Sunday 14th August, 2011

Q+A interview with Prime Minister John Key – Points of interest:

Sees no reason to back away from Treasury growth figures

Believes gap has narrowed with Australia in "real after-tax terms"

Doesn't believe gap between rich and poor increased after tax cuts

Trying to create an environment where poorer NZers can, “transition through their own efforts."

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

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JOHN KEY interviewed by GUYON ESPINER

GUYON ESPINER
Thank you, Prime Minister, for joining us. We appreciate your time.

JOHN KEY - Prime Minister
Thanks very much.

GUYON Can I start with the world economy. The United States has effectively said it’s going to put interest rates at near-zero levels for two years - effectively a concession that there’s going to be very little growth out of that country, which is our third-largest trading partner. We sell something like $4 billion worth of goods into that market. With a slowdown there and, to a lesser extent, in Australia and China, can you really still be sure that your projections of 4% growth and 170,000 jobs is going to realise?

JOHN Well, I feel as confident as I can do. I mean, we’re not naïve. I mean, New Zealand is part of a global world. But if you have a look at just the starting predications - Treasury were originally saying the first quarter of 2011 would be -0.5%. In fact it’s been positive: +0.8%.

GUYON That was before this situation, though. Before a meltdown in the international markets. Surely common sense would tell you if those markets aren’t growing and people aren’t buying enough, then of course New Zealand’s growth projections are going to shrink back. Do you accept that that’s going to happen?

JOHN Uh, no, not necessarily. I mean, what I’d say in the US is, yes, they’re keeping their interest rates at zero. Doesn’t necessarily mean there’ll be no growth. It means they’re not predicting a lot of inflation in their economy. There’s a lot of spare capacity in the US. You’ve got an unemployment rate sitting at 9.2%, but you’ve got an unofficial unemployment rate sitting at 14%. So I think what the US is saying is, ‘Look, we could grow for a considerable period of time and actually not have those inflationary pressures.’

GUYON So you’re still expecting 170,000 jobs over four years and back in surplus by 2014/2015?

JOHN We’ve got no reason to back away from that. I mean, at the end of the day, obviously if there’s a strong United States and a strong Europe, that helps New Zealand, and if there’s not, that can have some impact. But there are a number of different factors going on. I mean, I think in China, for instance, that’s really one very critical market from our perspective because the Australian economy is very closely correlated with China. So if China slows down, Australia slows down and New Zealand slows down. The second thing is you’ve got demographic changes there. You know, more middle-income people coming on-stream. As those commodity prices come back, you will see the exchange rate come back. We’ve got domestic issues - Christchurch rebuild adding about 1.5% of GDP.

GUYON Let’s talk about the domestic economy. You said when you opened Parliament for the year in February, and I quote you, ‘The government is conscious that for most New Zealanders, an indicator of how well the economy is doing is whether or not they can keep up with the cost of living.’ Do you seriously think they are?

JOHN Well, I do. I mean, if one goes and has a look at things like the Food Price Index and the like, yes, it has risen, but it’s not the craziest moves we’ve ever seen. Um, there’s quite a lot of fluctuation in there. I mean, everyone’s talking about milk prices. Again, we acknowledge that’s putting pressure on domestic households. But they’ve risen, I think, about 9% in the last 12 months under a National Government, or I think in the entire time, actually, of a National Government - three years. They grew 23% in the last two years of Labour.

GUYON Yeah, we can isolate things, and I know the price of milk has attracted a lot of attention, but it’s rates, and it’s meat, and it’s power. I mean, people are struggling out there. Do you acknowledge that?

JOHN Oh, absolutely. Look, we acknowledge it hasn’t been the easiest period of three years for New Zealanders. But I think we need to put some perspective on that. If you look at what drives real pressure on the household budget, interest rates are a huge part of that. So, you’ve got the lowest rates you’ve had in New Zealand you’ve had, really, for 45 years. And, yes, some of that’s because of the depressed conditions around world and, to a certain degree, in New Zealand, but I think, as a government, we’ve done quite a good job in trying to take the pressure off the Reserve Bank. That’s certainly helping those households.

