  |
|||
 
|
  Note: All transcripts are copyright to Front Page Ltd but may be used PROVIDED attribution is made to TVONE and Agenda
GUYON ESPINER MICHAEL CULLEN – Minister of Finance GUYON So something like $40 a week for the average wave? MICHAEL Yes, close to that kind of level actually I think over $40 a week at the average wage level, and more like 70 odd dollars, $73 I think it was at the top rather than $55. GUYON So quite significantly larger than what you delivered, why did you reject that? MICHAEL Because it just didn’t pan out in terms of the Treasury forecasts upon growth and revenue and so on, we very quickly moved into operating deficits and cash deficits which were so large that we were starting to borrow for the groceries and of course at that point you're also starting the next year you're borrowing to pay the interest on the extra borrowing the previous year and so on. GUYON Okay let's look at what you did deliver, $16 a week for someone on the average wage of roughly $45,000 – do you think that’s going to make a significant impact on their standard of living? MICHAEL It's a help, it's not more than a help it's a help, and the numbers show that we can't do much more than give some help in that regard. That $16 rises to $32 a week over the period of the tax cut programme through to 2011, increasing compared say with the National Party's 2005 programme it delivers bigger tax cuts for people earning under about $40,000 a year, quite significantly bigger modest incomes. GUYON And what do you expect people to do with that, I mean would you accept that overwhelmingly that money will be spent rather than saves? MICHAEL Oh yes, I mean the reason for the budget having tax cuts is twofold really, firstly as Brian Fallow was indicating there's a counter cyclical argument, the economy's slowing down, this provides a boost to the economy. The families are feeling pressure from some food items rising in price particularly dairy products and some others and also petrol prices, both of these being fed effectively from offshore price movements, but impacting on the family budget, which is another reason also for bringing forward the Working for Families because for a family with two kids around the average wage this is a 40 odd dollar a week increase on the 1st of October rising to over $80 a week by 2011. GUYON Okay but they’ll spend the money and that does mean that it will be inflationary, certainly the markets have looked at that and said that this will just keep interest rates up for longer, haven’t you failed one of your own four tests which is that these tax cuts wouldn’t add to inflation? MICHAEL No I don’t think so and I'm starting to see some of the market analysis changing. The first point I'd make is that bank ecnomists are not the best people to make independent analysis. GUYON Do you think they're being biased and have vested interests in this? MICHAEL Some do, because some banks who have taken the position that interest rates aren’t going to fall in June they have every self interest in ensuring that doesn’t happen therefore and this has been referred to earlier that some of the commentary on monetary policy issues is not coming from independent perspective. We're better to go to some academic economists in that regard. The second point is more important, the fiscal impact of the tax cuts in the first year is $1.5 billion that’s what they expected, the second year $2.3 billion, that’s 2009-10 so that’s well out into the future, and I think most commentators are expecting the total impact to be more with that $1.5 billion figure and they were a bit surprised 1 October rather than 1 April but had no reason why that would be so. GUYON Well that’s what I want to pick you up on. When did you actually decide that you would implement these tax cuts from 1 October? MICHAEL At the very last point of the decision making there were really two issues – the size of the package and the date. The size was made smaller but it was also clear from the analysis that the impact of that in terms of interest rates inflation was not significantly different from having it 1 October rather than 1 April, the pressure for families is now. GUYON I'm wondering whether you were also looking at the fuel costs – the fuel price rises from the Emissions Trading Scheme and thinking can we do this as well as the early tax cuts and you went for the early tax cuts because you thought if you did both you'd just provoke a rate rise? MICHAEL Well we have of course put off liquid fossil fuels coming into the Emissions Trading Scheme in 1 January next year for two years and that makes quite a significant difference to the forecast inflation. GUYON Was that a sacrifice to the early tax cuts is I guess what I'm asking? MICHAEL Oh no no, I think that was a decision taken independently recognising that there was growing concern around petrol prices, that the increases which have occurred have done a lot of the job of the Emissions Trading Scheme to this point, that’s is people are reducing their consumption of petrol. There's an impact on the government in terms of the cost of that delay, quite significant impact, hundreds of millions of dollars total impact from that, but if that enables the Reserve Bank to look at interest rate cuts earlier then that’s helpful from the general economic perspective particularly those who are on mortgages who are probably feeling the most pain at the moment. GUYON Okay can we look at your tax scale now at the upper end. When you came into government one of your actions was to raise the top tax rate to 39 cents in the dollar for income over $60,000 affecting 5% of income earners, it's now $70,000 that top rate but