Speech to Federated Farmers National Council
Phil Goff
Leader of the Labour Party

9.30AM Thursday, 19 November 2009.

Thank you for the opportunity to speak with you today.

Back in September, the Labour Party had the pleasure of inviting Lachlan McKenzie to our annual conference to give Federated Farmers’ perspective on economic issues.

It was the first time Fed Farmers have been at the Labour conference and Lachlan stated his wish that it would be start of an engagement with Labour.

I welcome that perspective. The primary sector is central to our economic prosperity - not only today, but it will remain the backbone of our earning potential far into the future.

The dialogue we entered there showed some important areas of agreement.

We are both deeply aware of the central importance of earning our living by trading with other countries.

We’re both strongly supportive of investment in research and development. Only through more and better research will we maintain New Zealand’s competitive advantage in the primary sector.

That’s why Labour in government made the largest single investment in science in New Zealand’s history, when we set up a $700 million Fast Forward fund and introduced a 15% research and development tax credit.

That investment would have been leveraged to be worth two billion dollars over the next ten to fifteen years.

Much of it would have been used to develop a competitive advantage in the sector.

The object was to partner with industry to achieve a step change in the economic performance of our primary industries.

I regret that one of the first things the National Government did when it took office was to cancel both the R&D tax credit and the Fast Forward fund.

Moving against science and research will weaken our ability to emerge from the global recession stronger than we went in.

Despite the Government’s decision, I am encouraged by signs our primary sector industries will be the key to recovery.

At one end of the spectrum, the wine industry this year went past a billion dollars a year of exports.

At the other end, Fonterra’s recent announcement of a further increase in its payout is very welcome news.

It will ease the pressure on dairy farms, and it will deliver a substantial boost to the New Zealand economy.

This performance has been good news in the recession, and has been boosted by solid progress on trade agreements which have been initiated and concluded over the last couple of years.

As we saw when I signed a deal with China last year, there is bipartisan support for trade agreements.

Labour and National have worked together on trade issues because trade and competition fuel the economic dynamism and innovation that lifts productivity and the standard of living of New Zealanders.

That China deal - the first China signed with any OECD country – will eliminate tariffs on 96 per cent of our trade. And it was followed up with an agreement with ASEAN last year that cut tariffs on our exports by 99 per cent.

The results are already coming in.

Our trade with China since signing the agreement last year rose by 60 per cent, making it now our third largest trading partner, and the gap between what we export from China and import from them has narrowed.

Since last year, the Government has now finalized trade agreement negotiations which I initiated with Malaysia, Hong Kong and the Gulf Cooperation Council.

These trade agreements will go a long way to securing our future in coming decades, because of the emergence of Asian economies.

The Asia Pacific already represents 60 per cent of global GDP and around half of all international trade.

Eight of the world’s ten fastest growing economies are in Asia.

In six years from now, Asia’s middle class populations will total 400-800 million - rivalling the middle class populations of Europe and of North America.

So this is an important market.

And we are well positioned to prosper in it, partly because of our trade deals - and also because we are efficient farmers.

For example, it is common for dairy products used in Asia to be produced from confined cows - where the feed for the cow is brought to the cow, and in many cases the feed is even imported.

The cost structure cannot easily compete against New Zealand’s farming practices.

And as Asia’s middle class grows, its demand for protein products and dairy products will increase.

I would expect good progress to be made towards concluding an FTA with Korea and I would also hope for progress to be made with India following the successful conclusion of the study I started with then Commerce Minister Kamal Nath on a free trade negotiation with India.

Trade with India increased by 100% last year, but high tariffs exclude most of our agricultural products.

I am pleased in particular to see commitment by President Obama last week to progressing the Trans Pacific Partnership.

That promises a high quality free trade agreement with the United States and beyond that a growing number of countries across Asia Pacific and Latin America which will want to sign up to take advantage of the big opportunities which will be created.

When I met with US Trade Representative Ron Kirk and the Assistant Secretary of State Kurt Campbell in Washington a few weeks ago, I was pleased at the positive attitude of both to progressing the TPP.

