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  Note: All transcripts are copyright to Front Page Ltd but may be used PROVIDED attribution is made to TVONE and AgendaAGENDA Presented by RAWDON CHRISTIE RAWDON The great British economist John Keynes, that’s Keynes not Key, once said of the Depression of the 1930s that economic expansion should be seen as the normal state of affairs while a downturn was an extraordinary imbecility. Like the rest of the world New Zealand now faces a downturn with increased government debt and a slower growth rate already confirmed for whoever forms the next government. On top of that we've now reached such extraordinarily downturns of high debt that the downturn will inflict real pain on many households, in short we face an extraordinary imbecility. Michael Cullen has been Finance Minister since 1999, he's with Guyon now. GUYON ESPINER Since 1999 we've had the longest period of economic growth since the end of World War II, we're now in a situation where we've got a decade of deficits looming. Your critics will say that you have failed your first test of balancing the books at the time when things got tough. MICHAEL CULLEN – Labour, Finance Minister We reduced government debt, that’s gross government debt from 35% of GDP to 17%, if the current forecasts are correct that'll go up to 24% in about four to five years time, so it's still well over 10% below what we inherited. We inherited 21% of GDP net debt, we have positive assets and the forecasts tell us positive assets. New Zealand's not responsible for the economic downturn, we're not responsible for the high prices of oil, what we aren’t responsible for is ... GUYON You’ve taken credit though with respect Dr Cullen, you’ve taken credit for those good times. MICHAEL Indeed and we used that not to splurge as many people wanted us to do, every budget I presented for the last about four or five years up to this one, people said to me you're maintaining excessively high surpluses why are you maintaining the surpluses, and I kept telling all of you, because when the times are good that’s when you have to maintain the surpluses because when the times are bad you're going to have to run deficits to keep the economy moving along, that’s exactly what we're expecting to do for the next few years, couple of years particularly is to have quite substantial deficits to keep this economy moving along. GUYON How bad is it going to get, have you had updated forecasts, the numbers from the Treasury since those books were opened? MICHAEL No, no they would not do this at this point, I would expect the next set of advice would be the briefing to incoming ministers, clearly we get day by day, every day, updates on the financial markets, but Treasury hasn’t given updated forecasts on growth. My assessment would be that we have to assume that growth over the next year or so is going to be lower than when those forecasts finalised at the end of August because the numbers that keep coming up that we see coming out of the US out of Britain out of the other European economies are all suggesting a marked slowdown in growth and probably recession in most of those countries. GUYON So how long do you think the recession is going to last here? MICHAEL Very hard to say at this stage Guyon but what we do know is that we will come out of that and part of what I need to tell you in terms of those forecast deficits is because of the way Treasury does forecast there is no upside to the economic cycle, in other words we're never going to have according to them what we will always have which is the years of 5% 6% growth at the top end and that’s when the government is really able to reduce debt, so don’t frighten yourself too much by forecasts about what will happen in ten years time, we do need to look very closely at the next year, what the government can do to keep the economy moving and then how we're going to manage the next three or four years on top of that. GUYON Okay last week when you announced the government guarantee for retail bank deposits, that scheme does not cover the funds that banks access from international wholesale markets, are you worried that the banks may run out of cash to actually loan to customers? MICHAEL The advice I have from the Reserve Bank is that the banks are not facing any crisis of that sort in the short term, their credit lines are secure for a period moving forward. GUYON For how long?
