Motions — Reserve Bank Funding Agreement—Ratification

I move, That, pursuant to section 161(2) of the Reserve Bank of New Zealand Act 1989, this House ratify the funding agreement entered into by the Minister of Finance and the Governor of the Reserve Bank of New Zealand pursuant to section 159(3)(a) of that Act, to apply for the period through to 30 June 2004 and for the financial year ending 30 June 2005, as presented to the House on 30 March 2004.

The amendment to the funding agreement is part of a package of measures to better equip the Reserve Bank to intervene in the foreign exchange market. The main change to the funding agreement is that any market losses sustained by the bank as a result of intervening in the foreign exchange market will not be treated as expenditure for the purpose of the funding agreement, and will not cause the bank to breach the maximum allowable expenditure under the agreement. This is consistent with the intent of the funding agreement arrangements in the Reserve Bank of New Zealand Act, which focus on the amount of income the bank is permitted to retain to meet its operational expenses. Market losses on currency positions are not part of the bank’s operational expenses but arise in exchange rate and interest rate movements, which are generally not controllable by the bank. It is therefore appropriate that these expenses are not included in the funding agreement. However, the bank will still be required to report any market losses in its statement of financial performance, in accordance with New Zealand accounting practice, and will still be accountable for all aspects of its financial performance in risk management.

The other changes that have been agreed by the Government, which support the bank’s ability to intervene in the foreign exchange market, are the increase in the bank’s equity and the increase in its holdings of foreign currency reserves. Taken together, these measures will strengthen the bank’s capacity to intervene in the foreign exchange market for two purposes. The first is to stabilise the market in periods of market dysfunction, such as when the market is very liquid. This has been the bank’s intervention policy objective for many years. The Government has agreed to substantially increase the bank’s reserves for that purpose, giving the bank access to around $7 billion in reserves for market stability purposes.

The second is to reduce exchange rate variability by intervening in the market where the exchange rate is either severely over or undervalued relative to economic fundamentals. This is a new policy for the bank. Why has the bank proposed to adopt this new intervention policy, and why has the Government supported its adoption? To answer that, let me step back in time to the adoption of the currency exchange rate regime in 1985. New Zealand dollars floated in March 1985 after many years of unsatisfactory attempts to manage a fixed but adjustable exchange rate system. Since then, New Zealand has maintained a clean float. The Reserve Bank has not intervened in the foreign exchange market in that period to influence the level of the exchange rate. In general, the floating exchange rate has served New Zealand well. It has allowed monetary policy to be directed at domestic price stability, with obvious success.

It has avoided the serious risks of prolonged exchange rate misalignment associated with fixed exchange rates. It has avoided the fiscal costs so frequently associated with maintaining a fixed exchange rate. The floating exchange rate has also provided a flexible mechanism to enable the economy to adjust to changing economic circumstances at lower costs than would otherwise have been the case. It has reduced the risk of serious financial crises often associated with pegged exchange rates.

But, as in other countries with floating exchange rates, New Zealand’s currency is subject to major cycles, which can be destabilising to individual businesses and to the economy at large. Hedging by companies against currency risk can only moderate, not eliminate, this impact. For the most part, such exchange rate cycles are a fact of life that we will not be able to do anything about. However, the Reserve Bank has advised that a well-timed intervention in the foreign exchange market when the exchange rate is markedly over or under valued relative to economic fundamentals can help to reduce the peaks and troughs in the exchange rate cycle.

The bank is not expecting to intervene often, and is not promising that intervention will always succeed, but it considers there will be opportunities to make a small but valuable difference where that is consistent with the bank’s price stability target. Indeed it advises that to fail to take advantage of such opportunities would be to abrogate the bank’s responsibilities in the policy targets agreement to avoid unnecessary instability in the exchange rate.

The Government weighed four issues before agreeing to provide the Reserve Bank with additional capacity to undertake foreign exchange market intervention. One, obviously, was the cost to the taxpayer for a mistimed or misjudged intervention. There are numerous so-called “war stories” about foreign exchange market interventions going wrong—George Soros and the Bank of England springs to mind, as does our own experience in 1984. But these are examples of Governments defending an exchange rate that was not sustainable and, indeed, was fixed. They were trying to prevent an adjustment in the normal range of the exchange rate, rather than trying to influence the extreme peaks and troughs around that normal range. The Reserve Bank will not be doing that. However, as the bank has itself made clear, any intervention carries some element of financial risk—but, of course, in economists’ language, risk is both up and down, both positive and negative.

The bank will almost inevitably carry market losses on its books from time to time, but these will generally be of an unrealised and non-permanent nature. They are likely to reverse as the exchange rate cycle progresses—that has been the experience in Australia.

