Reports — Reserve Bank of New Zealand’s Financial Stability Report, May 2010—Consideration of Report of Finance and Expenditure Committee

I move, That the House take note of the report of the Finance and Expenditure Committee on the Reserve Bank of New Zealand Financial Stability Report, May 2010. First of all, I would like to thank members of the Finance and Expenditure Committee. Members of this House will note when briefly looking through this report that the committee was generally unanimous, although there were some differences in some areas. Overall, I think that that reflects the importance of the really high-level framework stuff that this report addresses. I acknowledge the members of the committee, the officials who helped pull that report together, and, of course, Dr Alan Bollard, Grant Spencer, and Toby Fiennes from the Reserve Bank, who presented it to us, as they do every 6 months now. I think this is the fourth one we have had since a change of regulation in Parliament 2 or so years ago provided for reports to come out every 6 months. It is important to note the difference between this report and the Monetary Policy Statement, although members will be inclined to wander into that territory. They are all linked at the end of the day.

The good news is that New Zealand’s financial system is very, very stable. As noted in the report from the Reserve Bank itself and the report back from the committee, the general theme is that things are better than they were. All risks are still quite prevalent. There have been improvements—some within the control of these borders and some beyond the control of these borders. Generally, things are looking better. It is also important to note that this report came out on 20 May. In fact, we are now in August, which is 3 months later. It is amazing how quickly things have moved around the world, particularly in southern Europe over recent months, in and around Greece and Spain, and how what happens there affects how the rest of the globe looks at the New Zealand situation and any metrics that may come to their attention that align us up with perceived higher risk. Those are the glasses through which they are looking at many nations round the world. It is good to note, though, that the world is probably in a slightly better place than it was even in May, when this report came out, but the message to New Zealand is that it is still very, very tenuous indeed.

In the report itself—it may be of interest to those members who are not on the Finance and Expenditure Committee to pick it up off the Table—there is a very good diagram that the Reserve Bank introduced in an earlier report, and it is called the financial stability cobweb. It addressed many of the questions people would ask about the diagrams and all things finance. This is one diagram that the Reserve Bank has brought into the report—the bank is slowly improving it, of course—that shows in pictorial form, diagrammatic form, how things have improved, and the bank has quite solid metrics under that. As members can see on page 4 of the report, things have got better on the blue line, and the red line is behind.

One can see that the report starts in May 2009 and it looks at the trend until May 2010—until this report. On every single measure other than capital, which I will come to in a moment, financial market conditions have improved markedly since the last report, which was in November 2009. Even in the constraints of a recession and the tight cash market out there, there is still a measure of confidence and the domestic market, in a financial stability lens—that is what we are talking about here—has markedly improved, particularly in the last 6 months. Funding and liquidity have improved markedly. The global environment itself between November 2009 and May 2010, as in that report, also improved. Capital and profitability are still pretty much where they were, reflecting the squeeze on margins and the lower velocity of the economy, but a bit of confidence is indicated there, too. It is very noticeable that each and every one of those lines look better, although they are only a snapshot in time.

Looking forward, as can be seen in some of the graphs at the back of the report and in the commentary from Mr Bollard, again the message is that things are tenuous and we just have to keep our pencils very, very sharp as an indebted country—a country at the whim of the credit markets of the rest of the world. Like it or not, those so-called evil foreign bankers occasionally are the ones that have loaned this country $200 billion, so we need to make sure that they roll over those loans, at the very least, and have reasonable terms as our economy tries to address the principal at the very least, and pay it off.

This report picks up a lot of other issues and it looks at a whole lot of things, such as fiscal settings, monetary policy settings, liquidity changes and settings, which I will come back to, and the global environment overall, to name but a few. I tell members to remember that although it is often very tempting in politics to look for the silver bullet or to grab the headline, actually everything is linked in those various policy settings. We can argue and discuss as much as we like in this House and around this city, but at the end of the day we are a debtor nation. Be it private or public debt, as I said earlier we have to keep our pencils particularly sharp in a global environment where simple liquidity—that is, the cash itself—is very constrained. Credit—the ability to borrow the funds in the first place, then add the cash on top of that—is very constrained.

The Budget came out at around the same time as this report, and other members may want to touch on the importance of fiscal discipline insofar as the Budget is concerned. Members on this side of the House would argue that that was adhered to, given the constraints, the demands, and the commitments made by this Government to New Zealanders, and the tension between spending and saving. There is another very interesting part that might be new to members on page 9 of the Reserve Bank’s report, in figure B2 on credit default swap spreads. Simply, they measure the perceived margin that others are prepared to lend, and are lending, to New Zealand—anything denominated in New Zealand dollars.