GUYON But you promised also to, and I quote you again, ‘maintain a low level of inflation’ in that opening speech to Parliament at the start of the year. You’ve failed. 5.3%. Highest in 21 years. It’s a failure.

JOHN No, well, I don’t accept that either. You’ve got to go and look at the data. The 5.3% includes a 2.2% uptick for the one-off adjustment of, um, GST increase. Now, everyone knew that, so if you take that out…

GUYON But that’s real. This is not some technical discussion, is it? If you’re sitting at home and your food bill’s gone up because of GST, then you feel that.

JOHN Yes, but, I mean, you’ve got to look at two things. Firstly, we care about inflation because we care about the changes in prices and the impact that has on consumers, and we care about inflation because what the Reserve Bank might do to offset that inflation. So, in the first instance, the Reserve Bank’s not going to do anything to offset that 5.3%, because it’s not concerned about nearly half of it because it knows why it’s occurred. It looks through that in terms of the GST increase. Secondly, yes, of course prices have gone up, and that’s reflected in inflation, but, actually, wages have gone up in terms of after-tax wages because of the tax cut. That’s what’s driving that. So it’s not in isolation. People have more money in their hand, and they pay slightly more for their goods because of GST.

GUYON One of the key indicators of wages, one of the key ones that your government set was catching up to Australian incomes. Are you making any progress in that regard?

JOHN I think we are. Um, you know, we’re three years into what’s been a 40-year decline against Australia. But in real after-tax terms, we think we have narrowed the gap with Australia.

GUYON By how much?

JOHN Uh, well, I don’t have the exact numbers off the top of my head. I think we’ve grown by about 9% in real after-tax terms, and I think they’ve grown by about 6%, but we’ve narrowed the gap.

GUYON So why are people leaving in record numbers? In June, New Zealand had its highest migration loss to Australia in 30 years. 30,100 people left in that month alone. And for the year to June, 29,900 people. I mean, you sat in a stadium last election campaign, didn’t you, to illustrate a sports stadium full of people were leaving to Australia, and you’ve failed to stem that tide.

JOHN Well, I wouldn’t necessarily argue that. I mean…

GUYON How could you, with respect, argue it any other way if people are leaving in record numbers?

JOHN Well, one, you’ve got to look at things… You can’t look at them in isolation, one month. So, June, for instance, we had the earthquakes in Christchurch. So some of those numbers are influenced by the fact that there are people in Christchurch who have said, ‘Look, I’m leaving. Um, I don’t see…’

GUYON It’s not down to Christchurch. Surely you’re not putting it down to Christchurch, are we?

JOHN In part. There are people who have left Christchurch…

GUYON 30,000 people leaving, though? Why are they going?

JOHN Well, in Australia, actually, it’s largely been around the mining sector, and, look, there is a gap between our wages, and the gap is significant. It’s around 30%. So you are seeing quite an aggressive action by Australia, who know that they have a shortage of skills. They see New Zealand as an educated population, and they target New Zealanders. There’s no question about that. But, I mean, you can’t click your fingers and wish this stuff would disappear. All you can do is work on lifting those after-tax wages. And, as a government, we’ve been doing a pretty good job there. I mean, that’s why we worry about building infrastructure in the form of labour markets, keeping on top of our debt position, cutting taxes - all of those things are about lifting productivity and about lifting after-tax wages. We’re making some gains, but I don’t think anyone could argue we can reverse 40 years of decline in three years.

GUYON Let’s look at the people at the bottom who aren’t doing very well at all. Uh, you had a Ministry of Social Development report you quoted in the last few days in Parliament. Now, what that shows is the population poverty rate improving between 1994 and 2009. But between 2009 and 2010, that’s unchanged. Now, those figures show that there are about 500,000 to 750,000 New Zealanders living below the poverty line. I mean, that’s a disgrace, isn’t it?

JOHN Well, as a country, I think it’s a very serious issue.

GUYON What are you doing about it?

JOHN Well, I think, again, we need to understand how to address that. So, firstly, there’s a lot of benefit-based households in that grouping. And we acknowledge as a government- It’s one of the reasons I’m going to address that issue - at least one component, part of that - in my speech this afternoon. Because, as a country, we think we have in the order of around 13% of New Zealanders of working age on a benefit supporting around 220,000 children. Now, that is an awful lot of people, and that’s one of the reasons they’re in poverty. That’s the first point.