The second risk would be if monetary policies’ prime focus on maintaining price stability were subverted. That is why having the Reserve Bank conduct intervention under section 16 of the Reserve Bank of New Zealand Act, consistent with the policy targets agreement, is such an important part of the arrangement that the bank is proposing, and it is vital to keep politics out of this exercise. The bank must have the capacity to make the decision not to intervene where that would be inconsistent with the bank’s statutory mandate of achieving price stability, with the bank’s obligations under the policy targets agreement, or when the bank does not think there is much scope to influence the exchange rate.

The third risk is that currency speculators could be attracted to New Zealand. That is not to say that we do not see currency speculators attracted to New Zealand in any case—some, indeed, are attracted back to New Zealand. This is a real risk where a central bank defends or targets a particular exchange rate, but the risk is much, much less when the central bank merely seeks to trim the peaks and troughs in the exchange rate cycle as it is not seeking to keep the exchange rate within a target band. No target band has been set for this exercise.

Finally there is the risk that businesses are fooled into thinking that they need no longer manage their own exchange rate risks—that the Reserve Bank will do that for them. Given the fact that exchange rate cycles are here to stay—a fact that will not be changed by the Reserve Bank’s foreign exchange market intervention—the risk of businesses being fooled into thinking they need no longer manage their currency risks is very low indeed. In fact they need to understand that they continue to have full responsibility for managing their currency risks, and the Reserve Bank will doubtless be reminding them of this at every opportunity.

All in all, the change to the Reserve Bank’s exchange rate intervention arrangements is not particularly big, but one that is likely to have a big effect. But any small moderation of the excessively variable exchange rate cycle would be welcome. The costs and risks are relatively small, well understood, and well catered for in the proposed arrangement. I therefore ask for the House’s support. I thank both New Zealand First and the Greens for their indications that that support is forthcoming, and I note with some gratitude that the National Party’s position is that it will oppose it, but if it should become the Government it will not change it.

This is one of the more significant days, dare I say it, in this Parliament as it relates to financial matters. It will probably go relatively unnoticed, but I make the prediction that this may be a day that a future Minister of Finance will rue was ever allowed to pass in this Parliament—mark my words. Just as Frank Cicutto, the chief executive of the National Australia Bank, is no longer in his job, if the chickens do come home to roost and there is a substantial loss by the Reserve Bank of New Zealand, people will look no further than to the poor Minister of Finance who happens to be in the chair on that given day and they will seek answers to those questions. I do not wish that on the Reserve Bank or the people of New Zealand, but I do hope that I am not the poor Minister of Finance in the chair on that particular day, if it occurs. That is my only prediction.

I want to say with some degree of sadness that this day is passing without proper consultation. The people of New Zealand have not had an opportunity to come before a select committee and reflect on the changes that are taking place. Indeed, the largest exporter in New Zealand, Federated Farmers—the people whom we would most expect to be supportive of this move—are opposed, as are a great many exporters in New Zealand. National supports the increase of $1.9 billion to reserves in New Zealand. Our reserves have not been increased since 1988 and it makes sense with the size of our economy to be running slightly larger reserves. We do not support a capital injection of $1 billion into the Reserve Bank to allow it to undertake currency intervention under the conditions outlined by the bank, which were, to quote it, “exceptionally and unjustifiably high and low”.

In the speeches that will follow my speech a great many finance spokespeople for various parties will tell the people of New Zealand why they care more about exporters than the National Party does, why they care about doing more for them.

💬 Rod Donald: You’ve read my speech.

Mr Donald will come up and say that and I have no doubt that Mr Peters will as well. The argument will be that the National Party is made up of a bunch of ideological, laissez-faire economists who do not understand what is going on. What a load of rubbish that is. If these parties really care about the exporters of New Zealand and making sure that the New Zealand economy operates properly and efficiently under rules that everybody can understand and where moral hazard is not interwoven within our economy, they will not support this legislation, because it will not work.

I will start by making the point that this intervention will be based on the Australian style of intervention. What can we say about the Australian style of intervention? The very best we can say is that it made money for the Reserve Bank of Australia—that is the very best prediction that can be made about Australian-style intervention. Between 1984 and 1994 the Reserve Bank of Australia made $3 billion as a result of its intervention. But it has not made an iota of difference when it comes to volatility of Australia’s exchange rate. In fact, last year, when the Reserve Bank of Australia increased its reserves by the order of A$10 billion, the Australian dollar still rose faster than the New Zealand dollar did.

