Q+A’s Guyon Espiner Interviews Finance Minister, Bill English.

Points of interest:
- Government open to rise in tobacco tax
- English: “I wouldn’t guarantee the same number of government departments [at the end of this term]”.
- English confirms proposal to abolish Crown Research Institutes’ 9% return on equity requirement, but says “we're not going to remove basic financial disciplines”
- Cabinet considering proposal for more oil exploration
- English “pretty disappointed” with Radio New Zealand and DOC “playing politics”
- Long term economic restructuring more important than “buying” short term jobs
- Falling business confidence “a dose of reality”

The interview has been transcribed below. Q+A is repeated on TVNZ 7 at 9.10pm on Sunday nights and 10.10am and 2.10pm on Mondays. The full length video interviews and panel discussions from this morning’s Q+A can also be seen on tvnz.co.nz at, http://tvnz.co.nz/q-and-a-news

BILL ENGLISH interviewed by GUYON ESPINER

PAUL As Thank you Minister for joining us this morning, we really appreciate your time. I want to talk today about two of the most fundamental ways which your job affects people's lives, that is how you raise money, and how you spend public money, but I want to start with the state of the economy. We've got TVNZ's latest poll tonight and we have the numbers on economic confidence to release this morning. Now it shows that while there are still 59% of people who believe the economy is gonna get better over the next 12 months 41% of us believe the economy will either stay the same or will get worse. Now that takes us back to roughly where we were in July last year, who's right, the pessimists or the optimists?

BILL ENGLISH – Finance Minister
We're on the road to recovery and it's going to be a bit bumpy, I think confidence levels had got almost unreasonably high in the latter half of last year, just a sense of relief that the financial crisis didn’t turn into something really bad here in New Zealand, and now we're getting a dose of reality, people can see you know the housing market hasn’t really taken off, there's still job insecurity around and that’s why we've gotta focus pretty strongly on policy that’s going to help to broaden the base of the recovery.

GUYON So if you were asked that question get better over the next 12 months, stay the same or get worse, what would you have said?

BILL Oh it'll get better, the question is, is it going to get better fast enough and is it going to get better for everybody.

GUYON Because it's worse than you predicted. Last November when you were on this show you said that unemployment would peak at 7% now it's 7.3%, is that as high as we're going to get or do you think unemployment could actually go further?

BILL Well we would hope it won't go any further, the forecasters have given us some reasons for the 7.3%, which is essentially that there's more people who've come out of the grandstand on to the playing field, so more people who were sitting on the sidelines who now regard themselves as part of the labour market looking for work. So in a way that’s a positive sign, but again it shows the importance of policy that's going to broaden the base of the recovery and kick things along, so that those people's expectations can be met.

GUYON You hope it won't go higher than 7.3%, do you believe it won't go higher than that?

BILL Well look, I don’t know for sure, I think as your poll shows we're in a period here where opinion and confidence and real decisions are going to fluctuate, because the only thing that will get unemployment down is businesses deciding to actually employ somebody, so we need to focus on giving them the confidence and the rewards and the incentives to make good decisions.

GUYON That is longer term structural stuff some of it and I want to get to that, but what are you doing in the here and now to save jobs, we've got unemployment at about 62,000 people actually on the dole, and perhaps 160,000 people who are unemployed. What are you doing in the here and now to actually redress that situation?

BILL We're doing everything we reasonably can, and the main impact we're going to be having on unemployment directly are through the infrastructure projects that the government's rolling out. We're spending billions on roads, rail, the electricity grid, the roll out of Broadband that’s coming, half a billion dollar school building programme, just turned the sod for another new one in Auckland the other day, so that will be directly creating jobs, and then there's a number of schemes that are in place aimed at young people to try and connect them to the workplace, but in the end the long term policy is what's going to matter for creating sustainable jobs rather than just buying them short term.

GUYON Well let's talk about that long term because this week you painted a pretty bleak picture when you spoke on Thursday, you spoke of an export sector which hasn’t grown since 2003. You spoke of a stagnant forestry and tourism and fishing sector. You spoke of a country which actually spends more than it earns and over invests in the property market, and you concluded this and I'll quote it back to you, because this is what you said. You said 'no economy can survive long in this kind of fantasy land, we cannot continue with accelerated consumption based on the government spending more and our house prices rising, while imagining that this is making us wealthy.' What are you doing to bring us out of that fantasy land, and what is the real world going to look like.

BILL Well in the first place I think a lot of New Zealanders now understand that, and they are changing their habits to some extent, your confidence indicator I think is a sense of realism among New Zealanders that we're not going to just get back on the same conveyor belt we were on before. What the government's doing is laying out a longer term programme, we're not looking at one big bang because there isn't one big thing you can do which is suddenly going to fix a decade of problems, we're laying out a programme of consistent and considered reform, ranging from the infrastructure investment that I mentioned earlier, through to the tax switch that we're looking at, that’s had a lot of public discussion, through to some of the less glamorous bits like improving our regulatory structure, so that businesses can more easily make the decisions we want them to make to invest and to employ.

