AGENDA
Presented by RAWDON CHRISTIE

RAWDON The world's finance ministers and central bankers are now in Washington for the annual meeting of the International Monetary Fund, already the group of G7 top industrialised nations have announced a tentative agreement to follow Britain's lead and inject equity funding into struggling banks, but the world financial crisis is far from over and is fast turning into what looks like being the worst recession the world has seen since the1930s. in the United States there are reports that General Motors is merger talks with Chrysler in a bid to stave off bankruptcy, but here both our main parties seem to think it's business as usual. Dr Cullen has not gone to Washington and National has spent the past week on promoting its tax cuts which it says it can afford by cutting back on Kiwi Saver and research and development expenditure. Critics say cutting savings and research are bizarre things to do on the brink of a recession, their finance spokesman Bill English is with Guyon now.

GUYON ESPINER
Well Bill English let's start with that economic package that you outlined this week. I can understand the political advantage of giving middle income earners who missed out on Working for Families 10 to 15 dollars a week through that independent earner rebate but National has talked for a long time about simple lower taxes, why are you adding another layer of complexity into the tax system?

BILL ENGLISH – National, Finance
Well look it's not about the complexity of the tax system, we do in the long run want a simpler broad base tax system but the priorities here are to get through a recession, to provide some stimulus in the economy, to spread that across the widest range of people that’s possible and to strengthen the economy so that we can get some higher growth rates as we come out because most people can get through some tougher times if they think times are going to get better. Now it happens that the tool such as the independent earner rebate helps us do that, we've got a significant group of people who haven’t had the benefits of Working for Families, they haven’t had any relief on their taxes for the last nine years.

GUYON Sure but package actually delivers quite strongly to those at the top end as well doesn’t it? I mean if you look at top paid public servant Peter Hughes he's earning about $530,000 a year, he'll get $235 a week on this tax package I mean aren’t you just frittering money away in difficult times here?

BILL No not at all because the tax package is self financing, we have made some small reductions in the top tax rate and that’s a move in the direction of the kind of tax reduction that does help with growth.

GUYON How will that help with growth?

BILL Well we believe that the tax package spreads the benefits across the widest range of people we can.

GUYON How will cutting that top rate and giving someone on $530,000 a year a couple of hundred bucks a week, how will that help growth?

BILL Well in the first place you can't cut taxes without it flying through to people on higher incomes you just can't do it, it's physically impossible, secondly all the literature tells us, all the analysis tells us that reducing the higher tax rate is the most growth enhancing tax cut you can make. John Key's made it clear that in different circumstances we would have gone further with that because we believe that New Zealand is going to need a spirit of enterprise, we're going to need to be a country that rewards success and we don’t apologise for that.

GUYON Okay let's look at how you’ve funded that, largely through cuts to Kiwi Saver, I mean we've got one of the poorest saving records in the OECD, why would you want to discourage saving at this time?

BILL Well it's not discouraging saving.

GUYON But you're taking three billion dollars out of Kiwi Saver over the next three years.

BILL Look this is a matter of balance, if you think about New Zealand's retirement income system compared to Australia's we have universal national super at 66% of the average wage under National and 55% if Labour's re-elected they're going to cut super, and it's prefunded. Kiwi Saver on top of that as we proposed it will be a 6% scheme, the Australians have a 9% scheme but they have income tested and asset tested public pensions, so we believe the right balance in New Zealand is Kiwi Saver at 2% plus 2, we believe that will be enduring and fair and affordable and by far the strongest feedback we've had from our package is people saying to us in the street now I can afford to stay in Kiwi Saver because I can't afford to, when I've got a high deal I can't afford to keep putting in 4% and people coming up to us saying well now I've got my tax cut I might be able to afford to get into a Kiwi Saver, bear in mind a quarter of the working age population are in Kiwi Saver, three quarters of them aren’t in Kiwi Saver and it's simply unfair to have very generous subsidies for those who can afford to get in, particularly in a recession and three quarters of the working age population who aren’t in mostly because they can't afford it. So what we're doing is providing some stimulation for the economy across the board, treating all taxpayers fairly and creating a 6% Kiwi Saver scheme, if you put in 2% from your savings you'll get 2% from the government and 2% from the employer, it is a fair and enduring scheme, it still leaves the government putting in about a billion dollars a year in savings incentives.

GUYON Okay let's look at another way that you're funding those taxes, that’s through axing the research and development tax credits, I mean our private sector investment in research and development is about one third of the average in the western world why on earth would you want to discourage research and investment?

