Prescription is working

Opposition politicians and several commentators have criticised National’s economic prescription.

But the figures in Bill English’s fifth Budget showed the prescription is working.

The country has been on the right track and has a growth projection many other countries would envy.

Greens can’t join dots

When I heard Russel Norman criticising the government’s achievement in staying on track back to surplus I thought I’d mis-heard him.

But no – here it is in black and white from the Green Party Facebook page:

 

They can’t join the dots between economic surplus and the ability to provide services and assistance to people in need.

They still haven’t grasped the dangers of too much debt.

They still think it’s okay to spend more than you earn.

Capitalism vs Socialism

This could also be used as evidence that economic freedom is more important than oil which would confound red greens who want more regulation but less oil.

Hat tip: Capitalism

Restraint still important

The government’s operating deficit is lower than forecast as a result of continued restraint and higher tax revenue.

The Government’s finances continue to improve with higher than forecast tax revenue contributing to the operating deficit now being lower than forecast in the Half-Year Update in December, Finance Minister Bill English says.

The operating deficit before gains and losses for the nine months to 31 March was $5 billion, or $273 million smaller than the $5.2 billion deficit forecast in December.

“The financial statements show that continued spending restraint is important as we remain on track to surplus in 2014/15, as the Budget next week will confirm,” Mr English says. “Ongoing spending control will allow the Government to build up sufficient surpluses to provide choices around repaying debt and investing more in priority public services.

Restraint on public spending has contributed to the improved financial position and it must be maintained.

This won’t be easy. People have largely accepted the need for restraint and the public service has done well on less. But the pressure to increase spending will grow as finances improve.

That pressure must be resisted.

The government has worked hard to improve the efficiency of the public service and reduce the burden of the state. The discipline which has resulted must be maintained to reduce debt and ensure the country is better prepared for the next financial upheaval than it was for this one.

Economic diversity needed for jobs in regions

The report into economic development in 16 regions  released by Economic Development Minister Steven Joyce highlights significant differences between them.

. . . “The report is designed to encourage more debate about what it takes for a region to be successful, and to more clearly link the decisions that are made by local stakeholders about resource allocation and usage to the number of jobs available in a region,” Mr Joyce says.

“It is my expectation stakeholders will want to use it to compare and contrast the economic fortunes of different regions around the country, and ask themselves what lessons and opportunities there are for growth and jobs in their region.

“For businesses to succeed they need to be able to make the most of their local resources, both physical and human. They need public institutions that make sound infrastructure investment decisions, administer fit-for-purpose regulation and provide services that improve local circumstances.” . . .

It isn’t always people in the regions who are loathe to make use of natural resources.

West Coast people were very keen to continue sustainable logging of native timber. It was pressure from elsewhere, mostly urban areas, that put a stop to that.

. . . “Nothing creates jobs and boosts incomes better than business growth. For New Zealand to build a more productive and competitive economy, we need all of our regions to achieve to their potential.

“Each region needs to assess its performance and decide whether it is willing to take the opportunities that exist for jobs and economic growth.” . . .

The report shows economic diversity is important.

. . . Steven Joyce says while oil and gas will play a role in regional economic growth, diversity and developing new industries will be vital to economic success across New Zealand. . .

 ”If Taranaki was just the dairy sector it would be another struggling region, even though it’s an important dairy sector part of the country, but it’s got oil and gas, has had that for a significant period of time,” says Mr Joyce.

No longer can regions afford to ignore unpopular industries, like mining, intensive farming or aquaculture, says Mr Joyce, because this will be what brings the region economic growth.

“But what is a struggle is that some regions because of the discussion and the way it flows in a region basically don’t even want to look, and that’s a bit exasperating because many of the same people in the same regions would say we need more jobs for our people, but they just don’t want to explore the opportunities.” . . .

Instead of saying a blanket no to new industries, regions need to look at how to diversify using their resources while minimising or mitigating any negative impact.

Economic diversity brings growth and also offers protection from inevitable ups and downs in demand and performance which happens in every sector.

More than 100 jobs were lost at Summit Wools Spinners in Oamaru earlier this year but unemployment went down in that quarter in spite of that because there was work available in other sectors.

Irrigation and dairying have provided a lot more work in North Otago, but tourism which has grown on attractions like the little blue penguin colony, historic precinct and steam punk is also providing work.

Green’s not for growth

The Green party is soliciting funds for its election campaign with an email that says:

 . . . National’s policies of more mining, weakening environmental protections, poor economic management and growing inequality are not the recipe for a fair society and a better future.

 In contrast to National, we have the ideas to deliver a richer New Zealand. . .

Green is supposed to be the colour of growth but these Greens are really reds promoting the policies that have failed in the past.