GUYON Well let's talk about one of those issues which you're looking at to try and generate more wealth, and that is getting more commercialisation or more of a business model I guess, from our Crown Research Institutes. Now you’ve done some work on that issue, is it true that you're looking at abolishing the 9% return on equity that those Crown Research Institutes actually have to return to the government?

BILL Well we've had a group of people go away and have a look, and they want to see more emphasis on the science output, the science results coming out of ....

GUYON And that would allow you to do that, could you address that question, is that what you're going to do?

BILL Well the Cabinet hasn’t considered it yet, but look it's going to be pretty important over the next few years that every public entity focuses on its financial viability.

GUYON But you're seriously considering abolishing that rate of return?

BILL Well look it's been proposed.

GUYON So that is in the report is it?

BILL It's been proposed as I understand it, but with my hat on as Finance Minister, I want to make sure every public entity is focusing on its financial liability, so we're not going to remove basic financial disciplines however that’s expressed.

GUYON Well there's roughly 700 million dollars worth of equity in those eight Crown Research Institutes, that would be nearly a 70 million dollar helping hand for science, I mean are you prepared with your Finance Minister's hat on, to put that money into that productive side of the economy?

BILL No, well I wouldn’t make that commitment, certainly not here, and certainly not without any Cabinet discussion, but in any case if you think of – look they're typical of a lot of public organisations, they’ve had a number of years where things have been pretty easy for them, they need to focus on the financial basics and we're not going to take any soft options.

GUYON But are you prepared to give more money to them, I mean that is a productive side of the economy, it is potentially a way that we could commercialise some of our science and science results and a way that we could actually generate wealth for the country.

BILL Last year the government did – it did commit more money to them last year and the Prime Minister has signalled in his speech a couple of weeks ago, that he's very keen to see us focus on growing the revenue, not just on cost control, and better science is a way of doing it, so they probably can expect a pretty positive look from the government.

GUYON There's some talk too that you may be giving the GNS some more money so that they can actually do some more exploration work in terms of New Zealand's petroleum reserves, is that something you're willing to consider?

BILL Well again I think that’s been proposed, Gerry Brownlee the Minister of Energy and Resources, is a very vigorous proponent again of the same idea, that we do have to focus on getting our basic costs right, but we have to grow the revenue in a positive way, so we are trying to create better incentives for people to get ahead, but also better opportunities for them, and the Prime Minister has laid out a range of those from expansion of minerals and petroleum exploration through to looking at financial services up ahead.

GUYON Just before I leave this wealth creation side of this argument, one of the big ideas pre election for National was that you would be investing or getting the super fund to make 40% of its investment, investment in New Zealand companies. Where are we at now?

BILL Well they’ve made a small amount of progress, but it has been difficult with the huge fluctuations in the equity market over the last 12 months.

GUYON Do you know what percentage of their investments are invested in New Zealand companies now?

BILL Oh it's sort of 15 - 16% and we've set a target of ...

GUYON Of 40%.

BILL ... significantly higher than that, sorry, no it's actually about 22 – 23% if you count all the New Zealand investments. So look we've got an understanding with them, they know where we're headed, but they're like everybody else, they’ll be looking for opportunities...

GUYON Sure, but that’s where it was when you came into office, so you haven't made any more investment in New Zealand?

BILL Well they have made some more, but you have to take account of large fluctuations in the value of their shareholdings both in New Zealand and around the world. So now they're getting back on an even trail, but we're keen to create – now we've gotta create for the super fund as well as for everybody else, better opportunities to invest in New Zealand, that’s one of the reasons we're looking at changing the tax system.

GUYON Well let's talk about that change in the tax system. You’ve indicated pretty clearly that the top tax rate will come down to 33 cents, that was largely the signal that you gave this week. I mean do you really expect that to create economic growth, because that’s where the top tax rate was in the 1990s and we were hardly an economic nirvana then were we?

BILL Well the tax system doesn’t guarantee anything about the economy, what it does do is help people, it changes the incentives for people's choices at the margins, so we want to create the opportunity for them to decide – that it's easier for them to decide, to save more, to invest more, to create jobs.

GUYON Were things that much better though with respect in the 1990s when the top tax rate was 33 cents in the dollar?

BILL Well in some respects they were, I mean in the tax system what's happened since then is we've had a loss of integrity where there's different rates for different entities, people quite naturally try and reduce their tax rate, and the experts are telling us in the long run that’s going to erode a tax base we depend on, which is income tax, so we want to improve the integrity of the system, improve the fairness, so everyone is paying the right rate, but most importantly to adjust the incentives of the economy so that people have stronger signals about getting ahead rather than borrowing more because they're spending more than they earn.

GUYON I don’t want to spend a lot time with you dodging what the exact numbers are gonna be when they're released in the May budget, but ...

BILL But you will.

GUYON Two taxes which haven't been mentioned, excise tax on tobacco and alcohol, will they rise in the budget?

BILL The Maori Party's been making some proposal about excise tax but we haven't considered those in detail.

GUYON So they won't be going up this budget?

BILL Well there's been some proposals made, we haven't considered them yet.

GUYON Tobacco, can you rule that out for this budget?

BILL Well again there's been some proposals made and the government will be considering those.

