Last year, I released a proposal on monetary policy. Today, I’m launching a new member’s bill based on that discussion document and the feedback we’ve received.

My Bill will make the Reserve Bank’s Board responsible for setting the Official Cash Rate (OCR), not the Governor alone, and require the Board to publish their minutes within a fortnight of meeting.

No other country in the OECD gives full responsibility for the OCR decision to one person – the Reserve Bank Governor.

This is decidedly antiquated. It leads to poorer decisions; decisions which don’t reflect the wider economic interests at stake when the Official Cash Rate is set.

We’d bring the Reserve Bank into the twenty-first century by making the Reserve Bank Board accountable for setting the Official Cash Rate, rather than the Governor alone.

In Government we would also ensure that the Board includes representatives from the export and manufacturing sectors so that Reserve Bank decisions represent the broader economy.

That discussion document also proposed the use of quantitative easing, as has been widely used in other countries, to help lower the dollar. The feedback we’ve received on that element of our proposal made clear it did not have the broad support it would need to work.

New Zealanders expect their politicians to listen, the Greens do listen, and so we’re not pursuing the QE element of our monetary policy package.

Instead, we’re focused on the pragmatic changes I’m announcing today, along with the rest of our agenda for improving the New Zealand economy, creating jobs, alleviating poverty, improving child health, making housing more affordable, and reducing power costs to families and businesses.

So lets have a look at it a bit more rationally.

Obviously Key isn’t exactly like Muldoon, but I think that the actions of this Government of late wouldn’t feel out of place in Muldoonism.

No serious student of New Zealand history would argue much against the proposition that Muldoonism can be characterised by three elements: Muldoon concentrated and abused power; he was rigid against all necessary or even desirable change; and that he was a divisive figure in New Zealand politics.

So setting personalities aside, let’s take a look at how Key’s government fares against these characteristics of Muldoonism.

Concentration and abuse of power

Key gave us a sign of what was to come in his first term, when his Government pushed through 17 laws under urgency with no opportunity for public submissions (including the bill to introduce National Standards in schools) and rushed 60 bills through with truncated select committee processes.

They also abolished Canterbury’s democracy, sacking regional councillors and replacing them with Government officials, and suspending elections. Cantabrians still have to pay rates and taxes to the regional council, but they have no say over how that money is spent.  In addition they introduced Henry the Eighth clauses that give the Minister for the Environment the power to vary the RMA by decree, ie the law written on the books can be changed by the Minister without going to parliament. John Key also removed the right to challenge these decisions in the Environment Court. Top New Zealand public law academic Philip Joseph said this contained “elements of subterfuge” and was “constitutionally repugnant.”

But it wasn’t until into the second term that Key and his government showed the true depth of their contempt for our constitutional principles.

Without BORA advice, opportunity for public submissions or select committee scrutiny his Government passed the Anadarko Amendment, which outlawed protest on the high seas. This legislation breaches the rights of freedom of expression, peaceful assembly and free association. Peter Williams QC said this is “fascist legislation, this is shocking legislation, this is draconian legislation, and the people of New Zealand have got to be aware of it.”

Our judiciary is supposed to act as a check on the powers of governments. But in a single day, under urgency and with no submission process, this government took away the right of family carers of people with disabilities to test whether Government policies are lawful in court. Constitutional law expert Professor Andrew Geddis said this was “…trampling all over a basic foundational principle of our constitutional order.”

When it was revealed that the GCSB may have broken the law by spying on New Zealanders, Key’s response wasn’t to ensure that the limits placed on the agency’s power are respected, nor to introduce proper parliamentary oversight of the agency. Instead, he introduced a bill that makes it legal for the GCSB to spy on New Zealanders and expands its power to do so.

Under a new housing law, the Housing Minister can set up special housing areas without going through the process to get basic building or resource consents, meaning National’s backers, property developers, can be waved through. The Law Society called this ‘contrary to the rule of law and good legislation principles’.

Ultimately, the best safeguard for democracy in our legal system is that we hold democratic elections every three years. But Key’s government is ignoring the improvements Kiwis want made to MMP, so they won’t be made in time for the next election. National are gerrymandering the system to suit their own interests.

If we move to the environmental arena we find repeated concentration of decision making. Aside from Canterbury regional council National introduced the EPA to rubber stamp central government projects like the RoNS. The amendments to the RMA are all aimed at removing community input into decision making and giving central government more powers.

Rigidity against change

The best example of Key’s rigidity against change is his refusal to budge on the failed asset sale programme, even in the face of the revelation that he will now have to sell off Meridian in chunks because it can’t be sold in one hit, after the cost of selling Mighty River alone exceeded $100 million, and with his rhetoric about mum and dad investors exposed as a sham.

