Kiwiblog

Labour have released:

Labour’s Finance spokesperson David Cunliffe has released 15 quotes from John Key and Bill English that show they have consistently talked up an economic recovery …

Now it is true that the economic recovery has not been as strong as was projected. There are of course some strong external factors at play again like Europe and the Canterbury earthquakes, but putting that aside, whom else can we find talking up the recovery? Perhaps we can even find some politicians who claimed the Government was too cautious about the recovery, and they should start spending up large? Let’s see what Mr Google finds:

1. First we have Phil Goff saying there was a global crisis in 2008, but that it was all over by 2009. http://www.3news.co.nz/Sub-zero-Budget-worst-in-27-years—Goff/tabid/419/articleID/211868/Default.aspx#ixzz1d9dDbU5O. Someone tell Silvio.
2. Then we have David Parker demanding that “All New Zealanders must get their fair share in recovery”. A refrain repeated often.
   The better than expected GDP figures released today serve as a reminder to the National led Government that all Kiwis must share in the recovery, Labour’s Associate Finance spokesperson David Parker said.
   “With growth tracking faster than expected Kiwis should look forward to some relief from the Government’s 2010. The stronger than expected recovery gives the Government more room to move as it prepares for the May 2010 Budget.
   “Now the economy is showing strong signs of growth National must work to ensure all Kiwis share in it.”
   http://labour.org.nz/news/all-new-zealanders-must-get-their-fair-share-recovery
3. This one is my favourite – David Cunliffe actually accuses the Government of “trying to play down the extent of the recovery”
   Kiwis deserve to share in stronger recovery
   Better-than-expected economic forecasts should be reflected in a Budget in 2010 that allows all New Zealanders to share as much as possible in the recovery, says Labour Finance spokesperson David Cunliffe.
   David Cunliffe says today’s Budget Policy Statement is significantly more pessimistic than the latest Reserve Bank’s prediction.
   “The Government is still trying to play down the extent of the recovery, but whether you use Reserve Bank or Treasury forecasts, it is clear that hard-working Kiwis, who have been struggling to make ends meet throughout the recession, must be to the fore of the Government’s priorities in next year’s Budget.
   “The fact that Finance Minister Bill English is trying to play down the level of recovery is a worrying sign, but Kiwis want positive reinforcement that the country is on the mend.
   http://labour.org.nz/news/kiwis-deserve-share-stronger-recovery
4. The fact that the number of full-time equivalent jobs and total paid hours declined in the December quarter shows that thousands of hard-working Kiwis are not sharing in the economic recovery, says Labour Finance spokesperson David Cunliffe.
   http://labour.org.nz/news/declining-opportunities-grim-news-struggling-kiwis
5. Goff – Fortunately, the rest of the world’s largest economies are already on the road to recovery from the global financial crisis too.
   Because our trading partners are growing stronger, today, the outlook for New Zealand is much better.
   New Zealand will benefit from international economic recovery come this year, with the IMF projecting world economic growth of 3.9 per cent.
   At the start of the Government’s term in office, we announced our driving goal was to grow the New Zealand economy.
   Today it’s clear we need to widen our goal. As the recovery unfolds, it is essential that the gains are enjoyed by the people who were called upon to make the greatest sacrifice in the tough times.
   http://labour.org.nz/news/higher-incomes-prime-minister%E2%80%99s-statement-parliament-proposed-new-zealand-labour-party
6. Goff – So with the international economy starting to recover, what is being done to ensure New Zealand will gain fully from the benefits of the recovery, and that ordinary hard-working but hard-pressed New Zealander families will share those benefits?
   http://labour.org.nz/news/speech-labour-not-relaxed-about-government%E2%80%99s-deals-reward-privilege
7. Mallard – “Raising the minimum wage to $15 an hour, either in one step if it is prepared to be bold, or over two years, would show it is serious about wanting to close the wage gap as well as sending a strong signal that it wants all New Zealanders, not just those at the top, to share in the fruits of the economic recovery.
   http://labour.org.nz/news/kiwis-national-let%E2%80%99s-have-decent-minimum-wage-rise
8. “Now that an economic recovery is starting to take hold, National must ensure that all New Zealanders, not just a privileged few, share in the benefits of changes to the tax system, but Mr Key is trying to soften up the genuine expectations of lowest-paid Kiwis that their sacrifices will not have been in vain,” Stuart Nash said.
   http://labour.org.nz/news/astounding-40-percent-tax-claim-arrogant-and-wrong
9. Lianne Dalziel says the second Forum, organised by the New Zealand International Business Forum, is being held at an opportune time as signs of economic recovery in both countries allow a focus on developing new economic opportunities and other forms of co-operation.
   http://labour.org.nz/news/japan-new-zealand-forum-will-seek-build-stronger-partnership-between-two-countries
10. A chance to share the benefits of international economic recovery across all New Zealanders.
    http://labour.org.nz/news/phil-goffs-reply-prime-ministers-statement-parliament
11. “The Crown Accounts released today confirm that ACC’s assets are benefiting from signs of international economic recovery as anticipated,” says David Parker.
    http://labour.org.nz/news/crown-accounts-further-proof-government-scaremongering-over-acc

So really a massive own goal by Labour. They spent two years demanding the Government spend more money because they kept themselves proclaiming how strong the recovery was, and in fact their finance spokesperson even accused the Government of talking the recovery down.

Stuff reports:

Credit rating agency Standard & Poor’s has cut New Zealand’s rating from AA plus to AA, after a similar downgrade by rival agency Fitch this morning.

S&P has had New Zealand on negative outlook since late last year.

It said it downgraded the rating because of the likelihood that New Zealand’s external debt would get worse when the government is having to spend more as a result of the Canterbury quake.