it affects 11%. Haven’t you actually sort of breached that promise over the longer term? MICHAEL Well in fact by the time the new tax rate came in, I think it was about 7% of all income earners were on that top tax rate, but going to $80,000 will significantly reduce the percentage to much closer back to where it was, and interestingly enough if we'd simply indexed the thresholds from the time we became the government to now if that’s what we did at this point we just backdated if you like all the indexation, for those on $80,000 a year the tax cut that we've got in this programme is almost exactly the same as the effect of full indexation. For those on $50,000 a year the programme we've put in place is about 10 bucks a week more, for those on $30,000 a year the programme we've put in place is about $20 a week more. So in fact it does very very much meet my test in terms of social justice concerns. GUYON But does it meet any tests in terms of incentives for this higher wage economy we keep hearing about, I mean where are those incentives for people to work harder, to get those tougher jobs, to actually produce things for the economy if you're gonna hammer them at that top end? MICHAEL There's a number of things here, a lot of people have moved out of that top tax rate, moved from 62 to $80,000 over the three year period, and clearly looking through at the full we need to keep considering how we move those thresholds including the bottom threshold. GUYON But you don’t believe that tax has an economic benefit do you, you’ve come on this show before and said well look tax rates don’t actually help the economy. MICHAEL I don’t think – there's this religious element to it which I was lampooning in the intro that you saw earlier. If we take for example National Party's programme last time their big deal there was lowering the second rate from 21% to 19%. The notion that lots of people are going to work much harder keeping 81 cents in the dollar rather than 79 and New Zealand – the issue for New Zealand is not working harder, we are one of the hardest working peoples in the world, in the developed world we have one of the longest working weeks, the issue for us is working smarter, how do we become more productive, not how do we work harder and produce more. GUYON Well why don’t you address that then beause … MICHAEL I have. GUYON …as Finance Minister you're saying that tax cuts don’t really help the economy yet we just saw you spend 10.6 billion dollars over the next four years on tax cuts? MICHAEL Well that’s to help family budgets, that’s because people are feeling the pressure on the family budget, and there is an argument for addressing those thresholds every so often because people creep over into new rates. GUYON don’t you help them better over the longer term by growing an economy, by producing those high wage cheques, rather than giving them between 12 and 28 dollars that is just going to get sucked up by the rising price of petrol. MICHAEL That’s an argument for no tax cuts, well sucked up is a rather strange view because they if they don’t get the tax cut they're worse off than they would be without them, I mean that’s a strange argument, you could say the same if the tax cut was a $100 a week, well that'll be sucked by some spending somewhere or another. Look what we've done we've nearly trebled spending on land transport infrastructure, more than tenfold increase in public transport, big programme in this Budget around Broadband expansion, massive expansion of skills training work base skills training, complete revision of the education system almost from top to bottom. GUYON Alright I want to pick you up on some of those things, those capital things. MICHAEL Savings in investment change in the whole structure around savings and investment, the Kiwi Saver scheme, I mean we are addressing the structural things which underlie productivity, that’s one reason why tax cuts have been delayed we've been addressing a range of other issues that need to be addressed. GUYON Well let's look forward, you’ve got your debt to GDP, the size of the total economy ratio, your strategy is 20%, you're at 17% now right? You’ve got quite a bit of room haven’t you for extra capital spending? MICHAEL Oh you’ve gotta be very careful there because actually the projections beyond the four year period show us going back up to about 21% of GDP and you move more now that will get further away on you out into that projection period. GUYON So do you see yourself with room to move on capital spending, I'm just wondering whether in the campaign we might see some big infrastructure projects announced, are there any assets you want to buy back? MICHAEL We in this government have achieved a remarkable shift in spending, we are spending much less as a proportion of national income on welfare benefits because we've got 140,000 people off welfare benefits, and we have reduced spending on the interest because we reduced debt, and that additional money has gone into three areas particularly, health, education and infrastructure spending capital investment. GUYON It's that third point I want to pick you up on, I'm just wondering whether you see further investments there. Are you going to buy back any other assets? MICHAEL Not intending to no. GUYON None on the list at the moment? MICHAEL No. GUYON What about Toll I mean it's emerged from the Budget can you confirm that the cost is gonna be more like one and a half ….? MICHAEL No I can't because I think it's a very poor piece of economic analysis. The forward investment in the track and rolling stock would very largely have occurred irrespective of buying back Toll, so you can't say that’s a cost of buying