Q+A’s Guyon Espiner Interviews Treasury Secretary, John Whitehead

Points of interest:

- Warns that New Zealand can’t afford Superannuation “plus all the other things that we’re doing”

- Whitehead calls for a debate on compulsory superannuation savings

- Treasury wants scrutiny of overseas investment scaled back or removed: it “can help the living standards of New Zealanders”

- On loosening overseas investment rules: “I think you will find in due course they will come out with a policy which probably isn't as far as that, but certainly is looking at the benefits”

- “I don’t think tax reform has finished in this country”

- Treasury didn’t argue for greater tax cuts, only “hopes” that tax changes will persuade people away from property: “The exact amount remains to be seen”

- On catching Australia by 2025: “That’s a tall ask”

- New Zealand’s external debt rates are higher than Greece and Spain: “That makes us vulnerable in the eyes of others”

- Treasury has a “long-term hold policy” on state assets and hasn’t done work for government on floating state assets, but is investigating “what people are worried about in privatisation”

The interview has been transcribed below. The full length video interviews and panel discussions from this morning’s Q+A can also be seen on tvnz.co.nz at, http://tvnz.co.nz/q-and-a-news

Q+A is repeated on TVNZ 7 at 9.10pm on Sunday nights and 10.10am and 2.10pm on Mondays.

JOHN WHITEHEAD interviewed by GUYON ESPINER

GUYON Thank you John Whitehead for joining us this morning, we really appreciate your time. Treasury has long advocated for higher taxes on consumption and property and lower personal income tax rates. The Budget to a degree touches on and addresses those issues. I just want to take you through some of them. Did Treasury support the cuts to personal tax rates that were implemented or did you think the government was perhaps going too far, or not far enough?

JOHN WHITEHEAD – TREASURY SECRETARY
No we've for some time supported lower personal tax rates, because we think it's good for growth and for enterprise.

GUYON At that level, or did you think they could have gone further?

JOHN Oh there's I think debate about the levels. I don’t think tax reform has finished in this country I think there will be more, but at step at a time.

GUYON So did you advocate for a lower personal tax rate than was actually implement on the day?

JOHN Not at this stage, no. We've broadly argued for something of the order that we've got at the moment, because this budget needed to be fiscally neutral. What we have done is advocated for some time for a widening of the tax base, so that those reductions can be afforded.

GUYON Interesting. So you believe that we could go further in the future and perhaps lower personal income tax rates further?

JOHN Well I think personal income tax rates, corporate rates, are important and one of the key things that we are looking for in New Zealand is more investment to help our growth, help improve the standards of living, and lower rates are important to that.

GUYON Can I look at GST? Did you support a 15% rate of Goods & Services Tax, or was Treasury perhaps looking for a higher rate of consumption tax?

JOHN No I think something of the order of the move that we've made is quite a substantial one for a first step, it's you know the total package was about four billion dollars, including GST and other revenue effect. So that’s a pretty big package, the biggest for 25 years roughly.

GUYON You’ve publicly argued for some form of capital gains tax in the past, that didn’t happen in the Budget. But do you feel that the changes to tax treatment for investment properties, will have a significant impact in switching investment away from the property and residential sector, and into more productive areas of the economy?

JOHN Well I think they’ll have some impact, the exact amount remains to be seen. We've advocated for extending the boundaries of capital gains tax for some time now, governments have consistently rejected that. I guess that will probably go on for some time in both directions.

GUYON But you think it will have some impact on dissuading New Zealanders from throwing their money into the housing market?

JOHN That is certainly the hope and I think it will. But I think what is really important is that New Zealanders save more over time. We're quite vulnerable as an economy. Our external debt rates are higher than Greece's they're higher than Spain's, the order of Portugal's or a little bit less than Portugal's.

GUYON And how much of a problem is that?

JOHN Well I think it's quite a significant problem. And here I'm talking about the nation's debt, it's the private sector, it's households, it's government all added up together. That makes us vulnerable in the eyes of others. There are things that distinguish us from Greece and other countries that are vulnerable, but we do have a vulnerability?