This stubborn immovability in the face of overwhelming evidence can also be seen in this Government’s inability to accept that the world has moved on from its outdated understanding of  economic orthodoxy. It speaks volumes that when a ‘far-left think-tank’ like the OECD is speaking out in support of Green policies like a capital gains tax, John Key is willing to rule out implementing their findings without even reading the full report.

And when it comes to climate change, this government is absolutely rigid in its refusal to adapt. They carry on as if it will all just go away.

Divisiveness

Remember when Key was elected? He worked with the Māori Party, he worked with the Greens. He got all sectors involved in a collaborative exercise at the job summit.  For a moment, we thought that perhaps he was different. Perhaps he could succeed in uniting people from across the political spectrum in that time of crisis?

What a long way we are from that now. Far from a message of unity, Key’s government takes the posture that if you’re not with them, you’re against them.

To be with Key and National is to get special favours. It is to have tender processes designed so that you’ll win. It is to get $2 billion in tax cuts. It is to get shoulder-tapped for a top job by one of your old schoolmates, it is to get a job you applied for a month after it closed, or to get a job for which you were underqualified  because of your profile as a sportsperson and a Key supporter.

To be against Key and National is to be silenced. It is to have Ministers breach privacy obligations by releasing your personal information to the media. It is to be the subject of personal attacks from right wing lobbyists if you dare to speak out to protect the environment. It is to have “threats and budget cuts… used to silence dissenting voices,” according to New Zealander of the Year Dame Anne Salmond.

Think Big

And don’t even get me started on the comparison between the Think Big projects and the Roads of National Significance. Some of the Think Big projects made a lot more sense than the RoNS.

So, was the comparison between Key and Muldoon unfair?

In the sense that he and his government are disregarding our democracy and our constitutional principles, concentrating and abusing power and rigidly refusing to change, I stand by my statement that Key is sure as hell acting like Muldoon.

And as for John Key and all the right wing commentators who give me grief and who say I should shut up because I am a migrant. Quite frankly that is a pathetic response, worthy of Muldoon, and offensive to all those migrants who choose to live in New Zealand and participate in our democracy.

The decision to divest from Lockheed Martin came after a letter from me asking them to do so. The NPF Fund Manager, Simon Tyler, said in the letter “the NPF Board is comfortable that it acted in accordance with its policies and with New Zealand’s international obligations under the Cluster Munitions Convention and similar laws.”

Trouble is, I don’t work for the Fund. While I’m happy with the end result, it’s troubling the Fund doesn’t have the systems in place to stop it from breaking the law so unashamedly.

When we adopted the Cluster Munitions Convention in 2008, we made a commitment to “never under any circumstances assist or encourage” the cluster munitions industry.

Simon Tyler contends the Fund had only recently acquired $358,969 shares in Lockheed Martin, so their breech was short-lived. Yet the Fund continues to use “collective investment vehicles” (CIVs) over which it has no influence over the specific companies invested in. It’s unclear whether this will mean the Fund will, in the future, again profit from cluster munitions manufacturers at arm’s length through CIVs.

Russel

The public authorities create very little money. The notes and coins created by the Reserve Bank are only a small fraction of the ‘money’. See this interesting Seven Sharp story if you want to see a MSM story about how this works – essentially banks can lend out far more money than they have as deposits.

So quantitative easing, or as John Key likes to call it “money printing”, is simply government extending to itself the right that it has given to the private banks to increase the money supply – except doing it for public purposes rather than simply private gain.

So what is happening with money supply in NZ?

We can measure the increase in the money supply by looking at two indices produced by the Reserve Bank – M3 and M1. M3 is the broad definition of money and M1 is the narrow definition (official definitons at the end of the post). They are graphed here (also CPI):

The first point to note is that all of this huge increase in the money supply, what Key would call ‘money printing’, happened without the government engaging in any kind of government led increase in the money supply. It was private led increase in money supply.

Secondly, as you can see there was a huge increase in money supply through the early 2000s – it peaked at an annual 17% increase in the 2006 year alone! Presumably the big increase in bank lending into the housing market (partly funded offshore) through the early 2000s let to this surge in money supply  This lending was grossly irresponsible by the banks and led to a doubling of house prices in 5 years.

Thirdly, this growth in M3 dropped off as the GFC hit and it shrank through 2009.

And fourthly it has now taken off again and has been increasing at an annualised rate of around 7%, linked to the new housing bubble as the banks create money to expand the bubble.

So the debate shouldn’t be whether NZ should be ‘printing’ money, in fact the private banks are increasing the money supply dramatically (partly funded offshore) – our money supply (M3) has increased by $28.5 billion in the 2 years to March 2013.

