Financial Review Debate — TreasuryFinancial Statements of the Government of New Zealand for the yearended 30 June 2004

On behalf of the Opposition, I look forward to engaging in what I think will be a robust debate about a Government that just simply likes to spend money and that is driving up interest rates for New Zealanders with its wasteful spending. It is a wasted opportunity that this Government has failed to deliver on for the people of New Zealand, and I think the Government will be harshly treated for that in the months ahead.

This Government inherited some economic conditions that it had very little to do with. Indeed, it inherited some wonderful reforms that took place in the 1980s and 1990s, which really unlocked a country that had a closed economy—an economy that did not trade with the outside world in any great form, in a country that had all the wrong economic settings in place. Those were the policies that this Prime Minister likes to refer to as the “failed policies of the 1990s”. But those “failed policies of the 1990s” have delivered record surpluses to this Government—record surpluses that this Government has wasted. This Government inherited an exchange rate that was at an all-time low in the early part of its first term, and it had fortunate conditions in inheriting very high commodity prices from a very strong Chinese economy. All those conditions led to the Government having a very large and burgeoning tax take—in the order of $35 billion to $40 billion of additional taxes in the last 5 years. The way that it has chosen to spend that money is one of the key elements of this debate.

Before we go too much further we should look at the record of spending undertaken by this Government, because when the Minister of Finance took office in 1999 he set a self-imposed spending cap of $6 billion. For any Labour Government, we know that sticking within a spending cap can be difficult, and Dr Cullen has proved to be no different from any other Labour finance Minister who has gone before him. He broke his self-imposed spending cap in his first term, even if it was just by a fraction—at $6.1 billion. Having got the taste of that increased spending, having got the taste of blood in his mouth, he went on to undertake $12.7 billion worth of new spending in his second term, and if this Government—and we hope it does not—gets a third term, I project that spending will rise to somewhere in the order of $14 billion to $15 billion, if not more.

The finance Minister knows that that is a major problem for the country, because he told the Dominion Post, as reported on 24 March, that there was a bit of a hiccup with the numbers. There is, I might add for the benefit of anyone who may be listening to this debate, a lot more than meets the eye with regard to that comment. We will come back to it in due course. Dr Cullen said, and I quote from the Dominion Post of 24 March: “I can’t confirm any numbers, but I can confirm the initial run of the Budget numbers didn’t play out to a sufficiently credible long-term debt track. Steps are being taken to address that.” That is Treasury-speak for a major bust-up with Treasury and with the numbers it was crunching in an out-of-control spending ministry that was just spending money left, right, and centre. But members should not take my word for that. It may be worth referring to another article that appeared in the Dominion Post in the weekend by Gareth Morgan, who stated in the last paragraph of his column: “Meanwhile, the Government is spending like mad just adding to the inflationary pressures and in so doing increasing pressure on the Reserve Bank to tighten further, and substantially.” The message from economic commentators around the country is that you have a Government that is spending so much money—

The CHAIRPERSON (H V Ross Robertson): No, no—not me.

Oh, OK. The Government is spending so much money that it is putting pressure on interest rates, and New Zealanders are paying for that with higher mortgage rates.

This Government was faced with a couple of opportunities. One was to set in place a platform of future economic growth for New Zealand. This Government could have chosen to build capacity in our economy and to invest in infrastructure and quality education. It could have chosen to invest in things that would make New Zealand sustain higher levels of long-term growth. But it failed in that, and it failed rather miserably.

After 2½ years in Parliament, Mr Key has finally become a true member of the National Party. In other words, he cannot remember what he said 2 weeks ago in terms of what he is saying today. And that is the National Party all over. Its members have spent the 2½ years since the last election saying that “Uncle Scrooge Cullen” is running huge surpluses—massive surpluses—and is dragging resources out of the economy. Mr Key is nodding again; he remembers saying that. He was saying only a couple of weeks ago that we were dragging economic resources out of the economy unnecessarily, and that there was plenty of room for big tax cuts and for all the spending promises on law and order and everything else that his colleagues keep making, all over the place. They have a big doozy one coming up on Friday of this week, of half a billion dollars - plus a year. That will come out from the National Party as its next promise. We are just a bit shocked about that—the National caucus leaks so badly that we know when announcements are coming out on key matters.

But suddenly this week Mr Key has understood what I have been trying to say for the last 2 or 3 months: that, in fact, we do not have a large amount of fiscal headroom, at all. There is no room for large tax cuts, unless—and this was the hidden message of Mr Key’s speech—there is a major slashing of Government expenditure. Unless we cut back—

💬 Hon Member: Which one?