GUYON Because to most people that’s just a number sitting out there somewhere, what is the practical impact of having all that debt?

JOHN Well I think the practical impact is of course first of all you have to pay it back and you have to meet the interest payments on those. But the matter of concern is at a time when markets are fragile and people are looking for safe havens, they're looking around and saying well which countries have low levels of debt, and New Zealand as a country is not one of those.

GUYON When you look at the tax package that we were talking about in the Budget, I mean the impact on economic growth is just 0.9% over seven years. I mean it's hardly a massive impact. Were there ideas which you put forward which could have had more of a transformation effect on the economy than this tax switch?

JOHN Well I think on the tax switch itself, our estimate of the impact of that, I personally believe it's probably a conservative estimate. But what we've done is only estimated the things we've got reasonable certainty about, which is fundamentally around the impact on labour supply, increased employment and the like.

GUYON And is that simply because people are more likely to work extra hours if they get to keep more of your money. I mean what's the evidence for tax cuts being good for the economy?

JOHN Oh there's quite a lot of evidence on those labour supply impacts.

GUYON You mean people are willing to work more because they keep more of their money, is that what you mean?

JOHN More people come into the labour force because they keep more of their money, that sort of thing, that’s true.

GUYON But I guess if tax is the big answer then we'd be there by now wouldn’t we? We had a 28% company rate, and a 33% top personal income tax rate in 1988. I mean we'd be there by now wouldn’t we?

JOHN Oh look absolutely, tax is only one thing. This is a part step and I think a very important one and a very positive one for growth, but it's only a part step in one area. We've gotta get a lot of things right to really raise our game.

GUYON The Finance Minister has said, and I've heard him say this, he wants to be frightened by Treasury advice, he wants you guys to get out there with some big ideas. What are some ideas that you’ve put to him that have come into that sort of sphere and have actually surprised and frightened him?

JOHN That have frightened him? Well I spose one of the things we did do was push pretty hard on the capital gains side. Another thing we've done is recommended that the government go faster in getting its debts in order, its own fiscal accounts into order, those sorts of things I guess…

GUYON Cos you did say that getting us back into surplus was critical. Now we're running cash deficits to what 2016 from memory. Not good enough?

JOHN Well it's a balance because you don’t want to crunch the economy by going too fast, and I think there are risks of do that. At the same time because of those external debt levels the quicker we can get the public sector debt peaking and coming down, the less vulnerable we will be, the more chance we've got of absorbing the shock when it comes along, and there's a lot of risk out there.

GUYON Is this a budget do you think that puts us on a path to catching the sort of incomes that we see in Australia?

JOHN Well I think it's a step in that direction but there's a lot more steps needed. I guess you're asking me do I think we can catch up with Australia? Absolutely I think we can. Can we do it by 2025? Well that’s a tall ask, it's a stretched target.

GUYON Because the Reserve Bank Governor, Alan Bollard, sat where you're sitting and said, we can't catch Australia. You don’t agree?

JOHN Well I think Alan and I are probably not that far apart. I mean a really strong performing Australia is really important for us, it helps our economy when Australia does well. They're a long way ahead, but we've been ahead before. It's not just about minerals, it's not just about the resources you have, it's about what you do with what you’ve got.

GUYON Well let's talk about some of those minerals and resources. I mean our natural resources are obviously a key driver of economic growth. Is it Treasury's belief that there is considerable economic benefit in increasing the level of mining in New Zealand, and have you advised the government to yes go ahead and mine more conservation land?

JOHN We haven't specifically advised on that, because it's not our prime responsibility. But I think our view would be that actually what you need in New Zealand on this and the many other issues, is a really good debate which doesn’t result in one side or the other getting behind their ideological barricades and throwing stones at each other, which I think sometimes happens. I think we can have a really good environment in New Zealand. That’s crucially important for us as a society, and for our economy, and I think we can have mining as well.