The international trend of exchange rate intervention goes completely against the grain of what the Minister of Finance is suggesting in the House this afternoon. We only need to look at the Japanese position. Japan has been arguing, basically, that it will cease intervention in the exchange rate. Why? Because it lost £50 billion since September of last year. It set aside US$500 million for intervention in this year alone. If the Bank of Japan, with all of the reserves and might that it has, cannot influence the exchange rate, why on earth does New Zealand believe it can? Why on earth would we want a barrel of clean whisky—if that is the way we could look at the New Zealand exchange rate—and tip into it a quarter of a cup of mud and make it a dirty barrel of whisky? Why would we do that?

People should not just accept my view that it will not work. We should look at the Treasury documents that were written to advise on the position that was outlined by the Minister of Finance today. I quote Treasury: “Net gains likely to be small and not without risks.” It goes on to say: “The international evidence of whether foreign exchange intervention can successfully moderate excessive movements in the exchange rate is mixed.”

The Minister talked a little bit about when intervention would take place: on the highs and the lows. He relies, of course, on New Zealand sitting on a cyclical exchange rate, and it is certainly true that since the float of the New Zealand dollar in 1984 the Kiwi dollar against the US exchange rate has been cyclical in nature. But if it is so easy to predict the cyclical nature, why does New Zealand not just take a bigger position?

Why do we not become the greatest currency speculator since George Soros, because if it is easy and one can pick the tops and bottoms, then surely we must have stumbled across a great way to make money for the people of New Zealand, and why would we not become a hedge fund, because—

💬 Hon David Carter: You can’t lose.

The Hon David Carter says we cannot lose, but he knows, well and truly, we can. The Treasury document talks quite a bit about this point. It states that it is very difficult to pick the turning point. It says that intervening against the economic fundamentals may prove to be ineffective and costly, in both economic and financial terms.

It is good that the Reserve Bank at least acknowledges that there are risks and that it wants to front up to those. Adrian Orr, Deputy Governor of the Reserve Bank, made it very clear that the Reserve Bank wanted to be operationally independent and accountable for those outcomes. I commend the Reserve Bank for that. But one has to ask the question: when the Reserve Bank writes such a ginger proposal as this one and when Treasury gives the most qualified support it possibly can, why is it taking place? The answer is that Treasury is simply the messenger for the Minister of Finance, who is sick of going up and down the woolsheds of New Zealand and apologising for not being able to do anything when it comes to exchange rates. He does not believe that this is going to be—

💬 Clayton Cosgrove: What would that member do?

I would not intervene, because for 20 years it has worked successfully.

💬 Clayton Cosgrove: What would you do?

I would fix all the infrastructural issues that this Government will not fix. I want to talk for just a moment about an experience I had when I was giving a speech earlier this morning. One of New Zealand’s largest exporting hedging companies came up to me and said it was massively opposed to this move that was taking place today.

💬 Darren Hughes: Who?

Roger Kerr. Why? The reason is that the company knows that the moral hazard of this position is enormous. The message this is sending to the exporters of New Zealand is that the Government can control the exchange rate, when the Minister of Finance, the Reserve Bank, and Treasury blatantly know that that is not the case.

This will challenge the independence of the Minister of Finance, a Minister who has been saying since we were 47c against the US dollar that the New Zealand exchange rate has been overvalued. He will no longer be able to be a Monday morning quarter-back on the New Zealand exchange rate, as he has been in past years. This will attract hedge funds to New Zealand that are likely to take and challenge the risk parameters of the Reserve Bank, and this will not be the panacea to our problems.

I do not have time this afternoon to go on, but I want to make one final comment, which is simply that although the Reserve Bank has asked for multiparty support, National will not be supporting this legislation as it passes now. We will review it in time. We recognise the long-term nature of foreign exchange intervention and the 3-year cyclical nature of the parliamentary term.

I want to know when we are going to hear from the great debater. I want to know when we are going to hear from the expert on monetary policy who is the former Governor of the Reserve Bank. I want to know when he is going to speak. The speech we have just heard was the voice of utter inexperience—as Don Brash is on these matters, when it comes to running the whole economy. The National Party and the ACT party do not understand that the job is to run the whole economy in the interests of the whole nation and not just for the narrow, segmented, sectional interests of the capital markets. The great lesson for this country since 1984 has been the disastrous experiment that the ACT party began with its founder and that was supported by the National Government over all those years. The disaster shows in a comparison between Australia’s growth rate since 1984 and ours: Australia has a growth rate that in real terms is 35 percent faster than New Zealand’s.

