Motions — Reserve Bank Funding Agreement—Ratification 
Motions — Reserve Bank Funding Agreement—Ratification 
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Motions 
Reserve Bank Funding Agreement—Ratification 
Hon Dr MICHAEL CULLEN (Minister of Finance): 
 I move  
That pursuant to section 161(2) of the Reserve Bank of New Zealand Act 1989 this House ratify the funding agreement entered into by the Minister of Finance and the Governor of the Reserve Bank of New Zealand pursuant to section 159 of that Act on 20 April 2005 and presented to the House on 26 May 2005 
. The Reserve Bank’s operating expenditure is funded from gross income under terms established by the Act and a 5-year funding agreement. This funding agreement applies from 1 July 2005 to 30June 2010. The Act provides for these regular funding agreements for successive 5-year periods. The current agreement expires at the end of this month. 
New funding levels need to be agreed for the 5 years through until June 2010. If these are not agreed then the current funding agreement which provides for $33 million net is rolled over. The new funding agreement seeks to lift that amount to just over $39 million net per annum. That increase reflects a substantially changed environment—one of increased demands on policy outputs for the Reserve Bank one where systems are now at the end of their useful life and need to be replaced and one where new strategies need to be implemented to mitigate some business risks. Offsetting the lift in the proposed new funding agreement will be substantial savings accruing from the modernisation of the silver coinage as well as some smaller efficiency gains. 
The major influences behind the proposed increase are as follows. Firstly in recent years global regulatory standards affecting financial institutions have been upgraded in terms of monitoring and controlling their activities and the cross-border flows of money. A good deal of this of course is to do with anti-terrorism concerns. Key initiatives include also new supervisory standards known as Basel II and new accounting standards. As part of the international financial network the bank has to increase the level of its regulatory responses. 
Secondly 85 percent of our banking assets are now concentrated in the four major Australian banks and that in turn lifts the potential systemic risk in the event of a major bank failure. That means that the bank must increase its monitoring capacity and be committed to ensuring that New Zealand has resilient crisis management options for stand-alone banks and the wider financial system. The reinvigoration of the banking regulatory function includes the ability to better coordinate and communicate with foreign regulators. 
I think it is fair to say that the current Governor of the Reserve Bank was quite concerned when he became governor about the weakness on the regulatory side. It is particularly fair to place on the record that Dr Brash as the previous governor had also indicated the need to improve the regulatory side of the bank’s functions whereas the concentration in the period from 1999 to the early 2000s was on the monetary policy function rather than on the regulatory function of the bank. 
The bank needs also to fund the replacement and upgrading of several critical computer systems including the replacement of its treasury and document management systems its economic forecasting and data systems and its core financial reporting system and the upgrading of critical national payments system infrastructure. 
The final major influence is the fact that the bank is seeking to better safeguard its payment operations in the event of a natural disaster—which considering where the bank sits is obviously a very sensible concern. The bank needs to invest in a number of projects that will protect its computer facilities provide an enhanced presence out of Wellington for key infrastructure and services and establish a single disaster-recovery site in Wellington to replace the current multiple sites for dealing with a local disaster. I ask for the House’s support in ratifying this new funding agreement which I think will be important as we move forward in terms of the regulatory functions of the bank. 
Dr the Hon LOCKWOOD SMITH (National—Rodney) 
: 
 National will support this motion. As the Minister has pointed out this funding agreement really simply specifies the amount of the bank’s income that can be applied in meeting its operating expenses. It is interesting that the Minister has given a whole range of reasons why the amount of the bank’s income applied to its operating expenses has to increase in round figures by 33 percent because over recent years it has been roughly $30 million a year. 
Hon Dr Michael Cullen 
: $33 million. 
Dr the Hon LOCKWOOD SMITH 
: Well $33 million—so it is more like a 30 percent increase. 
Hon Dr Michael Cullen 
: No its about a 20 percent increase actually—six on 33. 
Dr the Hon LOCKWOOD SMITH 
: Well if we take off some of the bits and pieces it is still a huge increase. I guess it is typical of what has happened under this Labour Government. The bureaucracy and the cost of administering the Government operations in this country have ballooned under Michael Cullen’s stewardship as Treasurer in this Labour Government—and the Reserve Bank is no different. 
