Interest rates will rise: English
Donald Trump's victory has helped change the economic situation globally which ‘will work for New Zealand’, Bill English says
"But look, the interest rates starting to rise, I think, is a healthy sign of normalisation in the global economy and here. I see the NZ dollar’s dropped back under US 70 cents for the first time in quite a while. That would be a healthy rebalancing for our export sector," the Finance Minister says.
"So, in a sense, the thing we’ve been waiting for for three or four years — that is a US economy with enough strength to lead to a rise in interest rates — is starting to happen. The fact that Reserve Bank’s cut [on November 10] and it hadn’t passed through to lower interest rates is a pretty clear signal to borrowers and households we’re on an interest rate floor at the very least.
Has Trump has been the catalyst?
"Well, he seems to have set off the process, which I think was underway anyway. But it’s one that I think will work for New Zealand. We could get a rebalancing of the exchange rate for exporters. Let’s see if that happens," Mr English says.
He adds, "If interest rates come up a bit, people will get a bit more sensible about the debt and the housing market. A bit of inflation is actually not a bad thing in an economy. We’ve probably had not quite enough. People will be compensated for that. They’ll probably see their wage increases come up a bit. Certainly, benefits would keep up with inflation.’
Mr English also concedes that Working for Families, introduced by the Clark-Cullen government, "turned out to be a reasonably effective way of reaching the families with children and families that are on low incomes."
RAW DATA: Corin Dann interviews Finance Minister Bill English on Q+A
CORIN This month's massive earthquake is top of mind for Finance Minister Bill English as he looks ahead to his spending priorities in the election year, and one of them may be tax cuts. Last week, while in Lima, the Prime Minister talked about the need to raise living standards outside of normal wage growth. And while tax cuts is one way to do that, John Key said it wasn't always the best way, especially for low income families. So I asked Bill English — was that an admission that the market economy isn't delivering gains for middle and lower income Kiwis?
BILL Well, we’ve got a much more positive environment to make these kind of choices. US, UK, Europe — often big fiscal deficits, high levels of government debt, economies growing slowly. And that’s part of what’s frustrating for them.
CORIN Do you agree with him that you need to lift New Zealanders’ living standards outside of wages, that that mechanism is not actually working for some New Zealanders?
BILL Well, I agree we can do that, but because we’ve got the choices and the capacity—
CORIN Do we need to do that?
BILL Well, this is what the government’s considering right now. But my point here is we have a positive context in which to make decisions to ensure that everyone in the community gets the benefits of a strong growing economy. Overseas it’s a much more defensive context where governments are worried they can’t deliver to people who are starting to get frustrated. This is an economy that can deliver.
CORIN Some might think that this is a defensive move by your government that you are seeing this trend and you are rushing to give people tax cuts to defend yourself.
BILL Well, look, I think we’re pretty mindful of, particularly for low and middle income families, there’s been 25% growth in the average wage over the last six or seven years that’s pushing some of them into higher tax brackets that might be comfortable. Pressures of housing cost. We have a growing economy, budget surpluses, so we’re just being pretty open, actually, about the choices we have.
CORIN I don’t want to labour this point, but isn’t it extraordinary that you’ve got 3-4% growth in an economy that is expanding at a rapid rate, yet you’ve got the Prime Minister saying he can’t lift living standards for a big bunch of New Zealanders without giving them, effectively, a handout.
BILL I don’t think he’s saying that. I mean, benefit payments are increasing, national super’s increasing in line with wages, wages have been increasing moderately but consistently, because we have out ahead of us government surpluses.
CORIN Do you agree with the Prime Minister that you need to look at a families package here and not a tax cut? That it may be that you need to look at accommodation supplements or Working for Families as the best mechanism to help those people?
BILL All of those options are there. I find it difficult to imagine you’d do only a package that consisted of changes in tax rates and thresholds, because that can achieve some things with incomes, but for a lot of lower income people, it doesn’t achieve much.
CORIN Some people would say that’s just spin, though, because there’s been a little bit of a backlash against tax cuts, particularly in the wake of the Kaikoura quake, pressures on your finances, that you’re just trying to find a new term for this in order to give that election year lolly scramble.
BILL I wouldn’t agree with that. I mean, the government’s developed a record of attending to the issues around incomes, including for those on the lowest incomes, as we did with our hardship package a couple of Budgets ago.
CORIN What about timeframes? You’re saying there’s a package you’re looking at. What are the timeframes here? Would you announce that in election year for the following year, or are you going to have to push it out another year?
