Key Points:

Prime Minister John Key talked to Herald political staff John Armstrong and Audrey Young this week about his Government's approach to the global recession that has dominated his first 100 days in office.

Should people be afraid about what the future holds?

I think it is only natural that people have anxiety about the economy because the economy is real. It is their job, their ability to service their mortgage and look after their family. And in the final analysis, nothing is more important than your capacity as a breadwinner or an earner to provide for those that rely on you. So I think there is a natural level of anxiety and that is exacerbated by what we see through the media, particularly in international economies where things are really weak like the United States.


So at one level I can understand that, but at another level I genuinely believe that New Zealand is in a lot better shape. The sort of numbers you are seeing out of the United States where they lost 600,000 jobs in December, you've got to contrast that with what happened in New Zealand [in the December 2008 quarter] which was the unemployment rate rose but actually the economy created more jobs; there were more people looking for employment. The structure is slightly different. So it's the fear of the unknown and everybody is telling New Zealanders we will get worse and so people are bracing themselves for that but it is my view that when the wave of the global recession has died down, while there will inevitably be some impact on the economy, it won't be carnage.

Is there too much "doom and gloom" talk at the moment, especially by and in the media?

In my opinion, yes. It depends on what sectors you are looking at. You can see from the fact that a company like Fisher and Paykel could be financially challenged that this is a fairly significant crisis which is having quite a substantial effect on some companies. But within the economy, some sectors are actually [doing] very well. They are starting to benefit from a lower exchange rate, a lower operating cost, availability to hire staff and not all sectors have been badly affected.

For example?

Well tourism is likely to suffer as the global economy slows down but January was the strongest month for net flow into New Zealand, tourists coming to New Zealand. The fishing industry is a good example. It's actually doing very well. Commodity prices are reasonably high. The exchange rate is low. There are certain sectors which are badly affected and they fit within construction and housing, retail and agriculture if the farming entity has too much debt on it.

How long will we be in recession? And how bad is it going to get before we see an upswing in the economy?

I don't know the answer to the first question, although it will be highly dependent on what happens in the global economy. But I am still reasonably optimistic that by the back-end of 2009 we will start seeing some signs of improvement and that will flow into 2010. But what it is fair to say is that the early signs in 2009 are weaker than what the general consensus had been in the latter part of last year. And that is why the IMF and others have written global growth down quite aggressively in the start of the year. It is highly contingent on what happens internationally.

The Job Summit is yours. Why did you decide to have it and how will you measure its success?


I thought it was an important forum that we could bring together - the various stakeholders - and achieve some concrete and credible outcomes and so we needed a vehicle to bring together the various component parts, largely being the unions, employers, Government, all in one place. I don't think you would measure the outcome off the unemployment rate because that is likely to be fluid and all the indications are it will increase over the next 12 to 18 months. Success can be judged on the quality of the initiatives that are promoted and ultimately translated into change and the efficiency of the economy over the medium-term.

Why hasn't Labour been invited to the Jobs Summit? Isn't it time for a bipartisan approach to the crisis?

Firstly, they are free to propose any idea that they like. And if they are good, obviously we would consider them. We are not particularly trying to exclude them on political grounds but simply we don't think they bring anything to the table at this point. We are confident through the House that if the ideas are good we will have the numbers to pass them. This is really a forum where we are trying to get together those who are at the coalface, which is really the business leaders and the unions and the relevant chief executives from Government departments.

You personally met the main bankers to talk about liquidity; you pick up the phone to call F & P when business looks bad. Is this the behaviour of a Prime Minister or a chief executive?

In my opinion it is the behaviour of a Prime Minister but one that reflects that we are in very difficult economic conditions and the Government will be, rightfully so, judged on its ability to show leadership and try and combat the global recession. It is not the behaviour that will always be necessary but these are not normal times.

Bill English says the Government has never said it could roll back the wave of unemployment expected to hit New Zealand and that the best that can happen is the Government taking the "sharp edges" off recession. In other words, there really isn't much you can do for the great bulk of people who lose their jobs, is there?

I think Bill is being realistic. We are a small, open economy, highly dependent on global flows. It is inevitably a demand that dramatically alters and that is reflected in what we feel here in New Zealand. So there is at its most basic level a limit to what we can do and that is true everywhere.

Should people spend or save?

Depends on their circumstances. Some people will definitely save and that may be appropriate because of the amount of debt they have acquired over the last few years. But for others they will spend and this will hopefully allow them to consume without increasing their credit cards or other debt levels.

Critics argue your next round of tax cuts in April will do nothing to help the economy as they favour the well-off who will save the extra money rather than spending it. Shouldn't you cancel those cuts and put the money into infrastructure projects which have a better track record stimulus wise?