It is interesting to go back over history a bit—and I might have the figures wrong; I am sure the Treasurer will correct me if I am wrong. In 1990 the amount applied to operational expenditure was about $45 million in round figures. Under Don Brash’s stewardship as Governor of the Reserve Bank that figure was brought down to just over $30 million. In fact I think that at one stage it was brought down to $30 million and it probably went up in the previous 5-year period to $33 million. But for it to now go back up to just under $40 million is unfortunate because it is all hard-earned income of this country going into operational expenditure of the wider Government sector. As we look to the future I think that the cost of this administration should be very carefully examined in the next funding agreement. 
One has to ask whether Dr Alan Bollard has been as successful in keeping operational expenditure as efficient as Dr Don Brash was because as I said Dr Brash brought the operational expenditure down from about $45 million to just over $30 million. 
I do accept that some of the increased cost is necessary. I think that some of the systems upgrades the Minister just spoke of are needed and there is no question that there are some regulatory issues that have to be addressed. We can only question whether we needed the extent of the increase but despite concern about the size of the increase National will support the motion. 
We do so because it is important that there is bipartisan support for the work of our central bank the Reserve Bank. National totally supports and endorses the Reserve Bank of New Zealand Act and this debate is an opportunity to reflect just on how important that is. The formulation of monetary policy and the pursuit of price stability is critically important to our economy. I think the reforms of the Labour Government in the 1980s and the National Government in the 1990s brought inflation under control for the first time for many years in this country and in the preceding years the devastation caused by high inflation was only too apparent. 
It is interesting that during the stewardship of Dr Don Brash—who now leads the National Opposition and has brought it back into genuine contention with the Government in recent weeks—inflation was brought down from 18 percent in the late 1980s to average just over 1 percent in the second half of the 1990s. That is a tremendous achievement. 
 Interest rates during that same time period floating mortgage rates and variable first mortgage housing rates came down from around 15 percent to just under 7 percent during the 1990s. That made housing more affordable to so many New Zealand families. So I think the record of Dr Brash as Governor of the Reserve Bank has been quite outstanding. When the current Labour Government commissioned the Svensson report on the Reserve Bank of New Zealand it was interesting what Professor Svensson had to say about the workings of the Reserve Bank of New Zealand. He spoke of the extraordinary qualities—in fact his language was “the exceptional qualities”—of the then governor Dr Don Brash. 
Darren Hughes 
: Did you read it? 
Dr the Hon LOCKWOOD SMITH 
: I am quoting Professor Svensson from the Svensson report. He said: “Another governor may not cope as well with the pressure criticism and even abuse that seems to go with the territory and may in difficult times and under high pressure lose confidence and let policy go awry in a number of different ways.” It is interesting that the qualities that Dr Brash showed as Governor of the Reserve Bank for those years he has shown in great abundance as Leader of the Opposition as he has focused on policy to bring National into very strong contention with this Labour Government today. 
It is also interesting to reflect on what Dr Michael Cullen had to say about Dr Brash the day Dr Brash announced that he was actually standing for the National Party. This is what Dr Cullen had to say on 26 April 2002: “The Reserve Bank Governor Don Brash has been a leading central banker recognised around the world for his commitment to price stability.” It is interesting how Dr Cullen now seeks to criticise Dr Brash but of course it does not carry much weight because everyone in New Zealand knows the tremendous job that Don Brash did as Governor of the Reserve Bank. 
It is also fascinating to see now what the OECD is saying about what this Labour Government is doing to the inflation challenge in this country right now. The OECD in its most recent report following seven increases in interest rates over the last 18 months said that the Government’s fiscal policy has complicated the job of the Reserve Bank of New Zealand. That is what the OECD is saying: that this Labour Government has complicated the job of the Reserve Bank of New Zealand. 
There members have it—a chance to reflect on the work of the Reserve Bank of New Zealand—a tremendous achievement under the governorship of Dr Don Brash. He brought down the operating costs of the bank during his tenure as governor. Under this Labour Government and Dr Michael Cullen’s tenure as Treasurer the cost of administration is going back up again as we are seeing right across the whole area of Government administration in this country. All I can say is that help is on its way. A National Government will bring the spiralling costs of the public sector back under control when elected. 
It is frightening to reflect that here in this City of Wellington a very high percentage of the office accommodation space in this city today is now occupied by Government bureaucrats instead of the private sector. That is a bad omen for the future of New Zealand but help is on its way because a National Government will turn around that burgeoning bureaucracy of which this increase in costs of operating the central bank is just one indicator of something that is out of control under Labour. 
Debate interrupted.