Take their plan to bring down the exchange rate. Prime Minister John Key says currency intervention and printing money won’t work:

. . . “It didn’t work very well for Argentina, or Venezuela or Zimbabwe and it could never be done in New Zealand at the sort of magnitude we’ve seen in the United States,” said Key.

As for the New Zealand dollar versus its United States counterpart, Key used a seesaw analogy.

“It’s a bit like being a seesaw and if I weigh 85 kilos and you weigh 170 kilos, I’m going to go up when you sit on the seesaw and you’re going to go down. And that’s really the situation we’ve got at the moment.”

“We kind of weigh 85 kilos and the United States weights 850 tonnes. Right up to this point it (the US) has been very unwell. It has got everything from aids to bird flu. It has really been pretty unwell so the market’s just massively adjusting what they’re doing.”

When people say the Reserve Bank should be printing money, Key said you wouldn’t do that with base rates – the Official Cash Rate – at 2.5%.

“All you do is cut interest rates for a start off. The second thing was even if you printed money, it’s never going to work. I think they’ve printed US$5.5 trillion in the US. I mean it’s massive. So what would we print? NZ$50 billion or something? It wouldn’t make an iota of difference.”

“So my view would be I know we want to get the exchange rate down and I know it’s hurting a lot of companies. But it’s a cycle you’re going to have to ride through and all the Government can do is control the things that are in our control. So get out there and reform the Resource Management Act, make sure we don’t spend too much money, make sure we keep pressure off interest rates, manage the place well,” Key said. . . .

The reds want to increase the burden of government, their policies will lead to higher interest rates and they haven’t a clue about good economic management.

. . . Furthermore, he said intervention in the currency markets never works.

Here Key cited an example from his previous career at Merrill Lynch, where at one time he was head of global foreign exchange. One of Merrill Lynch’s biggest clients was the Bank of Japan, which used to intervene in the currency markets through Merrill Lynch.

“To tell you how bad it got, one night we were sitting there and the Bank of Japan rang up and the US$-yen was about 90 or something and they didn’t want it to go down lower. And the guy said to me ‘I want you to start buying dollars at 90′. And I said ‘how many do you want me to buy’, and he said ‘well, I’m going out for three hours so I’ll give you a yell when I get home.’ And I said ‘yeah, but how many do you want me to buy?’ And he said ‘I’m going out for three hours, don’t you understand the conversation?’

“I bought US$4.5 billion in three hours. He said ‘where is it (the US dollar-yen exchange rate)’ and I said ‘it’s 90, you bought US$4.5 billion. And he said ‘ah, well I’m off to bed now give me a ring in the morning’,” said Key.

“It never worked, it just never worked. I don’t know how much money they lost on intervention but it was massive.” . . .

Who do you believe – someone who has worked in international finance and has managed the country through the global financial crisis or people who want to print money and whose power policy would have a chilling effect on on private investment? Rob Hosking writes:

. . . There is something essentially frivolous about anyone who would cheerfully rip up the value of some of the country’s largest firms, and the value of the investment in those firms, simply for a political positioning exercise.

This is why the exchange caught by TV3 between Green energy spokesman Gareth Hughes and party spin zambuck Clint Smith was so telling.

For those who missed it, Mr Hughes was asked if the party was pleased at the reaction: Mr Hughes paused, turned to Mr Smith and asked “Hey, Clint – are we pleased?”

It was telling that he even had to ask.

But the almost palpable glee coming out of the Green and Labour camps at the destructive impact of their policy is highly revealing. 

It underlines – not for the first time – the problem with the makeup of both parties. They are dominated at the MP and the staff level by the sub-genus homo politicus.

That is, they are full of people who have done nothing in their lives apart from politics. All parties have a complement of this group, but with Labour and the Greens the group has reached critical mass.

This group has been involved in politics at university, moved from there to various political/union offices and then into parliament. 

There is little real world experience and everything is viewed through a very narrow prism of political advantage.

It’s the sort of attitude which means the value destruction seen this week can be just laughed off.

There will, unless we are careful, be more such frivolous policies to come.

I would use a far stronger word than frivolous and the business community certainly isn’t taking it lightly.

In an open letter to LabourGreen they say the policy would harm jobs, growth and investment, causing interest rates to rise, reducing KiwiSaver retirement savings and making people less well off.

. . .Business shares your concerns about constantly rising power prices and their impact on our global competitiveness. Businesses and consumers work hard every day to minimise their spending on electricity in order to stay in business and

to make their household budgets stretch further.

However, we do not think that electricity policies based on subsidies and greater state control are the right answers. Such policies have been tried in the past and have been shown to be incapable of meeting the challenges of a modern economy

with a complex, real-time electricity market.

 

Putting aside the sheer complexity of their implementation, policies that protect businesses from the full costs of the inputs they use ultimately dull the incentive to innovate and make them less, not more internationally competitive. Reducing retail

prices below the full marginal cost of production encourages households to use more than they should.