BILL Well again it's not discouraging it it's a matter of balance and priorities, we've made it clear that our top priority is personal tax cuts, we've made that clear for quite some time.

GUYON But do you honestly believe that those cuts to the personal tax rates are gonna stimulate and grow and give us economic growth more than investing in innovation and technology of our companies?

BILL Yes we do, the problem with the tax credits for research and development as even the accountants who are organising it will tell you that the vast bulk of activity going on is the reclassification of existing expenditure to get that tax credit. Now that’s a nice thing to have.

GUYON So you don’t believe those companies are going to honestly use that, you think that they're just going to use their accountants to somehow sort of skew this tax advantage.

BILL Yeah well there's widespread activity going on right now, has been, to reallocate to get that expenditure. Look this is a world we're moving into where there are things that are nice to have, now we have kept a number of the things from the last nine years that are about giving people a sense of security, their Working for Families, interest free student loans, making sure national super stays at 66% of the average wage, that gives people a sense of security going into a recession, we've maintained the budget allowances for public services in the future.

GUYON Sure but what we want to know and what people want to know is how you're going to grow the economy and you would have thought that investing in the technology and the innovations of our companies is one very good way to do that?

BILL Well Guyon this is about balance and I'm telling you the story, the first part of is people need a sense of security going into a recession, we're not gonna slam the brakes on, we're going to protect the vulnerable because this recession could get nasty, as your programme headlined it could, and those people deserve to know that the government will stand behind them and not pick on them.

GUYON Okay what I'm asking you is the second bit.

BILL I'm coming to that, I'm coming to the second bit. The second bit is about strengthening the economy so that we can grow out of it and we have gone for measures that are pervasive through the economy.

GUYON Let's look at your first one, I'll look at your first one cos you told us this week and it is – the first plank of your economic plan is - and I'll quote you – to improve productivity across the public sector by ensuring a strong focus on the provision of front line services, what does that mean?

BILL What it means is that the build up of bureaucracy that’s gone on in government spending has to stop and remain….

GUYON So are we going to cut government spending or not cos it doesn’t quite square with what you're saying, you're saying you're not gonna slam the brakes on but then you're saying that one of your first planks of your economic package is to rigorously review government spending.

BILL Well I'll give you an example, in education the Ministry of Education spending has more than doubled, the spending on schools has gone nowhere near doubling in the last nine years, so we're saying, we've said it quite straightforwardly to the bureaucracy in Wellington, that we want to redirect the money from spending on your bureaucracy to the front line, that makes sense to people. That is prudent it means that we can focus on the effectiveness of government services.

GUYON But let's be practical and speak in plain terms Mr English, does that mean that those bureaucrats will lose their jobs?

BILL Well we've said we're going to put a cap on the growth of it.

GUYON But when your shifting people to the socalled frontline from the back office that must surely mean that people are gonna lose their jobs doesn’t it?

BILL Well some may, look there's things that are going on there that we would not want to do if we were an incoming government, particularly under tougher times, so we are going to go -– we will have to go through government spending line by line and apply the same kind of rigour to the government budget as every household is applying and every business is applying to their own budget, but we are going to make sure that we maintain the public services that people rely on. So when we talk about strengthening the economy part of it is about government lifting its productivity, the current government is absolutely unsuited to doing that, they are just used to pumping in more money whatever turns up they just go and spend it without much focus on what it's spent on. We also talked in our plan through the week about the investment in infrastructure, that’s the Australians are heading down the same track where National gave itself the room for a bit more debt to bring forward infrastructure, do more sooner. When Fonterra our biggest export company tell us they spend more money moving their goods around than they do on processing them in New Zealand then you know that getting that cost down and getting the competitiveness for our exporters is going to be critical to lifting our economic growth.

GUYON Okay let's look at one of the other things that you could do and one of the reasons that people say we're in something of the muddle that we are and that is the property market. I mean according to a lot of experts the incentives for property have given us a situation where we have been buying and selling each other's houses and have ended up massively indebted to foreign owned banks and with little economic productivity from that, why not put a capital gains tax on the second property?

BILL Well I mean right now you'd be paying big tax refunds on capital losses because they're going through, we don’t support capital gains tax never have, and under the current circumstances it's pretty much irrelevant because our biggest concern actually is that property values will drop too much.

GUYON Isn't it about getting the incentives in the right place, Kiwis put all their money into their houses, they buy second houses, third houses if they can afford it rather than investing in companies and things that will make us grow, we're not gonna get rich buying and selling each other's houses are we?