back the rail. Most of that money's actually in the track side of things which we already own - we have significant under investment. GUYON New Zealand taxpayers watching you today can you tell them roughly how much it will cost to buy back the rail? MICHAEL Well actually the numbers are there in the Budget very clearly $690 million is the appropriation to buy back rail, we of course take over the company debt which is not that high in relation to its value. GUYON Do you think there's an irony here, you're buying back sort of 19th century technology? MICHAEL Not at all in Britain they're reopening railway lines, rail is not 19th century technology at all, it went through a downturn in the 20th century it's coming back in most of the world as a prime mover of long distance freight and indeed in many countries of people. Here I think in New Zealand it'll be primarily around freight but in urban areas like Auckland there is big potential for expanding rail over the next 20 years. GUYON Okay that was a decision on government spending, I want to look at your government spending, it's roughly doubled since 1999, I know the economy's grown as well, but you’ve gone from about $32 billion to about $62 billion in government expenditure, can you say hand on heart that every dollar of that is well spent? MICHAEL No you couldn’t possibly say that, no Minister of Finance could say every dollar has been well spent, but you look at the … GUYON Well where are your concerns? MICHAEL Well let's come back where the big ticket items are. We've achieved – people think the health system's in crisis, life expectancy has gone up, infant mortality's down, morbidity rates are down, gaps are closing between men and women, Maori and Pakeha, it's actually a very good story. GUYON They are you’ve got a good record there in some respects. MICHAEL Education. GUYON Before you rehearse a list I heard you say on Friday in your post budget speech that you too had concerns about some areas of inefficiency in government spending, I'm wondering where you think they are. MICHAEL Oh I couldn’t identify specific areas. GUYON But shouldn’t you be, I mean you're the custodian of that money. MICHAEL That’s what we do moving forward, I think there've been problems in the past around acquisition of Defence equipment, we still have some of those actually… GUYON But you had a razor gang didn’t you with Trevor Mallard and some others? MICHAEL No we've never had a razor gang. GUYON Well you were looking pretty carefully. MICHAEL No we had a group looking at areas and what's happened the last three budgets, three or four budgets, in both education and social development which are the two biggest areas out of the … there's been very significant reprioritisation of spending from various programmes to various other programmes, that’s part of the reason why we've got the number of people on benefits down because a lot more effort's gone into getting people off benefit into employment and we've out performed every Treasury forecast in terms of reduction of benefit numbers for that additional investment in certain programmes. GUYON Just before we go looking at your Labour Party who do you see there with the skills to actually do the job of Finance Minister or Finance Spokesman after you’ve gone? MICHAEL Oh I think there are a lot of my colleagues at some point could take over the job but I'm not thinking of handing it over at any time in the near future, that’s a matter for Helen to decide after the election should we win. GUYON Can you give us a short list of who you think might be? MICHAEL No not at this point. GUYON Good point to leave it. MICHAEL Thank you. RAWDON Now it's my our turn mine and the panel to speak to Dr Cullen. Vernon we'll start at the end of the table. VERNON SMALL – Dominion Post MICHAEL Well we had set ourselves a test on not increasing inequality, and to do that you’ve got to lower the bottom rate and increase that bottom threshold a long way. Remember that bottom threshold hasn’t moved since 1988 it's been at $9,500 since 1988. What the package achieves thereby is that for example people trying to move off benefits and to a small amount of part time work will face a significantly lower marginal tax rate dropping from 21% to 12.5%, that’s quite a big gain in that area, which is a crucial area for trying to achieve what for the government is a major objective. VERNON So that was the trade off what about the top rate you could have surely not gone as far with that and targeted the middle rate? MICHAEL We looked at say 75 rather and 80 but the difference between those two in terms of amounts of money is very tiny if you're spreading it across the middle rates, the middle rate changes are very expensive. Look at the Nats programme in 2005 their big move was that change in the middle rate that’s where a great deal of money went, they only moved the bottom bit a very small amount. VERNON But you’ve still got people earning less than the average wage paying 33 cents in the dollars which used to be the rate their bosses paid? MICHAEL Well yes that may well be true but in many countries that’s a quite normal marginal tax rate to be paying once you take account of social security taxes. In New Zealand what we often forget is we have no dedicated social security taxes and you have to add those in if you compare us with many other countries around the world and 33% is not a high marginal tax rate at the average wave by international developed country standards. RAWDON Dr Cullen a lot of other countries will also have this tax free bottom tier which people have still been calling for even after your budget, how close were you to considering that? MICHAEL Oh the