Macindoe Tim: Oral Questions — Questions to MinistersText is incorporated into the Bound VolumeMacindoe Tim: Oral Questions — Questions to Ministers[Sitting date: 11 August 2015. Volume:707;Page:5558. Text is incorporated into the Bound Volume.]2.TIM MACINDOE (National—Hamilton West) to the Minister of Finance: What reports has he received on the outlook for the New Zealand economy?Hon Member: Ha!Hon BILL ENGLISH (Minister of Finance): A rather more thorough report than that. I have seen reports where Fonterra has revised down its forecast payout from $5.25 to $3.85 per kilo of milk solids. This reduction will clearly have a significant impact on the dairy industry and dairy-intensive parts of the economy but it is not a particularly surprising downgrade as it reflects the ongoing reduction in the international dairy price. Fonterra has at the same time announced higher earnings per share of 40c to 50c and an optional interest-free support payment of 50c per kilo of milk solids. It is clear that for dairy farmers times are turning out tougher for longer than forecasters previously expected but the additional measures announced by Fonterra on Friday will offset that to a certain extent.Tim Macindoe: What effect will the fall in milk prices have on the wider economy?Hon BILL ENGLISH: It will certainly have a big effect on the dairy-intensive parts of the economy. A drop in revenue of this magnitude in the dairy sector will have flow-on effects to the wider economy because the dairy sector makes up about 20 percent of New Zealand’s exports and around 5 to 6 percent of the total economy. The automatic stabilisers though are providing support to the dairy industry and to the benefit of other industries. For instance the New Zealand dollar is down 25c against the US dollar for the last 12 months and this underpins the returns of all exporters not just those dealing with low prices. The Reserve Bank has cut interest rates the overnight cash rate to 3 percent and indicated this may fall further. The Reserve Bank’s most recent forecasts of the economy show that the economy is growing around 2.5 percent a year which is solid sustainable growth.Tim Macindoe: What other reports has the Minister seen on the economy?Hon BILL ENGLISH: In its Monthly Economic Indicators released last week Treasury said that most indicators remain around their long-run averages with the exception of dairy prices and they are consistent with an economy growing around its trend rate of 2 to 2.5 percent. Statistics New Zealand also released the latest employment figures last week. Unemployment increased from 5.8 percent to 5.9 percent. At the same time the average wage increased by 3.2 percent in the last year to over $57000 considerably faster than inflation of 0.3 percent. Of course there are a number of risks to the economy—well-known risks such as the uncertainty around Greece and some uncertainty about China’s growth prospects. So there is some chance that we could move away slightly from the 2 to 2.5 percent growth rate that we are seeing now.James Shaw: Has the Minister of Finance received any reports that show that the New Zealand economy will face a $7 billion hole as a result of low dairy prices and what specific measures is he putting in place to ensure that distressed dairy farmers are supported through this commodity price crash?Hon BILL ENGLISH: Yes I have seen those reports and I am pleased the member asked about them. In order to understand the context of this that $7 billion reduction is a reduction on nominal GDP of over $220 billion. When you look at it that way you can see that it is going to have a negative effect on the economy but a containable effect and we can continue to grow at moderate rates. In respect of dairy farmers in distress Governments have had in place for some time measures for those families that are in severe financial distress but generally the Government would not be looking to financially support dairy farmers because of low prices.James Shaw: Does he regret telling Radio New Zealand in March that the concentration of capital in dairying was “not a bad thing” and how will he now ensure that this over-allocation of resources into one sector does not now put out of work thousands of farm labourers retailers contractors and suppliers who all rely on dairy farms?Hon BILL ENGLISH: The flow of capital into the dairy industry has been based on a longer-term confidence that across the Asia-Pacific region the fast-growing class of middle-income consumers will show more demand for dairy and other protein products. That is a view of the world that is not really disputed by anyone in particular. In the short term however the reduction in income will of course have an impact on employment directly on dairy farms but also in the supporting towns and services. The measures announced by Fonterra last week and the positive indications from the banks that they will finance cash flow for dairy farmers over the next 12 months mean that it