Bennett David: Questions for Oral Answer — Questions to MinistersText is incorporated into the Bound VolumeBennett David: Questions for Oral Answer — Questions to Ministers[Sitting date: 21 May 2014. Volume:699;Page:18160. Text is incorporated into the Bound Volume.]2.DAVID BENNETT (National—Hamilton East) to theMinister of Finance: In preparing Budget 2014 what advice did the Government receive on how responsible fiscal management will take pressure off interest rates for New Zealand households and businesses?Hon STEVEN JOYCE (Associate Minister of Finance)on behalf of theMinister of Finance: The Government recognises that interest rates are the single largest cost on families with a mortgage. That is why we are focused very much on keeping rates lower for longer—certainly much lower than the almost 11 percent mortgage rates of 2008. In that context the Budget has struck a very good balance between investing in priority areas such as families and children and staying on track for surplus without putting undue pressure on interest rates. Last week the Minister of Finance released Treasury advice showing the impact of increasing the Budget operating allowance. The allowance is the amount set aside at each Budget for new policy initiatives spending or revenue initiatives. This advice confirmed that increasing the allowance to $1.5 billion in Budget 2015 is around the upper limit before it begins to materially affect interest rates.David Bennett: What did Treasury’s advice say would be the wider economic consequences of significantly higher Government spending?Hon STEVEN JOYCE: That is a very good question and one that the Opposition should listen to carefully. We all know what those consequences would be. We saw them in 2008 when Government spending increased sharply. Floating mortgage rates reached almost 11 percent which hurt households and businesses across the country. Treasury advised that in an economy expected to be operating at or above capacity significantly higher spending would lead to a more pronounced interest rate cycle push the New Zealand dollar higher and push interest rates up. This would increase pressure on the tradable sector and work against efforts to rebalance the economy and create jobs. Treasury said lifting the annual operating allowance to $1.5 billion would have an official cash rate impact of around 0.15 to 0.3 over 4 years. The Government would still meet its objective of reducing net Crown debt to 20 percent of GDP by 2019-20. You can simply imagine how much higher interest rates would be if we saw the sort of large operating allowances we saw under the previous Government.David Bennett: Why did the Government seek Treasury advice about the likely impact on interest rates of an increase in the annual operating allowance?Hon STEVEN JOYCE: Because interest rates are very important to Kiwi families. The Government wanted to modestly increase spending in priority areas but remain fiscally responsible and not put undue upward pressure on interest rates. This will provide options for targeting extra investment to further improve public services repay debt resume contributions to the New Zealand Superannuation Fund and possibly make modest tax reductions in future years. However it is very important that we donot return to the big spending increases of the mid-2000s which together with a doubling of house prices forced the Reserve Bank to push up the official cash rate to a record 8.25 percent. That is why we sought the advice.David Bennett: How does the Government’s planned $1.5 billion annual allowance for Budget 2015 compare with allowances up to 2008 and what were the consequences of those large previous allowances?Hon STEVEN JOYCE: The proposed $1.5 billion annual operating allowance is a very modest one compared with allowances before 2008. As the Minister mentioned at the Budget lock-up last Thursday the final year cost of the five Budgets to 2008 averaged almost $4 billion per Budget. In fact the final year allowance in Budget 2008 alone was a whopping $7 billion. The impact of that sort of reckless Government spending was obvious. Floating mortgage interest rates were almost 11 percent the economy went into recession ahead of the global financial crisis exporters were going backwards very quickly and we were left with a $3.9 billion fiscal deficit in 2008-09—before the global financial crisis and before the Canterbury earthquakes—because revenue could not support that high spending. We certainly would not want to go back to that situation again—Hon Trevor Mallard: 2008-09 wasn’t before the GFC. That’s just nonsense.Hon STEVEN JOYCE: It is absolutely correct Mr Mallard. You should listen carefully because that is why the New Zealand public will not support your party to come back.