first plan that I was considering was a substantial tax free threshold, it was quite difficult – well getting past certainly the $9,500 mark eventually, but quite difficult to phase in without actually raising the marginal tax rate at very low levels of income, and Treasury persuaded me at the end of the day it actually was terrible sensible because of the makeup of the people in that sort of 0 to 15,000 dollar a year range, either the tax rate at that range is not particularly relevant to them, they're on benefits so that the benefit itself is set in purely non taxable terms, they're on super and what's important for them is a tax rate at the average wage, or they're part time workers who may be in a household with a significantly larger income, or they're young people who are going to be in higher incomes later which is why we went for just a modest cut in the bottom rate but a much bigger increase in the threshold that that rate goes up to. VERNON …benefits then, why have beneficiaries missed out, I mean you’ve been getting flak today in the paper from Matt McCarten and others. MICHAEL Yeah well Matt McCarten said we'll give $40 bucks a week to every week to every adult for less than half the cost of the tax cuts. I did a back of the envelope calculation on the way up which cost nearly twice as much as the tax cuts to give $40 a week to every adult in the country so I don’t know who was doing the arithmetic. VERNON Why not beneficiaries? MICHAEL Well first of all beneficiaries with children do benefit because of the bringing forward of the Working for Families brings forward that increase in the per child payment that they receive. Single beneficiaries with a small amount of other income whether earned or just with a small amount of money in the bank do see a drop in their marginal tax rate. We are looking at the moment at what kinds of additional assistance might help those single beneficiary families in particular who have missed out from all the changes over recent times. VERNON Election campaign then? MICHAEL No no, I would think we'd be looking at something relatively modest but targeted before that point. RAWDON Let's have a bit more detail on that, what exactly are you looking at? MICHAEL Some of the areas of additional assistance the maximum amounts payable haven’t moved for quite a number of years and therefore haven’t kept up with the cost which may be involved in that, for example the special needs assistance around food for example. So Treasury and MSD are doing a degree of work at the moment around those issues and I'd expect that Ruth Dyson and I will be wanting to take to Cabinet some recommendations. RAWDON When's that? MICHAEL When we're ready to do so. RAWDON Weeks or…? MICHAEL Certainly weeks rather than months, I don’t see it's something we'd hang out for the future. VERNON Why on earth wasn’t it in the Budget? MICHAEL There were lots of other priorities to address in the Budget. BRIAN FALLOW – New Zealand Herald MICHAEL I think it's clear that the rate of growth during this calendar year is going to be quite low, we're forecasting 1.5% to the end of March next year but the first two or three quarters of this year I think are going to be quite low, so yes there is quite a strong slowdown, the stimulus is relatively strong therefore at this point and able to be absorbed I think and the numbers that have come out the last few weeks are clearly showing a stronger slowdown is anticipated at the time of the half year fiscal update. BRIAN But there's still more pain to come isn't there, you’ve got the majority of mortgage debt on fixed rates and a lot of those borrowers have yet to feel the effect of a global credit crunch regardless of anything that happens here. On top of that oil prices are still high, and when the dollar falls blessed relief for exporters but more pain at the pump, more pain at the supermarket checkout, isn't that side of the sort of arm wrestle much sort of brawnier than anything that you and Dr Bollard for that matter can do at this stage? MICHAEL Well yes we cannot compensate people completely for things like international oil prices and if the dollar should fall as you say good news for exporters and part of the necessary rebalance in the economy but bad news at the petrol pump for the consumer, but you can't just pay yourself to compensate yourself for those movements in international prices, we all know that, but this is something, it's as much as we can afford, I mean I'm under more criticism from those who are expert in fiscal economic matters for going too far, the only people who are saying you should go a lot further are political opponents. BRIAN Well aren’t you in fact running a risk there, you're projecting a pretty small surplus next year and indeed for the next four years that could easily turn into deficits, we haven’t seen that for many a year and nor have the ratings agencies, isn't there a risk given how bad our external accounts are that you're flirting with the danger of a credit downgrade that will raise rates. MICHAEL We've already had one ratings agency coming up with a clear picture saying this is still a strong fiscal position by international standards cos we're starting from a very low debt position at the present time, so I'm not deeply concerned about that. As I said before to Guyon I think some of the bank ecnomists were exaggerating the size of the stimulus in the first two years which is really not very much larger than anybody should have expected from all the statements which have been made. RAWDON ….there's a strong possibility? MICHAEL No I don’t think there's a strong possibility within the near future, what's forecast is we could be getting