GUYON 230,000 children in benefit-dependent homes?

JOHN Yeah.

GUYON But is that simply because we’re too generous? We’ve got too lazy with the welfare system?

JOHN Well, I think it shows you that the welfare system needs to be reformed.

GUYON So if only we could reform the welfare system, then somehow those people would come out of poverty?

JOHN Well, by definition, if you transition people from welfare to work, for the most part, they actually start moving into higher incomes, and the way that we structure things like Working For Families and our tax system ensures we do that. If you go and have a look at the family household income in New Zealand, about half of families do not pay tax in New Zealand, and the reason for that is Working For Families refunds any tax they do pay. Plus we give them support through things like the Accommodation Supplement. So the first things is, yes, there’s too many people there. But I think you’ve got to take that next step and say, ‘Well, OK, that’s again because we have quite a lot of unskilled, quite low-paid jobs, and, again, we’ve got to work on lifting that performance and that opportunity.’

GUYON OK. You’ve said, though, that for some of these people, I’ll quote you, ‘Some make poor choices, and they don’t have any money left.’ Do you stand by that? That they’re in poverty because they’re making poor choices?

JOHN Well, the question in particular was in the House. Annette King, and I think it was in relation to food banks. And the truth is that there are some people that make some poor choices. Um, I’m not arguing that’s the bulk of the cases. Um, as I say, if you try and live on the Domestic Purposes Benefit or the Sickness Benefit or the Unemployment Benefit, it’s pretty tough. Actually try and live on the average wage in Auckland, it’s pretty darn tough.

GUYON So, what sort of poor choices are you talking about?

JOHN Oh, people make poor choices…

GUYON Like what?

JOHN Well, look, there’s all sorts of reasons that they make poor choices. I mean, one of them can be in an area the government’s trying to address in terms of where they borrow money from. They’ll actually put up security of a family member, but end up borrowing money from a loan shark and paying ridiculous costs. Now, I’m not saying they deliberately do that. I’m just saying they may not be very well skilled in that area. But if I can just make one other point. You’re rightfully saying the position hasn’t improved in terms of these people in 2009/2010 period. And I’d say, yes, I agree with you - that it probably hasn’t dramatically. But this has been one of the worst recessions since the global Depression. As a government, actually, we’ve done a lot to try and…

GUYON Yet the rich got richer.

JOHN Well, actually, I don’t know. Is that right?

GUYON It must be. When you cut the tax rate from 38% to 33% and you’re earning $200,000, $300,000, $400,000 a year, of course you got richer. That’s a choice that you made.

JOHN Actually that’s not technically right. If you go and have a look at the Budget documents in 2010, they show the income distribution of those tax cuts. Now, what’s true is, yes, you cut the top personal rate from 38% to 33%, as we did, and you earn $200,000, you get a higher personal tax cut than somebody, say, earning $50,000. Absolutely right. But then go and have a look at the other impacts. They consume more. They pay…

GUYON Yeah, but that’s discretionary. If I buy a flash car and pay a bit more GST, well, it’s hardly a hardship, is it?

JOHN Yeah, but let’s have a look at the income distribution of those tax cuts. What the Treasury showed was if you look at the three cohorts or income distribution brackets - $0 to $40,000; $40,000 to $85,000; $85,000 and above - it was distributionally neutral because we took $1 billion out of property in Budget 2010. That’s what people don’t realise. We changed the depreciation rules, all those things. They affected, largely, higher-income earners.

GUYON You’ve made a lot of points there. Can you say that-? Because that MSD report you quoted in Parliament didn’t take in those October 2010 tax cuts. Surely the gap between the rich and poor after the tax cuts got larger.

JOHN Well, not according to Treasury’s advice. As I say, the Treasury advice says that basically the income distribution of those tax cuts was about +0.7% for fairly much all three of those groups. I think it was 0.7%, 0.5% and then 0.7%. In other words, yes, people got higher personal tax cuts, but if you look at the overall benefit of the package and where we also took money out of those higher income earners, or where we took money out, actually nominally they pay more in GST.