The debate should be: what constraints should apply to the private creation of money given the banks’ irresponsible behaviour in the past; and should the public institutions be expanding money supply as a policy tool, to what extent, and to what purpose? Should the state be allowed to also increase the money supply for public purposes such as refilling the Natural Disaster Fund and to see what effect it can have on reducing the very damaging high NZ dollar?

The answers to these questions aren’t black and white but for my pick I think we need to restrain the banks lending into the housing bubble and use a trial public creation of money to restock the Natural Disaster Fund – both to be prepared for future disasters and to see what impact it would have on the dollar.

It is of course difficult to have a rational conversation around these issues in the current political context (ie Key’s scaremongering) but it is an important conversation for rational adults to have. We do have an out of control current account deficit and if we want to be masters of our own destiny we need to change policy settings as under Key’s plan our deficit and debt increase dramatically.

Notes

M1 – Includes notes and coin held by the public plus chequeable deposits, minus inter-institutional chequeable deposits, and minus central government deposits.

M3 -The broadest monetary aggregate. It represents all New Zealand dollar funding of M3 institutions and any Reserve Bank repos with non-M3 institutions. M3 consists of notes & coin held by the public plus NZ dollar funding minus inter-M3 institutional claims and minus central government deposits.

Power Struggles
John Small, 9 May 2013

 Is the Labour/Green electricity reform proposal economic lunacy or a chance to finally get vengeance on a gang of bandits? Will the lights stay on? Will foreign investors desert us or punish us financially?

 These pressing questions are generating more heat than light. Maybe that’s because they’re difficult: the policy is after all silent on some crucial details, without which predictions are challenging. But we already know far more than you’d think from the angry reactions.

 Unlike what some are claiming, the concept is not inherently flawed. You don’t need to be an expert to see why.

 The main change is that there won’t be a single wholesale market price any more. Each power station will get paid what it actually needs to cover costs, instead of what the least efficient (most costly) station needs. That change alone will allow power bills to be slashed because about 60% of our power is from hydro stations and those generators get paid way more than they need. So there definitely are savings available: its not a mirage.

 If power stations are currently gaming the market (i.e. finding ways to jack up the price), that will also cease. This proposition has been argued and contested, but having money for price cuts doesn’t much rely on the outcome of that debate. Eliminating gaming is either an extra benefit or a sideshow, depending on whether you believe it happens or not.

 Retailers will still compete, but they’ll be buying their power from NZ Power. Depending on how NZPower operates (we’re going to need some details!), that could open the door to many new retailers which would intensify retail competition. Currently, electricity retailing is dominated by generators because that helps them avoid exposure to the spot market which is incredibly risky for a retailer. But retail competition is muted for the same reason: no retailer wants a market share out of whack with the market share of its affiliated generator.

 Those are the first round effects: lower prices and more retail competition. Both are good for consumers, but we also need to think a bit further ahead.

 The price cuts are targeted mostly at residential consumers, with commercial and industrial users in line for smaller cuts. Each of these groups will use more power when the price falls, so we’ll need to generate more, using extra resources. The amount of extra cost will depend on the details of retail pricing. For example, you could give everyone a block of cheap power with the rest priced normally: that would limit the extra generation cost and preserve incentives to invest in insulation etc. It’s a sensible idea from the Greens.

 Then there is the impact on the government’s accounts. Dividends from the SOE power companies will fall and if the budget is to be unaffected that means either more taxes or less spending elsewhere. This is a murky issue because asset sales are eroding the dividend stream anyway and also because we don’t know how the government will react. If taxes go up somewhere to compensate for lost revenue, that will affect people’s behaviour. On the other hand, the funds could be recouped from tax evaders. Or by cutting <insert your pet waste of public funds here>.

 What about the investors? The short story is that investors (including the government) will pay for the price cuts because they own the power stations whose revenues will be cut. In the longer run, there is a question over whether private investors will punish us by with-holding funds for new investment, either completely (cue horror stories) or by demanding higher rates of return. An investment strike is inconceivable: electricity is regulated everywhere and people are clearly willing to invest in extremely unstable countries. So capital will be available; the only question is the price and that depends on how risky the project is. For power station investors, the risk might well fall. A long-term contract with NZPower sounds a lot less risky than investing under the current industry configuration.

 Put all this together and we see that there are funds available for price cuts, retail competition could intensify and new generation will still be fundable. What could go possibly wrong?

