Foss Craig: Reserve Bank of New Zealand Amendment Bill (No 3) — Second Reading In Committee Third Reading 
Text is incorporated into the Bound Volume 
Foss Craig: Reserve Bank of New Zealand Amendment Bill (No 3) — Second Reading In Committee Third Reading 
[Sitting date: 02 September 2008. Volume:649;Page:18224. Text is incorporated into the Bound Volume.] 
CRAIG FOSS (National—Tukituki) 
: 
 It was worth a try! Speaking to Part 2—and yes I have spoken a fair bit on this part; I was on a bit of a roll before—I note that Mr Tremain alluded to the dividend that the Reserve Bank pays and also to the statement of intent that it has to produce. Mr Tremain started to describe how the dividend payment will be changed and that is all very fine but the size of the dividend depends on whether there is an excess of revenue over expenditure—I was going to say “profitability” but that would not be right in the Reserve Bank’s case. Hopefully it is positive. That drives what the bank pays back to the Crown. It will be interesting to see. 
I ask the Minister in the chair the Hon Shane Jones whether there is a charge on the capital that the Reserve Bank has. The Reserve Bank will now have $2 billion of taxpayers’ capital tied up in order for it to manage and run its operations. A hospital or district health board for example has to pay a charge of between 7 and 10 percent on the use of capital. I would be very interested to hear the point of view of the Minister in the chair on that. 
In the recent Budget $600 million extra of taxpayers’ capital was allocated to the Reserve Bank to enable it to carry out its operations. I was quite concerned about that. Many people were not aware of it. It has had some publicity now and the Reserve Bank has explained to the public why it needed that amount. But it is worth noting because there has not really been a debate on it that $2 billion of capital is now allocated to the Reserve Bank. That is capital that cannot be used to help fund infrastructure—to help pay for hospitals schools etc. That money is tied up with the Reserve Bank and at risk. I freely admit that it is very conservative with that capital and one would expect it to be. However I am somewhat concerned that we have not had a public debate about the matter. The outcome of that debate may be that yes it is absolutely fine but it did seem to slip below the radar. If the Reserve Bank lost some funds in the course of its operations be it through bonds that it has invested in be it through foreign exchange that it is engaged in or be it through the money supply that is out there that capital would start to be eaten. 
The Reserve Bank was given $600 million because its bond portfolio was massively under water when it marked to market. All Government accounts now have to be produced under the International Financial Reporting Standards so the bank had to put that money up as if it were for sale. The difference in respect of the money it spent to buy all those Government bonds versus the value of those Government bonds today is a huge negative hit to the taxpayer. The Reserve Bank argues and fair enough that it holds those bonds until maturity so it will always achieve the principal—assuming that the Government is still in place and let us hope a Government is in place to do that. That is fair enough but this issue should have been considered when the International Financial Reporting Standards were adopted for all public accounts in New Zealand. 
Members will note that even the Auditor-General has raised serious questions about the application of mark-to-market valuations to public sector accounts and that is a typical example of the problem. Landcorp is very open about its problems with it but we can take it right down to the level of our local councils which have huge issues with it because it imposes a huge compliance cost upon them. 
Regardless of how the dividend is structured and calculated the amount depends on the operations of the Reserve Bank and what is at risk. Given the pressure that non-bank financial institutions will be under because of this legislation the Reserve Bank should put itself under the same framework. The fact that it needed much more capital to fund its operation because of an accounting change shows that it was undercapitalised from the start. I know that the Reserve Bank has assured us that its prudential ratios are very very conservative and absolutely fine—we all know that—but $600 million suddenly disappeared from the Crown bank account to it to allow it to continue its operation and to expand. 
We also know that the Reserve Bank has a short New Zealand dollar position of $4.2 billion—$4.2 billion in foreign exchange. I know why it is doing that and that is absolutely fine but does New Zealand understand what is at risk? That is a debate we need to have. I am not saying it is wrong and I am not saying it is right but we have had big discussions about the purchase of New Zealand Rail—$650 million and counting—yet $600 million was parked with the Reserve Bank and there was hardly a whisper apart from two articles in the  
National Business Review 
. 
Finally I would like to take issue with the changes to the Act in terms of the statement of intent. The intent of the Reserve Bank as most people understand it is to keep inflation between the 1 and 3 percent band. Actually that is not its intent at all. The public needs to understand that the job of the Governor of the Reserve Bank now is to ensure that forecast inflation is between 1 and 3 percent over the next term which is basically 3 years. The effect of that has been to have forecast inflation of 3 percent rather than inflation being capped at between 1 and 3 percent which is what most people understand to be the case. Yes that might sound a bit boring and technical but it has huge ramifications. It creates uncertainty because when we calculate the value of something in 10 years’ time—infrastructure investment for example—the higher inflation and interest rates are then the less viable that investment is. That is why we need certainty that inflation outcomes will come within the band which is what has been agreed at the moment. High inflation is devastating. If we look at the interest rate curve in New Zealand and at the viability of many projects we see that they do not work and that is the core reason why. 
I would like to have another read of the statement of intent of the Reserve Bank to measure its outcomes versus its intent because inflation has been outside the 1 to 3 percent band many times over the last 2 years and it is forecast to be outside it for at least the next 12 to 18 months. That is devastating for New Zealand. It is devastating for our older folk who have funds invested because inflation eats financial savings. It is devastating for the first-home buyer who is trying to get ahead but has to borrow at an interest rate of 8 or 9 percent to obtain a mortgage. That is why it is devastating that is why we need to be totally vigilant and that is why the provisions in this bill need to be comparable with the regulations and supervisory commitments of the rest of the banking sector. Thank you Mr Chair. 
Part 2 agreed to.