Motions — Reserve Bank Funding Agreement—Ratification

I move, That pursuant to section 161(2) of the Reserve Bank of New Zealand Act 1989, the 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 of that Act on 8 June 2010 and presented to the House on 18 June 2010. The activities of the Reserve Bank have become significantly more extensive since the last time that Parliament ratified the Reserve Bank Funding Agreement. Five years ago the Reserve Bank had assets of around $12 billion, and it now has assets of $31 billion. In fact, it holds half of all the assets that the Crown holds through financial institutions considerably larger than the New Zealand Superannuation Fund and about as large as the New Zealand Superannuation Fund and the Accident Compensation Corporation combined. It is our most significant Government-owned financial institution by some considerable distance.

Interestingly, the growth in the size of the Reserve Bank’s activities occurred during a time when the economy was growing, and over the last couple of years it has been relatively stable. This is in sharp contrast to other central banks around the world that in the last 2 or 3 years have, in a number of cases, seen their size treble as they have taken on the assets or liabilities of struggling banking systems. We are fortunate to be considering this agreement in the context where the Reserve Bank has neither been unduly affected nor had its responsibilities stretched by a stressed banking system, although there has been some relatively small impact on the Reserve Bank’s balance sheet.

The Reserve Bank’s operating expenditure is funded from gross income, under terms established by the Reserve Bank of New Zealand Act 1989 and the 5-year funding agreement. Section 159 of the Reserve Bank of New Zealand Act requires the Minister of Finance and the Government to enter into funding agreements for successive periods of 5 years. The current funding agreement was signed in April 2005, varied in April 2008, and expired at the end of June 2010. This motion sees the Reserve Bank’s operating expenditure profile increase from $46.9 million in 2009-10 to $47.8 million in 2010-11, then increase to $56.4 million by the final year, 2014-15. This increase in expenditure reflects the additional responsibilities that Parliament has given, or is in the process of giving, the Reserve Bank, as well as ensuring that the bank maintains the capability to carry out its functions effectively now and in the future. In the light of the financial crisis of 2008 and 2009, we pay a good deal more attention to the Reserve Bank’s ability to carry out its function of maintaining stability in the financial system.

Changes to the Act in 2008 gave the Reserve Bank responsibility for the prudential oversight of the non-bank deposit takers. Under the Insurance (Prudential Supervision) Bill the Reserve Bank will shortly take on responsibility for the prudential oversight of insurers. The Reserve Bank also has a new role to play in the complex operation of anti - money-laundering and countering financing of terrorism.

As well as resourcing the bank to undertake these new responsibilities, the funding agreement provides for the upgrade of New Zealand’s banknotes, which will be 15 years old by the end of the agreement. Provision is also made to maintain the current capacity and quality of policy teams and information technology systems. This Government is committed to ensuring that rigour is brought to the expenditure of all public moneys, including that by the Reserve Bank. We have not increased funding without strong justification and clear benefits. Accordingly the new 5-year funding agreement has been developed in an environment of considerable scrutiny. The bank has had to convince the Government that its activities will provide value for money. Equally the Government has had to ensure that the bank is adequately resourced to carry out the significant new functions that Parliament is handing to it. The agreement reflects tight control of underlying costs, and reprioritisation within existing funding levels to absorb a range of cost pressures.

Our central bank has a reputation for efficiency and effectiveness. The Government expects it to continue to deliver excellence in outcomes while providing leadership across its entire range of activities. The Governor understands the need to use the resources he has available to best effect. Although New Zealand did successfully navigate the global financial crisis, much still needs to be done, and in this agreement we are ensuring that the Reserve Bank has the resources to complete the job. Ratification of this new 5-year funding agreement is evidence of a commitment by Parliament that the Reserve Bank remain operationally independent, and that it is equipped to handle the roles that Parliament has given it as a prudential supervisor, to ensure that the Reserve Bank can fulfil the functions that many central banks have now taken on to underwrite financial stability. I therefore ask for the House’s support in ratifying this new funding agreement.

Labour supports this motion and recognises the valuable role that the Reserve Bank of New Zealand plays in conducting monetary policy and prudential policy, and, as the Minister has correctly pointed out, being the custodian of New Zealand’s single largest financial institution and portfolio. This provides an opportunity to commend the bank for the admirable role it has played during this period of significant tension and challenge. It is largely thanks to the bank that New Zealand has come through this period of monetary crisis—

💬 Hon David Parker: And the prior Government.

—and the prior Government; Mr Parker is quite right—in the good shape that it has.

In saying that the Labour Opposition supports this motion it is very important to note that this motion represents an extraordinary wasted opportunity. The Prime Minister has said that New Zealand has the best monetary policy in the world, and Mr English has said that there is absolutely no reason to change any aspect of monetary policy in New Zealand. What is fascinating is that those two speakers are now increasingly isolated in a world that has responded to the recent global financial crisis by a fundamental review of monetary settings and institutions.