MICHAEL But they will get to a point probably this side of Christmas where they are needing to renew some of their existing loan facilities. Now we have plenty of time to work through the details of what an appropriate response to that should be. GUYON What will happen at that point though? MICHAEL Australia last week announced the wholesale guarantee is yet to announce the details of that because they're still actually arguing what the details should be of that scheme. We will need to be able to give the markets and the banks and others a clear indication of what's happening going forward but we don’t need to rush that, it's very complex because we have a financial sector which is overwhelmingly owned offshore so we have quite a different set of issues to address compared with Australia where so much of their financial sector is owned in Australia. GUYON Are you considering moving to a wholesale scheme? MICHAEL I'm receiving advice around the possible outlines of a wholesale scheme, we've obviously been working on that, we haven't been working on that as long as we've been working on the issue of retail deposit, we've been working on that for quite a long time but matters had to get accelerated very suddenly because of events last week. GUYON So you're considering extending that out to a wholesale scheme possibly in the next month? MICHAEL We are looking at what a wholesale scheme might look like before making any final decisions in that respect. Clearly we can't leave the New Zealand banking sector exposed to a position where there is a risk that money will all go to other financial systems because they have such guarantees, but most of the rest of the world is still struggling with what to do in this area, some have moved into wholesale guarantees, some have not as yet. Don’t assume everybody else is into wholesale guarantees at this stage. GUYON But why did you come out with just a partially formed scheme at that point? MICHAEL I was advised at that stage not to come out with a wholesale scheme, that we were not prepared, we had not done the work, we'd done a lot more work on deposits and what was important was given banks, credit unions, building societies, opening on Monday, if people in those institutions thought that there was no guarantee for their deposits while there was a guarantee in Australia then people might start thinking about whether they would begin to move their money, so it was important to move quickly and to have some detail, not important to move quickly on the other side. GUYON Have you talked to the banks directly, would that be appropriate, I mean ... what they're telling you is they’ve got about a month to go... MICHAEL I've had one conference call with one bank, the other banks have all been in contact with the Reserve Bank, I've had full reports on all of those conversations. I'm fully aware of what the position is but clearly I can't go into too much detail because a lot of that briefing is confidential around individual institutions. GUYON Is there room for bipartisanship here in this financial crisis are you prepared to work with National on this. MICHAEL I briefed Bill English personally on the latest moves around the retail deposit scheme on Wednesday I think it was before he had a Reserve Bank briefing. I'll make sure that he's brought up to date early this week on the latest consideration around wholesale deposits, if he wants to make any comments to me obviously I'll consider those ... GUYON Because it's a potential nightmare isn't it, I mean you sort of rewind back to 1984 when Sir Robert Muldoon refused to devalue the currency, I mean are we in a position potentially after.... MICHAEL No I'm sorry Guyon if I correct you, he refused to devalue the currency after the election result was in, it was clear they'd lost, in that point the then government was in a caretake position. We're not caretakers we are the government. GUYON I know that but I'm throwing forward, I'm looking to a possible scenario where various sides might be trying to put a government together and the whole New Zealand financial system is up in the air. MICHAEL What I've said is I'm making sure the major opposition party is kept fully briefed around these matters, I've undertaken one of those briefings myself, I mean to give you an exact description I handed my blackberry over to Bill English with the text of the paper on it that I'd received saying Bill skull this down, read this, this is what's happening, he was due to have a briefing a couple of hours later with the Reserve Bank. I will make sure that he's briefed on what's happening on the wholesale matters. GUYON You’ve talked about a mini budget if you like in December, what would that address? MICHAEL What that addresses is the fact that I think pretty clearly the economy is going to be having a more marked slowdown in the forecasts in late August, we need therefore to bring forward expenditure of an investment character in areas like rail and road and building schools and building early childhood centres, sewerage and water schemes, things which require to be done, but if we bring some of those forward and look at measures which are designed to make sure that we're keeping real jobs for real people and we're not just trying to push money into consumption but trying to make sure the economy keeps moving along and building for future growth and development. GUYON It seems like the strategy is to spend our way out of a recession, you’ve on this week of the election campaign spent something like 618 million dollars. MICHAEL Over something like a four year period Guyon when total government spending will be not far short of 300 billion dollars, and some of those are directly related to issues like how do you encourage people on benefits