But the challenge will lie in winning support in Congress and rebutting the strong opposition of the US dairy lobby. That lobby makes outrageous claims that Fonterra is government subsidized and fears the efficiency of our industry, even though Fonterra works collaboratively with bodies like Dairy Farmers of America and markets much of their milk powder.

I worked with the Ministry of Foreign Affairs while in Washington to promote a New Zealand Inc approach on the TPP and WTO Round in Congress, the Administration and with interest groups like the AFL-CIO.

This is a great opportunity for New Zealand.

But to seize it fully, we need to deal with issues at home, and there are two areas that are important to farming that I want to discuss with you - emissions trading, and monetary policy.

I know that we have different perspectives on the issue of the emissions trading scheme.

It’s important that farmers have the opportunity to understand the perspective we have taken.

I know from my time as trade minister how important it is to get this right.

We will not be able to sustain access to our target markets if we do not lift our share of the load on greenhouse gases and climate change.

We are already committed to obligations under the Kyoto Protocol.

It is not a case of whether we meet the cost of them – we are obliged to – but rather how that cost is met and by whom.

Labour recognises that New Zealand is not going to determine the pace and nature of climate change—we are too small.

The best outcome for New Zealand is a global agreement to reduce greenhouse gases in the atmosphere to prudent levels on a prudent timetable.

And since that's best for New Zealand, we must be part of concerted international action.

As a passionate advocate for New Zealand’s trade interests, I do not want to see us invite disaster with a poor policy response.

This is why Labour sought a consensus approach to emissions trading.

The stakes are high, climate change is a difficult issue, requiring hard choices in the face of some emotional and sometimes far-fetched claims.

An enduring agreement would take into account that we are in a unique situation in New Zealand.

It would take care of our natural environment.

It would be affordable.

And it would not make promises to particular sectors that can’t be kept over the long haul.

A consensus approach would make policies to reduce greenhouse gas emissions more effective, because policy would then be more credible with the people whose interests are affected.

Producers and consumers would know that policy is not going to be reversed at each change of Government.

Because the Labour Party is committed to working in good faith with other parties in Parliament to maintain a world-class ETS, we have put forward some constructive ideas to help achieve consensus.

For example, Labour would be prepared to introduce into the ETS, from an early date, an agricultural emissions offset scheme, modelled on the current Waxman-Markey Bill proposals in the United States, with units being fully convertible into international units from the outset.

Another example is with the issue of a cap on the price of carbon, which I know farmers have talked about.

There are problems with a cap because it distorts land prices, and it exposes the taxpayer to an unquantified risk.

But if it was helpful to achieve a consensus, we could accept a cap on the price of units, allowing one for a limited and fixed duration, where the point of it was to shield industry from unexpected price spikes.

This is one example of the point I am making that Labour is prepared to be reasonable and constructive.

Labour supports a market-based mechanism to allow individual consumers and producers to discover the least-cost way to reduce emissions.

And we support an "all gases, all sectors" approach.

Any other policy involves subsidies that will become unrealistic.

As the emissions trading scheme is currently proposed by the National Government, the level of subsidies from the taxpayer for polluters are unrealistic in the long term.

According to the latest Treasury estimates the subsidies will increase government debt by about $110 billion - $60 billion more than the Cabinet was told.

It’s a shambles, as Federated Farmers has said. It adds seventeen per cent to government debt - a doubling in government debt from the level of debt inherited by National when it took office.

Subsidies were removed for farming in New Zealand back in the eighties.

Today, I never hear of any farmer who would go back to the days of subsidies.

When I have gone into international trade negotiations around the world, it has always been a point of pride for me to be able to stand in front of any audience and say - New Zealand does not subsidise our agriculture.

Our farmers do not want subsidies, and do not ask for them.

Our farmers are so good at what they do, they do not need to be propped up.

That is an achievement for our agriculture that New Zealand farming can be proud of.

It makes little sense to now return to unsustainable levels of subsidy by subsidising pollution on the farm - or in any other sector.

I accept the need for an adjustment period.

We must be realistic about the realities of trading industries.