 Two things: time and nerve. Assume that Labour/Greens form the next government and get cracking on their plan. First up will be enabling legislation to create NZ Power and define its mandate. Hopefully, they’d constitute NZ Power so that it was independent of politicians. But if they want this to be effective (i.e. to actually transfer significant cash to consumers) they will also need to say so very clearly in the legislation. In particular, that means spelling out how NZPower is to determine valuations of generation assets.

 The policy refers to paying generators on the basis of “historic cost” but what exactly does that mean? Intuitively we know that the public funds used to build most of our hydro stations have long ago been recouped through depreciation. In that case, the historic cost is zero. But modern accounting rules require them to be valued on the basis of their earning power, so achieving the stated policy goal means writing these book values down. To zero.

 Inevitably, there will be some messy cases, such as where old records have been lost or where someone bought the power station fairly recently for a large sum. If the policy architects have enough nerve they will tackle these problems upfront and make the legislation nice and clear. History suggests they’ll wimp out and punt the difficult issues to NZ Power along with a few vague principles. That approach would create lots of work for lawyers, add costs, and runs the risk of neutering the whole plan.

 Some other crucial details will also need to be spelled out, like how to run a competitive pool to get efficient dispatch while also regulating generators to cost. These are geek fodder.

 What if Tiwai Point closed? That works in the same direction as NZ Power: there would be less spare cash to redistribute, but the prevailing prices should also be a fair bit lower.

 The bottom line is that this policy is certainly bold, but its not crazy. It has the potential to stimulate competition and be a force for good, but it will be difficult to do and even harder to do well. 

 John Small is an economist and director of the consultancy firm Covec.

I have more hope following this statement that the Reserve Bank has learned a lesson or two from the damaging housing bubble of 2002-2007. The Bank has been forced to show leadership given the dearth of it from central government.

The most significant shift in Reserve Bank thinking is that they now see low mortgage rates primarily driving the Auckland house prices rather than real supply-side factors like migration and land supply. Easy credit is driving this housing price cycle more than anything else.

Another metric the Reserve Bank has calculated (with provisos) is the astonishing and enduring faith New Zealanders have in rising house prices. Seventy-three percent of household wealth in New Zealand is invested in housing. This compares to 56 percent in Australia.

The absence of a capital gains tax is likely to be one of the primary drivers of this misallocation of wealth and is likely to be one of the key reasons why the fortunes of our economy rise and fall in step with house prices (see figure 1).

Given the fragile nature of our current economic recovery – a high exchange rate hurting manufacturers and exporters, cuts in government spending, and now drought – the Reserve Bank can foresee a scenario where a speculative bust in Auckland house prices would be hugely damaging to our banking sector and economy.

I’ll be watching what, if anything, they do differently this time around given the Bank’s fondness to rely on one tool – the OCR – to achieve everything. Don’t forget that over 2002-2007, the Bank increased the OCR by 350 basis points, mentioning concern over increasing house prices 17 times in their accompanying statements, yet New Zealand still experienced, in the Governor’s own words (p23), “the most rapid house price appreciation in the OECD during that period”.

20 March 2013

Dear David

After sitting through another chaotic question time I feel compelled to write this open letter to you as Speaker.

I strongly urge you to revert to the set of rules that Lockwood Smith had developed over the course of his Speakership. These rules can be summarised as “A straight question will get a straight answer”. These rules resulted in a much more orderly question time and a much more effective question time. The Opposition knew that if they asked straight questions then the Speaker would insist that Government Ministers gave straight answers. And we knew that if politically loaded questions were asked then the Ministers would be free to give politically loaded answers. Ministers retained the “public interest” defence for not answering questions.

Your current approach of only requiring Ministers to “address” the question means that Ministers now know that they don’t need to answer questions in Question time. This is causing disorder in the House as opposition members attempt repeatedly to get Ministers to answer questions. It also means that the House of Representatives is unable to fulfil its function of holding the Executive to account for their actions – we can’t hold the Executive to account if the Speaker does not require Ministers to answer questions.

If you continue down your current path Question time will continue to be disorderly, increasingly so, and the House will rightly be viewed as no longer serving its democratic functions.

Yours sincerely

Russel Norman

Is the Deputy Prime Minister of our country a climate change denier? It may well be the case.

During question time in Parliament yesterday I wanted to get into the lack of focus and inaction from this Government on climate change which is starkly highlighted by the suffering our drought-stricken farmers are going through.

I expected the debate to be around what actions were the right ones to take and who should bear the cost but, it ended up being about whether climate change was real or not.

Dr Russel Norman: Does he accept that human-induced climate change is real?

Hon BILL ENGLISH: It may well be, but I am not sure what that has got to do with this particular question.

Climate change is an inconvenient truth but the science is conclusive and political leaders around the world are now in agreement it exists and are working at ways to limit how extreme it gets.

