if you like from stronger growth and strong economic performance.

GUYON Treasury's already predicting inflation to be 3% by December I think, I mean are you comfortable with the Reserve Bank riding outside that band of zero to three or are you going to address the Policy Targets Agreement which locks in that 0 to 3% inflationary target?

MICHAEL Just a slight technical correction, the band is now 1 to 3%, but no no change at all proposed in that band, it was confirmed not very long ago when Alan Bollard's contract was renewed. That’s very much in line with where most developed countries are in terms of the inflation targeting, it's sort of consistent with the UK, consistent with Australia, and although the Americans don’t have a formal band it's pretty clear that’s the kind of number that they tend to be aiming for.

GUYON Okay let's broaden this out a little big, we talked at the top of the programme about some of the comments David Skilling made at a Trans Tasman Business Forum this week. One of the things that he pointed out is that per capita income in New Zealand is lower than every Australia state, I mean where is this high wage, high skill economy that you keep talking about?

MICHAEL Well in fact we've seen something like 25% growth in real household incomes over the last seven years.

GUYON We're very much the poor cousin though aren’t we because…

MICHAEL We actually have a more sophisticated economy than Australia, that’s often not realised. We export more than they do, and we export more sophisticated exports than they do. Don’t forget Australia's wealth is very largely built on its quite crude minerals exports particularly gas and coal.

GUYON But where is the payoff from the sophisticated economy, I mean another thing that ….

MICHAEL Well if we had the kind of natural resources they have we'd be digging them up and exporting them to Japan and China as they do and getting the kind of growth that they’ve had, we've matched their growth, we've actually exceeded their growth over the last seven years, we've done better than they have in growth, but what we've gotta do to address those issues are not sort of quick fixes, they're the things we have been addressing.

One – infrastructure - we're massively increasing infrastructure spending in New Zealand over recent years, it's one of the big growths in government spending. Two – we've gotta list our skills levels, and we've lifted the number of people in skills, we've embarked at the moment on a major programme to improve the quality and relevance of our tertiary education, we're now moving on to that senior secondary school into early tertiary sector, and we're going to address issues of savings and investment.

We've already improved the investment climate for business in terms of depreciation, we're lowering the tax rate for business, we've got Kiwi Saver coming in, we've got significant moves in the regulation of the financial sector. So those are the three big pillars that we've gotta continue to work hard at if we're to have any chance of catching up further on Australia, which of course has been about the most successful developed country economy in the last …..

GUYON Sure but look at even Greece, I mean Greece has overtaken New Zealand in the per capita income stakes, and aren’t you worried that …

MICHAEL Well there's a lot of argument around that, they changed their measure in some respects around their informal economy and decided to give themselves an extra boost. Actually we haven’t lost ground overall on the developed European economies.

One things that’s really interesting in that tax argument is the great majority of economies which have higher per capita GDPs than we do also have higher taxation as a proportion of national income than we do, and normally higher top tax rates than we do, so clearly tax is not the answer to every maiden's prayer in that regard.

GUYON So do you see tax cuts as playing into some of those economic incentives, I mean you’ve got 70,000 New Zealanders every year leaving to other countries we heard this week, I mean do you see those personal income tax – I mean obviously it raises people's take home pay, do you see that playing into keeping New Zealanders here?

MICHAEL I don’t think it would make a huge difference because you look at the kind of size of income tax cuts which are likely to be feasible and given the likely forecasts around the surpluses and then you look at the net or even gross income gaps between Australia and New Zealand, fundamentally we would have to have zero income tax to really get close to closing that gap, now at that point we'll have enormously bad health services, education services, superannuation etc, and those are also reasons why people might migrate.

In the early 90s people migrated to Australia because the National government cut working conditions badly, and working conditions were much better in Australia than they were in New Zealand. It's not just a simple single dimensional reason why people move to Australia.

GUYON Good place to leave it for me but I'm sure Rawdon and the panel will have things they want to pick up on.

RAWDON Yeah many thanks Guyon. Nevil, is the future of our direct economy in safe hands?

NEVIL GIBSON – National Business Review
Well I think it's really a matter of lost opportunities. I'd like to ask Dr Cullen, one figure that came out this week on the impact of Working for Families was that because of the tax claw back it's discouraging people who are affected by that re-entering the workforce and that’s obviously one area where the OECD said New Zealand's work participation rates were at the low end.

MICHAEL Well that was a classic case of a right wing economist going off at the mouth without looking at the data very carefully. We actually have a very high participation rate in the New Zealand labour market.

It's gone up under this government, but the survey that’s taken the household Labour Force Survey is a sample survey and the numbers bob up and down from quarter to quarter. It went up strongly in the previous quarter, came back in this quarter and it's fluctuated around a high level over about the last 18 months two years.

There's no sign at all of structural disengagement from the labour force in New Zealand, quite the reverse taking the longer term view over the last five years, for example paid parental leave is a very important part of maintaining a contact with the paid labour force.

MARIE MCNICHOLAS – MARIE MCNICHOLAS – www.newsroom.co.nz

I don’t want to harp on about tax cuts too much but if you go back to those four tests that you’ve set yourself, this one about inflation, at the end of the day who is the arbiter of whether a tax cut you bring in is inflationary?

MICHAEL In the end of the day that’s the Reserve Bank because their prime responsibility is the maintenance of inflation over the medium term within that target band.

MARIE But at that point it could be too late couldn’t it, the inflation for the year?

MICHAEL Well fiscal policy has to take account of the likely Reserve Bank response. Of course in Australia we've just seen the Reserve Bank mot unusually putting up interest rates in the middle of an election campaign, which I think is a bit of a commentary around fiscal proposals of both major parties.

MARIE The Reserve Bank's been warning you for some time though that it thinks existing fiscal policies are inflationary.