Some might ask who really cares. If we are a creditor nation, then that is a fair point. But as a debtor nation, regardless of whether it is the Crown, people’s mortgages, or working capital for businesses, the rate that they pay is totally reflected right there in that graph. It is a bit hard to read, but there is an Aussie and a US one over the page that reflects the spikes in the crisis around the globe a couple of years ago. We can see the trend in those southern European nations. When we line up some of the metrics, New Zealand does not sit too well on some of them with the rest of the world, but on some of them we sit very, very well. It is our mission, and I am sure it is our obligation to ourselves and to future generations, to do all that we can to start to address some of the core problems that can create financial instability in New Zealand. Also, as the committee noted, there are many, many useful graphs at the back of the Reserve Bank’s report. They are backward looking, then they forecast out.

I have no intention of making a political speech here, at all. I think, as all members acknowledge, that we have some serious issues in New Zealand. Many of them have been with us for a long time. They have just got worse or have compounded over particular cycles, but if we address the things that we can control in this country, then when things happen that are out of our control, such as an issue in southern Europe, New Zealand itself will be better prepared to get ourselves through any crisis. A good example of that is the free-trade agreements. Most of the members in the House are in agreement with free-trade agreements. For example, the free-trade agreement with China was started under the previous Government, and it was completed by this Government. Regardless of that, how that helped New Zealand through the recession and how it made our financial system more stable with more credit and cash moving around the system is a great example of one of those things that New Zealand could control. We invested in a free-trade agreement that actually helped our economy get through tough times, when the rest of the world was imploding.

On that note, I will leave it there. As I said, I am not getting political about this particular report. I will finish by acknowledging my colleagues on the Finance and Expenditure Committee. Overall, I think we worked together very, very well. Although this may seem very dry and boring to some people and members, it is of such importance to our country that our system stays as financially stable as it is right now. Thank you.

I join with the member who has just resumed his seat, Craig Foss, in welcoming this opportunity—quite a rare opportunity—to take the House’s time to note the Reserve Bank of New Zealand’s financial stability report, and indeed the report of the Finance and Expenditure Committee. There are several reasons for doing that.

The first is, of course, that the public normally sees this House in full debate, whether it be in question time, in the general debate, or in debates on members’ bills, as earlier tonight. They do not often have the opportunity to see the House in its less combative moments. It is in select committees that a lot of the work goes on in the background, where a lot of the time we join together to tease out evidence that is presented at the committees. This report from the Finance and Expenditure Committee tonight is really interesting because it shows 100 percent consensus. It is reported by the agreement of all the members around the table: the Labour members and the National members, and the Green member, the ACT member, and the Māori Party member. We all reached a consensus on what we thought of the material in this report on financial stability. As the previous speaker said, it is important, it affects our whole country, and it affects us for the longer term.

That brings me to the second point. I ask members whether it is not important and good that we have an independent central bank that draws upon the evidence and presents it in an apolitical way to a select committee, the public, and the banking system so that we can get the view of, if you like, the technicians in the trade and what the data is saying, with the politics taken out of it. That is helpful. It gives this House some things it can reflect on as we go through the headline conclusions in this report, because we know they are, in a sense, more objective than some of the stuff we hear across the Chamber.

What does the report say? Its first point is that although the global recovery has progressed over the past 6 months, it remains patchy and fragile in many economies. It mentions the problems in Greece, and it then goes on to talk about the problems that remain in the New Zealand economy. It notes that the first one is that the private sector in New Zealand remains heavily indebted, creating continuing vulnerability in the financial system. It is very important that the report singles out the private sector, because the overwhelming majority of New Zealand’s national debt is private debt, not public debt. It is not a matter of the Government spending willy-nilly beyond its means; it is one of New Zealanders having borrowed principally on international markets through the banking system to invest in their home mortgages.

Over the last few years it has been a national pastime, a sort of sport, in Auckland at least, where people now grab the property pages of the newspaper to discover how successful they have been at bidding up each others’ house prices, and feel richer as a result. Then they go out and spend a bit of their money, racking up some credit card debt. The net result is that New Zealand has become more indebted to overseas lenders.