GUYON So you are still open to possibly raising the tobacco excise ...?

BILL Well look we're in discussions with our coalition partners, they’ve aired some of their concerns about National's proposals.

GUYON Would you like to see it go up on tobacco?

BILL They’ve got some proposals of their own, and we'll go into it, but we're in a process of discussing the relevant merits.

GUYON Would you like to see it go up, Minister?

BILL Well there's a lot of public health reasons why we want to see people smoking less, particularly young people, but that’s really up to the proponents of any increase to argue the case.

GUYON Sounds like you're fairly open to the idea though?

BILL Well look we're in a coalition with the Maori Party, it's based on respect and goodwill, and if they’ve got propositions we will consider them as they consider ours.

GUYON In the few remaining minutes that we've got left, I want to talk about the public sector and your government spending on that, I mean basically your saying no money for five years essentially, that’s what you're saying isn't it?

BILL Well what we've been trying to do is avoid the problems of short term slash and burn savings, and focus more on getting the public sector to rethink how it delivers services to the public, because in the long run we want to deliver good services to the public, it happens we have to do it now for less money.

GUYON That means for Police, nurses, teachers, no pay rise for five years? Essentially that’s what you're saying.

BILL Well not it's not quite what we're saying.

GUYON Well how else do you do it though with respect Minister, how else do you do it if you're saying look no more money, staff is often the biggest cost for those organisations.

BILL I think you'll find that say Heath and Education can expect that they will get increases from year to year because you simply can't deal with the level of public demand with no more money, that’s unrealistic.

GUYON But for most people in the state sector, that would mean roughly no pay rises for three to five years.

BILL Well look we've signalled to them that we're quite happy to see pay rises if we're getting better ways of working and better services, and many of these organisations, and I'm reassured by the way that the leadership of the public service is getting to grips with reality, they can't wait this out, the public at large expect government to be showing better value for money and that’s where we're headed.

GUYON We saw a couple of examples this week that flared up in the media, Radio New Zealand and DOC, both of which were being asked to do some more creative things, or earn some more money, or cut costs in ways that may annoy some people. You went through the 1990s where National lopped pieces off here and there and it upset a lot of people and not always for a lot of gain, I mean do you wonder whether it might be better actually taking if not a big bang approach, then actually trying to make some substantial savings and actually just taking the hit from there?

BILL Well I think what you saw last week was a bit of old style civil service politics where they wheel out something unacceptable and try and get pressure back on the members of parliament, and I was pretty disappointed in those organisations.

GUYON Do you think that’s what Radio New Zealand did?

BILL I think that’s what both of those organisations were doing, and my advice to them is they can't wait this out, they are capable of being creative and flexible, and providing better value for money, and if they focused a bit more on the services and a bit less on the politics I'm sure they'd get ahead.

GUYON So they were playing politics, wheeling out something that’s unacceptable hoping it's knocked down and to try and create some public sympathy?

BILL Well it's an old trick isn't it? But I have to say the majority of the civil service can see their obligation to the public and there is professionalism, I mean they are rethinking how they do business because in two or three years time things in the public sector will be just as tight as they are now.

GUYON Can you guarantee there'll be the same amount of government departments at the end of this term, I mean I understand that there's serious consideration about Women's Affairs and Consumer Affairs, whether they actually need to continue existing, is that correct?

BILL Well I wouldn’t guarantee the same number of government departments.

GUYON Sorry, can I focus on those two with respect, Consumer Affairs and Women's Affairs, I've heard that there's serious consideration to actually getting rid of those departments, is that being looked at?

BILL Look – we want to focus actually on the large entities, the smaller ones don’t cost much and you don’t get big gains from shifting them around.

GUYON So can you guarantee their continued existence?

BILL Well look I can't guarantee it because we haven't really considered these things in much detail.

GUYON It is true then that it has been considered isn't it?

BILL Well it may have been mentioned somewhere, but I have to say the government's focus is much more on getting gains on the large numbers, rather than on what are in the scheme of things very very small entities.

GUYON Right, so merging or abolishing those smaller departments isn't gonna actually save you a lot of money, is not really on your agenda?

BILL Well it's certainly not our top priority, our highest priority is to sort out the very large entities, and you’ve seen ACC, Housing Corp's another very large one, Health and Education are clearly where you’ve got the public very sensitive to the way services are delivered, and that’s where our focus is.

GUYON You’ve got 1.1 billion dollars to spend in your next budget, there's not a lot of new money, will we see like last budget a lot of areas pruned back and reprioritised, and that spending made available for new initiatives?

BILL We're going to see a lot of that going on within the government departments, so most departments are getting nothing this budget, and they're going through a process right now where instead of focusing on bidding for another few million on top of the billion they’ve already got, they're spending time looking at the billion they've already got, and we'll see the results of that come through in the next two or three months.

GUYON Just final quick question, how would you describe your May budget?

BILL Oh look I think it's just going to be another step towards rebalancing the economy in a longer process of considered reform, but we want to move to stronger focus on investment and savings and sustainable jobs, and move away from a focus on consumption and probably speculation.

GUYON Thank you very much for coming and joining us, Bill English.

ENDS

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