Oh, it has to be the biggies! There is no point in fiddling around with the Ministry of Women’s Affairs; that will not address the need for tax cuts. The cuts have to be in health, education, superannuation, law and order, or defence—all the big items of Government. But what have National Party spokespeople said in terms of all those areas? The Government should have agreed to anything that nurses asked for in pay increases, according to the National Party’s health spokesperson at the time. National says we should increase the number of police all over the show. In fact, there should be more police than non-police in our society, if one listened to the National Party on occasions. National also says we should double the amount of money we spend on defence, and buy everything we possibly can for it. We should increase our overseas aid, of course. We should spend more on this, that, and everything else—

💬 Darren Hughes: And cut taxes, too.

Hon Dr MICHAEL CULLEN:—and have big cuts in taxes, at the same time. But Mr Key now says this Government is feeding too much demand into the economy. Well, we just cannot have it both ways. That is exactly what putting a Budget together is all about. It is not a series of exercises in wishful thinking. It is not a matter of going around all one’s caucus colleagues and asking them to say exactly what they would like, of doubling it, and of then seeing whether it adds up.

I will issue this challenge to the National Party time after time over the next few months: when that party produces an alternative Budget, based upon the Government’s own tax model and based upon the same economic assumptions—as Labour did when in Opposition—

💬 Clayton Cosgrove: Costed properly.

Hon Dr MICHAEL CULLEN:—and when it is all costed properly and it all adds up, then we may believe a word the National members say. But in 2002 National flunked that basic test; it refused to issue an alternative Budget. I ask Mr Key whether, after this year’s Budget when he has all the economic data, he will put up an alternative Budget. Oh, yes, he nods. Right—we have that on record. We will need to see then where the cuts will be made in order to pay for his programme, in terms of tax cuts and the diversion of expenditure out of excise duty, and to pay for all the other things the National Party will promise over the next few months.

Of course, 25 new camping grounds on Department of Conservation land may pay for all of that—I do not know. Who knows what National may have in train for that department when it comes to those sorts of proposals? That just will not do as a programme for an alternative Government. But it tells us that the National Party is not an alternative Government. National is just a party that hopes to claw back some ground in this election so that it may win a position by 2008, in order to look like an alternative Government. The danger, of course, is that it may just fluke it if it does that—just as Muldoon did in 1975, when he was lumbered with the superannuation promise that was part of why we had to do the things in the 1980s that we did, in terms of restructuring.

So I say that this debate needs to be about the true realities. I can tell the Committee that on the present projections around net debt and gross debt for the out-years, we are looking at a relatively flat percentage of GDP. There will not be a big decline, at all, in net debt or gross debt as a percentage of GDP. There will not be room in this year’s Budget for the big-spending promises that nearly every other party in this Parliament wants to engage in, on both the revenue side and the expenditure side. There will have to be some doses of cold realism amongst all kinds of other parties, in order for them to make any sense, at all.

I am sure that the Government would like to be congratulated on its healthy financial statements, but I have to point out that while it is sitting on record surpluses, hard-working Kiwi families, farmers, and business owners are paying a high price for Labour’s mismanagement of this country’s economy. That is because every family with a mortgage, every business owner with a bank overdraft, and every farmer with a loan is paying 1 to 2 percent more in interest because Dr Cullen refuses to take action on New Zealand’s record current account deficit and overvalued dollar. The Minister is shaking his head, but the Governor of the Reserve Bank confirmed, when he appeared before the Finance and Expenditure Committee, that because of our high and growing international debt, New Zealanders pay—

💬 Hon Dr Michael Cullen: And private debt.

Private debt; it does not matter—the fact is that Kiwis are paying a risk premium because of that debt.

I would like to know what the Labour Government is doing about that. I would maintain that it is doing less than nothing, because despite net foreign debt now exceeding $120 billion, the Government wants it to be even easier for foreign investors to buy up our land, our farms, our forests, our buildings, and our businesses. Despite the trade deficit being at record levels—$4.1 billion for the year to February, it was announced today—and imports climbing by 9.7 percent in the last year, Labour wants to fuel even more imports by removing New Zealand’s last remaining tariffs. Despite Dr Cullen claiming during the 2002-03 financial review that he had tools available to get the dollar down to realistic levels he refuses to relieve the pressure on our exporters and domestic manufacturers. I believe that that is because the Minister of Finance has a conflict of interest. He would rather sacrifice some businesses than face public outrage as the result of the inevitable rising cost of imports if the exchange rate of the New Zealand dollar was restored to realistic levels.

In particular, I believe that the Minister is rightly concerned about the impact that the rapidly rising price of oil will have on the New Zealand economy when the dollar rediscovers gravity. Despite the high exchange rate of the New Zealand dollar insulating New Zealand from the full force of escalating oil prices, the cost of oil imports rose by 29.9 percent in the year to February, according to today’s statistics report. The impact of oil prices will only get worse if the Government does not take action to reduce our dependence on imported fuel. The Finance and Expenditure Committee report on the financial review highlights that the Government has been caught napping on the oil issue. It was, and still is, totally unprepared for one of the greatest threats to the New Zealand economy and to our way of life.

