Parker David: Motions — Reserve Bank Funding Agreement—Ratification 
Parker David: Motions — Reserve Bank Funding Agreement—Ratification 
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Hon DAVID PARKER (Labour) 
: 
 I rise on behalf of Labour to speak in respect of the 5-year funding agreement of the Reserve Bank which is being discussed at the moment. Labour supports the motion but makes the point that a lot more reform is needed in respect of monetary policy. As Russel Norman has said and as David Cunliffe agreed before him there is a problem with current monetary policy in New Zealand. What was world leading and right at the time when monetary policy was introduced in the late 1980s when New Zealand had rampant and out-of-control inflation now needs to be updated because it has had some perverse effects in the last decade. Most notably the world has changed substantially in the last 2 or 3 years as a consequence of the international financial crisis and the lessons that have been learnt from it. 
I will restate my view and the Labour view on some of the current problems with regard to monetary policy. There is no doubt that in order for New Zealand to improve our relative wealth amongst the countries of the world and to maintain the quality of services that we want to have in health and education we have to do better than we have been doing relative to the rest of the world. In order to do that we need to increase our growth in exports. At the moment we are running quite a large current account deficit and we cannot become wealthier as a country until we export more than we import—and in those exports I include the investment flows: the interest that we pay to overseas lenders and the dividends that flow to the overseas owners of New Zealand assets. We cannot reduce our current account deficit if the settings in our economy are not conducive to an export economy. Our settings at the moment are not conducive to an export economy. Monetary policy is one of the settings that is not quite right. 
That has a couple of impacts on New Zealand. It is now abundantly clear that New Zealand’s long-term interest rates are higher than those paid by the competitors of our New Zealand export businesses when they are operating in other parts of the world. New Zealand businesses that try to invest in sophisticated plant and machinery in order to improve their productivity and compete against international competitors—be they competitors in China the United States Europe or Japan—face higher interest rates because we have ourselves on the track towards perpetually higher interest rates. I know that at the moment our interest rates are not higher than Australia’s; they are pretty much the same as Australia’s. But that is pretty rare in the longer term and it is because Australia is one of the few Western countries of the world that are still booming. If we look at ourselves compared with all of those other countries be they Japan Australia or the European countries we see that our interest rates are higher than the rates in those countries. Our exporters face that disadvantage. 
In addition to that our exporters face the problem of having an incredibly volatile currency. It has been said by some economists that our commodity prices and currency act as a hedge to each other and that may well be true in respect of the dairy sector. If dairy prices go high the currency reacts and goes high and conversely when dairy prices drop the exchange rate drops a little. There is a bit of a natural hedge perhaps in respect of major commodities like dairy products. But that is not true in respect of manufactured goods. 
I saw a presentation recently from Rick Boven of the New Zealand Institute who was analysing the difference between New Zealand’s economy and the economies of other developed countries that are wealthier than us. He looked at the issue of whether we can bridge the gap between us and Australia by increasing either mineral extraction or agricultural output. It was abundantly clear that the difference between New Zealand and Australia in respect of minerals is only about 10 percent of the difference between the two economies. Although the Government said a couple of months ago that mining would be the panacea for New Zealand and that moving in on minerals in the national parks and the like would bridge the gap in a large way between New Zealand and Australia that was never the case. It was never the case in theory and of course it is never going to be the case in practice now anyway because the Government has now abandoned its attempt to mine in national parks. 
If we are to become wealthier as a country relative to other countries and get back up the OECD rankings we have to increase our exports. At the moment our monetary policy with its effects in terms of creating a higher and volatile exchange rate and higher entrenched interest rates is curbing the performance of the export sector. If it is riskier for our exporters relative to investment in export industries by competitive producers of those same manufactured goods in other jurisdictions it is then absolutely true that there will be less investment in the expansion of those important export industries in New Zealand than would be the case otherwise. So we will not bridge that gap as we ought to. 
