Norman Russel: Debate on Budget Policy Statement 
Text is incorporated into the Bound Volume 
Norman Russel: Debate on Budget Policy Statement 
[Sitting date: 02 May 2012. Volume:679;Page:1873. Text is incorporated into the Bound Volume.] 
Dr RUSSEL NORMAN (Co-Leader—Green) 
: 
 I rise to speak on behalf of the Green Party on the Budget Policy Statement debate in this Parliament. The Green Party put forward its own economic plan in the lead-up to the election. It is a plan for a smart green economy and that is one where we take our national debt particularly our current account deficit seriously but also seek to transform our economy and deal with the fact that our export sector is in real trouble.  
When this National Government came in—when it was first elected—it inherited an economy that was out of balance. There is no question about that. It had much too much debt particularly private debt. The public sector debt was in a good position. The previous Government had actually run a surplus but private sector debt was very much out of control and the tradable sector was in real trouble. Since then the Government was rocked by some serious external factors that had nothing to do with it particularly the earthquakes in Christchurch but more generally the global financial crisis and of course the European crisis. So in a sense you could say the Government had some real challenges. The other way to look at it is to say that it had some real opportunities to remake our economy to put it on a more sustainable footing—an economy that saves more an economy that invests in productive enterprise more an economy that creates jobs in the emerging cleantech sector and an economy where Christchurch is rebuilt to be one of the most greentech and sustainable cities in the world. That was one of the many opportunities that were in front of the Government.  
The thing is that when you inherit an economy that has some fundamental problems you do have a window of opportunity to fix it. It is the one moment when powerful vested interests who have a vested interest in maintaining the status quo are open to acting differently because the status quo is not working. Our view is that the Government has not used this opportunity well to reform the New Zealand economy in some quite fundamental aspects. Firstly there is the question of the deficit. National’s signature economic policy was its tax cut package which was introduced in 2010. It was a policy that was designed before the global financial crisis and before the Christchurch earthquakes and it was a policy that was totally wrong for the time it was introduced after those events. Tax cuts failed to stimulate the economy because they were not tax cuts to low-income earners. They primarily went to upper-income earners and they did not stimulate the economy at the time it needed it the most. The other side of it was that it crashed the budget. Because the tax cuts were not fiscally neutral it meant that at a time when the Government actually needed more revenue it threw more revenue away. That in my opinion is not smart economic management.  
The fiscal crisis the Government is currently facing is a problem that is to a large degree of its own making because of the tax cut policy it pursued in the 2010 Budget—a policy that was designed before the global financial crisis and before the Christchurch earthquakes. Figures from the Crown’s year-end Financial Statements 2010-11 show that National’s 2010 tax package has cost the Government $1.1 billion in the first 9 months—it cost $1.1 billion in the first 9 months. Most of that cost is due to the reduction from 38c to 33c of the top tax rate which benefitted the top 10 percent of New Zealand earners. The signature economic policy for the National Government the tax cuts—tax cuts for those on high incomes largely—has not been fiscally neutral. The cuts have crashed the Government’s revenue at a critical moment and in my opinion that is a failure of good economic management.  
National was handed a once in an economic cycle opportunity to institute a comprehensive tax on capital gains. The crisis that the Government inherited created the opportunity in which it could move the tax system to a more sustainable footing and it failed to take advantage of that. A capital gains tax would remove the unfair tax advantages from investment in property over more productive measures. The Government did actually change some of the rules around tax and property and I congratulate it on that but it failed to introduce a capital gains tax that excluded the family home. The Government chose to ignore the conventional wisdom of just about all economists—the OECD the IMF and the Government’s own Savings Working Group—so it is no surprise that as our weak economic recovery is emerging at the moment we are finding that it is concentrated in the housing sector which is the very sector where we do not need another bubble. The reason it is happening is that the Government refused to change the tax incentives around investment in housing.  