And we have just heard that speech from the voice of the capital markets. That is the kind of voice I heard back in 1985 when Labour floated the dollar, supported by Prebble and the acolytes of the far right. The dollar went from US44c to US72c, and Roger Douglas and others were saying they would make New Zealand the capital market centre of the world. Not bad, eh! When they were asked how it would happen, they said it would happen because New Zealand gets the sun earlier than anybody else. It is voodoo economics, the sort of economics that is thoroughly discredited in every other First World economy. But today we heard again why the National Party cannot ever be allowed to govern by itself again. Its members are narrow and shallow. They do not understand even their own history. Can members imagine Keith Holyoake making that speech? I cannot. Can they imagine Harry Lake making that speech? I cannot. But the new breed of wide boys, as evidenced by their presence in this House, say things such as Mr Key has just said: “We’d fix all the infrastructure in one go.” I know he has been in Parliament only 5 minutes, but which politician of experience would make that bald, outrageous claim and expect even one person in his caucus, let alone anybody in New Zealand, to believe it?

That is what he said. He was challenged across the House to say what he would do, and he said he would fix all the infrastructure in one go. It is in the Hansard, and now, less than a minute later, he is denying it. It is so typical of his leader, who is asked time after time what his policy is. When he is asked: “Does this mean that?”; he says: “Ah, I’m not sure.” When asked whether A means B or C, he says: “Well, we’re working on that; we have a review going on.” When will this party, which has been around since 1936, with antecedents going back two centuries, come to grips with itself and realise that people want policy, not popularism? They want policy, not opportunism. They want ideas, not chance. They will not have themselves put at risk by all this inexperience. They do not want a narrow, sectionist, segmented interest group coming to Parliament, represented by these MPs, and pushing their interests over the person who matters most—the exporter, he or she, who goes abroad and brings more money back for the family in New Zealand. That is what we are talking about today. We are not talking about anything other than giving our exporters a fair go—the people who, in a dependent economy like ours, are so critical to our long-term economic interest.

The National Party purports to represent the farmer—provincial New Zealand. No wonder it has not one more seat left, apart from Whangarei, in the cities of the provinces! It is because they have forgotten exactly who it is who puts life into the economy of this country, and who it is, the wide boys, who put tens of thousands of dollars into their coffers but whose interests are not those of the mass majority of ordinary people in this country and of the women and men who go abroad and export.

In 1985 to 1987 our dollar went from US44c to US72c, and they did nothing. In 1994 to 1996, Don Brash was the Governor of the Reserve Bank. The dollar rose a dramatic 26 percent, and he would do nothing. In November 1996 we changed the policy targets agreement. The dollar began to drop dramatically, and, as a consequence, this country made a significant recovery. That is the one and only policy that one can point to for change. But what would those people in the National Party do? They do not actually know. They are opposed to it, but they will not change it.

💬 Darren Hughes: They’re uncomfortable.

Yes, they are uncomfortable. Apparently, we are going to run our economy like some sort of retreat or haven for those who are unwell—“If you’re comfortable, OK; if not, we’ve got something for you.” It is outrageous, when one thinks about it. The party that used to stand for business, for exporters, and the party that is going to stand for farmers, fishermen, and foresters is doing nothing for those people whatsoever other than to criticise, at long last, something in the area of monetary change. They have no policy. [Interruption] He says he has a policy.

He had the chance to speak for 10 minutes and he could not outline one element of it. I say to Mr Key that that is not good enough. No wonder they call him “Don Key”.

💬 Mr SPEAKER: Order!

I am sorry, I did not mean to say that, but when someone describes himself as Don Brash’s “mini-me” it leads to the automatic—

💬 Darren Hughes: How embarrassing!

Yes, it is. He is the fill-in person for Don Brash. All I can say is that “Moga-Don” no longer has any chance of being successful in this country if people hear those kinds of speeches. It comes back to the point of which other country would tolerate a do-nothing policy. Did Greenspan do nothing? No, he did not. When the sharemarket crashed in “black” October 1987 he did something, as did every other economy except New Zealand. We languished for decades with the sharemarket staggering at the same level because of a lack of confidence. This country needs low exchange rates and low interest rates, and they can be run in tandem. New Zealand First is the one consistent party that has argued for a currency level set to be sympathetic to exporters in a country more dependent on exporting than any country I know.

Those are the real choices in 2005 for the New Zealand electorate, and, for that matter, for the businessmen of this country who do real things and make real money other than those who prey like the vulture and exploit the weak, the halt, the lame, and the maimed in the financial markets, of which Mr Key obviously wants to make himself a spokesperson.

No doubt we will hear from ACT shortly. We will hear how dynamically successful that party was when its founding leaders were in Government. They sent the Labour Party almost to political oblivion. All I can say is that the good thing about the speech the House is about to hear is that it does not matter, because after the next election there will be three parties standing—that is, the two old tired ones, and the new dynamic one called New Zealand First.