I agree with what Russel Norman has just said in terms of the perverse effects of monetary policy in recent years. I am someone who can stand here with my hand on my heart and say I have been saying that since I have been here. I was on the Finance and Expenditure Committee when I first came to Parliament in 2002 and I said the interest rate differential between New Zealand and overseas countries was driving an inflow of capital into New Zealand that was being lent by the banks on ever-higher lending margins and ever-higher loans on the same securities. Those higher interest rates were through the liquidity being introduced into the New Zealand economy driving the very consumption pressures that higher interest rates were meant to curb. 
The interest rate differential between New Zealand and the rest of the world has become a problem. Therefore we need more tools for the Reserve Bank to control inflation with than just the interest rate lever because the use of that lever is having two perverse effects. I have mentioned one which is driving liquidity into the country and feeding the consumption pressures that it is meant to curb. But as well as that given our reliance on overseas capital every time we have an increase in interest rates in New Zealand where does the money go? We export it overseas. We increase our current account deficit through the interest rate differential between New Zealand and overseas because the majority of money that the banks have to fund their operations in New Zealand—their lending to New Zealand companies and individuals—is sourced from overseas lenders. When the interest rate goes up the major beneficiaries of that money that extra interest that is being paid by New Zealand borrowers are the overseas lenders. 
We currently have another strange effect. Because we have a current account deficit we are very reliant on overseas capital flows. We are seeing increasing pressure by overseas interests to buy more New Zealand assets. The Government is deeply conflicted on this. On the one hand it says it does not want all of the Crafar farms to be sold to overseas interests be they Chinese or otherwise but on the other hand it says it is happy for a number of small ones to be sold to them. Personally I cannot see the difference between one block of 20 farms and 20 separate farm transactions but the Government seems to see some difference. The Government wrings its hands about that particular problem but then it says it will loosen the foreign investment rules in New Zealand. I find that to be completely inconsistent. Bill English said he does not know what a strategic asset is. I can tell him that we in the Labour Party know what a strategic asset is. Anything that has monopoly characteristics as in an infrastructure asset is in my view strategic for two reasons. The first is that it will be extracting monopoly rents at one level or another and the second is that it will be important to the wider functioning of the economy. Those infrastructure assets have importance beyond their own individual business units because they facilitate the operation of other businesses. 
Those sorts of assets ought not to be sold overseas. I ask why we are under such pressure to sell such assets overseas. It is because we have such an enormous current account deficit and we have that because we do not save enough. In response to that the Government has cut the incentives to KiwiSaver. Again it is going in the wrong direction. This is another problem that we have because of higher interest rates in New Zealand. It is cheaper for an overseas owner to own a New Zealand business borrowing from offshore credit lines than it is for a New Zealand purchaser who is borrowing from New Zealand banks. I ask how that can be in New Zealand’s national interests. We have a set of policy settings that means it is cheaper for an overseas person to buy a New Zealand asset than it is for a New Zealand purchaser. In other words all other things being equal an overseas buyer can afford to pay a higher capital price for the same asset. That has to be wrong. It is an outcome of current monetary policy settings; it is also an outcome of current savings and investment policy. We cannot cure that through monetary policy but monetary policy can and should do some of the work. We need to put more focus on liquidity and flows of money in addition to interest rates. The singular reliance of the Reserve Bank on an interest rate tool is out of date and it is not in New Zealand’s interest. The National Government has its head in the sand. 
I finish by quoting from Rod Oram’s  
Sunday Star-Times 
 article. He said: “Given the new understanding growing overseas about the need to better manage fiscal misalignments in order to promote greater economic stability plus the shift at home by the Reserve Bank and the Labour Party monetary policy could become a defining issue at the next election.” I suspect that that raises the issue a bit too high because most people do not understand it but it ought to be a defining issue because it is a very important one. This motion is a missed opportunity on the part of the National Government.