This is a blow. It means all businesses and of course the Government will have to pay a bit more to borrow money. This is the price we pay for having kept interest free student loans – everyone else pays more interest.

This makes it even more imperative that the NZ Govt gets back into surplus as fast as possible. I hope both major parties do not use the election period to make spending promises we can’t afford, or in Labour’s case tax cuts for all we can’t afford.

I’ve noticed that this election that the Greens have billboards and slogans along the lines of “Vote Green to grow the economy”. This is radically different slogan from their rhetoric of a few years ago when the Greens would denounce economic growth as evil and actually argue against growing the economy.

I’m not convinced that their policies have changed, just that they have a better advertising agency. The so called policy to create 100,000 jobs  in fact has less substance than an anorexic Leptotyphlops carlae. Take their claim of 47,000 to 65,000 new jobs from renewable energy. They said:

The global market for renewable energy technology is forecast to reach an annual value of $590–$800 billion by 2015.6 If we can secure just 1% of this market, we can build a new $6–8 billion export industry here at home, creating 47,000–65,000 new cleantech, high-value jobs

Translation provided by a financial analyst:

So if the global market for green tech gets to an incredibly high number and if we could secure 1% of this incredibly high number and if those were highly-paid jobs and if they didn’t replace any other jobs in the economy then hurrah – we would have 65,000 jobs!

If the Greens were promoting a prospectus, you could get them jailed for securities fraud. But it doesn’t stop there. ACT candidate Stephen Whittington points out their massive mistake, which would have them fail NCEA Level 1 Maths. He explains:

I honestly cannot believe that the Greens have made such a simple mistake, in a document which is intended to set out how they will finance their plans to significantly increase Government expenditure.  

The Greens predict that increasing minimum wages will increase tax revenue by $519 million.  Even assuming that people don’t lose their jobs, which they will, increasing the minimum wage will reduce tax revenue.

Increased wages will increase the amount of PAYE collected by the Government.  But wages are also a deductible expense to businesses.  Given that the marginal personal income tax rate is lower than the corporate tax rate, increased minimum wages will decrease revenue from corporate income tax more than will be increased from PAYE, even assuming no increase in unemployment.

In the Green fantasy world, increasing the cost of Labour doesn’t decrease profits and hence taxes on profits. I am amazed they are not lobbying for the minimum wage to be immediately raised to $50/hour as this will cause employers to become more productive to be able to afford to pay the wages. No I am not kidding – this is what they actually argue.

Now in case you think it is only nasty right wingers using evil weapons such as mathematics and logic to attack the Greens policy, let’s look at the comments by Idiot/Savant at No Right Turn. He supports their policies but slams their advertising:

I’ve spent the morning reading through the Greens’ “Green jobs initiative” [PDF]. The short version is that the Greens are promising to “create 100,000 new green jobs through business incentives and government leadership”, specifically through increased investment, building a clean energy sector, and increased support for a green economy. But when you look at it, its not really about jobs at all; rather its about greening our economy, with jobs as a byproduct. Political marketing means that that byproduct is being highlighted, in a way which is at times outright deceitful.

He continues:

 The “big idea” in the policy is government support, through our energy SOEs, for a major new renewable energy industry:

“The clean energy sector is booming internationally. Currently, renewables supply only 15% of the world’s primary energy demands but its share is growing rapidly. The global renewable energy market grew by 6.8% in 2010 alone to reach a value of $389 billion. It is forecast to reach an annual value of $590–$800 billion by 2015. By securing just 1% of this market, we’d create a $6–8 billion new export industry here at home, creating 59,000–81,000 new jobs.”Which is a nice dream, and something we should aim for. Our economy is not very diverse (basically, we export butter and bungee jumping), and if it is to grow we need to start doing other things. Exporting wind turbines, geothermal technology, and smartmeters, and the technology, services and IP related to these is a good idea, and something that potentially fits well with what we already do. But a $6 – 8 billion export sector is enormous – bigger than meat; it would be our third-largest export industry after tourism and dairy. And that’s not something that’s going to happen overnight. Its a good idea, its something we need to do, and its something government needs to help with (after all, pretty obviously the market isn’t going to do it if left to itself), it will benefit New Zealand in the long run. But pitching it as an immediate job-creation plan, and implicitly suggesting we’ll have those jobs by 2015 (rather than in 20 years time) is deceitful and misleading.

I/S concludes:

This isn’t just wrong, it is a mistake. Quite apart from raising questions of the Greens’ honesty and integrity, one of their chief selling points, it undermines the policy itself. This is a perfectly good policy, and it can stand on its merits (hell, even MED agrees that we need active government intervention to build new export industries, up to and including direct investment in growth areas). Fudging things like this hands a gift to detractors, allowing them to dismiss it out of hand: “100,000 new jobs? Yeah, right”.

So, a good policy, but very disappointing marketing around it. Deceit is not the green way, and if you use it to sell your policies, then people will start treating you as liars, just like all the rest.

At the end of the day, the Greens are politicians seeking power. They’re just like all the other politicians – neither saints nor sinners. Just politicians.But politicians who can’t even do simple maths.

Don Brash gave a speech last week outlining ACT’s economic policies. People may be interested in a summary of them:

• ACT would promptly re-introduce youth minimum wages – or better still, abolish minimum wages entirely for those under 20.
• further reform of employment law so it is less heavily stacked against employers
• scrap the Emissions Trading Scheme
• radical reform of the RMA
• seek to reduce government spending to below 30% of GDP, the level it was at at the end of Labour’s second term in office in 2005
• Longer term, as the economy grew, we would want to get the government share of the economy to a lower level, perhaps 25%, as it was for much of our history up to the mid-seventies
• harmonise the top personal, company and trust tax rates at 21%; or
• radically reduce the company tax rate, to perhaps 10 or 15%, with the top personal and trust tax rates remaining at, say, 28%
• age of entitlement for NZ super has to rise gradually over the next 10 years or so
• favours the sale of government-owned businesses
• see legislation passed which would constrain the future growth of government spending
• see legislation passed which would make it harder for governments to pass laws and regulations which would impinge on the rights of citizens
• see the Bill of Rights amended to protect the property rights of citizens

While I don’t agree with every single item, there’s a lot I do agree with, and they would definitely help push New Zealand faster in the right direction.