Secondly, the capital that that behaviour brought into New Zealand has flowed to the housing sector, and not to productive businesses. That is why, principally, we have a very weak and shallow recovery going on, with very low wage growth and very little employment growth. It is in that context that I would like to agree with the Minister of Finance when he said it was “bumpy”, which was a bit of a euphemism. “Bumpy” means that we can hardly tell whether the economy is going up or down. I disagree with the Prime Minister, who called it an aggressive recovery. The only people feeling aggressive are the Kiwis at the supermarket checkouts whose housekeeping budget will not stretch to cover the trolley full of groceries.

The report states that rebalancing the domestic economy towards higher national savings and less reliance on external financing is important. In that regard, the report does not add, but I would add, that getting the savings rate up is absolutely crucial. It is with some pride that we look back on the time of the previous Government and the introduction of KiwiSaver, which was the biggest and most successful savings plan in New Zealand’s history. It is with regret that we note that the current Government has cut by half the contribution level and employer subsidy for that scheme, and that not only has that left New Zealanders worse off, because they do not have as rich a savings vehicle, but also it has depleted the rate of savings increase that was coming from KiwiSaver.

We note, again with regret, that in Budget 2009 the Government’s principal action was to defer pre-funding the New Zealand Superannuation Fund, and that is important because it was another principal tool for lifting our aggregate national savings rate. By deferring pre-funding we have reduced the inflow of funds into our largest collective savings vehicle. We did so at a time when the markets were down, and we have therefore missed out on some of the capital gain, surprisingly enough, as the markets have recovered but the Superannuation Fund was short of that additional capital that would have assisted it.

Coming through from the report is a lack of—but I will put it more charitably as a need for—a comprehensive economic plan to address the structural imbalance. If listeners out there do not believe me, perhaps we could quote the words of the Governor of the Reserve Bank, that independent authority who testified to the committee. He stated: “Despite the improvement in the current account deficit,”—people have imported less because they have been poorer in the recession—“the Governor stressed that the structural imbalances in the economy require continued attention. Specifically, the Governor said that a focus is needed on changing motivational levers away from consumption and back into production, to help to reduce New Zealand’s high private-sector debt,”. If that sounds familiar, that is because it is exactly what we have been talking about, but do not take it from me or the Labour Party; that was the Governor of the Reserve Bank saying that New Zealand needs a plan to rebalance the economy. I add the implication that if we already had a plan, he would not be saying that, and therefore we can conclude that the Government does not have a plan.

Labour does have a plan, and it has recently been released in our Blueprint for Monetary Policy Reform, which of course bears upon the material in this financial stability review. We would, firstly, retain the independent full-service central bank, and we would retain the current inflation target. We would, however, amend the Reserve Bank of New Zealand Act and the policy targets agreement to broaden the objectives of the Act to include growth in employment and the economic well-being of New Zealanders and, in so doing, mirror more closely the structure of our nearest trading partner and most important neighbour, with the Blueprint for the Australian Central Bank.

Secondly, we would explicitly recognise what this report refers to in terms of the Basel Committee on Banking Supervision and the G-20 movement in explicitly recognising the role of the new core assets ratio, which is strengthening the balance sheets of our banking system, and we would recognise the counter-cyclical role of what they call macroprudential policy—that kind of stuff—in the Reserve Bank of New Zealand Act itself. It is a surprise to us that the Government has not moved in that direction. It seems to be only the Beehive that has not recognised the movement that is going on all around the world as a result of the global financial crisis. It is going on in the G-20, in the Federal Reserve System in the US, even in the Bank of England, certainly in the Bank of Japan, and in the Reserve Bank of New Zealand, but it is not going on in the Beehive. It is also true that Labour would explore other complementary monetary tools, and I suspect that my colleague the Hon David Parker will elaborate on those when he takes a call.

It is important that we reflect, finally, on the record of the previous Labour Government on fiscal responsibility. We hear every day from the Minister of Finance in question time a mirage that somehow the previous Government was imprudent—

💬 Hon Dr Nick Smith: Reckless!

Yes. I ask the member how that squares with the fact that under Labour gross debt was cut in half, net debt was cut to zero, and the incoming National Government inherited net debt of only 5 percent of GDP—only 5 percent. It is now over 20 percent, I recall. This Government has taken the economy in the wrong direction, just as National did the last time it was in Government. As I have already mentioned, the Government has put off pre-funding superannuation, which puts an additional cost on our children. That is not fiscally responsible; it is not fair to the next generation. The Government borrowed for tax cuts. It borrowed for tax cuts because it did not keep its promise to be fiscally neutral in Budget 2010, and it gave one-third of those tax cuts to the top 5 percent of earners.