close to that in terms of operating surplus at the end of the fourth year but in terms of cash deficits of course we are forecasting quite substantial cash deficits for much of the next four year period about three and a half billion dollars which is as I said on Thursday close to the edge of my comfort zone. We would not want to see that going significantly above that level. BRIAN You said on Friday that the market had over-reacted but it wasn’t a big reaction, I mean they pushed back by maybe six or twelve weeks when they thought Dr Bollard would start to ease that’s not an unusual move for them, so what was the over-reaction. MICHAEL I think some of course were pushing further back than that and there's always the suspicion, I mean we've seen this in the past in monetary policy commentary from bank economists, but of course they’ve also advised their banks to take certain positions in the market. We certainly know that some banks have been taking positions that there'll be no interest rate drop in June. BRIAN But you also see a situation where a bank's economist is taking a different view from their own dealers you know often they disagree. MICHAEL Occasionally that may well be true but I'm always amused the bank economists I've seen as independent commentators on the financial markets in New Zealand I would have thought one might go to some academic economists for some independent commentaries as if like the old days used to go back to economists at the CTU or the equivalent of Business New Zealand for commentary. We now know that those commentaries of course have to be taken with some degree of indication of where they're coming from. RAWDON Dr Cullen budget obviously has an economic implication and there's also a very political implication this year's budget, you said budgets don’t win elections surely that was the motivation behind this though. MICHAEL The primary motivation clearly was to revise some relief to families, we've had a re-development of massive concern around particularly food price and oil price increases over the last two or three months where it's suddenly become a major issue when inflation's not been a significant issue in the political arena for a considerable period of time. Clearly this budget, my colleagues feel, puts us in with a better fighting chance than we had before two o'clock on Thursday afternoon, and clearly it puts my opponents in a very difficult position and if one tries to analyse their statements they seem to be saying that they’ll be taking away the further tax cuts at the bottom after 1 October and redistributing those towards the middle and upper end which is ground at which any Labour Party is happy to fight. VERNON How much room do you believe there is for any tax cuts, are you saying none? MICHAEL I think it's very very small indeed unless you can identify very clear savings and one of the things that concern me is that the National Party started off trying to hedge its bets in the debate, by the end of it when Dr Lockwood-Smith had taken over leading the charge they were clearly promising substantial tax cuts 1 April next year on top of the 1 October tax cuts. VERNON John Key on Friday in his speech indicated to the audience that he would bring your cuts forward if you like and probably make them bigger and skew them towards the top rate. MICHAEL If one did that on 1 April next year I think there is a much more serious risk of postponing interest rate cuts for an extended period of time because that’s a double stimulus within a quite short period of time. VERNON But he was also saying that you need to attack that top rate to incentivise people to work harder longer… MICHAEL Well that wasn’t the policy last time of course, the policy last time was not to cut the top rate but simply to extend the threshold at which it cut in. If he's going to be cancelling in effect the increase in the bottom threshold which is not in force of course in practise at the election time it's in law but a National government could change that law and redistribute that money which is modestly significant to the top end then let's have a fight on that on the hustings, very happy to do so when as always it's the people who are on very modest incomes who feel that they've perhaps not got a great deal. RAWDON Dr Cullen can I ask you a quote from the Southland Times in 99 which is obviously just before this government came to power, 'voters are not fools dangle promises of tax cuts in front of them in an election year and they’ll think you're trying to buy their vote' what's changed? MICHAEL Well actually the tax cuts will be in force before the election so it's not a promise and an old politician like me knows that people tend to bank what's already happened in politics. BRIAN In 2005 you gave National a hard time over cutting back future spending saying it would lead to fewer jobs in the health sector, fewer teachers, aren’t you doing exactly that with your cutting back the full protections. MICHAEL We believe that in a whole range of areas we've achieved significant capacity restoration in the last eight and a half years particularly a great deal of the core public sector, in other words we do not need to look at that kind of capacity restoration in much of the public sector moving forward, what we do need to do is continue to put additional resources into health an education and you do have to have at least five or six hundred million a year actually into Health to stand still, if you're putting less than certainly 500 million into Health you'll go backwards in terms of services not simply stay where you are. RAWDON Alright Dr Cullen, times against us, thank you very much for coming in.
|
||