The Green Party supports the motion. We support the new funding agreement between the Minister of Finance and the Reserve Bank, and we support the Reserve Bank taking an active role in getting the exchange rate of New Zealand’s dollar down to a realistic level. I said at the time of the announcement of this initiative that although it may have only a small influence on the value of the dollar, it was an important signal to the financial markets that the Reserve Bank was no longer prepared to sacrifice exporters, tourism operators, and domestic manufacturers to the foreign exchange speculators who are here to make a quick buck. I have to say that I was right. Immediately following the announcement, the exchange rate of the New Zealand dollar dropped by several cents against both the US dollar and the trade-weighted index. In fact, it immediately dropped by 2c against the US dollar, and within 3 days had dropped by 3.5c against the US dollar. It went down by 3c against the trade-weighted index over the same period. What is more, the New Zealand dollar is still below the level that it was at the day before this announcement was made—that is, down by 2c on the US dollar, and it has not risen in the intervening period above the level it was at on the day before the announcement. It is down by 2.5c against the trade-weighted index, and again, it has not risen above the level that it was at before the announcement was made.

So why on earth is National opposing this initiative? I am not suggesting that John Key read my speech, but he was right to say that we, the members of the Green Party, are asking in this House why National is not supporting hard-working Kiwi business people, why it wants farmers to earn less, and why it wants local manufacturers to be put out of business because of cheap imports. Those are all questions that the National Party has to answer, but in my opinion it certainly has not done so satisfactorily. Perhaps National will shortly roll out the former Governor of the Reserve Bank, who will give the king hit and provide us with all the information that we need to know. The best that John Key could manage was his statement at the time, when he said that currency intervention is not dissimilar to tinsel on a Christmas tree: it looks nice and makes everyone feel better, but it achieves very little. Clearly, he was wrong. Maybe that is because the spotlight was on that Christmas tree, and the tinsel was reflecting across the markets and around the world. However, the fact is that even the signal that this change would take place, and that the Reserve Bank was prepared to make a currency intervention, has had a beneficial effect on the New Zealand exchange rate.

However, I think the biggest irony in National’s opposition to the Reserve Bank intervening in the foreign exchange market—in addition to the one Dr Cullen pointed out, that National will vote against this measure but is not committed to getting rid of it if National ever becomes the Government—is that the initiative was begun when one Dr Don Brash was the Governor of the Reserve Bank. That was revealed during the Finance and Expenditure Committee’s hearing on the Monetary Policy Statement, where Alan Bollard said that Dr Brash was the chief executive of the Reserve Bank when a small study group was sent around the world about 3½ years ago to look at ways to intervene in the currency market. National cannot have it both ways. Either Dr Brash, when he was Governor of the Reserve Bank backed doing something about this, or he did not. If Dr Brash did back it 3½ years ago when he sent a study team overseas, and then made it a priority in the annual report of the Reserve Bank, why is the party that he leads now coming out against taking this initiative?

Nor can the Labour Government have it both ways. This intervention, while a worthy one and one that we support, is too little and too late. Foreign speculators are still exploiting New Zealand’s vulnerable economy. The New Zealand dollar is still overvalued. At the moment it is worth 65c against the US dollar and on a trade-weighted basis. That is too high for our exporters, our domestic manufacturers, and our tourist operators. As Mr Peters said—and for once I have to agree with him—they will continue to suffer until the Reserve Bank significantly reduces the official cash rate, to bring New Zealand in line with other economies. However, the Reserve Bank will not do that until Dr Cullen takes a range of initiatives to take the heat out of the domestic economy.

We do not have a two-speed economy, as some people say. I believe we have a schizophrenic economy, because while the speculative sector is growing, the productive sector is shrinking. It is time for the Government to tackle that. The indicators that are coming through do not look very good. The February import figures that came out last week show that New Zealand had its worst February trade deficit in our history, at $3.492 billion. That is an awfully large trade deficit; it is a massive trade deficit. It is not just a trade deficit as a result of imports growing faster than exports. For 2 years in a row we have had the unprecedented situation of export returns shrinking—down 6.5 percent for the year to February 2003, and down a further 6.3 percent for the year to February 2004. That represents a loss of $4 billion in exports over that 2-year period—or, I should say, a $4 billion drop in exports. The total drop is more than that, but if one compares February 2004 at $28.5 billion with February 2002 at $32.6 billion, one can see the impact that the high dollar has had on the New Zealand economy. To shave a bit off the top, as the Reserve Bank will now have permission to do, will not be enough to get our dollar’s exchange rate down to the level it needs to be at in order to bring exports back up to where they should be, and to even start, without the handicap of the high exchange rate for the dollar, to try to get New Zealand back into a trade surplus situation.