Finally, Opposition members do not need the Government to lecture us about fiscal responsibility and financial stability, because Labour’s record stands up for itself.

It is a pleasure to take a call to debate the report of the Finance and Expenditure Committee on the Reserve Bank’s financial stability statement of May this year. In drafting the comments that I intended to make this evening, I focused on three sections in the report: principally on the comments relating to unemployment, on taxation policies and the effect of GST, and, lastly, on the importance of agriculture in our economy. But the previous speaker, Mr Cunliffe, has just made a number of points, three of which I think need to be responded to. Before proceeding with my planned comments, I will briefly comment on some of the things that Mr Cunliffe has said.

Mr Cunliffe started by saying the Reserve Bank, in its testimony—because he said these were the words of the Reserve Bank, not the words of the Government—focused on the need to rebalance the economy, and, in particular, to direct funds away from consumption, which had been funded by high levels of private sector debt, and to put that money into, first, paying off debt and, second, savings. He said that if this Government does not have a plan, the Labour Party does. Well, the question that has to be asked is why we got into this situation in the first place. Why is the economy not balanced? Why do we need to rebalance it? The answer is very simply that there had been 9 years of mismanagement by the previous Labour Government. The current Government has to address these problems, because of the situation that it found itself in when it took over the Treasury benches in November 2008.

The next point that Mr Cunliffe made was that the Government, on coming into power, reduced the subsidy on contributions to KiwiSaver from 4c in the dollar to 2c in the dollar. Why was that necessary? The reason is that the Government accounts were in a huge deficit. In essence if we look at KiwiSaver, we see that although it has a number of attractive features, which I personally support, effectively it subsidises people on higher incomes. So it is a subsidisation by people on lower incomes, who are not in a position to save. They are subsidising—using Government funds, or taxpayers’ money—the savings of people who are in a much better position to save than they are.

Mr Cunliffe also criticised the Government for backing away from pre-funding New Zealand superannuation. Once again, why is the Government not setting aside funds for the New Zealand Superannuation Fund? Very simply, as Mr Cunliffe is very, very well aware, the Government is in deficit. It is running a huge deficit, and that situation was bequeathed to it by the previous Labour Government. Mr Cunliffe suggested that it does not matter whether we have a $3 billion, $4 billion, or $5 billion deficit every year; he would like us to go out, borrow some more money, and invest it through the New Zealand Superannuation Fund. Mr Cunliffe knows more than anyone else that at the beginning of this year the money in the so-called Cullen fund was actually less than the dollars that had been put in and invested. Despite the pre-funding, we had less than a dollar for every dollar that had been invested.

I now come to the comments that I intended to make. I will start at the back of the report, where there are comments on unemployment. They refer to the fact that the Reserve Bank governor informed us that the labour market is lagging, in terms of the overall economic recovery of New Zealand. We do not have higher levels of employment. Unemployment is still hanging rather high, at over the 6 percent mark. We have just had a debate on a member’s bill, which was voted down this evening, on the proposal to cancel the 90-day employment trial period. If we want to address the issue of unemployment, we need to do everything that we can to incentivise employers to create jobs and offer jobs, and to make it as easy as possible for people to get those jobs. That is one of the great things about the 90-day trial. It has enabled employers of companies with fewer than 20 people to go out and hire employees, knowing full well if they make a mistake and the person they employ does not work out, then they do not have an ongoing liability for that. The 90-day trial is about to be extended to all employers in New Zealand. If there is anything that will make a move to address the higher levels of unemployment that the governor referred to in his testimony, that will be it.

I thought it was particularly interesting that Nanaia Mahuta, in speaking about that bill, talked about the 60,000 unemployed young people. I ask why we have such high levels of unemployed young people. The very simple answer to that is that the previous Government took out the youth rates. Previously, an employer could go out and hire a young person—a 17 or 18-year-old—and pay something less than the adult minimum wage. Someone who did not have previous full-time work experience was able to go out there, and employers had an incentive to take on a young person. The previous Government passed a law to abolish the youth wage rate. What happens now when an employer is faced with choosing between two potential employees? Let us say one is a family person who is 35, has a couple of young children as dependants, has 10-15 years of work experience—has a proven track record and has commitments—and has proven his or her reliability. Let us say the other is a 16 or 17-year-old who does not have the same experience and cannot show the same track record of reliability. When faced with having to pay those two people exactly the same wage, the minimum wage, I ask why the employer would not hire the mature person who has experience and a track record of reliability.