Dr Greg Clydesdale says:

We cannot rely on Auckland to drive the New Zealand economy according to Dr Clydesdale who today releases a discussion paper ‘A middle path for the New Zealand economy’. 

 A key feature of recent economic debate has been the idea that Auckland will be the country’s economic driver.  The argument states that there are economic advantages to having many firms located close together.  However, Auckland’s industries have low rates of innovation and exports: key drivers of economic growth.  The city lacks the capabilities to deliver desired growth rates.

 Auckland’s location does present many economic advantages, but to expect it to drive growth is going too far.  Recent policy was inspired by recent literature from economic geography, diversity and immigration.  Dr Clydesdale states it is time to end the myths and alchemy that has influenced the New Zealand economy for so long.  It is time to get back to basics. …

Definite food for thought. The full paper is embedded below.

Conference Fashionable Policy With Super Font

Bernard Hickey writes:

BNZ Economist Stephen Toplis compiled some figures showing New Zealand’s GDP is still 1.5 per cent below its previous peak in late 2007 and is down 4.2 per cent on a per capita basis from the peak because of the migration and natural population growth we’ve had recently.

This is the truly shocking result from the recession and the debt-fuelled growth that preceded it. Per capita GDP in New Zealand is now back at the levels it was at in the June quarter of 2004.

Think about that for a moment. The “stronger for longer” economic growth bragged about by Helen Clark and Michael Cullen from 2000 to 2008 was a fraud.

It was growth built on debt and now New Zealanders are having to consolidate and repay that debt, and doing it on lower incomes.

After the housing boom and years of spending, New Zealanders have seen their per capita GDP fall, but total debt rise $97.5 billion to $246.5 billion in the last six years.

No wonder this recovery feels more like a hangover.

And this isn’t just because of inflation or because we’ve invested heavily overseas.

Our net international investment position, which includes debt and equity owned and owed by New Zealanders here and overseas, deteriorated by $55.4 billion to a deficit of $163.7 billion.

Household debt as a percentage of disposable income rose to 154 per cent from 127.5 per cent in that six-year period.

So what was the point? Now we produce less per person than we did in 2004. And now we have to repay a much bigger debt.

It wasn’t even a wasted six years. We went backwards.

The 2010 budget should help with the re-balancing economists talk about – greater incentives to invest and save, and less of an incentive to borrow and spend.

The Herald reports:

Strong export commodity prices have enabled the country to record its first annual trade surplus for nearly eight years.

Exports exceeded imports by one-sixth or $656 million last month, $200 million more than the market expected.

It pushed the trade balance for the year ended April into the black, by $116 million, the first annual surplus since July 2002, Statistics New Zealand said.

Goldman Sachs JB Were economist Philip Borkin said the most encouraging thing about that was the last time a positive annual trade balance was achieved, the New Zealand dollar was below 50c against the US dollar.

An annual trade surplus is rare indeed. And if we look at a graph of the NZ dollar:

Then we realise how unusual it is to have a surplus when the NZ dollar is so high. Thanks goodness for the global commodity price being high.

Trans-Tasman makes an interesting observation in their newsletter today:

Readers of Trans Tasman, an educated lot, will know the Aesop Fable of the Tortoise and the Hare. The two were in a race and the hare got so far in front he took a nap. The tortoise plodded on past him.

National looks like trying to transform NZ’s economic reform
progress – in the past we’ve been a bunch of hares – doing sudden bursts of reform and then taking a nap. This time, National is planning on being a tortoise. This was implicit in its initial response to the economic crisis it found on its desk in November 2008. Previous Govts, faced with similar crises, have tended to panic and push every policy button available.

They have usually been shortlived Govts, and they have tended to put NZers off the whole idea of systematic economic reform until it is forced upon them.

We got more tortoise-like behaviour last week, with John Key’s opening statement to the House. A series of headings, it initially looked underwelming, and the more superficial commentators pronounced it as excessively timid.

The implications of some of those headings, on tax as well as on things like education reform and resource development, are now sinking in. Now people have taken the time to think about them, they look more progressive than they looked at the time.

I agree with the sentiments here. Pushing through reform that merely results in a new Government at the next election that reverses that reform, is dumb.

Australia has been a pretty good example of continuous reform, rather than just in the odd spurt of activity. And the PMs statement did have a significant amount of good stuff in it.

My concern though is that pre-election commitments to not touch WFF, Student Loans etc, crown assets, Superannuation, will block significant reform. Now I don’t advocate a change to these policies in this term of Government, but I do hope for the 2011 election National will have a less restrictive manifesto.

The EU had a reception at the Backbencher last night, so lots of MPs and journalists there to chat to.  The typical opening line from a National MP was “So about that B grade” while from Labour MPs it was “Unlike Annette we won’t use Farrar and respect in the same sentence unless there are some other words in between”

Phil Goff was there also, so I said I looked forward to him quoting me more often in future . Actually had an interesting chat generally on economic stuff, such as land tax. If Labour are bold they could consider proposing a land tax (tied to income tax reductions) for 2011. That could attract some support from economic reformers.

General consensus I got from pundits there was that there was definitely some good stuff in the Government’s work plan – in fact more detailed plans that most Governments announce in the PMs statement.