There’s no ‘may well be’ about it.

Even Prime Minister John Key accepts there’s climate change he just doesn’t want to do anything about it. In fact this Government is actively undermining international efforts to tackle the problem.

That’s been condemned internationally but Bill English dismissed that: “The fact is that being condemned internationally by a handful of NGOs is not going to influence New Zealand Government policy.”

Tell that to the most senior Christiana Figueres, Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC), who described New Zealand’s decision last year not to sign up to a second commitment period of the Kyoto Protocol as ‘very disappointing’.

New Zealand will be hit by more droughts and more intense droughts because of climate change, yet this Government is doing nothing to reduce New Zealand’s greenhouse emissions, and it has refused to make commitments under the Kyoto Protocol to reduce emissions.

The Government doesn’t have a strategy to develop a national strategy to tackle climate change. It will it just leave the New Zealand public and businesses like farms to face the costs and harsh effects on their own.

Which is crazy given that responding to climate change now and incentivising green tech would put us in a much better economic position than being a slow follower.

Photo Dominion-Post

The Government has suggested that up to 90% of shares will be owned by New Zealanders, and Treasury’s figures show that around 5% of all New Zealanders will be able to afford to buy shares. Without even thinking of the Australian share float, which will dilute Kiwi ownership, the asset sales program is about a transfer of wealth from the public of NZ to a few.

Wheeler describes New Zealand’s manufacturing sector as a sunset industry, in terminal decline due to globalisation, competition from low wage countries, and a shift to a service intensive economy. It’s the kind of bleak outlook that sets up the rest of his speech justifying why he’s not going to fight to save our manufacturing sector.

Contrast this to the late Sir Paul Callaghan’s vision for New Zealand where he directly addressed the myth that we can no longer manufacture competitively in New Zealand. Not only can we manufacture competitively, we have to manufacture if we want to produce high value-added exports to pay our way in the world.

The export of elaborately transformed manufactured products is one of the key ways we can sell our specialist knowledge and skills to the world. This export strategy can’t be undercut by low wages elsewhere. And for most of this last decade, manufactured exports have remained our biggest export earner, higher than dairy exports, and higher than tourism. This high-earning potential is reflected in the fact that manufacturers make up 17 of the top 20 technology companies in the Tin100 list.

Graeme Wheeler understands that we’re living with an over-valued dollar and an unsustainably high current account deficit, but fails to understand how his policy settings are actively contributing to the on-going hollowing out of our productive economy. His sole focus on one outcome – inflation – has passed its use by date.

Russel

The closing of the Oamaru woollen mill is an example of the kind of crisis we’re in. The mill was founded in 1881 and, since then, has survived eight economic recessions and two depressions – including the Great Depression – but couldn’t survive the current economic settings under this National Government. For 200 workers, the impact will be particularly devastating.

Unlike Dann, I believe our export and manufacturing sectors are worth fighting for and I’ll continue to work constructively on new policy that might help rebalance the New Zealand economy towards productive enterprise not property speculation.

I have put together a suite of measures that will help address the high New Zealand dollar, favour productive investment, and address housing affordability. The suite of measures that I’ve been proposing (since 2007) include:

1. A lower Official Cash Rate and the use of complementary tools to otherwise control house price inflation – like loan-to-value ratios. A lower cash rate will take pressure off our overvalued exchange helping our export and manufacturing sectors and the valuable jobs they create. Loan-to-value ratios help curb bank lending excesses that fuel house price inflation and can be designed to exempt first home buyers or target high-priced homes, as has been done in Canada, Finland, Norway, and Sweden.
2. A capital gains tax (excluding the family home) to remove the current tax incentives to speculate in property. This will help reduce demand for property.
3. Limit the sale of land to New Zealand citizens and permanent residents only. Australia, Hong Kong, China, and Singapore have similar policies which help limit property speculation and dampen demand.
4. Increase the supply of affordable housing. Our Green Jobs initiative would see the state build an additional 2000 new energy-efficient state and community houses.
5. Help lower-income families into their first home through our Home for Life package announced last month. Our progressive ownership policy will give families that are otherwise locked out of the housing market a pathway to home ownership.

Lian Dann can continue his quest for a silver bullet solution – the kind that neo-liberal market reformers promised in the 1980s – but I prefer to roll up my sleeves and look for smart, practical reforms that will help move New Zealand towards a fair, prosperous, and more sustainable economy.

We owe the mill workers of Oamaru nothing less.

Russel

This decision follows last year’s contentious decision to allow Chinese Company Shanghai Pengxin to purchase the Crafar farms.  The 16 Crafar farms comprised nearly 8000 hectares of farmland.