But it is not just the export sector that has been hit hard by the way the economy is currently being managed. The other big issue that came up when the Monetary Policy Statement was tabled was New Zealand’s negative savings rate. That issue was swamped by all the flurry around the Reserve Bank saying that it is prepared to intervene with the exchange rate. But I want to bring us back to some of the points that the Reserve Bank made. Alan Bollard’s Monetary Policy Statement contained serious warnings about the fragility of the New Zealand economy and, in particular, that household spending is now expected to exceed income by 11 percent from the beginning of this month. That is an extraordinary situation for this country to be in. We have gone from minus 6 percent in terms of household savings to minus 11 percent.

The Greens would tell Dr Cullen that it is time to take some steps, and the first one should be to look at introducing a capital gains tax on properties other than the family home. That would help to deflate the property boom, but more important, it would give the Reserve Bank the flexibility it needs to drop the official cash rate. The exchange rate of the dollar would immediately drop, as speculative capital went elsewhere. Dr Cullen should also be introducing serious tax incentives to encourage people to save for their own retirement. That would take money out of consumer spending, and put it into savings and, therefore, investment. I do not mind whether Dr Cullen wants to shift the “Ts” and the “Es”, in terms of what is taxed and exempt, which would have that impact, nor do I mind whether he extends across the board the 6 percent savings incentive that exists for people earning over $60,000, but he needs to do something.

Dr Cullen also needs to bring in tighter controls on foreign investment, both to limit speculation on property and focus the inflow of foreign capital on new, productive investment. He should be looking at reorienting our economy towards self-reliance, so that we boost the import substitution sector—in other words encourage Buy New Zealand Made, so that we are less vulnerable to the fluctuations of the international marketplace. And, quite frankly, I will say another unpopular thing: he should be looking at an across-the-board tariff on imports. New Zealand’s balance of payments situation is sick, and it will only get worse. Whether one looks at the Reserve Bank or the Budget Policy Statement, one sees our balance of payments is getting worse.

Dr Cullen and other parties may find those proposals unpalatable, but I ask them to come up with alternatives that will get the exchange rate of the New Zealand dollar down and take our economy towards self-reliance and sustainability.

This has been an informative debate because it has lined up the political parties in this House. On one side are the parties that support the free market and the capitalist system, and on the other side are the parties that are opposed to the free market, do not support the capitalist system, and believe that politicians know best. Just so listeners who are tuning in are aware of which party is where, the National Party and the ACT party are on the side of free enterprise. The Labour Party, the Greens, New Zealand First, and United Future are against free enterprise. They are the parties that are prepared to take a few paltry billion dollars, put them up against the world capital markets, and, like King Canute, say: “That is as far as the New Zealand dollar will go. I command you to stop.”

That is something we in this House should have learnt, like King Canute learnt long ago. We heard the Rt Hon Winston Peters’ criticism of Mr John Key. Mr John Key had to learn that being in Government was about running the entire economy. Think about that for a moment. What kinds of people see themselves as politicians running the entire economy? What we want in this country is a framework of stable rules within which businesses can get on and be productive, earn a dollar, and employ people—not Winston Peters, not Michael Cullen, and not Rod Donald sitting in the chair over there, pretending they can run the entire economy.

The last person who attempted to run the entire economy in New Zealand—the last time that someone decided, politically, what level the New Zealand dollar should be at—was the mentor of the Rt Hon Winston Peters, Sir Robert Muldoon. We should understand this, because the Rt Hon Winston Peters says: “Everything done since 1984 was bad.” That is what he says. He goes back to the glory days of Sir Robert Muldoon, when he would command what the dollar could be. He would command what a punnet of margarine would cost. He would command what wages would be. He would command the economy. It is true to say that Sir Robert Muldoon did run the entire economy—and he ran it into the ground! What a backward step it is to suggest for a moment that the Reserve Bank can somehow, in a positive way, over the long run, manipulate the New Zealand dollar.

I notice that Dr Bollard and the Reserve Bank are being cautious about what they can and cannot do. But I do not see that caution from Dr Cullen, I do not see that caution from Mr Rod Donald, and I do not see that caution from Winston Peters. Is it not interesting that Winston Peters is standing in the House, saying that he should be in the position of running the entire economy? I would not put him in charge of running a taxi out to Lower Hutt, with a taxi chat, let alone put him in charge of a couple of billion dollars and deciding what the dollar should be in New Zealand! Who would be that stupid? We know, because we have heard it in this debate, that Michael Cullen and the Labour Party would be, and Rod Donald and the Green Party would be. Is United Future voting for this motion? That is typical. One United Future member says “no”, and one says “yes”. Are they voting for this? [Interruption] They are voting for it. They are the parties stupid enough to put a couple of billion dollars into a political war chest, to sit there like King Canute, and spray it around for 10 minutes and blow the lot. That is what they are prepared to do.