BILL And we are not going to bring in measures that are going to push property values down further. It shakes the confidence of the households and the more important immediate effect is going to be the many small businesses in New Zealand whose overdrafts are secured on housing, whose value is dropping, and if we're going to bring in a capital gains tax now you are sending a signal to them that we're going to do our best to keep those property values down, in fact we're bringing in something that guarantees they’ll go down further, I think it couldn’t be a worse time to interfere with what's going on in the property market and make it worse. We are potentially headed for a significant credit crunch for small business in New Zealand and depressing property values will make that worse.

GUYON Okay well what shall we do about that liquidity crisis, should the Reserve Bank be cutting interest rates?

BILL Well I'm sure the Reserve Bank will end up cutting interest rates further it's just a matter of when and how far and when you see central banks around the world executing coordinated cuts on 1% then I'm sure that weighs on the Reserve Bank. The calculation they're trying to make is the same as everyone else, how much is the overseas financial market's turmoil going to impact on New Zealand. So far we're actually just dealing with our own recession which actually started back in February or March of this year and they’ve been up till recently a bit cautious about taking the view that the economy's going to go through the floor. So look the Reserve Bank makes their own decisions, our job is to get on with the measures that are pervasive that are going to strengthen the economy.

GUYON And what are you going to do, are there any short term measures that you would make if you came into government, have to open the books up again and say look we can't go through with this set of promises or we have to introduce some emergency measures, I mean are there any headline ideas that you’ve got to actually get us out of this mess?

BILL Well look we just presented a package that’s a 15 billion dollar stimulus to the economy that’s very significant, it's going to put money in the pockets of everyone, it's going to improve the incentives across the board. Now a lot of these socalled big ideas are highly targeted at particular small groups, for instance incentives for people to come back from overseas, well that might benefit a very small group of New Zealanders who are going to arrive back in the next 12 months but won't have any material impact on the economy.

GUYON So it is business as usual as we said in the intro really from you?

BILL No it isn't, and I think there's a misjudgement where people are looking for nice sounding ideas but our job is the prudent and responsible management of incentives and the prospects for growth across the board and that’s why much as people don’t regard it as sexy further investment in infrastructure doing more sooner affects every single business every single household and that’s why we've given ourselves the room to do it. Labour say it's reckless, we don’t, we believe it's vital and actually it'll help soak up a lot of the unemployment that’s coming out of the construction sector which is – you know parts of which have just simply gone dead. Another pervasive policy here is around regulation, we've developed these complicated overlays of regulation from good times under a government who thought there was a rule for everything.

GUYON We know your position on regulation I just want to ask you …

BILL It's simply not good enough to say these things done matter, they do, they affect every single business and some rinky dink scheme that might sound good on the news isn't going to help the business who is dealing with the challenges of the Building Act, the Resource Management Act, you know the rules that have got as silly as telling us what kind of shower heads we can have in our homes.

RAWDON Time now for the panel to have an opportunity to have a few questions as well, Vernon.

VERNON SMALL – Dominion Post
Yeah Bill on Monday John Key said that you'd reduced the size of the tax package that you were going to bring in by roughly two billion dollars as a result of the economic crisis around the world. Where would you have made the cuts to be able to afford those?

BILL Well there was a few adjustments to it around the top tax rate around the rate of adjustment in the middle rate and then we've produced the package which we believe is a good balance between helping people through a recession and lifting our prospects for economic growth beyond that by improving the incentives people have. As a result of this package 80% of New Zealanders will end up paying 20 cents in the dollar on their marginal dollar and that’s pretty good.

VERNON But previously you'd said that it was going to be a neutral package vis a vis Labour's that you were going to find the savings somewhere in order to do the tax cutting, where would you have made those savings to pay for that extra two billion in tax cuts?

BILL Well look I think that’s getting a bit hypothetical at this stage.

VERNON But you had the package in place up to Monday didn’t you?

BILL Well look the challenge ahead of us though, I'm not gonna go back into all the versions of the package that we looked at because there's a much bigger challenge ahead of us and that is the possibility of this financial turmoil flowing over into New Zealand and we think our approach is a good balance, you know some people say we didn’t go far enough because people want some kinda hairy chested push, other people saying we went too far. Well we've gotta guide this through you know with broad political support and sound attention to lifting our economic prospects.

JOHN ROUGHAN – New Zealand Herald
Bill your package reduces Labour's predicated deficit of ten years by one year, are you really comfortable with a package that has deficits for the next nine years?