We have only to look at page 4 of the report to see that it states: “Treasury conceded that previous projections”—that is, oil price projections—“were based largely on historical prices. This has proved a reasonable basis for predictions in the past, as the real price of petrol has stayed relatively constant for the past 30 years.” However, Treasury concedes “historical prices may no longer offer an accurate reflection of future prices”. Well, tell us about it! But Treasury went on to state that it believed that: “current high prices will be temporary”—this was in October last year—“and, in about 7 years, oil prices will fall to around US$35 per barrel.” Well, clearly the futures trader who put in a bid for oil costing $100 a barrel this June had not read what the New Zealand Treasury had to say about oil prices, and the New Zealand Treasury claims that it now relies on futures traders to tell it what the price should be. I think it is time that Treasury revised its $35 per barrel figure upwards, because oil at the moment is trading at more than $50 a barrel, even though the price has settled slightly, and that is almost three times what Dr Cullen stated it would cost in last year’s Budget. He said that oil would reduce to an equilibrium of $19 a barrel.

💬 Hon Dr Michael Cullen: I didn’t; Treasury did.

I am sorry to slight Dr Cullen. Dr Cullen’s advisers in Treasury said that.

We have a small window of opportunity to tackle that problem. At the very least, and to begin with, the Government needs to recognise that the problem is real and urgent, and that change is inevitable. It needs to bring in vehicle fuel-efficiency standards right now. It needs to invest more in public transport, in rail for freight and passengers, and on walking and cycling. It needs to encourage more local production and to become less dependent on long-term trade. I acknowledge that the Government has taken some small steps towards that in cooperation with the Greens, but those steps simply are not enough. We need to rapidly transform our economy; otherwise, we will not cope.

I think Dr Cullen made some very interesting points. We need to get a bit of reality about the National Party back into this debate. Here is the reality and here are the facts, which I think set a wonderful framework and platform for an argument and a debate at the next election. For 6 years we have had the highest growth rate in the OECD. For 5 years we have been ahead of Australia. For those in the National Party who always see Australia as the panacea, I point to those figures. We have the lowest rate of unemployment in 20 years—3.6 percent. Since December it has tightened to 3.1 percent in my own province, in Canterbury. They are facts. They are credible facts; they are verified by overseas agencies.

After the 2004 Budget, when Bill English was the leader of the National Party, I recall getting up and being astounded at the fact that, for the first time, the Labour Government was being attacked for being too tight. I recall that, throughout our history, the National Party and the conservatives have always taken pot shots at the Labour Party as being the tax-and-spend party; but here was a leader of the National Party—for the first time in my short living memory—who had got up, broken the mould, and accused the Minister of Finance and the Labour Government of being too tight.

Of course when that did not work, and it has been proved that we are being fiscally responsible, we now have Dr Brash on the one hand saying that we are still too tight, and on the other is the softer face of National’s economic and finance policies, John Key, saying that we are leaving people out in the cold because we are not spending as much as we should. Then there is the Green member and others who are also saying that. Dr Brash is complaining about high interest rates and is then promoting policies, like spending millions of dollars on law and order—hundreds of millions of dollars, probably; we wait for the dollar signs to come out—and massive tax cuts, which would promote inflation. They would be inflationary and would provide again another pointer for Dr Bollard to raise interest rates on Kiwis.

Of course, as Dr Cullen has said, we cannot really have it both ways. In the last couple of weeks we have seen the softening of the National Party on every particular point at issue that the people have rejected the National Party on in the last couple of elections. With regard to superannuation, there was a very interesting pamphlet—a bit of National Party propaganda—that said National would keep the age of entitlement right, and it would not alter or tinker with the mechanics. But it left out a little bit in terms of the rate: whether the rate would actually stay the same under a National Government. That is the little piece of information that is probably the most sought after by our elderly folk—the rate of superannuation. It was just left out in the ether somewhere and was fudged. There was no mention of it.

National members have had a turn around on asset sales. They say they will not sell assets, except maybe for one or two, such as some of our best-performing State-owned enterprises, like Landcorp Farming.

💬 Hon Dr Michael Cullen: Three or four.

Or three or four, Dr Cullen says. Then there would be massive spending on health; massive spending that will outdo us—they say—on law and order, but not one dollar figure has been put beside the promises.