No, I don't accept that. Firstly it depends on who receives those tax cuts. Certainly low to middle-income earners will spend them, so I don't think there is a likelihood they will save them. Higher income earners may consume them, they may not. It depends on their own personal debt levels. In terms of infrastructure, an infrastructure project provides a lot of stimulus to people that are engaged in that project in that particular location, whereas tax cuts are uniform across the country and provide stimulus in all sorts of communities.

There's a lot of debate among commentators as to whether your stimulus package will actually work. Will it?

I think the only way you can judge that is the counter-factual - which would be if the Government took no action and I think, given the contraction in the private sector at the moment, that would have no counter-balancing increase in expenditure and the Government would certainly deepen and worsen the recession.

And secondly, in part, the Government packages are about confidence and people are seeing the Government responding and having empathy for their issues. It is not just about money. It is also about an acknowledgement from the Government that New Zealanders face more challenging times.

Your "rolling maul" approach to releasing policy might be seen as cynical politics in terms of getting more political buck for your bang? Wouldn't Kevin Rudd's "big-bang" approach be better in terms of giving the economy a boost, rather than drip-feeding your responses and tinkering with the problem?

I just don't accept that we are tinkering and the reason for that is that there is substantial change taking place. Some things don't have a fiscal implication, like reform of the Resource Management Act or the changes we are making to the state sector but they will drive efficiency over time. That will be very important for the economy. I just don't think it is practical to argue that we would have a big-bang approach because the reality is that we campaigned on some major financial reforms, particularly tax-cuts so that card was already on the table when the recession really started to bite internationally. That puts us at a different part of the cycle to other countries. Thirdly, if you look at the totality of what we are doing, it does reflect a significant commitment to try and head off the worst of the recession. It is also important in my view that the Government tries to buoy confidence by having solutions as problems emerge. And I just don't think it is sensible or practical to play all your cards on one day.

Would you favour a more co-ordinated global approach to the global recession?

To some degree we are getting that. There has been wholesale interest rate cuts globally on a co-ordinated basis at times. Secondly, if you look at the packages that have been promoted around the world by various Governments, by and large they are extremely consistent in so much that they have a component that tends to have a component which includes personal tax relief and a significant component in relation to building new infrastructure. They varied depending on what is prevalent in the local markets in the United Kingdom and the United States, packages have been heavily focused on bailing out the banks and that hasn't been an issue here in Australasia.

So I think for the large part there has been a large bit of consistency and again you have seen those comments reiterated by the G20, Apec, as those leaders recognise this is a time to stimulate their economies and not a time to put up protectionist barriers. That said, we can see by the actions of some Governments that domestic pressure to try to erect barriers is intensifying.

What is the maximum level of debt to GDP that you can live with?

Well, at this point we haven't quantified that but I think an everlasting upwards sloping curve of debt to GDP is unacceptable.

If the recession is deep and prolonged will you go higher?

Some of the very long-term predictions, those in the 2025 forecasts at the moment, where a case for the debt to GDP is very, very high ... is totally unacceptable. But I think you need to put those forecasts into a bit of context which is to say that beyond the three-year forecast period, into the projected period, there are an enormous number of assumptions built into the models, and I don't think those assumptions actually all reflect actuality - in the same way that if you looked at the very same models a year ago, they would have predicted that New Zealand had no debt in about 10 years. So they are highly volatile and we need to take them with a grain of salt.

Why doesn't the Government cut its overall spending, as Sir Roger Douglas and Roger Kerr are arguing?

In effect, at one level we are - cutting the increase in Government expenditure. If we live to a $1.75 billion new budget spend then the relative overall size of the Government compared to the economy reduces and certainly that's a much slower spending track than has been in place in the last at least six years. So in essence we are doing that. But also there is a danger that if we really take an axe to Government expenditure we are also a significant part of the economy and we will slow things down. In fact that [cutting expenditure] runs counter to the view that even the rating agencies have been saying, that this is a time that Governments should be reasonably fiscally expansionary a.k.a. spending more money.

Can you confidently say that superannuation as it is will be sustainable into the future with Treasury's downside debt projections?

Yes. We have modelled New Zealand superannuation. It's our view that it is fair and it's durable and we are committed to retaining it.

History suggests that while we might pull out of recession fairly quickly GDP wise, the property market, the sharemarket and the job market will take far longer to recover. Isn't that going to be a problem for you at the 2011 election, politically speaking?

At this point our focus is solely on making the changes that are appropriate to give the economy the best potential it can, and certainly businesses, the best potential they can to come through this crisis. We are less focused on the politics. In essence I think that will take care of itself.

If the voters consider that we have done what we can then I think they will judge us kindly for that. I don't think the New Zealand public is unrealistic. They recognise that this is a global recession, they recognise there is a limit to the amount that the New Zealand Government can do to combat an international recession.