BILL The events of the last couple of weeks, I think, have shown why you need to be a bit flexible. So if you’d asked me that question three weeks ago, there was at least a billion dollars’ more room to move, possible two or three billion dollars’ more room to move over the next three years than there is today, because that’s the money the earthquake’s going to take out of the system; probably a billion just in the next six months or so. So we’ve always kept that pretty flexible. We’ve got a range of choices. We’ve got things we need to do — investment in infrastructure to support this growing economy, some pressures in parts of public services. Our top priority is getting debt down precisely to maintain our capacity to deal with things like large earthquakes you didn’t expect to happen. And so any movement on family package or tax reduction has to fit in that context.
CORIN But you’re looking at $2 billion or $3 billion in quake costs, you’re looking at a big defence spend, you’ve got $2.5 billion you’ve got to find for prisons over the next few years, and realistically in health you’ll be putting in another $600 million or $700 million, I’m sure, in the next Budget. Where do tax cuts fit into that, given the Prime Minister has said you really need to spend $3 billion on tax cuts.
BILL Well, look, we’ll make prudent choices about it. You’re right about all those pressures. Those are all there. If none of those existed, then there’d clearly be room to spread the benefits of growth, lift people’s incomes. The fact that those pressures are there just means that there’s trade-offs that have to be made. Being able to achieve any of them requires ongoing sensible fiscal management. So there is no opportunity for spending large amounts of money on programs just to feel good that aren’t going to achieve anything. If we want to be able to deliver on that list, including in lifting people’s incomes, then we’ve got to maintain pretty tight management.
CORIN Okay, here’s the thing. Can you give New Zealanders an absolute cast-iron assurance that you will not offer up tax cuts at the same time as increasing borrowing — in your track, your borrowing track?
BILL Well, that’s very unlikely that we would be continuing to increase borrowing at the same time as reducing taxes.
CORIN But this is the critical bit, though, isn’t it? Because you can’t realistically offer up a families package or a tax cut package if it means you have to borrow more. So can you tell us once and for all no extra borrowing, whether it be capital or operating expenditure?
BILL Well, as I said, given the events like the earthquake, you can never quite know exactly what’s going to happen, so I wouldn’t give an absolute guarantee because I just can’t predict the future accurately enough.
CORIN Just looking again at the international picture with Donald Trump. We’ve seen a bit of a shift in markets over the last month or so where markets seem to be predicting a much stronger US economy, infrastructure spending, and interest rates have certainly started to turn around. And we are seeing that here with fixed interest rates rising in New Zealand. Are you worried about that in that we could easily see another per cent on those fixed rates, perhaps, next year. You’ve got million-dollar mortgages in Auckland. Is that going to put Kiwis under pressure?
BILL It might put a few under pressure who really overextended themselves. But, look, the interest rates starting to rise, I think, is a healthy sign of normalisation in the global economy and here. I see the NZ dollar’s dropped back under US 70 cents for the first time in quite a while. That would be a healthy rebalancing for our export sector. So, in a sense, the thing we’ve been waiting for for three or four years — that is a US economy with enough strength to lead to a rise in interest rates — is starting to happen.
CORIN And Trump has been the catalyst?
BILL Well, he seems to have set off the process, which I think was underway anyway. But it’s one that I think will work for New Zealand. We could get a rebalancing of the exchange rate for exporters. Let’s see if that happens.
CORIN That means Kiwis are going to pay more for petrol, they’re going to pay more for imported goods, and how is that going to help those on the low incomes?
BILL We could get a bit of inflation, right? So the criticism for the last couple of years has been inflation too low. This is what I mean by normalising. If interest rates come up a bit, people will get a bit more sensible about the debt and the housing market. A bit of inflation is actually not a bad thing in an economy. We’ve probably had not quite enough. People will be compensated for that. They’ll probably see their wage increases come up a bit. Certainly, benefits would keep up with inflation.
CORIN And do you think—? Let’s get to the housing market that is still clearly running far too hot for your liking, I’m sure. Do you think that a rise in interest rates next year would be enough to pull it back, or do you still think you’re going to have to give the Reserve Bank more tools to whack it into shape?
BILL Well, let’s see what happens, but I’d say that the fact that Reserve Bank’s cut and it hadn’t passed through to lower interest rates is a pretty clear signal to borrowers and households we’re on an interest rate floor at the very least. And when they see rates rising, that does have an impact. Even if you know that they’re going to rise sometime, it’s still different when it actually happens and they’ll be recalculating what their debt servicing is going to be, and I think it’ll make our housing market a bit more sensible.