BILL Well we're not comfortable with the opening of the books and bear in mind they were opened last Monday we produced a package on Wednesday and as we said then we'd made a start which is a lot better than our political opponents who have known about this for months, accused National of being reckless for proposing a bit of borrowing and then turn up with a 50% increase in government borrowing, I mean how can you trust people like that. So we've made a start, if we become the government we would want to pull those deficits back, but I have to say from the history of governments coming out of government books and recessions the thing that has the most impact on the government's books is actually the rate of growth coming out of the recession, and the Treasury forecasts around that aren’t that good and we would need to work hard to lift that rate of growth because that is the thing that'll have the most impact alongside controlling government expenditure.

JOHN And I get the impression that you think the way to do that is to lower taxes rather than cut spending and get the deficit back into balance quickly?

BILL Well look let's just keep the government spending in perspective. Labour in the last budget set out some budget allowances which were less than half what they have been spending in new money for the last five years, less than half, so the civil service is already quite clear there is going to be real restraint, now that hasn’t even started yet, Labour's still out there promising pay jolts, buying high country stations, the billion dollar package they did with the Greens aren’t even included in these figures, so just living within those much lower spending allowances is going to be a real challenge.

JOHN The fiscal update mentioned two big social outlays that Labour have introduced that are having a higher uptake than Treasury expected and contributing to the present deficit, one was Kiwi Saver, the other was free child care for the well off as well as the poor, what's your attitude to the second one?

BILL Well look that’s part of people's sense of security going into a recession and we've made it plain that we are not going to remove – pull the rug out from under them, so Working for Families, the 20 hours ECE, national super at 66%, those are all going to stay in place and we don’t see a compelling economic reason to cut those back but more importantly we believe people need a sense of economic security going into a recession and we have to focus on the growth promoting policies that'll be needed over the next three to five years.

RAWDON Bill English some economists are saying the government, whichever government we have in the next four or five weeks should keep its options open until they open the books up early next year and then after the banking crisis has time to settle a little bit and then make decisions at that point, what sort of flexibility are you going to be offering if you are the government in that situation?

BILL Well if the outlook alters significantly then we would keep to the commitments that we've made and John Key will be making some more of those commitments today at our campaign opening, keep to the commitments that would be made and I think any change in outlook will simply give a stronger sense of urgency to policies that are going to help this economy lift its growth rate as we come out of a recession, but people need a sense of security on the one hand and the confidence the economy is going to pick up, and I think there is a growing sense of urgency and that’s a good thing.

RAWDON What if the world economic picture almost necessitates a change of tack though?

BILL Well look if we are the government of course we will take into account what's happening with the outlook but you know if you look at the range of possibilities then the mix of policy is likely to be maintaining that sense of security for people to get through a recession on the one hand, and on the other hand more urgency about measures that are going to lift our growth rate in the long term and that may well involve some of the ideas that are starting to be talked about at the moment. If we're the government we'll be quite open minded about the range of ideas within the fiscal limits that we have cos we're not gonna let the government's books get a whole lot worse, but we will persist with our programme which we outlined the other day some of which is quite far reaching, the infrastructure investment, rolling back the cost of regulation and the deadening effect on growth over-regulation has, those things are vital.

VERNON As the possible incoming Finance Minister how long do you think this recession's going to last?

BILL Well it's anyone's guess, Dr Cullen told us three weeks ago that it was over that we're already out of the recession, my own view is that while confidence picked up a bit in the last three or four months that that’s going to take a dive again, people are just seeing so much bad news in the media, I think the effects of it are going to start biting here where credit's going to get hard to come by particularly for businesses that are a bit riskier, and for people trying to borrow 90% for a house they're just not going to be able to get it, so look we could be flat for the next 12 months two years, who would know.

VERNON In the interview with Guyon you hinted at the concerns you’ve got about property prices falling even further I mean is there a risk of that spilling over into the real economy quite quickly, that people can't borrow against their businesses, cos New Zealanders often do don’t they, they borrow against the house for a small business and that that will then have a feedback into the bank's security?

BILL Yes I think there is a risk of that, there's all sorts of risks, most of the risks that we're looking at – most of the uncertainties over the next two years are on the downside and that’s why it's important that we maintain the package that gives some stimulation that puts some cash into people's pockets, that keeps the economy ticking over while we deal with the challenges to the growth of the condition, and strengthening that growth is what's going to matter.

VERNON Putting all that into one package then how quickly can you get us back out of deficit into surplus if you're the Finance Minister?

BILL Well at the moment we've made a start and this is a start that we can make from Opposition where we have pretty limited resources and don’t know exactly what's going on in government, but clearly we're much better equipped for that than the Labour Party we're just possums in the headlight, I mean what plan or policy has Labour announced – zero.

RAWDON Okay Bill English thanks very much for joining us this morning.

ENDS

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