But what may trip the Government up is they misplayed the expectations game. Building the statement up as the “most important” one ever was a mistake, as was talking about it being a “step change”. Again, there is some good stuff there that certainly will help lift economic growth. But will the announcements alone close the gap with Australia? Of course not. But the rhetoric leading up to it, got expectations artificially high.

With the benefit of hindsight, it would have been better to have positioned the statement as a typical PMs statement – a general overview of the Government’s achievements and workplan, and then surprise the media and opposition when it turns out to have close to 30 specific initiatives in it.

As I said yesterday, I welcome the focus on growing the economic cake, not just how to split it up, and look forward to more details in the budget.

Reaction from others:

• John Armstrong – 4/10 for economic boldness
• Fran O’Sullivan – John Key deserves an A- for intent. But a mere D for the dreadful prime ministerial statement that buried a coherent economic agenda in a mass of confusion.
• Tax Working Group members seem happy
• NZ Herald editorial calls it a stutter not a step-change
• Bernard Hickey hits new levels of hyperbole
• Canterbury Employers call the package welcome but light
• Solid Energy is excited
• Colin Espiner gives it a pass, but with much more to do
• Tracy Watkins looks at the risks
• The Press editorial says it was lacking boldness
• The Dom Post editorial says it was a welcome focus on growth, not slogans

Bill English writes:

As New Zealand emerges from recession, the Government’s focus has firmly shifted towards significantly lifting our economic performance. …

Making changes that help permanently lift our economic performance will be the overriding focus of the 2010 Budget.

The tradeable side of the economy – exports and those industries that face international competition – has been in recession for five years, with output now some 10 per cent below 2005 levels.

That’s a great line – the tradeable side of the economy has been in recession for five years!

By contrast, the public sector has grown rapidly, but with poor productivity. That has lowered the economy’s overall productivity. Unless we can turn this around and create the right environment for businesses to compete on the world stage, we will not achieve the sustained increase in incomes the Government aspires to.

The rhetoric is spot on. We await the policies in the budget.

Trans-Tasman has published a road map for improving New Zealand’s economic performance. They say:

No Government can ever get policy initiatives and responses 100% right. History shows too many imponderables from oil shocks to war, from disease to depression and simple lack of aspiration, to ensure perfection. They can only aim at good, not perfect, results.

What Governments are indeed sworn to is the search for profitable directions and good results, say well above the 50% and hopefully towards the 80% mark.

That’s a reasonable goal.

Observers are still surprised to think how, in the prosperous decade from 1999, the Clark/Cullen Government retreated from those goals. In seeking greater social justice, it chose to slice and dice the national cake.

I regard the 2000s as a missed opportunity of a generation. A massive period of economic growth and Dr Cullen spent it all.

So what does Trans-Tasman recommend?

1. A Trans Tasman Single Economic Market – In Effect Economic Union – by 2015
2. Energy as the Transformatory Base
3. Greening NZ with Environmental and Industrial Forestry
4. Innovation : Research, Science and Technology
5. Ultra-Fast Broadband
6. Securities Law Reform

Can’t see anything there I disagree with.

The Boardroom CEOs also rate the Government:

The New Zealand Herald’s Mood of the Boardroom survey shows the Key Government has won wide support from leading NZ business leaders with 76 per cent saying it is “providing sufficient economic leadership for New Zealand.” That view is reinforced by the adjoining survey of Business New Zealand’s membership which found 73 per cent of SME respondents agreed.

Not too bad considering the recession.

“Key has the political standing to take the country into his confidence and chart a sure-footed strategy to break out of our lacklustre and declining performance,” said a company chair. “But the Government is too timid and needs to take a strong lead.”

EMA (Northern) chief executive Alasdair Thompson believes the Government is not yet showing enough economic leadership. “The y need to build a constituency for change and sell it”.

I would agree with some of that. I think the response to the recession has been sound with am improved credit rating, and a path back to surpluses.

But there is still a lot of work to be done around increasing productivity growth, which is the key to closing the gap with Australia.

Others like Solid Energy’s Don Elder are more optimistic. Elder accompanied Key to China on his first State Visit as Prime Minister. “The US and Europe are still in the doldrums,” says Elder. “But we’re now seeing demand [from China] pick up – which will spark confidence in investing.”

I met my financial advisor yesterday and we one of the things that struck me was the performance of investments in China compared to elsewhere – it has had amazing performance. And I think the US economy is not through the worst, so Asia-Pacific is going to be vitally important to us.

But many believe English’s first Budget should have set out a more robust deficit reduction path. This concern that the Government is “slipping into cruise control” mode is borne out by the fact that 63 per cent want the Government to take a “more aggressive approach to getting expenditure (and the Budget deficit) down quicker.”

I would not be averse to that either.

Thirty per cent of CEOs responding to the Herald survey rank the level and effectiveness of Government expenditure as the most important single Government-related issue. Other issues include: Infrastructure – ranked highest by 18 per cent; Auckland (16 per cent), regulation (14 per cent, tax rates (7 per cent), savings (5 per cent) and the ownership of major central Government assets (6 per cent).

I could not agree more on the level and effectiveness of Government expenditure being of vital importance.

The Key Cabinet’s hesitance to take tough decisions on spending issues plays into how some CEOs rate individual Ministers in the economic team. “English is held back by his conservatism, which apparently also applies to cutting Government expenditure,” says the EMA’s Thompson. “(Gerry) Brownlee likewise. (Simon) Power is good but is restricted by National’s ‘do nothing ‘policy on state-owned enterprises. (Steven) Joyce is excellent. A great solution for Waterview.” Joyce is clearly a rising star within the Key Government, ranking just below English in CEOs’ eyes.