MICHAEL No no, what they’ve been worried about Marie is that as we've tried to move back from excessively large surpluses - and I do remember being on this programme a number of times and being accused of running excessively large surpluses – then technically obviously fiscal policy becomes looser.

We're still forecasting and certainly still in a situation where the government is taking demand out of the New Zealand economy, not putting it back in, but if we're taking less demand out than we were say the previous year then strictly speaking fiscal policy has become looser.

I don’t think anybody at the other end of the camera I'm looking at at the moment expects me to be running the kind of surpluses we've run in the two financial years, they're not consistent actually with our medium and long term fiscal strategy.

MARIE The other test relating to social equality and not exacerbating inequality, and given that inevitably means that a tax cut will be across the board and it can't be that large, aren’t you running a risk here with Labour Party grassroots that you know they philosophically, and I know you disagree with that, you say personally you're not ideologically opposed to tax cuts, but they philosophically are aware of tax cuts and they could say well it's not worth the candle 20 dollars a week, we'd rather spend the money on hospitals. Now are you at some risk here of alienating your own support base for something that may not be worth it in the end.

MICHAEL Well come back a small step Marie, if those tax cuts aren’t spread reasonably broadly then yes they’ll be bigger for those at the top end but those on low to middle incomes will get nothing.

Now a Labour Party will be much more opposed to that than the kinds of ideas which are beginning to be discussed within my office and obviously a little bit more broadly than that at the present time.

The reality is that if one's to have across the board tax cuts they're not going to be very large per person. If you just cut the top rate or just move the top threshold then you can have large tax cuts for those earning about $60,000 a year, and while that’s a growing proportion of the workforce it's still well under half the full time workforce and way way less than that in terms of total income earners within New Zealand.

It was interesting at the Labour Party Conference, I think a lot of the media missed the subtlety of what went on, when Helen said there are gonna be tax cuts next year that wasn’t the big round of applause, it was actually the next sentence which was that I be the person delivering them because I think the Labour Party Conference felt confident if I was delivering them that in fact there'd be attention paid to those issues of social equity which are close to Labour Party people's hearts, it's what we're there for.

RAWDON Dr Cullen let's move off tax cuts for minute and look at the bigger picture. If things are moving in a positive direction why are economists of the calibre of the David Skilling effectively playing doomsayer at this stage?

MICHAEL I don’t know why David's so doomsaying, he always wants very very large expenditure in areas like Broadband and savings and so on beyond the capacity of any government to sensibly deliver I think.

Quite rightly I think he points out that a pure free market approach does not deliver the goods for New Zealand, it requires a more active and strategic government approach, and let's take one area which I obviously know quite a bit about having been the Minister of Tertiary Education for the last two years.

We were running a system for the last 15 years or more where fundamentally it was bums on seats, if people elected to do xyz we just paid them to do it, we didn’t worry about the quality, we didn’t worry about the relevance, we're now moving to an approach of investing in a plan with the Tertiary Education Commission, where the tertiary institutions agree on an investment plan for the next one to three years period, and we try to ensure that we're better meeting the needs of our economy and the needs of our society, at the same time of course remaining true to own Labour Party traditions about people fulfilling their own ambitions in life and their own potential.

There's an important strategic shift – Kiwi Saver is an important strategic shift in approach, we're saying the government does have a role in trying to support the growth of private savings because this economy needs a high level of savings and stronger capital markets if we're very very to do better.

NEVIL But Dr Cullen we are falling in the areas of competitiveness and I think David Skilling's emphasis is that we're not really paying our own way on the world market, we're very low in the OECD on trade and income from exporting and that kind of thing, and you can say that you haven’t really concentrated as a previous Labour government did in knocking out some of those monopolies, you’ve got greater role for the State rather than less, and that’s where the inflation is coming in, it's actually built into the government spending rather than the private sector.

MICHAEL Oh I don’t think there's a great deal of evidence to demonstrate that at all, yes spending has grown a bit as a proportion of the national income the last two or three years, it actually went down in the first four years or so of this government, and that’s largely because of Working for Families and now Kiwi Saver, where that spending of course is going in to support private savings, it's not going out there into the market to support consumption.

NEVIL But the prices in the public sector have been going up. I'm really talking about rising prices and how we're being made less competitive and a lot of that higher pricing is coming in through government impulse and that kind of thing.

MICHAEL Oh there's a little bit of increase in some government charges but they're largely in those user pay areas where people are paying for the services the government provides, across the board you haven’t seen large increases in that regard at all. The government has been running stronger surpluses so we have been taking demand out of the economy.

That’s not got a lot to do with our exporting position, I mean that’s been primarily due to a very strong dollar against the US which in part is a reflection of a weak US dollar.

I repeat, we export more than Australia does, we export a lot more than the United States does as a proportion of our national income, and on a value added basis we do better than the pure measurement of the crude level of imports and exports. A lot of economies like Ireland and Singapore also have huge levels of imports.

GUYON Well just interesting Dr Cullen you talk about Working for Families and Kiwi Saver, the Cullen Fund, your big contributions to economic ideas over the last eight or so years, is there another big economic idea from you or is it tax cuts?

MICHAEL I thought that’s what everybody wanted at this time. We've gotta deal with that issue, gotta deal with I think not just the short term but the longer term, what with the shape of continuing to be able to give out dividends to New Zealand people for their effort and their work look like over the medium to longer term, that a big and important issue, but we've got big issues particularly around that interface of school and tertiary education, some major moves to make in that regard.

We've got the whole issue around climate change to bed in. This government is still the political party which is producing all the big ideas within New Zealand, nobody can ever tell me one single idea the National Party's come up with over the last couple of years.

RAWDON Great, thank you very much Dr Cullen for joining us this morning.

ENDS

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