It was one of the great disgraces of this Parliament that when it had a chance to reinstitute youth wages earlier this year and support the member’s bill of my colleague the Hon Sir Roger Douglas, this Parliament, both the Labour and National members, chose to vote it down. I think that that was a disgrace. One would expect that sort of thing from Labour members, but one certainly would not expect it from National. I think that the National members, when they talk about youth unemployment, should realise that the answer to that problem lay in their own hands. They had a chance to do something about that, but they missed that opportunity. That is tragic for those young people. As my colleague Sir Roger Douglas said, a young person might be prepared to work for $9 or $10 an hour, but the parliamentarians in this House do not believe that that young person should have the chance to do that. Instead, that young person is put on an unemployment benefit of about $160 a week.

I now refer to the section of the report on agriculture. The select committee’s report states that agriculture makes up some 16 percent of the total lending by New Zealand banks, and that as the cash-flow position of farms has improved, the demand for credit has declined. The report talks about the impact of the recent financial crisis on the agriculture industry. Once again, one of the great tragedies of this Parliament is that we proceeded with the emissions trading scheme on 1 July. We became the first country outside Europe to have an emissions trading scheme, and, in the words of the Hon Nick Smith, the Minister for Climate Change Issues, it is the “most comprehensive” emissions trading scheme in the world. Those were his words from 24 September last year, and he repeated them again in the third reading of the Climate Change Response (Moderated Emissions Trading) Amendment Bill on 24 November—the “most comprehensive” scheme in the world. Those were his words, which are in Hansard, and he has the nerve to suggest that New Zealand is not leading on climate change.

What is the impact of the emissions trading scheme on farmers? Well, Beef and Lamb New Zealand has said the impact of the emissions trading scheme will add some $3,900 a year to costs for the average dairy farmer. Those costs do not come in in 2015; they came in on 1 July this year. Dairy farmers face up to $3,900 in additional costs from 1 July this year. Do the farmers in Australia pay those costs? No, they do not. Do the farmers in Japan pay those costs?

My time is coming to an end, but I finish by simply saying that if the Labour Party members are concerned about the fact that we have had to reduce the subsidy on KiwiSaver contributions, and if they are concerned about the fact that we have not been able to put funds into the New Zealand Superannuation Fund, the so-called Cullen fund, the reason for that is very much in their hands.

💬 Mr DEPUTY SPEAKER: I am sorry to interrupt the member, but his time has expired.

To deal very briefly with the comments of the previous speaker, John Boscawen, in respect of problems within the dairy sector, I say the problem within the dairy sector is that farmers have paid too much for their farms. Debt in the farming sector has gone up by more than two or three times in recent years, and as a consequence the interest bills are unaffordable for some farmers. The impact of emissions pricing is relevant, but it is not nearly as significant as farmers’ interest bills on their inflated capital prices.

In the couple of minutes that I have, I will deal with the issue of gross public debt. In the Financial Stability Report, the Governor of the Reserve Bank sets out a graph showing OECD averages for Government debt. It shows that by the end of next year, the average gross public debt for OECD countries will be 100 percent of GDP—100 percent of GDP. If things do not change in places like Japan, Japan’s debt will reach 300 percent of GDP by 2040, and that figure will be 200 percent in the UK and 150 percent in the US. That situation is not faced by New Zealand, because of the prudent fiscal management of the previous Labour Government. When we left office, net debt was at zero, and gross debt was at about 17 percent. John Boscawen said spending was out of control. Well, the National Government has had the opportunity to cut spending, if it wanted to do so. It has cut some of it, but it has not cut most of it, because most of it was prudent.

The big problem now is that we have a structural deficit caused by unaffordable tax cuts. If members do not think that is true, I ask them to look at the Business and Economic Research reports following the Budget on the financial outlook for New Zealand. The future deficit forecast by the Government relies on a very significant rebound in non-residential business investment. Non-residential business investment has been going in the opposite direction of that. Business confidence is down for the third month in a row, and it is plain that the Government’s deficit next year, in my opinion, will be higher than the Government has projected it to be in its rose-tinted view of events this year. Why? It is because the Government wanted to give 35 percent of its tax cuts to the top 5 percent of income earners. National could have easily avoided having a growing deficit by not borrowing for tax cuts and, indeed, by not having such generous tax cuts and not running such big deficits. Instead, we have gross Government debt going up, and net Government debt going up as well.

It is true that New Zealand is relatively stable in its financial sector. That is largely because of both the strong balance sheets of the Australian banks and the prudent fiscal management by the previous Government.

Debate interrupted.

The House adjourned at 10 p.m.