Nick Smith was criticised over the Resource Management Act reforms (“there was very limited thought on how they might work in practice, they went through a very poor select committee process and then have stalled as Smith tries to work out how fix all the stuff-ups he has made … a classic case of more haste, less speed”).

I’ve also heard pretty major criticism of the RMA reforms – and not from greenie groups but from business and sector groups. It sounds like there is a lot of work still to be done there.

“The Prime Minister currently appears to be carrying too much of the load himself,” cautions a tourism boss.

“There is a perception that if something is going to get done, and if the bureaucratic barriers are to be overcome it needs the PM’s personal engagement.”

This is often correct. A response to the s92A issue only happened when it hit has radar.

Also of interest are the survey results on the economic team:

1. Bill English – 74% above average and 4% below average = 70% net approval
2. Steven Joyce – 67% positive, 5% negative = 62% net approval
3. Tim Groser – 51% positive, 12% negative = 39% net approval
4. Simon Power – 51% positive, 13% negative = 38% net approval
5. Gerry Brownlee – 16% positive, 24% negative = 8% net disapproval
6. Nick Smith – 22% positive, 31% negative = 9% net disapproval

Sadly I couldn’t make the annual Mood of the Boardroom in person, but the Herald reports:

Stop making “petty hits” on the Government and come up with innovative solutions to aid New Zealand during these difficult economic times.

That sums up the blunt message from chief executives to Labour leader Phil Goff and finance spokesman David Cunliffe.

Just 26 per cent of chief executives responding to the Mood of the Boardroom survey believe Goff and Cunliffe have done enough to challenge the Government’s economic performance to-date.

Auckland Regional Chamber of Commerce chief executive Michael Barnett believes Labour has missed an opportunity to “throw out the big dreams and challenges” when they are needed by a market facing uncertainty. “As an opposition they would have had to deliver but could have pushed the Government for more innovation and vision.”

“Skills and education would be a good subject for Labour,” adds EMA (Northern) chief executive Alasdair Thompson. “But they have to tackle poor performance, not just protect teachers’ unions.”

That would be a welcome step.

Goff’s pursuit of disgraced former Cabinet Minister Richard Worth put him back in the political spotlight. But CEOs aren’t that impressed. “Labour was distracted with the Worth affair – forget playing the man and make a meaningful and real contribution.”

“I have no idea what they are doing. No policy. They are just mud rakers.”

I think most in Labour would now agree Goff handled it badly.

“Ritual bleating about possible privatisations means they exploit the ignorance of some voters whilst not offering any meaningful solutions to our overseas borrowing problems,” says a finance chief. “They dumb-down the debate”

I think Labour have a real problem with the 2011 election. The crown accounts will still be in deficit, and debt projections still negative. Is Labour really going to go into 2011 promising to borrow more money to indebt future generations? Or will they promise tax increases? Or will they commit to the same fiscal parameters as the Government – but instead propose spending more in some areas and less in other areas?

Labour since the election has implicitly committed to billions of dollars of extra spending. At election time they will have to put forward an alternative budget where people will be able to see how much extra debt or tax they are promising.

Colin Espiner blogs:

Last night I was in Christchurch for a public meeting on the economy organised by The Press.

We had Prime Minister John Key along, plus Canterbury Employers’ Chamber of Commerce head Peter Townsend, Lincoln University chancellor Tom Lambie, Ngai Tahu kaiwhakahaere Mark Solomon, Canterbury University vice-chancellor Rod Carr, Christchurch Mayor Bob Parker, Press editor Andrew Holden and me.

We packed out the James Hay Theatre (well, we only charged $5 a ticket) and for two hours we debated the economy – how bad was it, and what could we do to make it better. You could have heard a pin drop.

Not because the audience was asleep (we had electric buzzers fitted to their seats) but because nearly 1000 people had turned up to hear what Key had to say about the recession, and how to fix it.

That is an amazingly high number of people to attend.

The night was interesting for several reasons. It was good to hear the Prime Minister explain what he planned to do about the recession in words that didn’t have to be fitted into a seven-second television soundbite. Or in a dry speech to a chamber of commerce. Or in the heat of battle in Parliament.

And it reminded me that the public is interested in weighty issues and able to absorb them in relatively big chunks. They don’t need stuff dumbed down, and they do care about more than just day-to-day issues that obviously still concern them.

Did they learn anything? Well, they learned Key doesn’t have all the answers, although he does have a sound grip on what the problems are. He took a sound telling-off from Rod Carr about the lack of expenditure on education with good grace.

Wish I could have attended.

Key apologised for canning the tax cuts, though he said they would be back: “I believe in the power of tax cuts,” Key said, almost evangelically. He spoke of the opportunities that existed in China and India, the need to develop a “China strategy” to make it easier to do business in that part of the world, and to focus on human capital.

Key talked about food quality, water storage, regulatory reform, and the difficulty of doing more on less money. There was no silver bullet, but then I suspect there isn’t one.

Overall it was a pretty commanding performance on what is easily Key’s best subject, when you get him away from the sideshows and the distractions.

Good to see the reaffirmation of the importance of tax cuts.

And Colin quotes Key’s final words in what he calls one of his best public performances:

“I think that you get elected to concentrate on what actually matters to people. And in the end my perception is when you go down to the polling booth, you vote on whether the economy is going to be managed properly, whether your communities are safe, whether your kids have got an opportunity, whether New Zealand has a health system that really works, whether you feel like you’re actually going in the right direction.

“And all of the other stuff is just sort of white noise that bubbles along. And the risk for politicians is they get attracted to the white noise. It’s a bit like a bar fight, you know? Everyone watches it, hopefully you’re not involved in it, but actually not much changes.

“And when you go and have a look at political parties that have spent their life on those kind of salacious, scandal-based issues, their support never rises. Because you the voters want answers to real problems.