An overseas purchaser must show that they are bringing significant economic benefit to New Zealand.

The Swedish consortium that has purchased the farms has stated it wants to lift milk production and develop the farms.  Presumably this is the substantial economic benefit to New Zealand from allowing this purchase.

This argument is reminiscent of the one Shanghai Pengxin used in the High Court after an legal challenge by a consortium of Iwi and Sir Michael Fay.

Shanghai Pengxin’s argued that they would bring the rundown Crafar farms up to working order.

Here we have a Swedish consortium arguing that they will follow standard farming best practice and lift milk production.

Of course the woefully understaffed Overseas Invest Office are unlikely to monitor if any substantial economic benefit does flow from this purchase.

This test is simply a way of allowing overseas investors to buy up prime New Zealand land. Decisions such as this mean any overseas investor that can outbid New Zealand farmers will be able to buy up land in New Zealand.

Perhaps the significant economic benefit to New Zealand is keeping former Shanghai Pengxin spokesperson Cedric Allan in business.  Mr Allan is handling the media for the new owners.

Green development and green jobs provide a clear vision and economic direction for our nation. We can have good jobs without destroying the environment, and we can take advantage of the huge green economic opportunities overseas to supply exports with a premium. That’s what smart green economics is all about.

It is the alternative to National’s failed economic approach which has given us one of the fastest increases in unemployment in the OECD, the second highest current account deficit, and further environmental degradation. National’s attacks on the environment have accelerated since the last election.

National still believes that all growth is good growth, but it isn’t. Growth which leads to more debt, pollution and environmental destruction is bad growth.

Now that the dust has settled on Labour’s leadership contest, we have to ask: where does Labour stand on these clear economic alternatives offered on the one hand by National and on the other by the Greens?

Labour MP Shane Jones has been vocal in the pages of the New Zealand Herald over recent weeks, criticising the Green Party over our concerns about the serious environmental impacts posed by deep sea oil drilling off our coasts and the use of slave labour on foreign chartered vessels in New Zealand waters.

Given that Labour has been supportive of some environmental and worker protections in the past, we have to ask if these repeated outbursts from one of their senior MPs are simply the views of an individual, or something more.

The free-rein given to Mr Jones to attack the Green Party on environmental issues suggests the latter. I hope this isn’t the case.

Protection of the natural environment is fundamental to what makes New Zealand a great place to live and is fundamental to our future economic prosperity. The tourism industry – our second biggest export earner – is built on the appeal of our amazing natural environment. Our dairy industry, our biggest exporter, is dependent on our clean, green and safe brand – that’s why exports into China are booming after their tainted milk scandal.

Just this month, the Pure Advantage group of leading New Zealand business people including Sir Stephen Tindall, Rob Fyfe, Jeremy Moon, Philip Mills, Sir George Fistonich and others released their second report on the green growth, green job opportunities for our economy. Their report offers many elements of an inspiring and lucrative alternative economic direction for our country.

Now that the failure of the National Government’s economic policies is plain to see, it is refreshing to have a clear alternative strategy.

In this context, it is very worrying that Mr Jones’ anti-environmental tirades have been greeted with a deafening silence from the Labour Party leadership.

Mr Jones’ outbursts won’t deter the Green Party from doing our job in highlighting the risks of the National Government’s decision to open up New Zealand to dangerous deep sea oil drilling.

The oil industry’s promises of an economic boom are, in our view, inflated and need to be weighed against the very real risks of a spill, highlighted by the Deepwater Horizon oil spill in the Gulf of Mexico which devastated local wildlife and cost over $40 billion to clean up.

The oil and gas industry tends to be risk-rich and jobs-poor. Nationwide, coal, oil, gas and metal mining employs only 3,000 people, according to Statistics New Zealand. That compares with around 200,000 employed in manufacturing, and any future job growth in the mining sector won’t compensate for the 40,000 manufacturing jobs lost in the last four years.

Mr Jones claims to be driven by a concern about jobs for Maori. Yet while he was chairman of Sealord, the company chartered a Ukrainian vessel and foreign workers were hired rather than New Zealanders. After Mr Jones departed, Sealord continued the practice of using foreign charter vessels instead of employing New Zealanders. Mr Jones accepted $10,000 from the company for his last election campaign.

The mistreatment of crews working on foreign chartered vessels has been well documented; they are essentially slave labour. The National Government has taken far too long to start to address this issue and Mr Jones played a part in allowing this disgrace to happen in the first place.

