Debate on Crown Entities, Public Organisations, and State Enterprises — Reserve Bank of New Zealand

I rise to take a call in this debate. I want to reflect on the mandate of the Reserve Bank, and why, in the view of the Labour Party, we should as a Parliament update it to cater for the challenges of today. New Zealand has not had a current account surplus for 40 years. For 40 years we have run a current account deficit.

💬 Hon Steven Joyce: Ha, ha!

Whenever I say that, for some reason Mr Joyce finds it funny. He seems to think that getting back to about minus 3 percent of GDP as a current account deficit is the best that it can ever get. It is the best that it will ever get under the National Government because on these big calls National is always a follower; it is never a leader. It was not a National Government that introduced the Reserve Bank of New Zealand Act in the first place. It was not a National Government that introduced the Cullen fund. National members opposed it—in fact, they called it a dog—but now they say it is good. It was not a National Government that introduced KiwiSaver.

These long-term changes that make New Zealand a better place are generally brought about by the Labour Party. The last time New Zealand had a current account deficit we had terms of trade that were good. But do you know what? They were not quite as good as the terms of trade that we have just had. So in comparison with 40 years ago, when we had terms of trade this good, New Zealand had a 2 percent current account surplus, and we still have a deficit that is around 3 percent. It might get a wee bit under 3 percent by the time it starts going out again, but then it is going to go back out to over 3 percent.

Every year that New Zealand has a current account deficit it plugs the gap in one of two ways, and generally a combination of both. It either borrows more money from overseas lenders or it sells assets that were previously New Zealand - owned to overseas owners. As a consequence, the burden on New Zealand’s economy to pay interest or dividend flows to those overseas lenders and owners grows every year.

Of course the control of inflation is important. Prior to our announcements there was concern amongst some of the bank economists and academic economists that we were going to lose that grounding—the target to control inflation. But we have not done that. We have not done that.

💬 Hon Steven Joyce: No, that won’t change.

Mr Joyce chortles away there on the other side, but he is a man of so little vision that he does not get the subtlety of any policy. He thinks the way to go about policy is to employ more than 50 spin doctors at the Ministry of Business, Innovation and Employment. That is his view of policy. The reality is that we can cause the Reserve Bank to approach monetary policy in a way that best achieves external balance over the cycle, and so that is what we have said it should do. If we do that, we will also get the Reserve Bank encouraging better policy outcomes from the Government.

We know that the reason interest rates are going up at the moment is that we have got enormous house price inflation in Auckland at a time when general price inflation is low. The failure of Government policy around housing is responsible for those interest rates going up higher than they would otherwise need to go. Part of that imbalance in the economy is caused by biases in our tax system—notably, the absence of a capital gains tax taxing speculative property purchases.

The National Party rattles on that we have already got a capital gains tax. That is not true. We do tax as income some traders in property, but the vast majority of investors in property who buy a property and then sell it at a profit do not pay any tax on their economic gains. The IMF, the OECD, Treasury, and the Reserve Bank all agree that these cause imbalances. One of the reasons why the Government gets away with not doing anything to address this—which is plainly in the interests of the economy even if it is not in the interests of the minority of New Zealanders for whom this National Government plainly governs and whose interests it prefers—is that the Reserve Bank is never, under its current mandate, really strongly incentivised to say “Well, look, if you don’t introduce a capital gains tax, we are going to have to push up interest rates.”

That is effectively the trade-off that we have in New Zealand at the moment, and yet that is not exposed under current settings. So the changes that we propose to monetary policy would be one of the ways that New Zealand could keep its interest rates lower for longer. We have interest rates that throughout the economic cycle are higher than those of other countries. I am not talking about the variation within an economic cycle, the timing of which will be different in New Zealand compared with overseas countries; I am talking about overall New Zealand interest rates being about 1.5 to 2 percent higher than they are in Australia. The difference in respect of some other countries is even higher. We will not get over our current account deficit and we will not be able to increase our wages in New Zealand and grow our export economy unless we address these problems.