GUYON OK. Before I move on from this issue, because I want to go on to the next steps of the economy very shortly. But there’s a report out this morning called Every Child Counts by Infometrics, a respected economic-research think tank. They helped write that report, uh, so it feels like a fairly credible piece of research. They are saying that we are 28th out of 30 developed countries in terms of outcomes for children. I mean, that’s outrageous, isn’t it?

JOHN Yeah, so I think, again- I haven’t read the report. I’ve seen some media reports, but I haven’t read the report. But I understand they use lots of different factors to weight that ranking. For instance, youth suicide - an issue I’m particularly interested in trying to address, and if we get a second term, I’m going to throw resources as a department, Prime Minister and Cabinet to try and resolve or at least lower the youth suicide rate in New Zealand. It’s one of the factors in that report. So because we have one of the highest youth suicide rates in the developed world, we rank more poorly in that report. I mean, if you go and have a look at young people in New Zealand, the first thing you’ve got to say is, yes, there are issues. That’s why we’ve got a Green Paper. That’s why we’re trying to have welfare reform. That’s why we’re dealing with…

GUYON It seems to be, though, that it all comes back in your mind to welfare reform. I mean, this report shows we spend less than half the average public spend per child for under-6s in the OECD. And yet you keep coming back, your answer for poverty and children etc is welfare reform. Do you really think that’s going to solve everything here?

JOHN No. As I say, I haven’t read that report. But let’s understand a few other facts. Actually, for the average New Zealand child, most of them are doing extremely well. So, let’s have a look at education. On the PISAs study, New Zealand does extremely well in terms of if you send your child to school, for the vast bulk of them, they should come out with a world-class education. Our health system…

GUYON I know that. And we don’t need…

JOHN Well, with the greatest of respect, actually, if you have a think about those things. If you send your child to the doctor, you pay very little or not much for it.

GUYON But I’m talking about the underclass that you talked about.

JOHN I agree with you. But then…

GUYON And I put it to you that you’ve done nothing about that. You’ve got 230,000 children in benefit-dependent families. You’ve got reports like this saying we’re amongst the worst performers in the world for some of these things, and you talk to me about welfare reform and a Green Paper that may come up with some ideas.

JOHN Yeah, but what I’m saying to you is there’s almost two groups here. There’s a group of a lot of young New Zealand children who are getting a world-class education, who get great health care, who have loving parents, and they have good income coming into their household. It’s not easy for them, but basically they’re doing pretty well when you compare them to OECD countries. There is another group, the tail as we look at it, in terms of education, and we understand that that tail is disproportionately larger, and in education terms, the comprehension levels between the tail and the bulk of the other children is quite broad. But you can’t just say, ‘Well, OK, look, you know, you want to talk to me about welfare reform, but, by the way, you know, I want to talk about something different in that group.’ That group is dominated by young kids growing up in poor areas with low income going to their families, often broken homes with a lot of social issues. And if we look at what’s happening in those households, of course we have to have welfare reform and a Green Paper and a better way of dealing with these young children. And today when I give my speech, we’re going to be doing some really positive things to try and help those young people that get in those situations.

GUYON And so you think that what you’re doing in this regard is going to change those statistics? If I’m interviewing you in three years’ time if you get another term, is it going to be different?

JOHN Well, I hope so, and that’s the aim of it. But what I’m saying to you is some of these problems have been there for a long period of time - generationally, actually. And the thing about things like welfare, we’ve had intergenerational welfare dependency that’s now run through three or four generations in households. And, yes, of course we’ve got to address those issues as aggressively as we can. But, I mean, as a government, if I look back in, say, three years in office, do I think I’ve done everything I can for vulnerable New Zealanders under the circumstances we inherited and the financial conditions? I think we did. We ran quite large deficits, actually, to support those vulnerable New Zealanders. We’re also out there trying to create an environment where those New Zealanders who find themselves in poorer positions can transition through their own efforts, through their own work and through a system that encourages them into higher levels of performance. And we see lots of positive examples of that, actually, every day.

GUYON All right. That’s pretty much all we’ve got time for. Prime Minister, thanks very much for your time. We appreciate that.

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