to take up jobs. The retraining announcements last Sunday given that we're likely to have some people laid off how do you make it easier for them to retrain for other jobs, so it's all about if you like labour mobility enabling people to move from job to job. GUYON Sure but something doesn’t stack up here, I look through the government books and I look and see that government expenditure is projected to increase 4% a year, but you’ve got an economy that’s contracting. MICHAEL But in the short term when you’ve got an economy contracting that’s when you do run deficits, I come back to what I said before, that’s why I withstood all the pressure from the media, the National Party, almost every other political party, all kinds of people saying why is Cullen sitting on these huge surpluses, I think one of your previous commentators on this show just a few moments ago used the word obscene about the size of one of the surpluses that we ran one year. That was because we were running an economy where it was growing faster than normal, government revenue was growing faster than normal, you don’t spend up to that limit or cut taxes up to that limit at that point because then you don’t have the room to move, and here we are in a position where with a world financial crisis we can run deficits even for some years and still have debt GDP ratio 10% less than it was when I became the Minister nine years ago. GUYON You were accusing National a couple of months ago of being irresponsible for talking about a debt to GDP ratio of 22%, now your own forecasts are showing you're in a position of perhaps 25 to 30%. MICHAEL At that stage they appeared to be engaged in sort of magic mirrors trick to borrow for tax cuts at a time when the economy was forecast to be going along in a much more normal pattern. You're always going to want to run a more stimulatory policy if the economy's going through a deeper and longer recession than previously anticipated. You started off the programme with references to Mr John Maynard Keynes, Keynes was the ultimate advocate of fiscal stimulation in downturns of the economy but the problem is you then have to operate the other side, you must be fiscally very conservative at the top, and the problem for governments in the post war decades was they operated one sided Keynesianism, they spent hard at the bottom but they carried on spending hard at the top and running small or no supluses and so government debt kept rising rising rising over the longer term. We are not planning that approach at all. GUYON Can I ask you a question that we put to the leaders this week in the TVNZ debate and that is – what is your definition of what it means to be rich? MICHAEL I think what it means to be rich is that you’ve got so much money you don’t really need to worry too much about you know where your job's coming from how are you gonna pay the bills etc. GUYON Can you put a definition on that? MICHAEL I don’t think you can put a definition on it in terms of actual amount of money because people have quite different perceptions but clearly I'm a rich person by most people's standards, my income is whatever it is five six times the average wage, clearly I am a rich person by average standards. On the other hand I've been at the other end of the scale as a post graduate student I've known what it is to be on a relatively low income. GUYON Do you resent wealth in some ways, MICHAEL No not at all. GUYON I look back to your maiden speech in 1984 was it. MICHAEL Oh don’t go back to that, that was one of the most embarrassing... GUYON Within five minutes of being in parliament you were crowing about ripping off the farmers to pay for your Christ's College education. MICHAEL I want to apologise for that because what happened there was that somebody broke a longstanding convention, interjected on me one minute into my maiden speech which was pretty unfair, I was wound up like a wire, this is my maiden speech in parliament, you could have twanged me and I'd have played a whole concerto. GUYON Yes but you called John Key .. MICHAEL And I responded. GUYON You called John Key.... MICHAEL I interjected on him not realising not realising it was gonna be picked up when he was bringing my wife into parliamentary debate and referring to Helen Clark being childless again, and I do think that that was appalling behaviour and shows a real double standard that my comment back to him – and he was being a prick in saying that bluntly - was that it was then picked up. I know lots of very wealthy people, I have no trouble with people being wealthy at all. What I have trouble with is people being poor. There is no excuse for governments not doing what they can to try to ensure that people aren’t poor. We've listed 130,000 children out of poverty under this government, for the first time in decades we've narrowed the gap between rich and poor, that is my proudest achievement as Minister of Finance and those who condescend from a position of great wealth and say we shouldn’t be doing this, this is social engineering, this is redistribution, those people I fundamentally