In these brief remarks today Labour will set out the nature of the problem, the effects on the New Zealand economy, the moves that Labour is making to seek policy reform in this area, and an outline of the approach that we will be taking when returned to Government. Very simply, Labour is on the side of the real New Zealand economy. Labour is not on the side of soft-shoe speculators who have been, in many cases, profiteering from the stress that the financial crisis has placed on ordinary New Zealanders. The reason they have been able to do that is that we are still using a monetary framework that was designed for a previous time under previous conditions and is now overdue for reform.

What is the nature of the problem? The problem is that the New Zealand dollar is highly traded—so highly traded that it is one of the most highly traded currencies in the world in absolute terms. It comes in ahead of Mexico’s currency and Singapore’s currency. It comes in ahead of the yuan, the South African rand, the krona, the rouble, the Indian rupee, the renminbi, and the Brazilian real. Some of the major economies of the world are dwarfed by the trade in the little old flightless Kiwi dollar. It is extraordinary.

The question that must be asked is, firstly, why this occurs and what effect it has. Traders have been telling us that one of the reasons the New Zealand dollar is so extremely highly traded is that it is such a clean float. There is almost no intervention—or very seldom—in the operation of the foreign exchange markets. We have a very clear and hands-off policy framework, and that reduces some of the business and financial risk for the speculation industry. That is inappropriate in light of the effects.

One of the effects is that we have made worse the volatility of our exchange rate. We would be the first to admit that the volatility is driven by a range of factors, some of which are beyond our control. Some of them are the risk preferences of foreign institution investors, but some of them could be attenuated if we had a regime that provided stricter oversight on speculation. Of course, we have an average level of our exchange rate that has partly been fed by the financial inflows. The effect has been to inhibit exports, to undermine New Zealand’s real economy, to benefit the banking sector, and to contribute to the real estate bubble that has been extreme in New Zealand, to everybody’s detriment. We have had a single-tool, single-goal approach that is now increasingly looking archaic in an international context.

The second problem is that the world has changed but New Zealand’s Government has not caught up. Even the Reserve Bank has acknowledged this in recent Bulletin articles and in statements by the governor. For change we have institutions like the International Monetary Fund, the G-20, the Basel committee on banking, the Bank of Japan, the Reserve Bank of Australia, the Federal Reserve Board in New York, arguably the Reserve Bank of New Zealand, and the New Zealand Labour Party, for sure. Against change we have John Key and Bill English, and, possibly, the Bank of England. That is a pretty small group.

What would Labour do? Labour has been working on this problem since last year when we announced that we believed reform was essential. Our leader, Phil Goff, made public statements that Labour was withdrawing from the previous consensus, and I underline “previous consensus” because I believe that it no longer exists now in any case. We set up a thoroughgoing research process, which has been led by my colleague the Hon David Parker, and in recent weeks, in speeches made by David Parker and our leader the Hon Phil Goff, Labour has set out its new approach.

First, we would move beyond the single-tool, single-goal approach. We will do that responsibly. We will retain the independence of our full service and well-run Reserve Bank. We will retain the primary focus on inflation control, and we will retain the 1 to 3 percent target range. But we will change the Reserve Bank of New Zealand Act. We will review the Act and change the goals and objectives to more closely mirror those of our near neighbour, the Reserve Bank of Australia, which includes growth, employment, and giving benefit to the sovereign territory of Australia amongst its objectives. We believe that having similar goals in New Zealand is important.

We would change the policy targets agreement to reflect that new approach, and we would broaden the tool kit in several respects. The Reserve Bank of New Zealand has elaborated important change in the area of macro-prudential policy and has, in our view, rightly advocated that this should be used in a counter-cyclical manner to assist the official cash rate to stabilise monetary conditions. We agree. We believe it would be proper for this Parliament to agree, through an amendment to the Reserve Bank of New Zealand Act that specifically provided for an important counter-cyclical role for macro-prudential policies such as the core assets ratio, because, at present, it can be used—arguably, with a little bit of sleight of hand—by saying that it is only a secondary effect of direct prudential policy. We think that a more transparent approach would be appropriate in the new international environment.

We are giving active consideration to the imposition of a tax wedge on international borrowing, as recommended by the Reserve Bank in a previous review. We have excluded the imposition of a variable rate goods and services tax. We have excluded any consideration of a mortgage interest levy. We have excluded widening the inflation target range. We would encourage a more active role being taken by the Reserve Bank of New Zealand Act in the operation of the international New Zealand dollar currency market.