“What I say to the Cabinet on a very regular basis and to the caucus on a very regular basis is look, for as long as we stay focused on the issues that matter to New Zealanders, that we come up with solutions, that we’re honest with them, we’ll enjoy their support.

“And when we start thinking it’s about us as politicians, when we start losing track of what matters to you then actually I reckon you will boot us out.

“I can’t tell you whether that will be two and half years, or in five and a half years’ time, or eight and a half years’ time, or more, but what I can tell you is the simple, fastest way to get thrown out is forget why you were put there.

“And we were put there to make New Zealand a lot better. And that’s going to be my intention. And that’s what I’m going to deliver.”

An excellent initiative from The Press to have such a forum.

On Friday the Greens launched their so called Green New Deal, with a price tag of $3.3 billion over three years. It has five main elements:

1. Energy efficiency measures such as home insulations, school upgrades etc costing $300 million.
2. $1 billion to be shifted from roads to public transport (so not count as new spending)
3. $600 million on protecting waterways
4. $2 billion constructing 6,000 new state houses
5. $440 million on community economic development

Most countries have had a fiscal stimulus to take the edges off the recession. NZIER calculated that the NZ fiscal stimulus to date will save around 10,000 jobs. They also point out that the increased debt lowers household incomes down the track.

The Greens estimate their package would create 18,000 FTE jobs directly and andother 25,000 indirectly.

I’ll analyse parts of it shortly, but have to say for now that it at least passes the initial test that they are proposing generally one off projects, rather than initiatives that would permamently increase Government spending at a time we can’t afford it. They are the sort of projects that can be considered as part of a fiscal stimulus.

The energy efficiency measures tend to be the most sensible, as they actually can pay for themselves over time by lowering energy costs.

The suggestion that $1 billion be taken from motorways and put into public transport is simply not going to happen. The Greens always try and portray it as a choice between roads or public transport. It is not. We need both. There is not a country in the developed world that has just stopped building new roads.

The plan to protect rural waterways from pollution has more appeal to me – there are tourism reasons you may want to do this.

$2 billion for new state houses is not a good priority. The current housing stock is run down and the Govt under Labour became a slum landlord. The Govt’s priority is to improve the current stock before looking to expand it – that is sensible.

So anyway have to give the Greens kudos for actually putting up costed serious proposals, even if I do not like many of them. I much prefer them doing this than working on further things to ban!

NZIER have done a very interesting report on the balancing act between jobs and debt.

The fiscal stimulus of almost $10b over four years will result in an extra 10,000 jobs in the short run, but it will reduce future consumption by $160 per person per year. We can spend now, but we have to pay for it eventually.

And that is the key thing to remember – that debt has a cost.

We find that a policy that reduces the cost of employing people could boost employment more at a similar cost to long-run consumption. Better still would be well-targeted spending on infrastructure to deliver longrun productivity improvements. Given New Zealand’s longer term growth challenge, any fiscal efforts to stabilise the economy and avoid a more severe recession should have productivity at the centre of the policy radar screen.

Productivity growth is all important.

we find that the current package is likely to:
• generate an extra 10,000 jobs in the short run
• raise GDP in the short term by 0.6 percentage points
• lead to lower employment after 2012 and a 0.8 percentage point fall in long-run real consumption per annum than without the stimulus.

Again debt has consequences. And just think about how much more debt there would be with Labour – not just $1b+ for their pet tunnel, but they have oppossed every cost saving in the public service.

The NZ Institute has published an analysis of NZ’s lack of economic fitness, and that it is not all about the “recessionary flu”. The Institute notes:

Achieving a step change in New Zealand’s economic growth rate is essential to improve the fiscal position. Unless New Zealand radically improves its growth prospects, basic amenities such as quality free education, health services, environmental protection measures and security in retirement may be at risk.

Yep, we need more pro-growth policies. The recession is a good reminder of how important economic growth is.

Both tax and spending measures should also be on the table to control the deficit, to make room for growth-boosting policies, and to maintain and strengthen support for at-risk individuals through the recession to avoid creating a future social deficit.

A $10 billion a year deficit must be curtailed. The interest on public debt would indeed threaten education and health funding.

The next two proposed tranches of income tax cuts should be cancelled on the grounds that they would contribute to the structural deficit and likely do very little for growth.

Long term, tax cuts are part of higher growth, but I agree these one are unsustainable.

Other spending areas that have contributed to the increase in government spending between 2003 and 2008 of 1.6% of GDP should be carefully reviewed with the aim of achieving their objectives more effectively at lower cost going forward. These include: the Working for Families tax credit system, and health expenditure.

WFF is very inefficient. There is huge wastage or churn as you take money from taxpayers to give it back to the same taxpayers. Welfare should be targeted to those most at need.

The tax mix should also be on the table as part of a long-term rebalancing exercise. Creating new sources of revenue (such as from taxes on property) will create room to finance the cost arising from future demographic pressures. Another objective is to more lightly tax productive investment and savings (for example through gradual reductions in company tax and taxes on savings overtime), while making residential property investment less attractive. This will help to address the structural imbalances in the New Zealand economy.

This is a big call, but one that does have to be looked at.

The full OECD report is here. One key aspect:

The country appeared to be on the right policy track with its earlier market-oriented reforms. But the policy focus on productivity and growth eroded during the years of economic buoyancy, while other countries advanced.

The 2000s were the wasted years. Complacency ruled, and the rest of the world left us behind.

Sir Roger Douglas gave the now famous Orewa Rotary Club speech last night. His full speech is here.

The Herald reports:

Act MP Sir Roger Douglas is proposing a new low-tax option for taxpayers in which the first $30,000 of income would be tax-free – but only if they pay for their own retirement, health care and welfare insurance or costs.