I want to explain a few technical facts. It is interesting, when one is talking about giving the bank a couple of billion dollars. It sounds very expensive. But it is not as expensive as it sounds. In fact, it is estimated that in holding foreign reserves, which the Government has done since 1989—since the new Act came into force for “dysfunctional” markets—the holding cost is $3 million a year fixed cost, and about three-quarters of a million per $1 billion held. So the actual holding costs of those reserves is not a lot. Indeed, given the increase in foreign exchange dealings, the Reserve Bank has suggested that it get an extra $1.9 billion over the next 4 years for its reserves so it can manage if it ever gets a “dysfunctional” market, whatever that is. The cost of that is not $1.9 billion; it is estimated to be $1.6 million a year. So there is not a lot holding those reserves. But what a lot of mischief it is when another couple of billion dollars is put in and it is said that this is to take the top off if the dollar is too high, or this is to lift the dollar up if it is too low. That is where the cost will go. Because that is not sitting the money in a little pocket over here for a rainy day, in case we need it. That is actively trading in the foreign exchange market.

I would like to take members back to Michael Cullen’s pronouncements on what he thought the dollar would be doing in the future. Can everyone remember when he said: “Oh well, it won’t stay below 50c for long.”? It did. Every pronouncement Michael Cullen has made, even about the direction that the dollar was going in, was wrong. Is that truly the man to whom we would want to give a billion dollars, to play on the market? What Rod Donald knows about foreign exchange markets and economics would not fill Nandor Tanczos’ tea cosy. It is next to nothing. The idea that we would put him in charge of—or having anything to say about—$2 billion, bidding against the capital markets of the world, is absurd.

Of course, we all know that we would not put Winston Peters in charge of anything. Then there is John Key, who has actually managed a foreign exchange dealers’ room, who says: “This ain’t gonna work.” I think that this House should pay attention.

Adrian Orr, the deputy governor of the Reserve Bank, gave an interesting speech on 25 March this year. He said: “Here are the principles by which we would get involved in intervening in the foreign exchange market. At times the exchange rate has varied by far more than can be justified by relevant economic fundamentals.” So that means our models are not according with reality. He is saying that if our models do not accord with reality, a billion dollars should be spent to make our models work. He went on to say: “It is at these exceptional and unjustifiable levels of the exchange rate that the bank would consider buying or selling foreign currencies for New Zealand dollars in an effort to influence the level of the exchange rate.” We are going to have a bunch of bureaucrats, guided by a bunch of politicians, deciding when the dollar is at an unjustifiable level and entering that market to buy and sell. I have to say that that is madness.

Members should listen to this further quote from Adrian Orr: “What we are recommending is intervening when the moment is justified and opportune, with the outcome of, at best, trimming the extreme tops and bottoms of the New Zealand dollar exchange rate cycle. … At best, intervening when the moment is justified and opportune.” Would we not all like to do that? Would we not all like to invest in the sharemarket and on the foreign exchange market, when the moment is “justified and opportune”? The point is that they will not know, and a great deal of taxpayers’ money is being put at risk through a foolhardy political experiment, the lessons of which we should have learnt a long time ago.

Thank you very much for the opportunity to speak to this Government Motion No. 1 that the National Party will certainly vote against. It is a sad, sad day that we are here now voting on the ability of the Reserve Bank to intervene in the exchange rate. One only has to consider the way in which the exchange rate has performed over the last 4 years and I suspect that this day was inevitable. Over the last 4 years the economy of New Zealand has performed quite credibly. The reason for the initial burst of performance by our economy was the New Zealand dollar at an unrealistic level. Dr Cullen as the Minister of Finance—in fact, the untested Minister of Finance—thought that that those sorts of levels would be there for a considerable time, making his job easier to run, or to see the economy grow at a respectable level and accrue quite sizeable surpluses.

What he did not realise was the inevitable—that as the economy performed, the exchange rate would also improve, as investors throughout the world recognised the performance of the New Zealand dollar. As the dollar started to rise, Dr Cullen knew then that that may put some sharper focus on the continuing performance of the dollar. So his first response was a limp-wristed attempt to talk down the dollar. Of course, that failed. His second response was another attempt to talk down the dollar. Of course, that made no difference at all. The only time we have seen the dollar come back from 72c to a current level of around 65c was when he and the so-called independent Governor of the Reserve Bank came up with a proposal whereby the Reserve Bank had the ability to intervene at the margins and attempt to influence the level of the dollar, and that is what we have seen over the last few weeks.