We have excluded pegging, or banding, the New Zealand dollar in a strict sense, but we believe that the New Zealand Reserve Bank is amongst a very small number of institutions that take such a hands-off approach that it reduces the business risk to speculators and makes volatility of the New Zealand dollar worse by attracting more speculators to our currency. We would note that on the few occasions when the bank has employed its intervention and stabilisation fund according to the current policy targets agreement, it has made a handsome multi-hundred-million-dollar profit, which it has returned to the taxpayer in the form of a dividend. So we do not accept, given the skills of our central bank, that it would be impossible for it to repeat the performance, on average, with more consistent intervention to impose more costs on speculation.

We will be following the further evolution of the G-20 commitments and the G-20 reform process, and we will be looking to support, as the Minister has indicated, the prudential role of the bank in insurance and the non-bank financial sector.

In summing up, I say that around the world in the wake of the global financial crisis, Governments of developed countries know that monetary policy must change—that is, all Governments, apparently, except the New Zealand Government, where we have a Prime Minister and a Minister of Finance who are still stubbornly pretending that the tide can be stopped on the beach and that Canute is alive and well. Monetary policy needs reform.

I rise to speak to Government motion No. 3 about the Reserve Bank’s funding arrangements and agreements. The Green Party will be supporting this motion. This motion raises much broader issues, which the previous speaker, David Cunliffe from the Labour Party, has discussed. I think the member addressed those issues well. I will address some of the issues with regard to how we can deal with some of the underlying objectives of the Reserve Bank. Its objectives are to keep inflation low, to maximise employment, and also to have a stable currency. These objectives are not all part of the Reserve Bank of New Zealand Act currently. One of the changes that needs to be made is that some other objectives need to be incorporated within the Act, as they are in the governing legislation of other reserve banks around the world.

I will discuss this issue particularly in relation to the asset bubble that we saw through the 1990s and into the beginning of this century, which has only recently collapsed since the global financial crisis. That was the housing asset bubble in New Zealand—a classic example of why the current policy settings do not work. A classic asset bubble came out of the housing market. The Reserve Bank tried to squash it because it saw it as a source of inflation within the economy—quite rightly, because households felt they were richer, so they were spending more—and it tried to squash it with higher interest rates. But increasing the interest rates only drew more capital into New Zealand. At least in the short to medium term, that blew up the housing asset bubble even further by drawing in more and more capital, which was attracted to the high interest rates in New Zealand. The banks were very happy to funnel that capital into the housing market and to clip the ticket along the way and make a very fine profit.

The other side was that as banks increased the interest rates, they increased the cost of borrowing for the productive sector. They also drove up the value of the New Zealand dollar, as more and more money came into New Zealand and drove up the cost of the dollar, and that made it harder for the tradable sector. In many ways, that was not the ideal outcome, and monetary policy was not acting in the best interests of the New Zealand economy. It was adding to the imbalances in the New Zealand economy, particularly through the destruction in the tradable sector—that is, businesses that are competing with imports, and businesses that are trying to export—by driving up the value of the New Zealand dollar. It also made it harder for the productive sector, because it had to borrow at high interest rates.

It seems to me that this is a classic example of where the Reserve Bank not only needed to have multiple objectives and more than one tool but also needed to have the different tools in the tool box operating together. If we were to address the housing asset bubble, we needed to take much more of a comprehensive approach to deal with it.

The first thing was that a capital gains tax excluding the family home would have had some downward pressure on the housing asset bubble. The Reserve Bank does not have access to the means to introduce a capital gains tax, but in terms of having a comprehensive approach to dealing with things like asset bubbles, it was one of the tools in the tool kit that the previous Government did not use but could have used during its last term, when the housing asset bubble came up.

The other side of it was to change the tax system, particularly with regard to loss attributing qualifying companies. In the tax system, these companies were set up to encourage speculation in the housing market, so this tool could have been used in parallel with anything that the Reserve Bank had, pushing up interest rates, in order to try to reduce the asset bubble. We could have also limited the sale of New Zealand land. The Greens support a policy of having New Zealand land for New Zealand citizens, residents, and entities. Limiting the sale of New Zealand land would have also placed downward pressure on the housing asset bubble. The other side of it was to increase the manufacture of public housing to also put some downward pressure on the housing asset bubble—particularly in the rental market, where affordable public housing was so short. Furthermore, we could have had urban development rules that would have encouraged medium-density housing around transport routes.

These kinds of measures may seem a long way from monetary policy, but they are totally connected to monetary policy, because the Reserve Bank was trying to deal with a problem coming out of the housing sector by using one tool, which was interest rates, or the official cash rate. The problem is that trying to use the official cash rate to address a very complicated problem like the housing asset bubble simply did not work. In fact, it had all of these negative consequences. What we needed to do was to use all of the tools available to us. Some of those tools were available to the Government, such as urban development planning, so that we could have an increase in the supply of medium-density housing, which would mean more public housing. Some of the tools were available to the Government and some of them were available to the Reserve Bank. Putting all of these tools together would have allowed us to address the issue that was obvious to everybody, which was that we had a housing asset bubble.