Despite Mr Jones, the reality that we live on a finite planet is forcing the world to confront its environmental challenges by creating more sustainable jobs. National has failed to create jobs for the 175,000 unemployed New Zealanders. Labour and the Greens owe it to those workers, and the thousands more whose jobs are at risk, to work together to build a clean green economy that delivers genuine prosperity for everyone.

I asked the Parliamentary Library to prepare statistics on the performance of the manufacturing sector in the wake of the GFC and QE. The results are mostly positive.

The GFC hit the US manufacturing sector hardest in 2009; exports contracted and hundreds of thousands of jobs were shed in this sector. But from 2010 onwards, manufacturing has turned around creating an average of 18,000 new jobs each month.
Source:  Federal Reserve Bank of St Louis, Real exports of goods & services.

Real exports volumes of manufactured goods are up and on a much steeper growth path than historically, although it is now slowing from double digit growth in 2010 (14.4%) to a more modest 4.2% growth rate in 2012.

Over this time period, inflation has remained subdued despite the massive credit easing. Since August 2008, inflation in the USA has been 5.2%, which equates to an average annual inflation rate of just under 1.3%.

Russel

That’s an unusual position for the minister responsible for tax collection to take, and quite different from his views of the past:

Tax tightening covers asset sales shortfall: Dunne
NZ Herald Wednesday June 20, 2012

The Inland Revenue Department’s clampdown on tax avoidance and loopholes will bridge the gap left by the Government’s planned sell-down of its energy company holdings, according to Revenue Minister Peter Dunne.

“Where those gaps have been identified, they’ve been closed. That will continue to be the policy,” Dunne said. “Our focus is on getting in the revenue that is property due to us.”

Address to IFA annual conference
16 March, 2012

“I am more focused on making sure we collect the revenue currently legitimately due to us through our broad based, low rate system, before embarking on new taxes, which almost inevitably would fall more harshly on some than others.”

Database to reveal the real charities
Dominion-Post 29 December, 2011

Revenue Minister Peter Dunne said tax avoidance among charities was part of the IRD’s brief “to focus strongly on areas of possible tax avoidance across all sectors of the economy”.

Speech to NZ Institute of Chartered Accountants
11 November, 2011

“A range of existing rules in the Income Tax Act better target tax avoidance arrangements involving gifts.
And last year’s Budget further reduced opportunities for avoidance by aligning the trust and top personal rates.”

Dunne delighted with Penny and Hooper decision
Media Statement 24 August 2011

“It is important to the integrity of New Zealand’s tax system that everyone pays their fair share of tax,” said Mr Dunne.

Under-table cash jobs not fair go, says Milne
New Zealand Herald 16 August, 2011

“Part of the problem has been the New Zealand psyche to put one over the IRD with `mates rates’ or nod-and-wink jobs. That’s fine for those people, but the revenue lost is made up by everyone else – we all end up paying a little bit more,” Mr Dunne said.

Will post 2012 once available.
Russel

The UN report found that better income distribution within an economy helps to stimulate the economy in the short term while providing stronger incentives for investment, innovation and job creation in the long run.

Progressive taxes do not reduce incentives to invest in fixed capital, innovation, and skills acquisition. On the contrary, the reduction of inequality that can be achieved by progressive taxes is more likely to accelerate traditional growth and employment creation than the current trend towards less progressive taxation and lower social transfers.

Also of interest in the report was their finding on labour-market flexibility. The UN found that, not only has deregulation of the labour market failed to reduce unemployment, but it has even tended to exacerbate it!

What’s the solution? One answer is to do the exact opposite of the National Government and reintroduce more progressive tax rates.

The 2012 Australian Budget institutes a raft of new measures to raise revenues, especially revenues from activities that damage the environment. These new eco-taxes will help balance the Government’s books and shift their economy onto a more sustainable footing. Here’s how:

1. A carbon pricing mechanism
Receipts from the carbon pricing mechanism are expected to be A$24.7 billion to 2015/16. The revenue raised is being recycled used for tax cuts for those on lower incomes and a clean energy fund.

2. Resource Rent Taxes
These include a petroleum resource rent tax and a minerals resource rent tax expected to raise A$31.4 billion to 2015/16. These new eco-taxes recognise the one-off nature of resource extraction and will share the benefits a little more fairly across the country.

3. Cancellation of the company tax cut
The Aussie Government will save A$4.6 billion to 2015/16 by not proceeding with the company tax cut scheduled for the 2013/14 income year. The National Government here cut company tax rates here assuming Australia would follow suit as part of a race to the bottom that we can ever win, as IRD have recently argued (p36).

4. Cutting tax concessions for wealthy Australians
By cutting the tax concessions on superannuation contributions for individuals on income greater than A$300,000 the Australian Government will save A$1.4b to 2015/16 which they can recycle into new saving incentives for those on lower incomes.