Well, it is an interesting little story that Mr Parker runs. We have actually had in this country an independent Reserve Bank focused on fighting inflation since 1989. It was introduced, of course, by a Labour Government, and in all other respects they are ashamed of it on the other side of the House, but nevertheless, the members of the Labour Party seem to be a little bit happier with this one.

That model is based on transparency and independence, and Labour has now decided—or, more particularly, Mr Parker has now decided—to pretend you can simultaneously have low inflation, low interest rates, a low exchange rate, low house prices, and a current account surplus all because David Parker magically says that is possible.

The only way you can have a few of those things is if you allow more inflation in New Zealand. Actually, it is a law of physics that, actually, unless you have an independent monetary policy, then you will have more inflation. Labour is basically saying that if it is going to change this thing, then the interest rates would be different, and if the interest rates are different, then that means more inflation. All inflation does is destroy the savings of New Zealanders, it makes it more difficult for businesses and consumers to invest, and it sets off wage and price spirals. And, interestingly, it hits the people who are struggling the most the hardest.

As one commentator said after Labour had announced its policy: “It’s deeply bizarre that the Labour Party would actually actively promote policies that would harm the worst off in society the most.” That is what Labour’s proposed softening of its attitude to inflation would achieve, which, of course, brings me to the small issue of the KiwiSaver idea, the interest rate jack-up idea—the “big tool” that Mr Parker likes to refer to—which I respond to today. But the moment you think about that, it falls apart, because housing is less than half of New Zealanders’ debt. The rest is companies, credit cards, farmers, councils, and Government agencies.

Apparently, Labour is going to tell businesses and councils to carry on borrowing and spending, because wage and salary earners will be forced to have more money taken out of their take-home pay to do the belt tightening for them. Weirdly, Labour has still not come up with any sort of indication of how much it would require people to put into their KiwiSaver accounts to offset a 1 percent increase in interest rates. So here we are—I think it was the beginning of May that this thing came out—6 weeks down the line and Labour is still shtoom on any suggestion of what the actual trade-off would be between rising interest rates and forcing people to put more money in their KiwiSaver accounts.

Well, over on this side of the House we actually did the exercise. We reckon that to get 1 percent, Labour would have to increase the KiwiSaver contributions by around 6 percent. Those members are out there today saying that they are already going to increase your KiwiSaver—

💬 Hon David Parker: Rubbish! Making it up.

It is true. And if it is not true, then the Opposition should actually come up with some numbers.

💬 Phil Twyford: You’ve made it up.

They are not made-up numbers. They are actually worked out, and what we know is that the Opposition has come up with nothing. So here we are debating the Reserve Bank of New Zealand Act and the Reserve Bank, and the Labour Party is proposing to throw away the independent control of inflation. It is talking about this “big tool”, this weird big tool, which, apparently, magically can keep interest rates under control while boosting people’s KiwiSaver rates, and it has no idea how that works.

It is actually embarrassing in a debate about Crown entities for that sort of ridiculous policy-on-the-fly rubbish that the Opposition has come up with. So, fundamentally, the good thing about the Reserve Bank policy is that it controls inflation. Inflation is very tough, particularly on those people who are struggling the most in society, and what we know is that the Labour Party would change that. We know it would relax the control of inflation, and we know that its monetary policy approach is to force people to have more money taken out of their take-home pay, but Labour says: “Don’t worry. You’ll all get it back when you are 65.”

So while you are sitting there with your families, under Labour Party - type inflation conditions—which, as we know, is about 8 percent, which is what it was at the last election, or higher again; those were the high inflationary times—Labour will be saying to New Zealanders: “Don’t worry. The solution is to whip some more money out of your pay. Don’t worry that prices are going up. You will feel it for, oh, I don’t know, maybe a year, but the good news is that in the long run”—the very long run, when you are 65—“you will get a little bit of it back.” That is those members’ answer, and what a load of rubbish.

Report noted.

New Zealand Transport Agency