A lot of people did not want us to address the housing asset bubble, because they were making a lot of money out of it. The banks were part of the problem, and the real estate and property sector was part of the problem, as well, because they were all making a fortune out of it. But it was really bad news for the New Zealand economy. What we need to do in terms of reforming our approach to monetary policy is to say that these different tools and levers need to work in sync with monetary policy and need to support it.

The other side of it, which I think we need to explore, is the use of capital adequacy ratios, which is a Reserve Bank tool. But it should be used explicitly not just for prudential reasons but for monetary policy reasons. The Reserve Bank currently uses prudential policy to have the secondary monetary policy effects, which is fine, but we need to say that it is OK to use some of the prudential measures directly for monetary policy purposes. We need to be open about it.

The capital adequacy ratios can work in different ways. One way is to target the asset bubble class themselves. We need to say to the banks that if they want to lend into the housing market, if that is the asset class that has the bubble, then they need to have a greater proportion of cash on hand, or triple A rated assets on hand, before they can lend into the housing asset bubble. That makes it harder for the banks to lend more and more money into the asset class that is of concern in terms of a bubble. We can change the capital adequacy ratios in order to directly target the asset bubble, rather than simply using interest rates across the board to push up the price of money across the whole economy.

The other way we can use capital adequacy ratios is in a counter-cyclical way. That is, we say to the banks that during the normal business cycle, during the upswing when it seems like they can lend more and more money because we are seeing the inflation in asset prices, we can increase the capital adequacy ratios, and relax them during the down cycle. Instead, at the moment, during the up cycle the banks look at the value of the assets and can lend more and more money based on the value of those assets. All they do is inflate the bubble. Then on the downward side, as the value of the assets is static or the banks are short of credit, they close down credit right across the board, which means that it exaggerates the downward trend on the other side. We need to use capital adequacy ratios not only to target particular asset bubble classes but also to reduce in a counter-cyclical way these kinds of bubbles. Those are a number of tools we have available to use in parallel.

The other tool that I think we have not really considered properly in New Zealand is the use of a Tobin tax. A Tobin tax is a tax that applies to international currency transactions. It has been supported by the Canadian Parliament previously, and I think we need to have a position working with other countries to support a Tobin tax right across the planet. The idea of a Tobin tax is to increase the cost of international currency trading, which, if you like, puts a bit of grit in the wheels of international currency traders, so that it slows down the movement of currency trading. New Zealand has a problem with a very volatile currency, which has a dramatically negative impact on the productive sector in New Zealand, so that if we were to slow down some of the volume of currency trading, we could slow down some of the volatility in the New Zealand dollar, which would be tremendously helpful.

The other part of it that I just want to touch on very briefly is that we have some issues, and there will be further issues, around structural inflation pressures, which the Reserve Bank struggles to deal with. Oil is likely to become a structural inflationary pressure in the New Zealand economy over time. As the price of oil continues to go up, it will have continual inflationary effects in New Zealand. I think we need to think carefully about how we can reduce the vulnerability of the New Zealand economy to oil price shocks that are very likely, when the previous Government did the opposite by making us more dependent on oil. We also need to empower the Reserve Bank to look not just through short-term price shocks, which it is currently empowered to do, but also through long-term structural price shocks. If we say that oil prices in the long term are bound to increase, then it becomes a structural inflationary effect on the New Zealand economy, and we need the Reserve Bank to be able to look through that as well.

The last thing I will say is that anyone who has seen the movie Inside Job, currently on at the film festival, and anyone who has seen the tax avoidance activities of the New Zealand banks will know that it is absolutely essential that we have a strong regulator. For that reason, we support this funding agreement.

I rise on behalf of Labour to speak in respect of the 5-year funding agreement of the Reserve Bank, which is being discussed at the moment. Labour supports the motion, but makes the point that a lot more reform is needed in respect of monetary policy. As Russel Norman has said, and as David Cunliffe agreed before him, there is a problem with current monetary policy in New Zealand. What was world leading and right at the time when monetary policy was introduced in the late 1980s, when New Zealand had rampant and out-of-control inflation, now needs to be updated, because it has had some perverse effects in the last decade. Most notably, the world has changed substantially in the last 2 or 3 years, as a consequence of the international financial crisis and the lessons that have been learnt from it.

I will restate my view and the Labour view on some of the current problems with regard to monetary policy. There is no doubt that in order for New Zealand to improve our relative wealth amongst the countries of the world and to maintain the quality of services that we want to have in health and education, we have to do better than we have been doing relative to the rest of the world. In order to do that, we need to increase our growth in exports. At the moment we are running quite a large current account deficit, and we cannot become wealthier as a country until we export more than we import—and in those exports I include the investment flows: the interest that we pay to overseas lenders, and the dividends that flow to the overseas owners of New Zealand assets. We cannot reduce our current account deficit if the settings in our economy are not conducive to an export economy. Our settings at the moment are not conducive to an export economy. Monetary policy is one of the settings that is not quite right.