disagree with, I'm in politics to make sure people have real opportunity and real security and if some people get rich that’s fine but if people are poor when we are a rich society then we really have to address those issues. GUYON Just finally for me will you commit to a full term as Finance Minister should Labour lead the next government? MICHAEL I would certainly like to be but of course those matters are always ones for the Prime Minister Helen Clark. GUYON Good place to leave it. RAWDON Thank you very much Guyon, now it's the turn of myself and the panel to continue the question line and I'll throw it open to you John. JOHN ROUGHAN – New Zealand Herald A short question. How long is the rainy day? MICHAEL I don’t know the answer to that question John, I don’t think anybody knows the answer to that question at the present time because I think like every Finance Minister in the world I probably spend somewhat sleepless nights wake up in the morning listen to the news and wonder what's been happening on the markets overnight. JOHN It can't last ten years can it? MICHAEL No it certainly can't. JOHN So our deficit is definitely unsustainable, we have to do something either spending or tax side to make sure it doesn’t last for years. MICHAEL Let me try and take you through what happens when Treasury makes forecasts. They forecast for four years no more than four years. At the end of that four years you get back every year you'll find it comes back to 3% growth at the end of four years, they ten project on a series of assumptions of 2.5% per annum growth, so they're forecasting an economic cycle which has no top to it at the current point because they can't in their model. So they're not forecasting a cycle as every cycle we've had over the last 20 or 30 years has been with some years of 5% 6% or even 7% growth. If you forecast that normal economic cycle those ten year projections would look very very different indeed, so we shouldn’t jump at the shadows on ten year projection, what we have to address is the next two three four years. VERNON SMALL – Dominion Post But even coming back to 3% growth they still have us in deficit. I can understand your point but the peaks we don’t. MICHAEL But what they're not doing is forecasting 4, 5, and 5 and the two or three years after that which we had in this last cycle, we had in the previous cycle, we had in the cycle before that, and those are the years when government revenues get up to the 8% even 10% growth level and you're able to reduce the deficit. VERNON So there's nothing wrong with your spending plan that’s driving this, you're not putting too much money forward into KiwiSaver, into Working for Families, into the other .... MICHAEL The last thing you do in the current situation is reduce spending in areas which are helping the economy along, and unlike National we do not believe in cutting back on spending which is assisting long term growth and savings. Cutting back on KiwiSaver and cutting back on recession development tax incentives is totally counter to what we should be doing in this economic position. JOHN You said when the Prefery cam out that if you'd seen it back in May you wouldn’t have given the tax cuts that you did because the current spending levels obviously and the taxation that’s now projected isn't sustainable. MICHAEL I said that because clearly this constrains options of moving forward, we are announcing in this election campaign a far smaller programme than we normally would or would want to, even sort of like the student allowance we're not bringing in in full, the full student allowance for about four years down the track and we have revised our programme in the light of that Prefery very very substantially indeed, and so for a social democratic party like the Labour Party that means that what we're saying to the country is we are to going to be able to expand programmes anything like as much as we would like in those social spending areas, or address some of the social needs as much as we would like too, that’s a very conscious set of decisions that we've taken. The rolling total from the Herald still has the National Party well ahead of us in terms of spending promises. JOHN But we haven't netted their KiwiSaver savings. MICHAEL Well very hard to work them out cos they won't tell us the assumptions they’ve made, and Mr Key keeps telling us under their policies lots more people would take it up but hey presto they're still making large savings. Actually of course the latter is right, they're cutting KiwiSaver they're savaging it and the take up rate has been incredibly high already so the whole argument that he's making there doesn’t seem to have any substance. RAWDON The Herald poll also does show up the promises made in the last week or so in the campaign or the last couple of week, Labour at 618 million as Guyon brought up, National Party at 75 million, now I know we've got to spend in order to maintain some sort of momentum but that’s a vast difference isn't it in promises made? MICHAEL But they haven't actually costs a very large number of their promises, there