CORIN What about immigration? Do you personally think New Zealand can cope with another year of 70,000 net migration?
BILL Well, look, it would be unprecedented. We haven’t seen that before.
CORIN It would be, but can we cope with that?
BILL Well, I think we can cope. The other question, of course, is can we cope without it when we’ve got so much demand for the skills that come with our migrants. So the government’s trying to get the balance right here. We made some changes a couple of months ago that are going to have the effect of tightening up the flows a bit for migration. As soon as we’ve done that, we’ve started getting noise, complaints—
CORIN You can see that New Zealand’s looking increasingly— Which is a compliment to New Zealand and your government, I guess. More and more people want to come here.
BILL Well, they do, and fewer New Zealanders are leaving, which is the biggest single change. But we are now getting out of the business community quite a lot of complaint about the fact that any tightening in the rules is going to make it hard for them to get the labour they need.
CORIN But you must also see the political challenge in this in that, as we’ve seen in the UK and as we’ve seen in the US, people who aren’t perhaps getting ahead are concerned and looking at immigration, and that’s where they’re pointing the finger of blame.
BILL Well, again, because we’ve got this relatively unique positive economic growth, it’s a different context. So in the UK and in the US there are skilled people who just haven’t been able to get work for a long time, and if they have, their incomes have stayed low for years. In New Zealand that’s not the case. People can get jobs. We’ve got the highest participation rate in the labour force we’ve ever had. Unemployment heading down under 5%.
CORIN Yes, but coming back to where we started, even your prime minister’s saying you can’t raise the living standards of those very people you’re talking about without giving them a tax cut or increasing some supplementary payment.
BILL I don’t agree with you that that’s what he’s saying. What he’s saying that in this positive—
CORIN He says outside of wages.
BILL The wages are rising moderately but consistently in a growing economy. The fact is that growing economy is going to provide the government with some surpluses which would give us the opportunity to spread those benefits around in addition to rising wages. So we don’t see it as a way of offsetting the effect for people who haven’t been able to get anywhere.
CORIN I seem to recall when Labour brought in Working for Families, John Key was calling that Communism by stealth, and yet now, eight years on, your government is looking at increasing those very types of supplements.
BILL Well, it’s turned out to be a reasonably effective way of reaching the families with children and families that are on low incomes.
CORIN So he was wrong, then?
BILL Well, there was a debate about it then. We’ve been here for eight years and didn’t get rid of it, so we’ve clearly accepted the reality of Working for Families.
CORIN Just finally on the issue of immigration, we saw the seasonal workers quota increased by another thousand. We’re not talking hugely highly skilled jobs here. I mean, there are obviously some skills involved. Why can’t New Zealanders be trained to do those jobs? Why isn’t there the supply of New Zealanders to do that when we’ve got plenty of unemployed people?
BILL Well, New Zealanders will have to be trained, because that decision is made in the light of advice that said they need something like 2500 to 3000 more workers in those relevant industries. And the government has said, ‘We’re not going to use the RSE scheme to fill that gap. So we can lift it a thousand because the horticultural industries are growing really quite successfully; they’re really on a bit of a burn at the moment, which is fantastic. But that still leaves a significant workforce which those employers will have to take the responsibility of recruiting and training and retaining. Now, they often have complaints that the locals don’t stick to it or don’t turn up to work. Those are issues—
CORIN And do you think that there is an element of New Zealanders who won’t do these jobs?
BILL I think it’s pretty clear cut. It’s not a matter of what I think. It’s a matter of what you hear when you go and talk to employers and, actually, the people who are actually doing the work, because they have to carry the burden of someone was recruited, worked half the day and took off. The person that’s left there has to actually pick the fruit.
CORIN So when Winston Peters and others get up there and argue that you guys should be doing more to get Kiwis to do these jobs, you’re arguing that Kiwis don’t want to do them?
BILL And what that means is we have to work with the employers. They have to take responsibility, because in the long run it’s their business, they’ve got to get their own fruit picked. We’ve got to look on the welfare side in particular, because there’s detail about how the welfare system works that seems to make it a bit easy for, for instance, a 21-year-old young guy who meets the requirements by turning up but he doesn’t have to stay. And so the anecdotal evidence is sometimes they’ll turn up and then they’ll go away again.