And we must be realistic that New Zealand taxpayers will not forever subsidise polluting.
And we should also be realistic about the potential damage to our exports if we cannot tell a compelling story about our environmental performance.

We need to show them how good our products are, and how desirable is the environment in which we grow the products we send them.

Another major issue for farmers, and for exporters generally, is the way New Zealand’s monetary policy is working.

I was pleased that Phil York made a strong submission on behalf of Fed Farmers to the parliamentary banking inquiry Labour helped to set up earlier this year.

As he pointed out, total bank lending to agriculture is around $45 billion.

That means that every one percent change in interest rates is worth $450 million to the farmers’ bottom line.

The Inquiry concluded that around half a percent was inappropriately held back by banks from farmers during the worst of the recession. So it called for action on bank supervision, action to level the playing field and action on monetary policy.

Monetary policy affects farming in important ways. Farms are heavily exposed to interest rate movements, and even more exposed to exchange rate movements.

We export 95% of everything our farms produce. When our exchange rate surges, it undermines the competitiveness of our prices in destination markets.

When the exchange rate falls, the price of inputs like fuel can soar unexpectedly.

The ideal is a stable and competitive exchange rate.

But our Reserve Bank policy targets are not well designed to produce a stable and competitive exchange rate, nor to keep interest rates as low as possible.

In fact, it often operates the other way round.

When there is a surge in domestic demand, the policy response is to increase interest rates.

Ironically, higher interest rates attract even more inflows of foreign capital, which then gets lent out and sometimes causes even stronger domestic demand.

So New Zealand’s overseas debt increases inexorably, while monetary policy punishes our most productive businesses and first home-buyers - just about the two sectors that we least want to affect.

As the parliamentary inquiry into monetary policy showed, the current Official Cash Rate punishes the tradable sector for inflation in the non-tradables sector.

Interest rates are quick to go up when inflation rises.
The OCR skews investment away from the productive areas of the economy.

It is no coincidence that it’s been nearly forty years since New Zealand earned as much as we spent overseas.

The closest we came in all that time was in 1989 - the year the Reserve Bank Act was passed, the bank was made independent and the single focus on price stability was adopted.

In those terms, the Reserve Bank Act has been successful.

An independent central bank is now orthodoxy, and it has worked well.

We battled inflation successfully.

But the battle against inflation is no longer New Zealand’s sole or over-riding policy objective.

Growth and wealth creation are at least as important.

For twenty years since the Reserve Bank Act was passed, there has been a bipartisan consensus between National and Labour over the policy targets and the primacy of price stability.

The consensus between us continues on the independence of the Bank.

But today I am announcing the end of the consensus around the policy targets and tools of the Reserve Bank.

Labour wants to see a step change in our export performance.

We want policy that will keep our exchange rate as stable and competitive as possible.

We want to reduce interest rates for businesses and home-owners, so that we put more money into the pockets of New Zealanders.

Working New Zealanders with mortgages will benefit from policy that tilts the emphasis away from its current sole concern with the holders of wealth, to a focus on creating wealth.

Price stability and low inflation will still need to be important objectives for the Bank.

We need to guard against people locking in higher expectations of price rises.

The way they interact with other objectives will be an important part of our economic policy at the next election.

The Reserve Bank Governor told a parliamentary committee last week that the Bank is already looking to use new capital adequacy tools under Basel II to provide countercyclical support to the OCR.

The Bank itself is asking questions you have asked.

Labour believes they are vital questions and New Zealand needs new answers.

We will be studying the options closely.

There are a large number of commentators who have useful contributions to make on this issue.

As the New Zealand Manufacturers and Exporters Association said this week, New Zealand needs a policy framework that underpins and supports export growth.

The system we have causes widespread damage to the tradable sector.

This is an important policy area for farmers, and for the performance of our economy overall.

I welcome the contribution that Federated Farmers made to the multi-party parliamentary inquiry on banking, and I hope we will be able to work with you as we develop a new monetary policy.

I started out by saying I hope the appearance of Federated Farmers at Labour’s conference this year was the beginning of a much more constructive relationship between us.

We have a lot of common areas to cooperate on.

And I hope that as we go forward we can continue to work constructively together.

ENDS

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