GUYON You see an open economy obviously as another key driver of economic growth, in fact you go as far as saying in a speech last year that we should consider “lowering or even removing investment screening on all but the most sensitive of items”. Is it really Treasury's position that for the most part, we should let foreign investors simply buy our assets and land without scrutiny?

JOHN I guess we're now trying to scare people here too aren’t we? I think fundamentally there's a lot to be gained from open flows of people, open flows of ideas, open flows of investment. That can actually help our economy, it can help the living standards of New Zealanders. We do need protections but fundamentally overseas investment is beneficial for New Zealand.

GUYON Because that’s quite a radical statement, lowering or even removing investment screening on all but the most sensitive of items. So would that mean that a farm like the Crafer Farms, or some of these dairy farms that the Chinese want to buy, should they just go through without question?

JOHN Well you have an Overseas Investment Office which is….

GUYON Yes but you're talking about removing that screening though aren’t you, in that statement?

JOHN Yes, for all but the most sensitive items we're saying, and then the definition you would argue about is what's sensitive?

GUYON Would that qualify?

JOHN Well it does at the moment effectively. People can apply to invest in those items and you know they are approved at various times.

GUYON But you're talking about considerably reducing it from the scrutiny that we have now?

JOHN That’s right.

GUYON And have you advised the government about that?

JOHN Yes we have. There's a process going on at the moment, revising the Overseas Investment Act.

GUYON And what's the reception to that idea?

JOHN I think it's still early days, the government hasn’t made up its mind on all of those things yet. But I think you will find in due course they will come out with a policy which probably isn't as far as that, but certainly is looking at the benefits you can get from overseas investment.

GUYON One of the other things we're constantly told is that we need to shift our investments and our money into more productive areas of the economy. But a constant refrain is that there simply aren’t the good investments out there, and we've had this debate raise its head again recently, about the partial or full sale of state assets. What is Treasury's advice on the economic advantages or disadvantages about partial or full sales of state assets?

JOHN Well can I answer your question in two parts. I mean first of all I do want to make it clear it's the government's policy at the moment, that in this term they will not privatise, so we haven't been working on any kind of programme of all or partial privatisations for individual or multiple assets of the state owned enterprises. Do we think it has a place? Well the work we are focused on, is actually how do you get the best value out of a very important sector of New Zealand, the state owned enterprises, which account for about 50 billion dollars worth of assets. How do you get the best impact for the economy out of that? Obviously very important. We've got a long term hold policy at the moment in the area of state assets, and there's a number of things we can do.

GUYON Sure, I want to move on to some of that a little bit later, but if I could just bring you back there. What is your advice – economic benefit of partial state asset sales.

JOHN I think on partial privatisation, if we were to advise, I think we would say that there were some advantages and some disadvantages. The big advantage you would get from partial privatisation is you would have them listed out there, people would be able to analyse their performance, you'd get all the benefits of the markets. You would also help deepen some of the capital markets, which is a very important thing for New Zealand.

GUYON So Treasury would be advocating on this, it would be surprising if they weren't?

JOHN We over time have advocated in favour of privatisation, but there are also some disadvantages about partial privatisation. People tend to thing for example that because the government is still an owner, in some way it guarantees things, and of course it doesn’t.

GUYON Before I leave this issue, have you don’t any work, any paperwork at all on this issue?

JOHN We haven't reported to government on it, they haven't asked for reports…

GUYON Have you been doing internal work on it?

JOHN We do some thinking on all sorts of things, and privatisation would be one of those.

GUYON So there are papers that have been written internally by your staff?

JOHN Well one of the things I asked my staff some time ago, is to really think about what are some of the arguments that people advance against privatisation, because New Zealand's a bit unusual. Most countries overseas that’s not particularly controversial nowadays, it is here, and we want to get a better understanding of what it is that people are worried about in privatisation.

GUYON One of the other areas that I guess would be a bit of a shot in the arm for capital markets in New Zealand, would be increased savings. In Australia they’ve had compulsory retirement savings for 18 years. Do you advocate that here?