But they certainly expect us to be focused and engaged and realistic and honest with them.

Are you satisfied with the banking sector's response to your call to treat their NZ customers fairly, given the guarantees the taxpayer is offering to their deposits?

I think there will always be some businesses that feel that the banks aren't responding to them and I get that feedback.

Banks themselves are having to gaze through what is a pretty murky crystal ball but, by and large, the signs at this point are that they are acting responsibly.

Given the limitations on spending more, what will be the major focus of the Budget in terms of easing the pain of the deepening recession?

Very good question. We are working on a focus and some initiatives for the Government for the Budget but I think it's fair to say that there is a limit to what is possible in the Budget and it will depend in some part on how much we are prepared to commit to initiatives that come out of the Jobs Summit. Because that is the issue that we face.

If we pick up a lot of those initiatives and spend a fair bit of money it substantially reduces what we can do in the Budget. Either way there is not a lot of free board.

Are you considering any further fiscal stimulus?

I think yes is the answer to that because in my opinion the job summit will promote some ideas that will ultimately include Government expenditure and in the Budget it is highly likely there will some initiatives. So, yes is the answer but how large they are and how expensive they are is another matter for consideration. And there are limitations. One of the things we are hoping for in the Jobs Summit is that it won't solely be seen that Government is the solution to the problems, that this is an opportunity for the private sector to also come up with some initiatives as they work with unions, employers and the like to find some solutions to some of the challenges they face.

And thirdly, not all of the actions that the Government might take are a fiscal cost to them so they may just be changes in the way that we operate, the RMA [Resource Management Act] being a good example. There is no fiscal cost to it but it's likely to have quite a stimulatory impact on the economy over time.

How has the first 100 days been?

It whirls past in a flash, I have got to say. You are always busy, particularly so at the moment where there has been a lot of different challenges, whether they have been economic or .. we've had everything from Air New Zealand issues, to New Zealanders being stranded in Bangkok to people wanting to raise the (tino rangatira flag) on the Harbour Bridge. There is just an endless series of issues that you need to deal with.

Personally, I am really enjoying it. I think you grow into the job. People would expect that of you. I don't think my instincts and my approach to things will change dramatically over the years but inevitably you will get a bit smoother with some of the things that you do. And that is already happening in certain areas I think.

There is always room for improvement.

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In the wake of the Fisher & Paykel profit drop this week, you indicated the Government would prevent some important private New Zealand companies from failing. Can you explain the general criteria that would cause such an extraordinary move?

What we are trying painstakingly to point out is that our preferred option is commercial solutions for commercial problems. Government doesn't see itself as a banker. That said, these are highly unusual times and I believe we would be derelict in our duties if we didn't at least look to see whether there is some assistance we could practically give. Now, it may not always be financial assistance. It could be a change in laws or regulations. That's a possibility. In the case of Fisher & Paykel, I never said it couldn't fail. I simply said it was an important New Zealand company and certainly my preference would be to see it succeed and continue in New Zealand. We will look at whether it is practical for us to offer support to do that if that is what is required. At this point it hasn't been requested of the Government.

Did you go further than you really wanted to at the post-Cabinet press conference then [in talking about Government help]?

No. No. I just stated the facts as they are and the facts are that it is a profitable company, that it has got a temporary funding issue, that I took the opportunity to ring the CEO because I need to understand what is happening. Certain companies have different characteristics. Some companies, there is an inherent long-term weakness in their business model and they won't succeed. And it won't matter whether the Government tries to support them or not, they won't, long-term, be successful There are other companies that face a very temporary issue and they truly are a victim of very, very unusual circumstances.

But it might be "temporary" for as long as the recession and if the recession turns into a three or four year recession, it's not really temporary is it?

Well no, and that's a judgment call. But on the other side of the coin, you've got to make sure that you don't end up with the bushfire equivalent of your economy, which is this thing sweeps through at 150mph and you're not prepared to take some action and so a flash in the international economy ends up destroying the entire foundations that your economy is based on. And that is the judgment call we've got to make, if we are going to get involved, and we accept that.

Unless the business candidates for Government help are clearly strategic, such as Air New Zealand and Fonterra, aren't you sending the wrong signals to struggling businesses and encouraging a moral hazard and potentially creating inequities?

Well there is always a risk of the latter. You have got to accept that. If we were to provide some support, there is always the risk of that - clearly that is not going to be an option for every company. So there are always those risks and it will always be subjective in that regard. But there are some broad principles that we would follow. I have no doubt that over time, whether we help Fisher & Paykel or not, there will be a request from companies for support. That is the way it will be. But whether Government responds to that, all I can tell you is we will look on a case by case basis.