That has a couple of impacts on New Zealand. It is now abundantly clear that New Zealand’s long-term interest rates are higher than those paid by the competitors of our New Zealand export businesses when they are operating in other parts of the world. New Zealand businesses that try to invest in sophisticated plant and machinery in order to improve their productivity and compete against international competitors—be they competitors in China, the United States, Europe, or Japan—face higher interest rates, because we have ourselves on the track towards perpetually higher interest rates. I know that at the moment our interest rates are not higher than Australia’s; they are pretty much the same as Australia’s. But that is pretty rare in the longer term, and it is because Australia is one of the few Western countries of the world that are still booming. If we look at ourselves compared with all of those other countries, be they Japan, Australia, or the European countries, we see that our interest rates are higher than the rates in those countries. Our exporters face that disadvantage.

In addition to that, our exporters face the problem of having an incredibly volatile currency. It has been said by some economists that our commodity prices and currency act as a hedge to each other, and that may well be true in respect of the dairy sector. If dairy prices go high, the currency reacts and goes high, and conversely when dairy prices drop, the exchange rate drops a little. There is a bit of a natural hedge perhaps in respect of major commodities like dairy products. But that is not true in respect of manufactured goods.

I saw a presentation recently from Rick Boven of the New Zealand Institute, who was analysing the difference between New Zealand’s economy and the economies of other developed countries that are wealthier than us. He looked at the issue of whether we can bridge the gap between us and Australia by increasing either mineral extraction or agricultural output. It was abundantly clear that the difference between New Zealand and Australia in respect of minerals is only about 10 percent of the difference between the two economies. Although the Government said a couple of months ago that mining would be the panacea for New Zealand, and that moving in on minerals in the national parks and the like would bridge the gap in a large way between New Zealand and Australia, that was never the case. It was never the case in theory, and, of course, it is never going to be the case in practice now anyway, because the Government has now abandoned its attempt to mine in national parks.

If we are to become wealthier as a country relative to other countries and get back up the OECD rankings, we have to increase our exports. At the moment our monetary policy, with its effects in terms of creating a higher and volatile exchange rate and higher entrenched interest rates, is curbing the performance of the export sector. If it is riskier for our exporters, relative to investment in export industries by competitive producers of those same manufactured goods in other jurisdictions, it is then absolutely true that there will be less investment in the expansion of those important export industries in New Zealand than would be the case otherwise. So we will not bridge that gap as we ought to.

I agree with what Russel Norman has just said in terms of the perverse effects of monetary policy in recent years. I am someone who can stand here with my hand on my heart and say I have been saying that since I have been here. I was on the Finance and Expenditure Committee when I first came to Parliament in 2002, and I said the interest rate differential between New Zealand and overseas countries was driving an inflow of capital into New Zealand that was being lent by the banks on ever-higher lending margins and ever-higher loans on the same securities. Those higher interest rates were, through the liquidity being introduced into the New Zealand economy, driving the very consumption pressures that higher interest rates were meant to curb.

The interest rate differential between New Zealand and the rest of the world has become a problem. Therefore, we need more tools for the Reserve Bank to control inflation with than just the interest rate lever, because the use of that lever is having two perverse effects. I have mentioned one, which is driving liquidity into the country and feeding the consumption pressures that it is meant to curb. But as well as that, given our reliance on overseas capital, every time we have an increase in interest rates in New Zealand, where does the money go? We export it overseas. We increase our current account deficit through the interest rate differential between New Zealand and overseas, because the majority of money that the banks have to fund their operations in New Zealand—their lending to New Zealand companies and individuals—is sourced from overseas lenders. When the interest rate goes up, the major beneficiaries of that money, that extra interest that is being paid by New Zealand borrowers, are the overseas lenders.

We currently have another strange effect. Because we have a current account deficit, we are very reliant on overseas capital flows. We are seeing increasing pressure by overseas interests to buy more New Zealand assets. The Government is deeply conflicted on this. On the one hand it says it does not want all of the Crafar farms to be sold to overseas interests, be they Chinese or otherwise, but on the other hand it says it is happy for a number of small ones to be sold to them. Personally, I cannot see the difference between one block of 20 farms and 20 separate farm transactions, but the Government seems to see some difference. The Government wrings its hands about that particular problem, but then it says it will loosen the foreign investment rules in New Zealand. I find that to be completely inconsistent. Bill English said he does not know what a strategic asset is. I can tell him that we in the Labour Party know what a strategic asset is. Anything that has monopoly characteristics, as in an infrastructure asset, is, in my view, strategic for two reasons. The first is that it will be extracting monopoly rents at one level or another, and the second is that it will be important to the wider functioning of the economy. Those infrastructure assets have importance beyond their own individual business units, because they facilitate the operation of other businesses.