I look forward to the next election, because I will stand up on the stump and say: “This is what I said I would do. This is what the Labour Government said it would do. Don’t trust us by our words, trust us by our actions.” I will lay that side by side against the only legacy that the National Party has on financial matters, health matters, social security matters, and social welfare matters. The only legacy those members have was 6 years ago.

Unlike some members opposite who pray that voters are stupid and have short memories, I believe that voters will come home because they can remember the triple cut in superannuation. They can remember the selling out of State-owned enterprises. They can remember all the hospitals being underfunded. They will remember that, and it will become an issue of credibility.

I want to also address for a moment the issue of tax cuts and the argument that we are not doing enough. Well, there is an argument—tax cuts versus Working for Families. That is a spending package I am proud of, because of what Working for Families will do for a family of mum, dad, and four kids on $55,000, which was not a bad income 10 years ago. That family is looking at an increase of $150 a week extra in the hand. Maybe we should not use the term, but we could call it a targeted tax cut, because it is taking money—the wealth of our economy—and redistributing it to the working families, at the bottom of the heap, who need it the most. To get anywhere near that amount, the same family would require a 9.5 percent tax rate, which National would not even deliver, and that is where the credibility starts and finishes.

Well, we have heard the Minister of Finance, and the chairman of the Finance and Expenditure Committee, who is also a Government member, and we have heard very, very little about what the Government stands for and what it intends to do. We have heard everything about what the National Party is doing wrong or is supposedly doing wrong, but we have heard very, very little about what the Government will do. I will give the member a little credit. He spoke about Working for Families and he recognised that it was a targeted tax cut, which it is. But there was not one mention—not one single mention—about the current account deficit. If I am correct, it stands currently at $9.3 billion. That is up $4 billion from last year. There was not one mention of that. That was all fudged over.

Put simply, we are living too much on credit in this country. There is too much profit being made by overseas organisations based here that is being shipped back to wherever those organisations came from, and there are too few savings being made by the average New Zealander. The average New Zealander likes imports, and buys imports that maximise the value-added content; whilst going in the reverse direction, our exports contain little value-added content. The average New Zealander is hurting.

💬 John Tamihere: Yes, listening to you! Ha, ha!

The members laugh. Their own colleague has just said that a family on $55,000 a year needs to have financial assistance. If people are hurting at that level, how are they hurting when they get down to $18,000, $19,000, or $20,000 a year? They are hurting. And what is the Government doing? Come April Fool’s Day, it will put another 5c a litre on petrol. We have heard the Greens talk about the price of oil. When people talk about the price of oil, they basically think of petrol prices. What will the good Minister of Finance do? He will make the price over $1.30 a litre for 91 petrol, come April Fool’s Day. I say to the Minister that it is appropriate that he is doing it on April Fool’s Day, because he is making fools of all New Zealanders.

💬 Hon Dr Michael Cullen: Have you seen the price in Britain?

I think the Minister said to look at the price in Britain—but we should also look at the wages in Britain. We should look at the price in the USA and in Australia, and look at what the Government here is taking in terms of tax on a litre of petrol.

💬 Hon Harry Duynhoven: Five cents a litre in Venezuela.

I do not believe that the Minister who is shouting out really believes what he is shouting out. I believe he shares my view that it is outrageous that in this day and age we are taking 18.5c per litre and putting it in the Government’s coffers at the expense of roading.

Let us look at what is happening in the electricity industry. Let me read to the Committee a quote from Genesis Energy’s annual report: “Genesis Energy has been concerned at the lack of available information regarding New Zealand energy demand and implications for the industry.” That is a very telling statement. In other words, Genesis Energy does not believe that anybody has a clue what is going on—so much so that it further states: “Genesis Energy commissioned a research report prepared by the Centre for Advanced Engineering to obtain accurate supply and demand information for future planning.” [Interruption] I am telling the member that he should go to his own electorate, particularly in the winter, and ask his constituents whether they are happy with power prices, and whether they are happy that prices will go up and up.

He should ask his constituents whether they are happy that their wages are keeping pace with their electricity bill. I can tell members that I have had more photocopies of electricity bills sent to me in the last few weeks than I have ever seen in my life. [Interruption] Those are the members who think Labour people will look after them. I can tell members that the average New Zealander is exceedingly concerned about the price of electricity. I am referring to the low paid and to people on fixed incomes, and I have a great deal of personal sympathy for them, but I am also talking about business people, who are finding that the price of energy in this country is going through the roof. If this country wants and needs to be competitive—and New Zealand First supports all that—then we must stabilise the price of electricity at a reasonable level. Equally, we must target roading in this country, and use the money the Government takes from petrol motorists for roading.

💬 Clayton Cosgrove: That’s what we do.

The member is full of talk. If he took only 1 hour to read the Allen report, he would be much more educated on the importance of roading in this country.

Reports noted.

Office of the Auditor-General