JOHN We haven't advocated compulsory superannuation in the past. I think it's another area where we need a really good debate. I think people that put issues like mining and compulsory superannuation on the agenda, it's really good for New Zealand, because we need to work through what's in our own interests, and that’s one of them. So we would certainly be interested in looking at that issue amongst others.

GUYON Do you support it, you're the chief advisor to the government on the economy, do you support the idea of a compulsory retirement saving.

JOHN What I do support is that we need to get much better at savings in this country, and we need to look at a range of options for that. KiwiSaver has been one of those. Take the recent personal income tax and GST changes, I think [they] are helpful in that. I think compulsory superannuation should be part of the debate.

GUYON And when we're talking about superannuation, I mean one of the ways we're trying to smooth the demographic changes that Treasury's very worried about, is by prefunding superannuation by a two billion dollar yearly contribution by previous governments. What is Treasury's advice about whether we should be making contributions to the super fund now?

JOHN Treasury's advice is to get your debt down first, and to get back to surplus, and that was part of the original act that was passed on the superannuation scheme. Once we've done that our advice is yet get back into prefunding.

GUYON And is your advice to raise the age of eligibility for superannuation from 65?

JOHN Well we haven't formally advised on that, not recently. What we did do is publish a long term fiscal statement a while ago, which looked at the cost of the various policies that we've got in place.

GUYON Because you don’t believe it's sustainable at 65. That document was very clear on that.

JOHN Well I think what is very clear is we can't afford to keep doing our existing policies at the same rate as we're doing at the present, in the future, because of demographic and other changes. Actually you could afford to continue New Zealand superannuation, but what you can't afford is that plus all the other things that we're doing.

GUYON Just a couple of minutes left. I'd like to look at the state sector performance, which is a big area for the Treasury. We've all heard about the restraint in the public sector, but I wonder whether we've actually grasped the magnitude of it. I mean you're saying that for us to have a sustainable debt level of 20% of GDP, I'll quote you here. In your long term fiscal outlook you say that "for that to happen the state sector workforce will have virtually no growth over the next 40 years." Are you talking about no new workers in the state sector for 40 years?

JOHN Well obviously it's a projection, and there's a lot of things that can change in that time. But what I would say is two things. One, I think initially the state sector has begun to grasp that nettle. I can give you an example…

GUYON But is that what they should expect? No new workers, no workforce number growth at all, for four decades?

JOHN Oh look, for four decades I think we've got lots of choices, and the sooner we make some of those choices, the easier some of those trade offs will be. So yet there will possibly be growth in some areas, but we have to make some of those trade offs, and that means restraint in the short term.

GUYON Are you tinkering around the edges a little bit here with the mergers of departments and the mergers of HR and IT back office functions. I mean have you thought about turning the lights out in some government departments.

JOHN Oh, not exactly in those terms. What we have done I think – I think there's been a very good start in many respects. If you go back to 2008 there were over 700 budget bids, this year there were 30. So I think there's a change in the attitude of public servants and others putting forward proposals. But if you just look – let's not look 40 years, let's look five year ahead – you're faced with inflation of a couple of percent on average a year, 2.4% over the forecast period per year. That means over the next four or five years you're facing 10 to 12% reduction in real base lines that we've got. We've gotta get much smarter. I don’t think it's fundamentally about the numbers of people, I think it's actually fundamentally about the way we do things in the public sector.

GUYON Okay you’ve got a year to run on your contact about, is this your final year as the head of the Treasury?

JOHN Yeah, I think it's a wonderfully privileged job, I've really enjoyed it, I've got quite a few things to do in that year, but I think eight and a half years in charge of any organisation is time for a leader to step aside and move on at that point.

GUYON So that'll be it, you'll be hanging up your hat as the head of the Treasury at that stage?

JOHN I certainly will be looking to make a contribution, but not in that form.

GUYON Good place to leave it. Thanks very much for joining us this morning we appreciate your time.

ENDS

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