Those sorts of assets ought not to be sold overseas. I ask why we are under such pressure to sell such assets overseas. It is because we have such an enormous current account deficit, and we have that because we do not save enough. In response to that, the Government has cut the incentives to KiwiSaver. Again, it is going in the wrong direction. This is another problem that we have because of higher interest rates in New Zealand. It is cheaper for an overseas owner to own a New Zealand business, borrowing from offshore credit lines, than it is for a New Zealand purchaser who is borrowing from New Zealand banks. I ask how that can be in New Zealand’s national interests. We have a set of policy settings that means it is cheaper for an overseas person to buy a New Zealand asset than it is for a New Zealand purchaser. In other words, all other things being equal, an overseas buyer can afford to pay a higher capital price for the same asset. That has to be wrong. It is an outcome of current monetary policy settings; it is also an outcome of current savings and investment policy. We cannot cure that through monetary policy, but monetary policy can and should do some of the work. We need to put more focus on liquidity and flows of money, in addition to interest rates. The singular reliance of the Reserve Bank on an interest rate tool is out of date, and it is not in New Zealand’s interest. The National Government has its head in the sand.

I finish by quoting from Rod Oram’s Sunday Star-Times article. He said: “Given the new understanding growing overseas about the need to better manage fiscal misalignments in order to promote greater economic stability, plus the shift at home by the Reserve Bank and the Labour Party, monetary policy could become a defining issue at the next election.” I suspect that that raises the issue a bit too high, because most people do not understand it, but it ought to be a defining issue, because it is a very important one. This motion is a missed opportunity on the part of the National Government.

As indicated, the Labour Party will support the Government notice of motion from the Minister of Finance on the latest agreement with the Reserve Bank. However, we do so with a heavy heart because it is a missed opportunity, as my colleague David Parker so eloquently outlined, for a real consensus to emerge on some change to monetary policy settings. If I needed to learn a little about this issue, it came a couple of weeks ago at a forum of Canterbury exporters in my electorate of Christchurch Central. It was called the 2010 Thinking Export Forum. There were a couple of hundred solid, sensible Canterbury exporters gathered, and the opening address came from the Prime Minister. He told that forum: “New Zealand has the world’s best policy when it comes to monetary policy.” It was a Canterbury audience, so we did not flinch or sneer or show disdain for such a comment, especially when it is being given by a Prime Minister, but the body language was indicative. Any Canterbury exporter who is still in the exporting game has remained so through extraordinary ups and downs, in large part set by our current monetary policy. When we have 12,000 jobs lost in Canterbury over the last 12 months or so, many of them from the residual base we have in manufacturing and exporting, we are saying clearly that something needs to give. At the moment, more and more jobs are giving. That comes in part from the current setting and focus we have, where the Reserve Bank focuses solely on inflation, but the Prime Minister does not accept that. He said to the audience that it was not true that the Reserve Bank’s only focus was inflation.

I would like to ask what else there is in the policy targets agreement with the Reserve Bank, other than inflation. My reading of it suggests that that is what is referred to. The Prime Minister said that New Zealand currently has the lowest inflation rate in memory, but that the New Zealand dollar was still high so there could be no correlation between monetary policy and other settings. One has to say, hello, there has been a world recession and it has driven down inflation across the planet. Other nations’ currencies have declined much more than ours, but I believe that what has held ours up in some good stead has been in large part the economic settings of the last Labour Government and some of the work we did to reduce Government debt. In fact, we halved it during our time in office.

I again quote the Prime Minister addressing that Canterbury exporters’ forum. He said: “No OECD country owes more to foreigners than New Zealand, but it is mums and dads, not the Government, that owe the debt.” That is true, but it begs the question as to why Labour’s record in office, when we halved the debt down to 17 percent of GDP, constantly comes under denigration in this House. Another comment from the Prime Minister to that Canterbury exporters’ forum was: “At some point, international currency markets will respond and the exchange rate will come down.” I ask how long the export sector has to wait for that day to come and how many more jobs will be lost in the interim. I would like the Prime Minister to address those questions, because, as I mentioned, we have seen 12,000 jobs go in Canterbury in the last year already. That is a very high cost for a dollar that remains stubbornly high.

Not only that, it is the fluctuations in the dollar that create all of the problems for the exporters. When we have a dollar that has been below 50c and is nudging 80c in the last year or two, how on earth do we plan, prepare, and try to make a living in foreign markets when our margins fluctuate by that amount? How on earth do we make a living when we are exporting to the British market, which, once upon a time, meant nearly $4 to the pound and today is around $2 to the pound?

