Hon Dr Michael Cullen
Minister of Finance

24 January 2008 Op-ed

New Zealand well-prepared for global slowdown

The news on the global economy at the start of 2008 is cloudy at best.

The subprime mortgage crisis in the United States and the subsequent credit crunch have made the possibility of an American recession very real. Global share markets have taken a considerable hit, with the NZX no exception.

To complicate matters, this period of weakening has so far been accompanied by persistent inflation driven largely by global rises in food and oil prices (up 50 and 80 per cent respectively on a year ago). The inflation rate in the U.S. has passed four per cent; in China it has passed six.

In summary, the global economy is facing considerable uncertainty, the US is facing significant challenges while consumers globally are feeling real pain as a result of rising living costs.

My interest as New Zealand’s Finance Minister is to first assess what the impact on our country will be, to define the unique shape of the challenges we face, and to determine what steps, if any, the government should take in response.

The most obvious point is in some ways the most important: we do not yet have a clear picture of the precise impact that these overseas events will have on our economy.

Acknowledging that uncertainty is absolutely crucial. In the days and weeks ahead we are likely to hear a number of proposals and ‘plans’ on how to respond to a ‘crisis’ we do not yet know the full character of. Some of these suggestions will be well-meaning and potentially useful. Others will be neither.

But we do know some things.

First, inflation in New Zealand is too high – certainly not by current international standards, but by the standards we set for ourselves to keep inflation within a 1-3 per cent band.

As a Labour Minister of Finance, fighting inflation is personal. I am in politics primarily to make sure that working people and their families get their fair share of New Zealand’s success. It is of particular concern to me that the rise in food and transport prices is hurting lower and middle income families at a time when the vast majority of our economic fundamentals are so strong.

We also know that the excesses that have led to the not-yet-recession in the US have mostly not occurred here. While household debt is a problem in New Zealand and the US, the predatory behaviour of subprime lenders – who lured vulnerable people into the housing market with extremely low-interest loans, only to have their repayment rates skyrocket later – is a uniquely American phenomenon. Like homeowners around the world, New Zealand families are facing real challenges with mortgage repayments, but our affordability problem must be kept in perspective with the fact that vast numbers of Americans are losing their homes to foreclosure.

Similarly, the United States Government has increased national debt, sent government accounts into deficit with large and continuing tax cuts, and significantly weakened its ability to prevent a real downturn.

The contrast with New Zealand could not be greater.

The fact that the Crown’s fiscal position has been very significantly strengthened under Labour over the past eight years, means that the government is now in a position to respond to any undue weakening in the economic outlook in the event that that is judged appropriate in the weeks and months ahead. If needed, we will have choices that we would otherwise not have had, especially if we had followed the fiscal policy supported by the National Party.

We have lowered crown debt to below 20 per cent of GDP. We have made addressing imbalances in our economy a top priority with policies like KiwiSaver. And we have vehemently opposed proposals to borrow for tax cuts, a policy that can only be described as crazy (but still one supported by Bill English).

We also know that our operationally independent central bank, the Reserve Bank, has the authority to adjust its monetary policy stance quickly if need be - as it judges appropriate in response to any changes to the inflation outlook that might arise out of weakening global growth. It will be important for the Treasury, the government and the Reserve Bank to remain in close contact as events unfold this year.

Under this government, New Zealand has enjoyed its longest period of economic expansion in generations. Unemployment is at a record-low 3.5 per cent, over 350,000 jobs have been created, child poverty has fallen dramatically, regional economies that were in decline eight years ago are now thriving, and real household incomes are up by more than 25 per cent.

Against that backdrop, many people called for the government to cash-in on good times, to loosen the government’s books, take on more debt and distribute large tax cuts ahead of needed investments in services and infrastructure. We have resisted these calls exactly because we knew that as a small, isolated nation with an economy still in a rebuilding phase that we were vulnerable to global shocks.

It is telling that a plan to fight inflation announced by new Australian Prime Minister Kevin Rudd this week included steps to increase the government’s surplus and to support initiatives to improve savings rates. The sensible plan that a new Labor government is proposing for today’s inflation problems mirrors the one that our Labour government has followed for years.

So what we know is that the short-term challenges facing the New Zealand economy are not unique. Rising inflation, rising food and oil prices, stock market downturns, and housing market pressures are global issues.

What is unique is that the New Zealand government is prepared for the challenges we face. Our low-debt, strong surplus fiscal policy helps to lessen the impact of global shocks and gives us more options in formulating a response if the situation deteriorates.

In the weeks and months ahead, you can be sure that the government will be keeping a close eye on the global economic situation. And you can be sure that in any response, our focus will be on protecting ordinary New Zealanders from the harsh edges of a global downturn. The approach taken by National and Bill English in the face of the Asian crisis of the late 90s – to cut the rate of superannuation – is not one that Labour would ever consider.

The Budget I am currently working on – including the personal tax cut package I will announce – will be a Budget for these times. It will be a Budget that will not exacerbate inflationary pressures, that does not make us more vulnerable to global shocks, and that takes our challenges seriously.

It will also be a Budget that keeps a long-term view in balance. Our economy has been rebuilt over the last eight years. We now have an unprecedented opportunity to become the world’s first truly sustainable nation and in the process become more prosperous than ever before. While we work through today’s challenges, we must not take our eyes off that prize.

ENDS

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