Cullen Michael: Debate on Crown Entities Public Organisations  and State Enterprises — In Committee 
Cullen Michael: Debate on Crown Entities Public Organisations  and State Enterprises — In Committee 
[Volume:631;Page:3047] 
Hon Dr MICHAEL CULLEN (Minister of Finance) 
: 
 On historical principle I have a great deal of sympathy with some of what the member was saying towards the latter part of his discussion—that is that GDP is not a measure of everything in our society. Indeed I think that those people who tend to talk as if GDP per capita is the only thing that is important are missing many many points. They are missing first of all the point that GDP per capita in itself is not necessarily a very good measure of relative material standards of living because it takes no account of a whole range of costs that may go into that element. For example it is often said that when one goes to the UK £1 is worth $3 but for many things one buys one might as well regard £1 as equal to $1 in terms of what it actually buys such as a cup of coffee or something in a restaurant. The second thing is that GDP cannot possibly measure a whole range of issues around quality of life and style of life and it is often a poor proxy—except in very broad senses—around a range of social indicators such as life expectancy housing quality etc. 
However it is also true to say that over the broad span GDP is a measure of the standard of living as long as the argument is not pressed too far. Our standard of living today is immensely higher than it was 100 or 200 years ago and our GDP per capita is immensely higher than it was then. In traditional pre-European Maori society life expectancy was barely 30 years. That has been well demonstrated by the analysis of remaining skeletal evidence. Now of course life expectancy for Maori is less than it should be because it is less than the general average of the population but it is more than twice what it was under a traditional society and clearly on many other social indices similar points could be made. 
Coming back to the subject of the Reserve Bank I think it is important to recognise that that bank has to some extent a limited brief. First of all it is there to manage the financial system which is not the same as to give the value of the dollar. It is to ensure that the financial system is operating in a prudential fashion. That banks are not likely to fail for example is the most obvious measure of a secure financial system. 
The Reserve Bank’s second role and the one most seen in the public arena is to try to manage monetary policy to underpin low inflation. I am sure the member does not want to go back to the days of high inflation which erratically redistributed wealth and income and which led to enormous uncertainty in many ways. At the moment our inflation rate is something above that target rate—which is another reason why tax cuts are a silly idea at the present time. But more important than that the bank at the moment is in what is called a tightening cycle. It has been raising interest rates. 
Not unnaturally people do not like increases in interest rates. It is not the job of the Reserve Bank to be popular. It is not going out there like Westpac the BNZ or Kiwibank to try to find out whether people like its services because it is a regulator and it is a moderator of interest rates. Those are not two key functions that are necessarily designed to make the Reserve Bank popular. I have always said that the most important reason for giving central banks independence to raise and lower interest rates—apart from the fact that Ministers of Finance do not like doing the election years—is to ask: “Why the hell should the Minister of Finance take the blame and leave it off for reserve banks anyway around the world?” which my good friend Gordon Brown saw instantly as a very good reason for giving the Bank of England operational independence in that matter when Labour became the Government in the UK in 1997. 
The Reserve Bank’s job is also not to try to make the New Zealand dollar higher. Yes the New Zealand dollar in one sense has been underperforming in recent times if we mean by that that the dollar has fallen. But the dollar falling has been good news in recent times for exporters—not bad news. I do wish that our media would stop reporting the dollar as though it were some kind of representation of the male physiognomy; “up” is not good and “down” is not necessarily bad when it comes to the level of the New Zealand dollar. But if we watch television every night we know that it talks as though the New Zealand dollar did well on the days it went up or did badly on the days it went down. But if one were an exporter selling manufactured goods to Australia when the dollar was worth over A90c one was hoping the dollar would have a bad day—and one wanted a lot of bad days in a row—in order to be able to make some profit on one’s bottom line. 
So it is not the job of New Zealand’s Reserve Bank to prop the exchange rate above the rate that is represented either by the market or by the equilibrium rate. In a small economy the real problem is that the New Zealand dollar will be a volatile currency because it has low liquidity in terms of international exposure. 
Report noted.