will not be as bad as the straight drop in income indicates because dairy farmers have to spend $4.50 a kilo just to get the milk on the truck.Tim Macindoe: What implications do recent developments in the international economy have for New Zealand’s economy?Hon BILL ENGLISH: Although there are risks in the global economy it is evident that growth in our trading partners is holding up reasonably well—in the range of 3 percent to 4 percent. When we look back through the history of New Zealand’s growth patterns it is reasonably clear that when our trading partners are growing at that kind of rate—3 to 4 percent—that is a positive indicator for sustainable moderate growth in New Zealand of around 2 percent to 2.5 percent which is our long-term trend growth rate.James Shaw: Given his previous answer that investment in dairying was based on a long-range view of the sector what work has he done to understand whether the dairy price collapse is actually a structural long-term change in the market rather than a cyclical short-term change?Hon BILL ENGLISH: We try to make an assessment about that the same as everyone else. It is pretty evident though that no one is quite sure. It is likely that dairy prices will not go back to $8 a kilo. In fact it may well be not a bad thing because what is evident is that the price going that high has stimulated not just positive supply but probably excess supply. No one quite knows the answer to that question but talking to the people whose capital investment is at stake and whose livelihoods are at stake they maintain confidence that prices will rise from where they are—in fact they have to because they are below the cost of production—and they maintain a positive view about where they put their investment.Grant Robertson: Has the Minister of Finance seen this report about the economy under his watch which features a boat that has run aground?Hon BILL ENGLISH: Yes I have and I thought how similar it is to the fate of the Labour Party. [Interruption]Mr SPEAKER: Order! Just complete the answer.Hon BILL ENGLISH: In the interest of assisting the vice-great helmsman as I understand it that is the Westpac Economic Overview and I note that its forecasts are for between 2 percent and 2.5 percent growth over the next 3 years despite the fact that it says there is going to be a recession.James Shaw: Will he stop subsidising the expansion of high input - cost dairying by spending $160 million on irrigation when that money would be much better invested in capturing more of the dairy value chain to escape the boom and bust of commodity price cycles?Hon BILL ENGLISH: I could not verify that number. What I can tell the member is that the irrigation investment fund has actually paid out around $8 million or $9 million much as some people would wish it is $160 million—Hon Nathan Guy: $6.5 million.Hon BILL ENGLISH: —$6.5 million sorry. So look the Government spreads its support for infrastructure around the country whether it is roads or public transport and in the case of irrigation schemes dealing with some of the short-term demand issues that enable those schemes to get up and running and we do not have any plan to change that. I do expect though that the low dairy prices mean that there will be less willingness among farmers to finance the overwhelming share of the development that they pay for.James Shaw: Is he aware that organic milk powder commands up to six times the price premium of conventional milk powder on international markets and will he turn this crisis into an opportunity by helping move more dairy farmers into organic milk production?Hon BILL ENGLISH: If the member is correct that farmers can earn six times as much by selling their milk as they earn from organic milk then I am quite sure they will.James Shaw: When he says that this is not a crisis and that dairy is just 5 percent of the economy is he saying that when the All Blacks lose it just does not matter because they are one of thousands of sports teams playing over the weekend many of which are winning?Mr SPEAKER: In so far as there is ministerial responsibility the Hon Bill English.Hon BILL ENGLISH: Clearly the Greens like New Zealanders being able to watch the All Blacks lose but they do not want them to be able to watch them win in the Rugby World Cup. I mean when people use the word “crisis” well the Opposition should explain what that means. If those members think it means that dairy farmers are sitting around with their heads in their hands paralysed by low prices then they are wrong. Actually they are getting up every morning going out into the cold wet weather doing the calving milking the cows and spending the money they need to get their production moving and get their product to world markets. Calling it a crisis seems to me to be particularly useless. In fact it downgrades the resilience and the responsiveness of not just the dairy sector but households right across New Zealand to a bit of economic pressure which they can handle.