Our tepid economic recovery which we are experiencing at the moment looks nothing like the export-led recovery we actually need. We need the tradable sector to do well. Part of this is linked to the hands-off approach when it comes to the exchange rate. A recent business operations survey by Statistics New Zealand found that a high and highly volatile New Zealand dollar was the No. 1 barrier that our exporters faced. That is what it said. The same survey shows that the number of businesses exporting has remained flat under 4 years of this Government. The high kiwi dollar has been damaging our tradable sector the lifeblood of a sustainable resilient economy. As far back as June 2009 the Governor of the Reserve Bank was uncomfortable with the stronger currency telling his board that the high New Zealand dollar would not deliver the rebalancing we need in the New Zealand economy. Since then the kiwi dollar has appreciated a further 28 percent against the US dollar while the trade-weighted index which is an attempt to compare the kiwi against lots of other currencies based on how important they are to us as a tradable sector is up 21 percent. So if we want our export- and our import-competing sectors to thrive to help pay our way in the world we are going to need to address our high and highly volatile exchange rate.  
Our trading partners have not taken a hands-off approach to their exchange rates. If you look at Japan the United States and the UK they have all engaged a suite of measures to actively manage their currencies. The IMF recently even backed Switzerland’s most unorthodox use of quantitative easing—probably one of the most unorthodox exchange rate management policies we have seen for many decades. The IMF said that it was “appropriate” in the circumstances because the Swiss franc was getting so high that it was destroying the tradable sector of the Swiss economy. I wish our Government would take some notice of that. Other countries have introduced new domestic capital requirements on banks and controls on foreign capital to try to dampen some of the wild swings in their exchange rates. The global financial crisis has changed the world as we know it and the rules as to what is acceptable monetary policy and fiscal policy but no one it seems has told the Government. Our exporting sector and our tradable sector have been left high and dry by the Government’s non-interventionist approach to economic management. It has not worked.  
Many aspects of the Government’s policy I think we could disagree with but selling the State-owned enterprises through the privatisation programme the Government is engaged in is bad fiscal policy as well as bad economic policy. Fiscal policy is of course the management of the Government’s own budget whereas economic policy refers to the broader impact on the New Zealand economy. The way the Government has sold the privatisation it has deliberately tried to confuse debt with deficit in order to try to confuse the argument. In the short term selling these companies will have a negative impact on the Government’s deficit. That is a very important thing to think about. Why is it that we have a public debt problem? It is because we have a deficit problem and we have to overcome our deficit problem. Selling the assets makes our deficit problem worse. That is because of course the cost to the Government of borrowing is much lower that the return on these investments. Actually we are in a worse position.  
So hanging on to these assets is not only good for the fiscal position; it is also good for the economic position of New Zealand because fundamentally these companies—these clean green companies which is not what all of them are but a significant number of them are—are part of what could be New Zealand’s economic future. There is a growing clean-energy sector globally and if the climate change science is right—and I have got every reason to think that it is—then the cleantech sector the clean energy sector is only going to grow and grow. And New Zealand is right now in a great position to take advantage of that. But if these companies fall into overseas ownership they will move the headquarters and the research and development overseas and we will become a profit centre for another multinational company that owns these companies rather than the centre of a sector that is exporting clean technology to the world.  
One of the key aspects in all of this that is not getting the attention it should deserve is the current account deficit. If we do not deal with our current account deficit we will enter a worse and worse spiral. Current projections are for the current account deficit to go towards 6.9 percent of GDP in a couple of years. That is a huge problem. The only way you service a current account deficit is to sell assets or to take on more debt. Each time you do that you solve your current account problem for this year but you make next year’s current account deficit worse because you then have higher debt repayments and you lose all the dividends on those assets. The fact that the Government has not addressed the current account deficit problem I think is a fundamental fail on the part of the Government. Until it addresses that problem it cannot claim to be a good economic manager of New Zealand and clearly on the fiscal side it is failing there as well. Thank you.