are these endless reviews, there are two new government departments that they promise for example, they’ve promised new Police and new Corrections officers, they’ve costs the Corrections officers they haven't costed the new Police. Their promises so far their core programme is to expand the core public service not to contract it, but they say they're going to slash back on it. VERNON Hang on a minute, aren’t you selling us a pig in a poke as well because you’ve said you'll bring in a mini budget in December you haven't costed that, you say you can't, I can understand some of that issues, but we're being told you're gonna spend a whole lot more in December if need be but we don’t know what. MICHAEL We're going to bring forward some investment, we make no apology for that because we need to keep the economy moving along but whereas some would argue we just push money into consumption to do that, we believe we've don’t enough in that respect already with the 1 October tax cuts and what's coming up in 2010, 2011, we need to be concentrating on things which will assist long term growth in the economy not just consumption, so keeping the savings keeping the R&D stuff but also looking at those areas in infrastructure and other aspects which will assist us long term. VERNON And you still wouldn’t think about bringing forward one of those other tax cuts to next April as National is planning to do in order to stimulate, you say that’s not necessary? MICHAEL I think it is more important now to turn to the investment and growth side of the equation rather than the consumption side of the equation. RAWDON What about the idea of delaying the Emissions Trading Scheme that'll take the pressure off business? MICHAEL It won't take much pressure off business. RAWDON But it will take some pressure off. MICHAEL It'll simply add to the pressure on taxpayers, because all you do if you delay any aspects of the Emissions Trading Scheme is add to the government's Kyoto liabilities which in the end have to be met by the taxpayer, so there's no answer here, again it's a short term answer for long term loss, everything the National Party's announced like the R&D stuff, like KiwiSaver is sort of short term gain for long term pain, whereas dear old Roger of course is still arguing for short term pain and long term gain. VERNON On the KiwiSaver the unions have said that they would quite like to move to a 2% scheme as the minimum contribution – the maximum contribution sorry, whichever, and yours is in 4 minimum, why not drop to 2? MICHAEL Well because if you’ve got 2 plus 2, even if the employee doesn’t end up paying employer's contribution as the National Party's proposal, it then starts to get only 4%, the Australian scheme is 9% and they keep talking about expanding that 9% and going higher, take fees off that the return's likely to be not too bright over the longer term. VERNON But in terms of saving isn't it easier to save 2% .... MICHAEL There's an argument which we have at the moment, you can go in on 2 plus 2, that is actually still available as an entry point but phasing up, there's a big difference between 2 plus 2 as an entry which phases up to 4 plus 4 as opposed to 2 plus 2 permanently. The problem with keeping that permanently is it's more complicated for employers, it's more complicated for the managed funds if you're continually having people coming in at 2 plus 2 and winding up. For employers it's a lot simpler trying to keep things as we're moving, and if we move to the 4% employer it's 4% across the board for all employers on KiwiSaver contributions. JOHN I just want to switch to the financial crisis quickly. When you're considering wholesale bank guarantees is it definite that that will be some form of guarantee to foreign investors into the banking system, or is there some other way of making up any money that our banks can't raise overseas in the next few weeks? MICHAEL I don’t want to go into details because no decisions have been taken around details. What I'm very conscious of and very concerned about is that as a small country with only a very small part of its financial sector owned within the country we don’t end up with effectively open ended guarantees to people offshore which effectively gives a benefit to offshore shareholders and offshore owned institutions and we're in a quite different position in this regard from most countries, most developed countries around the world, so we've gotta be very very clear that whatever we do the potential costs to the government are met by those involved in the scheme. VERNON But it's inevitable isn't it? MICHAEL I don’t want to comment further than that. Very obviously the government is seriously considering a scheme, Treasury and Reserve Bank have been working as hard as they can on potential ways in which that could be done, but we don’t have to rush, we've got some time to continue to work through the details of that before we make announcements. RAWDON Okay Dr Cullen thank you very much for joining us this morning, much appreciated. |
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