As the spokesperson on agriculture for the National Party I spend a lot of time with farmers. They, as much as any sector of our economy, have been hurt by the ever-increasing dollar. Not one farmer I could name would support what the Parliament is proposing to do today. Not one farmer wants to see us go back to the days when somebody attempted to influence the market determination of the exchange rate. I acknowledge that Federated Farmers today have opposed this move, even though they acknowledge that an appreciating exchange rate hurts them. When one talks to the farmers they say that it is not the ever-increasing dollar that is hurting, it is the volatility. It is the ever-changing exchange rate.

Most farmers are realistic and know that New Zealand will not be wealthy through a declining exchange rate. As Rodney Hide pointed out, one has only to look at the performance of a former National Prime Minister and Minister of Finance, Sir Robert Muldoon. If the answer was to try to interfere with the exchange rate and force it down, then frankly, Rob Muldoon had all the answers. That was what he used to do. When things got tough he would come to Parliament and simply declare a devaluation of the exchange rate. What he did not seem to appreciate was that that only made things get tougher, so his next response was to come back to Parliament a second time and then talk down, or in fact impose a devaluation of the dollar. That never worked. That made New Zealand poorer. I can assure the House that under no circumstances do I accept that any intervention, either by a Reserve Bank governor, or by a Minister of Finance trying to influence the level of the dollar, as opposed to market influence, makes any significant long-term beneficial difference.

The incredible thing today was to listen to the contributions made by other politicians. The Rt Hon Winston Peters took a call earlier on in the debate to lament the fact that Australia had grown 35 percent faster than New Zealand over the last 15 years. In that respect he is right. Then he tried to suggest to the House that this move today, allowing the Reserve Bank Governor to intervene at the margins of the exchange rate, would, in some way, be a silver bullet to achieve a greatly improved gross domestic product growth rate so that we did start to close the gap with Australia. Nothing could be further from the truth.

I do acknowledge that Australia has a mechanism whereby it intervenes with the exchange rate. But if members look worldwide the efforts by various Reserve Banks of the world to intervene is on the decline. The other point that needs to be made, because it has not been made in the House today, is that when other countries that have the ability to intervene, do intervene, more often than not it is an attempt to arrest a declining exchange rate in an attempt to restore confidence to an economy.

We then listened to the co-leader of the Greens, Rod Donald. I take exception to his suggestion that Don Brash, as he said, wanted to do this all along. Don Brash, as a previous Governor of the Reserve Bank, certainly investigated whether the Reserve Bank should have the powers to intervene in the exchange rate, in an attempt to line out the volatility I spoke of earlier. The conclusion of his work, and the work of the Reserve Bank, was that it was not advantageous to intervene. In other words, the risks of intervening certainly outweighed the potential benefits of the intervention. But Rod Donald went on further to outline the sorts of policies that New Zealand wants to be aware may arise if the Greens and the Labour Party form a coalition Government.

💬 Pansy Wong: Scary.

It was scary. Rod Donald said that there would be a capital gains tax. He also said we would see the imposition of import tariffs again. These are all the tactics we saw 20 years ago, under the Rt Hon Rob Muldoon, and Rod Donald is saying that these are the sorts of issues we need to go back to.

An amount of $1 billion will be available with the passing of this motion, for Dr Bollard and the Reserve Bank to speculate, in an attempt to iron out the exchange rate at the margins. I think that is the point that needs to be made tonight. The exchange rate so far, in 20-odd years, has varied from 37c to 72c, and the current Governor of the Reserve Bank has said that even that extreme range would not be enough for him to attempt intervention. That suggests to me that any attempts to intervene at a range wider than that will have minimal chance of making a significant difference.

Where the risk is then for exporters is that they currently have the ability and the responsibility to take things like forward exchange contracts to cover the risk of volatility of the exchange rate. This sends a signal to those exporters that the Governor of the Reserve Bank will do that job for them. The governor will not be able to do that job. He will not have the money and the resources required to influence a world market. He knows that. The Japanese found, to their surprise, that they did not have the resources, so obviously New Zealand does not have them. I fear we will see that exporters will not take the exchange rate cover they should, that they have been accustomed to taking in the past, because they will be relying on the Governor of the Reserve Bank to do it for them. I know it will not happen and, sadly, exporters will quickly figure out that it will not happen. I oppose this Government motion.