Molesworth & Featherston - Back in the game

Parliament is back in business this week, with the Prime Minister’s statement opening the action for the year. With political and economic news beginning to pick up again, Molesworth & Featherston is back in business, with exclusive and informed analysis.

PM’s statement No surprises in the Prime Minister’s scene-setting speech to open parliament. The government lost some political initiative with the attention Don Brash’s Orewa Rotary speech received (see below for our analysis of how the sides shape up). The PM’s speech previewed the fight back strategy. The government will depict itself as ‘positive’, ‘forward looking’ and capable of uniting New Zealanders, while painting the Opposition as negative, divisive and backward looking. Thus the PM’s comment that, governments in the 21st century ‘don't try to reinvent the economic policies of the 1990s, the society of the 1950s, or the attitudes towards indigenous people of the 1830s. New Zealand has moved on. Our government is about taking New Zealanders into the future together, not back into the past divided’. Elsewhere, she claimed the economic policies of Opposition parties divided ‘New Zealander against New Zealander’.

Coming up this year The government’s preference is to play down expectations of dramatic policy announcements and signal its intentions early. Its programme for the year is no exception. New laws at the top of the agenda this year: An aquaculture reform bill The Building Bill The Care of Children Bill The Charities Bill The Electricity and Gas Industries Bill The Employment Relations Law Reform Bill A foreshore and seabeds bill An Auckland transport package bill A Railways Bill RMA amendment bills covering renewable energy and the Waitaki catchment, and Legislation phasing out asset testing on older people in care. Expect further analysis of all of these in upcoming editions of Molesworth & Featherston, provided we remain solvent long enough. The PM also confirmed MPs will be busy with laws covering insolvency, reform, securities trading, consumer protection for home owners, human assisted reproductive technologies, civil unions, and human rights.

This year’s budget The budget will be heavy on improving the financial position of low-income families who work, along with support for innovation and skills. Some of the announcements flagged: The budget will have a hefty welfare to work component, to ‘ensure that families with dependent children are always better off when in work than on benefits’. There will be substantial increases in family income assistance, along with packages aimed at making childcare more affordable. There will be fresh measures to reduce accommodation costs for those not in state housing – i.e. with a mortgage or in private rental housing. More student allowances will be provided from next year. There will be initiatives to ‘boost science and research’, including in collaboration with the private sector, while the tertiary education sector will be subject to performance based funding. The Resource Management Act is to give ‘greater priority to renewable energy projects’. The government will announce in the first of the year its response to the Commerce Commission’s proposal for ‘unbundling’. The government is also looking at ‘improvements’ to the Paid Parental Leave Scheme.

This week: The economy The week started with Treasury's monthly (but this time two monthly -- because of the Christmas break) update of economic data, which as expected revised the December Economic and Fiscal Update growth figure from 2.8 per cent to between 3.25 and 3.5 per cent for the year to the end of March 2004. That was largely the result of Treasury underestimating growth in the September quarter (1.0 per cent forecast against 1.5 per cent actual) and signs that the expected weakness in the domestic market is retreating into the future -- now expected towards the end of 2004. Treasury is looking for stronger commodity prices and overseas growth rates to compensate for, and ameliorate the expected slowdown as the impact of the high dollar feeds through to the urban consumers.

Dollar options On Wednesday Finance Minister Michael Cullen will front up to the Finance and Expenditure committee to be quizzed on the Budget Policy Statement, although most attention is expected to focus on his ‘options’ for controlling the dollar. In effect his options are dead in the water and his new position seems to be that he must preserve the illusion of ‘options’ because New Zealand was being harmed by the perception that it would never intervene in the currency.

Job numbers Thursday should see some good news for the Government with the Household Labour Force Survey expected to show a further fall in unemployment from the current 4.4 per cent to 4.2 per cent or even lower. That, though, should be the end of the decline in unemployment and we see only a 40 per cent chance the rate will fall below 4 per cent in this cycle – although Budget initiatives to encourage more people into the workforce will mark an heroic effort to breach that level.

Foxes to meet hens A frantic government effort to schmooze small business this Friday will see Ministers visit businesses and host events all over the country, starting with a speech from the PM at Parliament. It’s all part of Small Business Day. Aspiring entrepreneurs are being offered free consultations with experienced businesspeople, seminars and an expo. Fresh small business initiatives are expected to result from small business concerns expressed during Ministerial contact. One of the aims is to improve still further the level of support for small business start-ups, an area that most commentators already believe is well served.