Late last week I was in Marlborough, talking to some in the wine industry. They were expressing very real fears that we will see more Marlborough wine companies close or go into receivership in the not-too-distant future. This is in large part because, first, the dollar remains stubbornly high and it is particularly attached to the British market, as many will know, and also to the American market and the Australian market, all with their own particular issues. Second, the wine is often being sold below the cost of production. That is being driven by some of the foreign companies coming here, sucking up the wine and taking it back and selling it below the cost of production. That costs Kiwis their jobs and it costs Kiwi companies. That situation is aligned, in part, to the fact that our monetary policy setting is not working for exporters.

I quote, again, from the Prime Minister’s address to the Canterbury exporters’ forum, which was an open forum and at which the media were present: He said: “The Government is focused on improving New Zealanders’ savings.” Well, the slogan on the Tui billboard comes to mind when we consider that this Government cut the employers’ contribution to KiwiSaver from 4 percent to 2 percent to help fund the first round of tax cuts, and that despite the New Zealand Superannuation Fund having bounced back there are no proposals from this Government to put funding back into the fund. Although that is a working source of capital and an alternative to foreign borrowing, we will not see that funding reinstituted under this Government’s policy setting.

So again we heard the Prime Minister commenting on the issue of monetary policy setting and effectively pooh-poohing the idea that we could look at this issue, review it, and make some changes in line with what Australia has managed to do. He said: “Playing around with a few words in the Reserve Bank Act isn’t going to make a difference. Trust me!”. Should we trust the Prime Minister on that issue? Maybe what we need are 40,000 exporters marching down Queen Street so we can show the Prime Minister that the current monetary policy setting is not working, is not accepted, and is not liked by New Zealanders. It is costing them jobs, it is costing export income, it is to the detriment of this country, and we really need to see some changes made. So rather than sticking to it like glue, why do we not see the Government and the Prime Minister acknowledge the problems that are being created by the fixation of a monetary policy focused only on inflation, and look at what other nations are doing.

Let us look at what Australia is doing, with its recipe that says one looks at the health of the whole economy, at employment, at the export sector, and then frames one’s reserve bank targets around those issues. That does not mean going soft on inflation; it simply means that we need to look across the board at the whole economic setting. Nobody wants to see rampant inflation again; that is an awful price to pay. But if we have only the one setting, then that is what the Governor of the Reserve Bank will deliver on and that is what the costs will be to our export sector.

I note also that although the Government is talking exports, even with our monetary policy setting as it is, in Christchurch we have seen the halving of the staffing of the New Zealand Trade and Enterprise office. That office has assisted many smaller Canterbury exporters but they are no longer able to get the assistance they were once able to get in Christchurch for advice, facilitation, and encouragement to get out into export markets. If they need to, they can of course get on the phone to Auckland and Wellington, but the word is that they really will get assistance only if they are a bigger company trying to grow their cake rather than being a small entrepreneur needing a bit of advice and assistance to get out there in that world, already made difficult by the current monetary policy setting. So it is a double whammy for them as Canterbury exporters. Not only are they facing a prevailing high set of interest rates, driven off our monetary policy and not only are they seeing the difficulties of trying to find capital but also they are not getting the assistance and support they were once able to get through the New Zealand Trade and Enterprise office, which is down from 18 staff to nine in Christchurch.

The key thing I would like to say is that we have the Prime Minister all over the place on this issue. He wants to see more foreign investment; he does not want to see the Crafar farms sold; he is saying that he wants to liberalise further the foreign investment laws. We have a dollar that remains persistently high, and interest rates are remaining high, sucking in more and more foreign capital. That is what is happening. That is why we need a review of the Reserve Bank’s policy targets.

Section 159 of the Reserve Bank of New Zealand Act 1989 requires the Governor of the Reserve Bank and the Minister of Finance to enter into agreements that provide funding for the bank’s activities. The agreement is a 5-yearly one that specifies how much of the bank’s revenues can be retained by the bank to meet its operating costs, with the remainder going to the Government. Such funding agreements become effective in law only when they are ratified by Parliament, and that is why we are here to debate the relevant issues.

Labour supports this motion, but we reiterate that it is a missed opportunity to address one of the critical economic issues facing New Zealand, and that is our monetary policy setting. In 2009 the Labour Party withdrew from the cross-party consensus on monetary policy. Labour believes that the policy is in need of reform and that it has been one of the underlying limits on our economic performance relative to wealthier developed countries.

I recently listened to the Hon David Parker when he spoke to the New Zealand Manufacturers and Exporters Association in Auckland in June. The heading of his talk says it all: “Monetary Policy Reform for an Export-led Economy: Labour’s direction”. The efforts of the Reserve Bank to rein in inflation were formalised by the late 1980s. By then New Zealand had been suffering from high and erratic inflation averaging between 10 and 15 percent for close to two decades. The Reserve Bank was given independence and a mandate to pursue price stability to preserve New Zealand’s purchasing power. However, as argued by the Hon David Parker, it is at the very least arguable that the New Zealand prescription of monetary policy was applied in too Draconian a fashion in terms of how high interest rates were pushed and in too lax a fashion in terms of credit flows into New Zealand.