Of course, the Budget wasn’t all good news. Education and unemployment benefits were ignored, along with a commitment to the cleantech manufacturing sector. But when you compare this Budget to ours, you start to see how poorly the National Government are managing our economy.

National’s programme of deep cuts to public services, poor quality spending on motorways, and collapsing tax revenues means they’re leaving us vulnerable to further economic shocks. And as for the actual economy, they’re not going to leave it any more resilient or sustainable from when they took office.

Russel

Dr Bollard made those comments in June 2009 to his Board when the kiwi dollar was worth US$0.63 and the Trade Weighted Index (TWI) was at 60. Since this time, the kiwi dollar has appreciated 28 percent against the US dollar to US$0.81 while the TWI is up 21 percent to 72.6.

The New Zealand economy has been seriously unbalanced for years. It has had large current account deficits and, in order to pay for those deficits, it has built up high levels of external debt and overseas ownership of the economy. The only way out of this downward spiral is to rebalance the economy towards the tradeable sector so that it can perform much better, but that needs a lower exchange rate.

As I showed last week, the Business Operations Survey provided plenty of evidence of how the high and volatile exchange rate is hurting our export industry with close to half of all New Zealand export companies saying it is the most important factor constraining their exports.

We need to have a national discussion on measures that can stabilise our exchange rate at levels our export industry can thrive in. Overseas governments have been taking this issue very seriously.

For example, in Switzerland, their Reserve Bank has been using quantitative easing to keep their franc lower, their export industry in business. The IMF recently backed the Swiss move to effectively “print money” saying the measure was “appropriate” in the circumstances.

So there are practical steps a small trading nation like New Zealand can take that can help.

Besides empowering the Reserve Bank with a mandate beyond inflation control to include managing exchange rate levels and volatility, we could also institute a tax on capital gains (excluding the family home) which would also act to ease upward pressure on the exchange rate.

It’s way past time to start having the conversation.

Russel

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If the tax changes were not fiscally neutral, then it undermines National’s credibility and it undermines their whole argument that we have to cut government services because there isn’t enough money. And it also means that the Government is having to borrow to pay for upper income tax cuts.

So I questioned John Key in the House yesterday over this repeated claim that the 2010 tax cut package was fiscally neutral.

The exchange ended with the two of us waving around different pieces of paper: I had a series of numbers from Treasury. John Key had a memo from his Finance Minister.

Let me present my evidence in three steps:

1. Treasury have consistently reported that the 2010 tax cut package – the package that cut taxes for those on high incomes, lowered company taxes, and raised GST to 15% – is not fiscally neutral in the short-to-medium term.

When announced, Treasury estimated that the static four-year cost of the 2010 tax cut package would be $1.1 billion. (See the original table on page 8 of the Minster’s Executive Summary in Budget 2010.) You will see that the projected cost in just the first financial year was expected to be about half a billion.

2. Just nine months after the tax cuts had taken effect, Treasury had significantly revised their initial estimate of the fiscal impact of the tax cuts. Within nine months, the net cost of the 2010 tax package was close to $1 billion, or double the initial estimate. (You can see the original table here on page 8.) The gross cost of the tax cuts was $2.7 billion but this was offset by a $1.6 billion increase in GST.

3. Yesterday, the Financial Statements of the Government of New Zealand for the Eight Months Ended 29 February 2012 were released showing tax revenues had collapsed even further due to the weak economy. Treasury reports a further $369 million shortfall in GST revenue, a $200 million shortfall in income tax, and a $193 million shortfall in corporate tax. This indicates that the cost of National’s 2010 centrepiece tax cut package has crashed the Government’s budget even further.

This is not a smart way to manage the Government’s finances. What household would slash their income sources when times are difficult, thus throwing themselves deeply into debt?

Here’s what’s happened to Government revenues (as a percentage of GDP) over the last few years.

And here, likewise, is what’s happened to Government debt.

It is true that the difficult economic conditions have put downward pressure on the tax take. But that is not the issue. The issue is, given the economic conditions, are the Government’s books in a better or worse position as a result of the 2010 tax changes? The answer is very clear: The deficit is much worse because of the 2010 tax changes. They were not fiscally neutral and the Government is having to borrow to fund the tax cuts to upper income earners.

In many ways, the Government’s dire financial position was of their own making.

Russel

(1) Note that they try to reduce the projected cost in the line in the table “adjustment for macroeconomic effects” by claiming that tax cuts cause GDP growth which increases the tax take (think Reagan’s J curve), but given what actually happened to the tax take, we can safely ignore their Reganomics.