Fran O'Sullivan: Forget making mates, Key should call shots now

Prime Minister John Key appears to be gearing himself up to take the economy off the fiscal "life support" that has saved New Zealand from outright depression.

In Tokyo this week, Key conceded that "monetary policy needs mates" - code for getting Government spending under control so that the Reserve Bank doesn't have to do all the work to keep inflation at bay.

Neither Key nor his Finance Minister Bill English have indicated where they will make the necessary cuts. The political softening-up process has hardly begun yet.

And Key's propensity for being "Mr Popularity" means he will want to ensure the cuts are evenly spread.

Finding "mates" will be a difficult task when so much of the Government's Budget is swamped with big ticket items like welfare, health and education and Cabinet ministers show no stomach for selling stakes in assets to reduce debt.

But the Prime Minister is buoyed by private Government polling which indicates at least 60 per cent of New Zealanders would rather the Cabinet used spending cuts to reduce the growing public debt burden than raise taxes - two of the options canvassed by the pollsters.

It is a conundrum facing all Governments which have leveraged up their balance sheets with mountains of debt to pump cash into their economies over the last year, but now worry about the prospects of a "double dip" recession if they either withdraw funds too early, or their central banks crank up interests rates too soon.

In New Zealand's case, Key was hardly surprised the Reserve Bank Governor Alan Bollard announced an intention to hold interest rates down until the second half of next year instead of flagging rises from the beginning of the year. He had been betting against the market all this week by stoking the prospect that Bollard would maintain low interest rates well into next year and telling Asian journalists any other alternative would have been disastrous.

In reality, what Bollard has done is to knee-cap the currency speculators who had priced in the earlier rising scenario. The upshot is the kiwi dollar has come off its recent peak against the US dollar but our exporters - whom Key believes are essential to the Government's efforts to 'rekindle the economic growth story' out of New Zealand - are not out of the woods yet.

Key conceded this saying, "We have to help Alan Bollard through this so he is not left solely abandoned ... to quote the famous phrase, 'monetary policy needs mates'.

"It is going to be incumbent on us as a Government to ensure we don't add fuel to the fire. That would be disastrous."

Four Cabinet ministers have been doing the traps in Asia this week, Key, Trade Minister Tim Groser, Foreign Minister Murray McCully and Commerce Minister Simon Power.

The foreign affairs triumvirate Key, Groser and McCully has been pushing the trade liberalisation cause by campaigning for New Zealand to be included in the emerging East Asian economic community, celebrating the signing of the Malaysian free trade agreement, pushing to get a similar deal with Hong Kong through the door and endeavouring to get Japan to the negotiating table.

The Cabinet ministers have all enjoyed their fair share of glory through live television interviews on Bloomberg, and interviews with Asian media outlets.

But they can't have missed the fact that it wasn't the intricacies of the emerging East Asian trade architecture that was top of mind for their journalistic interlocutors but the effect of the high Kiwi dollar on New Zealand's ability to drive up export returns.

While the dollar has come off its recent heights, Kiwi exporters present in Tokyo for a meeting were disturbed by forecasts it will nudge US80c again within the next year.

Key - who has form in this area himself - is perfectly aware of how tempting a prospect the New Zealand currency is for speculatively-driven foreign currency traders. It is one of the most traded currencies in the world relative to actual trading flows.

But surely there comes a point when New Zealand has to start thinking seriously about changing the rules of the game rather than having our exporters put too much attention on combating currency volatility rather than opening markets.

In April 2007, Opposition Leader, Key warned that the the New Zealand economy could not sustain exchange rates at the then current level of US74c. It would lead to substantial jobs losses and closures.

And he said the situation could get worse if nothing was done to tackle the underlying conditions which are attracting the Asian cash to take advantage of the highest interest rates in the Western world.

He wrote to then Finance Minister Michael Cullen offering National's support in finding a mechanism to stop the crippling effects of currency volatility on New Zealand's tradeable sector.

Key was rebuffed by Helen Clark. Now he is calling the shots, he should get that letter out and do something.

fran.o'sullivan@nzherald.co.nz