The issues ahead The government faces a tough year with its foreshore and seabed package dominating headlines -- but it is a package that will attract reducing levels of support. On the other hand, it has an enormous war chest in the fiscal surpluses, and from the date of the budget in May, it will use those funds to set a new agenda. The centre right is showing signs of developing momentum. Total polling support for the four centre-right parties, National, Act, NZ First and United, is around 48%. Although Don Brash’s speech at the Orewa Rotary lifted National, it did so by seemingly cannibalising support from Act and NZ First. NZ First’s support has been nevertheless surprisingly resilient as a series of allegations and much more serious innuendo was trotted out against Winston Peters. David Carter’s complaint against Mr Peters backfired and the damage to relations between National and Act remains untested. Certainly Mr Carter’s career has suffered a hit. Act has dropped below the 5% threshold in both of its previous parliamentary terms and recovered easily in election year each time. We place the odds of a repeat of the cycle at 90%. On Labour’s side, the pathway to a majority after the next election is not straightforward. United is likely to switch sides if there is an excuse, which it could yet manufacture. The Greens are in similar territory to Act - likely to recover support in election year. Nevertheless, the Greens are voting against the coalition government on confidence and supply. The odds are that it will return to supporting a minority Labour-led government after the next election – but it remains possible the Greens could continue their current refusal to support a Labour-led Govenrment if Labour doesn’t produce policy concessions. That could be enough to wipe out a centre-left government, and it’s likely to be a significant election issue. A Green coalition with Labour is the least likely outcome. Meanwhile current coalition partner, the Progressives, are yet to make any headway although Jim Anderton has is quietly planning to step up his presence this year. Our odds on the re-election of a Labour-led government: 65%.

Australia’s free trade deal Odds of a New Zealand free trade deal with the US have shortened considerably following the conclusion of the US-Australia deal. Tariffs will be eliminated on virtually all US imports to Australia, including car parts, electrical equipment and information technology products. Duties will be scrapped next year on nearly all Australian manufactured goods as well as metals and minerals. Holden utes, currently subject to a 25% tariff, could be competing with Chevy pick-ups. Tariffs will be removed in four years for wheat and some fruit, but Australia missed out on increases in its sugar quota – the Bush administration needs to hold its sugar-lobby and protects the sector with a 200 per cent (sic) tariff. This will be the centre of the political attacks on the deal, with the Labor Opposition saying John Howard has ‘dudded’ the farm industry. Meanwhile protections have been secured for Australian health care, environment and broadcasting content. The US gets concessions in the chemicals, plastics and infotech sectors, duty-free access into Australia for its agricultural exports (do we hear the word ‘hypocrites’ anywhere?) and open access for telecoms, express delivery services and computers.

Changes to government pharmaceuticals purchasing will see a roll-back of generic drug purchasing. US contractors will get access to Australian government procurement, meaning increased competition for New Zealand contractors in that market. US Trade representative Robert Zoellick estimates US exports to Australia will increase by US$2 billion – with the US expected to double Australia’s gains, even though it already enjoys advantage in trade flowsd between the countries. The agreement is still subject to ratification by the US Congress.

A NZ-US deal? Fears that New Zealand would be seriously disadvantaged by being excluded from the Australia-US deal are over-blown, because the concessions to Australian agriculture are so weak. Over time, however, New Zealand will have to match the deal, or face falling behind still further. The deal is a massive setback for the global free trade movement in the eyes of many critics. For one thing, bilateral trade deals are by definition anti-free trade, because they advantage the bilateral partner over other traders. More important for New Zealand is that the deal has damaged the credibility of calls for free trade in agriculture – Australia and the US have been among the strongest advocates for agricultural free trade, yet can’t agree on it between themselves. As we have argued before in Molesworth & Featherston, the time may have come to review whether New Zealand’s advocacy of ‘utopian’ multilateral free trade deals is doing more harm than good, by alienating nations prepared to make small concessions and advancing our cause towards a deal not one bit.

What would be on the table in a NZ-US deal? New Zealand already provides – or is intending to provide – to the US the concessions Australia granted in its deal. New Zealand is already so open that we have little to offer the US. New Zealand would almost certainly miss out on dairy access within any meaningful timeline. Pharmac would likely have to be sacrificed to secure a deal. That’s no small cost to the New Zealand taxpayer. Successive governments have estimated that Pharmac saves the New Zealand government hundreds of millions of dollars each year in pharmaceutical subsidies, although critics argue it would also restore the potential for drug company investment in NZ-based research. There would be pressure on contestable science funding as well as contracts for government services such as prison management and perhaps aspects of the education sector. Odds of a NZ-US free trade deal in the next three years: Virtually nil. Odds of a deal in the next 5-10 years: 75%.

Quote of the week (and ‘in other email) MIS New Zealand newsletter editor Chris Bell: Amidst the furore over free lunches and political corruption, Kiwi journalists (and for some reason IT journos spring instantly to mind) should pause to remind themselves about what befalls certain kitchen utensils that call certain other utensils black, and people who throw hard, geologically occuring objects in houses of a particularly fragile mode of construction. At numerous lunches, Christmas parties and breakfast briefings I and other journalists have enjoyed food and refreshments paid for by IT vendors…. Surely no one would dare to suggest that these meals and beverages acted as some sort of ‘inducement’ for us to write more favourably about the vendor ... Would they?

Fine Print Molesworth & Featherston is compiled from informed sources and published on Tuesdays to be New Zealand's most up-to-date business and political newsletter. You are reading the complimentary edition. You may forward this copy, but if you wish to forward it for commercial gain, you must make an agreement with us first. Copyright remains with the publishers. Molesworth & Featherston welcomes your feedback. Email us at: editor@molesworthandfeatherston.info You are encouraged to subscribe online and view back issues at: http://www.molesworthandfeatherston.info

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