Govt should not be a business risk: English

By Brian Fallow

Finance Minister Bill English says the country needs a counter-cyclical fiscal policy, including running surpluses and paying down debt. Photo / Mark Mitchell
Finance Minister Bill English says the country needs a counter-cyclical fiscal policy, including running surpluses and paying down debt. Photo / Mark Mitchell

The Government should not be one of the risks businesses have to manage, says Finance Minster Bill English.

In a post-Budget speech to a business audience in Wellington yesterday, he reflected on what it would take to sustain the economy's expansion once the twin boosts from the rebuilding of Christchurch and the most favourable terms of trade for 40 years faded.

The terms of trade, which reflects relative prices of exports and imports, is beyond any government's control but the Treasury estimates if it were back at its average level for the past 30 years, next year's more-or-less balanced budget would be a deficit of 3 per cent of gross domestic product, or around $7 billion.

"Governments need to create an environment of stability and good incentives for [businesses] to grow the economy. Businesses need confidence the rules will not shift and the Government is not one of the risks they have to manage," English said.

It was also important for the Government to run a counter-cyclical fiscal policy which, right now, meant running surpluses, paying down debt, and limiting future initiatives in spending and tax cuts to what would not push interest rates higher than they need be.

What had driven mortgage rates over 10 per cent on the eve of the last recession was the combination of runaway government spending and runaway house prices.

There was no single answer to "ridiculously expensive" house prices, he said, especially as councils made many of the decisions about land availability and other regulatory imposts.

"They need to understand that decisions planners in Auckland make about the minimum size of balconies will affect returns to a cray fisherman off Fiordland."

But with the recently announced prospect of 33,000 more houses in Auckland, expectations were being shifted.

"There is no longer a guarantee of 15 per cent compound annual capital growth."

Questioned by an exporting manufacturer about the high dollar, he said the Government and Reserve Bank had limited tools.

"But we can affect the real exchange rate by promoting a more competitive economy and by not pushing up interest rates."

Exporters had done an amazing job of lifting their competitiveness, he said.

They had had to be very good to survive and were in good shape to do well when the United States started to raise its interest rates.

Labour's finance spokesman, David Parker, said: "Because of our imbalances we're already paying higher interest rates than the rest of the world and despite dropping export prices, the currency is going up as people chase higher interest rates in New Zealand.

As for exporters doing well, tell that to the many timber processing firms which have closed in the last couple of years."

In an implicit reference to Labour's focus on the external deficit and its link to low household saving rates, English said in recent years the Treasury and others had tended to forecast larger current account deficits than had eventuated, and as for the low savings rate, he was sceptical of the idea that year after year people make stupid decisions.

Asked later about recent OECD data showing New Zealand with conspicuously low household saving rates and high interest rates, and whether he thought those two things were connected, he said: "Well, possibly, but I don't think we quite understand why it is the case.

"The most common description I get of why New Zealanders don't save enough is that they don't know what they are doing, and I don't agree with that."

"I think New Zealanders see the payment of their tax as a guarantee of future consumption, so they know if they pay their tax they will get early childhood subsidies, free health care, free education, interest-free student loans and universal super. That isn't a bad package."

Parker said: "Those social protections also exist in countries which have better saving records than we do."

Distortions in the tax system encouraged saving in property rather than vehicles that put money into the productive economy, he said.

- NZ Herald

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