Income over the $30,000 tax-free threshold would be at a flat tax rate – 15 per cent – to be phased in over 15 years.

The Douglas plan would cut corporate tax rates to the same 15 per cent.

Sounds a good idea to me. Encourage people to look after themselves.

There are fish hooks though. The Centre for Independent Studies had a seminar on this a couple of years ago, and the challenge is how do you cope with people wanting to move from one option to another. Should the decision you make at 18 be unchangeable throughout your life? But if you let people change, they might take the low tax option when healthy, and then when older the high tax option.

The other challenge is what if someone has gone for the low tax option and pledged to look after their only health and retirement costs – yet they lose their savings. As a society do you let them die because they can’t pay for their health care?

As I said, I am very supportive of the principle, and like the notion of people choosing. It would be good to have some further research done on how one might practically have such a system work.

Sir Roger outlined his opt-in proposal to the Orewa Rotary Club.

He would inflation-proof the tax-free income so the $30,000 threshold would rise at the rate of inflation.

But rates would vary for income-earners with dependent children: the threshold for a couple with one child would be set at $50,000.

Families would have a guaranteed minimum income, so that if they earned less than the tax-free threshold they would receive a tax credit up to the threshold.

The concept of people paying no tax until they are earning the minimum income they need is very sound. It avoids the deadweight costs of churn where you pay taxes to then get soem of it back in welfare.

The economy that National has inherited is even worse than thought at the end of last year.

NZPA reports that Treasury has told the Government it now expects unemployment to hit 7.5%.

PM Key has said that a number of initiatives have been considered and will be announced on 4 February.

To get some idea of how bad it is, look at these trade figures from the US, a reader sent to me:

THE NUMBERS: American imports:

July 2008: $230 billion
October 2008: $208 billion
November 2008: $183 billion

This is the biggest drop in imports since 1942. And it is near impossible for us to maintain exports and economic growth with that sort of contraction in the US.

I’m not sure the recession may not turn into a depression.

MacDoctor highlights a visit to an alternate reality by Phil Goff”

Can someone let me know in what dimension the following is considered a healthy set of books:

• A decade of deficits projected
• Debt to increase by over $30 billion from 20% of GDP to 30% of GDP
• Inflation at 5%
• Unemployment projected to hit 6%
• A recession
• Billions of dollars needed to bailout ACC

At the first question time, some Govt backbenchers should ask questions to Mr English on whether he agrees Mr Goff has left him “a healthy set of books”.

UPDATE: The crown accounts out today show the Government’s surplus has plunged by $5 billion from a $1.5 surplus to a $3.5 billion deficit. More of Phil’s healthy set of books! The plunge is primarily due to unrealised losses on investments, but they will have flow on effects to income and lead to increased debt.

I attended the Mood of the Boardroom Breakfast in Auckland organised by APN. The results of a survey of CEOs was presented, and then we had speeches from and questions to Dr Cullen and Bill English.

Now some may say why survey CEOs only? Well a CEO can and does have a massive impact on the sucess of a business. Just like a great principal can turn a school around, so can a great CEO. CEOs are where the buck stops. And the CEOs of our top businesses probably have more impact on our country’s economic prosperity than most Ministers.

The Herald reports from the survey (all scores are on a 1 – 5 scale so 3 is average):

• Key 3.5 vs Clark 3.0 on overall campaign performance (Clark did better than Brash last election in the same survey  so CEOs tend to be quite fair while reflecting their backgrounds)
• Clark leadership is 3.9 to 3.6 for Key
• Vision and strategy has Key 4.0 to 2.5 for Clark
• On trustworthiness Clark is 2.6 and Key 4.0
• Put’s NZ interests over party has Key 3.8 to Clark 2.3
• On experience Clark 4.4 vs Key 2.9
• Economic management Clark 2.5 to 4.2 for Key
• Overall 90% prefer Key to Clark (last time it was 72% Brash to 28% Clark)

Cullen spoke first and got a great laugh when he said “Welcome to both of my supporters in the audience, even if I had to pay your airfares to be here.”

He then spoke about the three Is and three Ss that he says are crucial:

1. Innovation
2. Infrastructure
3. International Connections
4. Skills
5. Savings
6. Sustainability

On the deposit guarantee scheme he said he doesn’t like doing it, in fact that it was the second worst option. But the worst option was to do nothing. He is worried about the moral hazard it creates.

Mentioned (ever so casually) that US Secretary of State Condi Rice would be calling him later that day to brief him on what is planned for the G20 meeting. The US incidentally is playing a real leadership role – even the US Federal Reserve is doing a $15 billion cash-swap facility with the NZ Reserve Bank – something not covered in much detail in the media considering how extraordinary it is. Uncle Dubya is helping Helen out

Cullen did have a little snipe at some of the business leaders telling them that it was no time for the “top end of town” to be lecturing Government, when the Gordon Browns are bailing out the Gordon Geckos. Went on to say they need to work together, and wants to sit down with business groups after the election re the planned December mini-budget.

English started off with a scathing attack on Labour saying look at the front page of Herald as to whether Government is qualified to lead. That instead of focusing of helping economy they are working on smearing the Leader of Opposition by innuendo and influence. Said it was a disgrace and why Labour are not qualified, despite Dr Cullen’s best efforts.

Bill also asked what sort of strategy is it to say trust us and after the election we will tell you what we will do.

He said that National trusts business to innovate and to get through recession as they have previous ones.

He gave Cullen credit for include the Opposition in briefings on financial stabilisation and shares Cullen’s misgivings. He said the Australian guarantee is unravelling a bit and they should learn from that.

He said a National Government is not going to whip out rug from under people as we go into recession – people need security. Also that it was important not to over-react to fiscal outlook. The key is to get through the recession and lift long term prospects for economy.