The New Zealand export sector is roughly 30 percent of GDP or about $40 billion. Broadly, primary production, processed primary production, and manufactured goods each contribute one-third of New Zealand’s export sales. According to the New Zealand Manufacturers and Exporters Association our tradable sector has been in decline since 2003. New Zealand has slipped in OECD rankings from 5th in 1950 to 23rd in 2007, and well into the lower-middle bracket of global income per capita. Much of the decline of the tradable sector can be attributed to currency instability and uncertain returns in the medium term for efforts in export markets.

It is worth noting that a 1 percent change in our terms of trade can have an impact of around $400 million, and we have witnessed changes of over 30 percent a month. Furthermore, if our economy fails to develop and instead produces ever-simpler products, we will not develop skills in our labour force and we will see local wealth polarisation. We will all be part of an ever-poor New Zealand and we will witness a widening gap between what the world has to offer and what New Zealand can afford in health, infrastructure, and general consumption.

I agree with the New Zealand Manufacturers and Exporters Association that New Zealand is too small an economy to amortise the research and development costs associated with added-value products on sales to our domestic market. To recover the costs of added-value development New Zealand must sell to the world. Only successful export and trade can increase wealth and improve our living standards.

As a member of the Finance and Expenditure Committee, I had the privilege of participating in the parliamentary banking inquiry initiated by Labour, Progressive, and the Greens. The submission by the New Zealand Manufacturers and Exporters Association is worth noting. It said: “The “must-trade” imperative must be at the forefront of our policy design if greater investment, and consequently higher growth and productivity in the export sector, and ultimately our entire economy is to be anticipated.” The inquiry found that our commercial banks, which are largely owned by Australians, did not pass on the full effect of reductions in the official cash rate to their customers.

Statistical evidence produced to the inquiry showed that although most interest rates have fallen since the global financial crisis began, major banks had not passed on the full impact of official cash rate cuts into short-term interest rates charged to customers. As the Hon David Cunliffe, who chaired the inquiry, said, the Government failed in its responsibilities to hard-working Kiwi families and taxpayers by refusing to even take part in a bipartisan inquiry.

The inquiry recommended more policy work to explore reforms to better align bank supervision, monetary, and taxation policies. It is appropriate for me to emphasise what the Progressive party leader, the Hon Jim Anderton, said during the inquiry—that party politics should be put aside in search of monetary policy that supports people who produce tradable goods rather than those who speculate on property and take the profits offshore.

Although the Reserve Bank cut the official cash rate from its high in mid-2008 of 8.25 percent to only 2.5 percent, banks kept a 1 percent margin in interest rates for themselves.

💬 Hon Gerry Brownlee: Free Tibet.

The reality is, if that member is interested in knowing, that 1 percent extra interest adds $787 million in costs for New Zealand businesses, $460 million extra to the cost of loans in the farming sector, and $1.6 billion to the cost of mortgage repayments.

💬 Hon Gerry Brownlee: What about Tibet?

Well, I welcome the member to the debate if he wishes to join in.

So what should we do? I ask that member whether he is really interested in knowing. In March 2004 Labour introduced an important change to enable the bank to pursue a more active role in foreign exchange markets. This assisted the economy by tempering exchange rate volatility and moving New Zealand monetary management closer to Australian practice.

Another important change we would make, as the Hon David Parker noted in his speech, would be to amend the Reserve Bank of New Zealand Act to broaden its objectives. The objectives of the Reserve Bank of Australia are the stability of the currency of Australia, the maintenance of full employment in Australia, and the economic prosperity and welfare of the people of Australia. In contrast, our Reserve Bank is tasked solely with maintaining stability in the general level of prices.

Changing the objectives in the Act will not in itself sort out the problems we are faced with. It is a necessary but not sufficient part of reforming monetary policy. As the Hon David Parker pointed out, focusing on the medium term, not on the short term, helps. The core assets ratio can help reduce risk in our financial systems by anchoring reserve assets in known risk classes with a minimum onshore deposit funding requirement. This will share the load borne by the official cash rate. It can also create a stronger demand for domestic savings. Further, Mr Parker indicated areas Labour would not change. Labour will not undermine independence, will not widen the inflation target range, will not introduce a mortgage interest levy, and will not introduce a variable goods and services tax.

When Reserve Bank governor Dr Alan Bollard released on 30 June the Reserve Bank’s statement of intent for 2010 to 2013 he acknowledged that there was likely to be a debate on the role of monetary policy in managing financial misalignments. It is good news that Dr Bollard has confirmed that the Reserve Bank has been investigating the potential for other policy tools to help support its traditional official cash rate instrument in monetary policy, and will continue to look. Thank you.

Motion agreed to.