He said the combined tax cuts would be the largest fiscal stimulus in 15 years.

Highlighted how Clark has said National’s borrowing for infrastructure was reckless, dangerous and gambling with future and then two weeks ago announced similar policy to National’s.

English said changes in attitude as important as policy and that having Key as PM will be important. Said he is the most relentlessly optimistic person Bill has ever met and that is why hundreds turned up in Invercargill to meet him (Winston got 50).

Bill concluded “That is why I’m voting National.” Cullen offered response and quipped “Well I’m not voting National.”. Was very funny.

Bill also called Cullen only economically literate member of the Labour Party.

Someone asked for a grand coalition and Dr Cullen said a recession is no reason not have give people a choice, and it is one of a moderate centre-left or a moderate centre-right Government. Nice to have him confirm National as moderate centre-right.

Herald Economic Editor Brian Fallow asked a great question to English on why this recession is different from previous recessions that one needs to intervene for people who have ignored all the warnings about inflated house prices, and don’t take on a mortgage you can’t afford. His column yesterday makes the same point.

He also asked what is the point of ghettoizing the Cullen Fund? I thought Bill was rather unconvincing in his reply to both points – probably because he somewhat agrees with Fallow privately – but in politics you never get the luxury of agreeing with 100% of your party’s policies – not even the Leader. Holyoake once said he only agreed with 80% of what his Government did. Mind you with Muldoon it might have been 100%

Cullen said that once you break that line of non involvement in the Super Fund, you have no defence to further involvements. Highlighted how the Greens support National’s policy on the Super Fund and they would like to invest it in many pet projects – none of which probably have much of a rate of return.

English did well though on Fast Forward and he had even Cullen nodding as he said the private sector is yet to commit a dollar for fast forward. English said the fast forward fund is borrowing money to then reinvest it in bonds. The structure is stupid. He supports actual research and National will put more money into fast forward projects, but not through the structure of a dedicated fund.

Overall both did very well I though. Both knew their stuff, agreed with each other on a bit but also exposed the weaknesses on both sides.

Infometrics is predicting a second recesson in 2009!

New Zealand has been in recessions since the end of 2007, with negative growth in Q1 and Q2 2008. It is widely expected that Q3 will also be negative.

So Infometrics seem to be saying Q4 might be marginally positive, but then in 2009 Q1 and Q2 will be negative again.

If they are right, the decade of deficits just got worse.

One sentence worth extracting:

Helen Clark has resurrected a goal of getting into the top half of the OECD in wealth but is promising more of the policies that have taken us down, not up, that ladder.

Indeed.

Vincent Heeringa has published an article called The First 3,000 days:

Labour swept to power in 1999 promising to transform New Zealand into a world-class, knowledge-led economy. Instead, they reverted to ‘Old Labour’ habits of taxing, regulating and centralising.

Anyone remember their goal of the top half of the OECD?

Today, it’s Labour’s turn to look flat-footed. Its stuttering, knee-jerk reaction to John Key reveals a Cabinet empty of fresh talent and ideas.

Does he mean their policy of borrow and smear?

In ’99, Labour swept in with an agenda to transform the New Zealand economy. … Most importantly, it declared that ‘economic transformation’ would lead us to a knowledge-based, world-class economy. Optimistically, Labour promised to get us into the top half of the OECD by 2011.

Oh yes that’s right – all the buzzwords and goals.

Labour knew what had to be done to get New Zealand’s economy off the road to nowhere, but has done far too little, much too late. Despite a good start and despite being armed with full knowledge of what transformed the similar economies of Ireland and Finland, Labour surrendered the task through a lack of willpower and ideas. When it was time to step up, Labour reverted to type.

So long as there was enough economic growth to fund their spending promises, they saw no reason to transform the economy.

The greatest failure, in my view, is that Labour’s rhetoric about transformation has proven to be just that. Fancy talk. The Growth and Innovation Framework was dropped around 2004. Of the three major task forces established in design, ICT and biotech, only design continues. The science and research that was to emerge from such a framework has simply not occurred. In fact, the science system may be in a worse state than when Labour took power.

Once the high profile conferences finished, so did the strategy it seems.

But while the Australians have deployed public–private partnerships in infrastructure and state services, this government reverted to the old Labour policies of taxing, regulating and centralising. It now owns ACC, Air New Zealand, KiwiBank, KiwiRail and four power companies. The government has turned the idea of private ownership of strategic assets (even as partners with the state) into an anathema and hobbled crown entities with high dividends and restrictions on how they can raise capital.

No other left-wing Government in the OECD has such a hatred and aversion to the private sector. NZ Labour are miles apart from Australian Labor and UK Labour.

And whereas the Blair government re-energised its public services and brought in much-needed entrepreneurship and investment by working with the private sector, Clark’s Labour has simply added more bureaucrats. Total government spending has increased from 36.1 percent of GDP in 2000 to 41.4 percent last year.

It gets worse than that. The recent PREFU shows total government spending increasing to 45% of GDP next year. The tax increases in Labour’s planned mini-budget to cover this will be massive.

Heeringa then looks at individual indicators:

• Standard of Living: slipped from 20th to 22nd in OECD
• Productivity: annual labour productivity growth of 1.1% half of the 1990s and below OECD 1.8% average
• Savings: praises KiwiSaver but says why did they wait until 2007
• Innovation: NZ ranks just 25th in our ability to use innovation to develop new and unique products
• Tax: No tax cuts until 2008 – and a unnecessary tax increase in 2000
• Infrastructure: Not enough power due to planning restrictions, are extending copper network when fibre is needed.

So low marks all around. And Heeringa is no “hard right” commentator. If anything, a but Labour-friendly.

Hat Tip: Homepaddock