Of particular concern with the policies announced is their chilling effect on investment across the entire economy.

 

We are especially concerned at investment analyst reports noting the potential for $1.4 billion of shareholder value to be wiped off the books of the private power companies. A similar amount, if not more, will come off the value of the public power companies.

 

 

Capital destruction on such a scale will severely undermine business confidence.

It sends signals to investors, on whom the New Zealand economy relies, that their wealth and the benefits it provides are not welcome.

 

Investment plans and job creation opportunities are foregone.

 

Rather than remote and intangible, this dampening of investment intentions will have a direct and real economic impact on those of all walks of life who seek to accumulate wealth by working hard to save, invest and grow. It causes interest rates

to rise, depletes retirement savings held in KiwiSaver accounts and means that other economic opportunities such as first homes are foregone and new business ventures as savings are unexpectedly reduced.

 

Individuals are less well-off as a result.

 

With the good of all New Zealanders in mind we ask you to withdraw these damaging policies. We offer to work with you in increasing public understanding of the operation of the electricity market and in ensuring consumers, both small and large,

have better choice from one of the increasingly competitive electricity markets in the world.

 

Yours sincerely,

 

 Phil O’Reilly Chief Executive BusinessNZ

 

Ken Shirley Chief Executive Officer Road Transport Forum

 

Catherine Beard Executive Director Manufacturing NZ

 

Ralph Matthes Executive Director Major Electricity Users Group

Chris Baker Chief Executive Straterra

John Scandrett Chief Executive Officer Otago Southland  Employers’ Association

Raewyn Bleakley Chief Executive  Business Central–Wellington

Kim Campbell Chief Executive EMA

Peter Townsend Chief Executive CECC

Michael Barnett Director  New Zealand Chambers of Commerce

These people represent people who employ people, the ones who need certainty and confidence to make investment that creates jobs, earn export income and pay taxes.

These are people who work in the real world.

They know there’s nothing funny about bad policy that would take the country backwards, cost jobs and make us all poorer.

They know that Green isn’t for growth and it doesn’t mean go.

Green economic policy is bright red and it will mean stop to economic growth and job creation.

The upside of high $

Petrol prices fell 12 cents during April and could drop below $2 a litre according to the Automobile Association.

The price of 91 octane petrol fell to $2.05 per litre in the main centres, while diesel fell 10 cents per litre to $1.42 a litre at most service stations, the lowest price since July 2012.
 
“Since mid-March, petrol prices have fallen 16 cents per litre, and diesel 13 cents. In all, fuel prices have fallen on seven consecutive occasions, the most number of sustained drops since June 2012,” says AA PetrolWatch spokesperson Mark Stockdale.
 
“However, the AA’s monitoring of commodity prices shows that since the last retail price increase in mid-February, the imported cost of petrol has fallen nearly 19 cents per litre, and diesel 16 cents. That means fuel companies have not passed all of the lower costs onto motorists, although some service stations have discounted prices below $2 a litre.”
 
This time last year we were paying $2.20 a litre for 91 petrol and $1.57 a litre for diesel, meaning motorists buying 40 litres of petrol today will be saving about $6 a time, or about $158 a year for a typical 2-litre car.
 
“International fuel prices have been consistently falling due to lower global demand, and increased supply as refinery production comes back after shutting down for maintenance,” Mr Stockdale said.
 
“Although in the last few days oil prices have risen slightly, at current trends there is a good chance the price of 91 octane petrol will fall below $2 a litre soon, the first time since June and July last year,” Mr Stockdale added.

The value of our dollar also plays a role in the price of fuel.

The upside of the higher exchange rate which makes export prices more expensive is that it makes imports cheaper.

LabourGreen say they’ll bring the value of the dollar down.

Bigger economies than ours have tried to do that with no success and at a very high cost.

If they did succeed it would immediately devalue everyone’s purchasing power as the cost of essential imports, including fuel, would rise.

Those were the bad old days

Bruce Wills, Federated Farmers president, reminds us how it was in the bad old days:

. . .  the good old days, was one of wage and price freezes, exchange rate controls and carless days.

To those of us who can recall this period, it was not a stellar time for New Zealand economically.

An increasingly desperate government had all but exhausted the interventionist toolkit.

We seemed to have more controls than what the international space station currently has.

Tourists would joke, “I came to New Zealand but it was closed”.  From 1945 until October 1980, shops opened Monday to Thursday at 9am and closed at 5pm; late night Friday trading to 9pm was the week’s highlight. Limited Saturday trading from 1980 meant just that and families would wander the streets “window shopping” – an expression out of favour with those born from the late 1980’s.  Those who now shop on Sunday should know it only arrived in 1990 and following deregulation.

Prior to the 1980’s economic reforms, the entire New Zealand tax system was a dog’s breakfast.

The largest tax burden fell upon wage and salary earners who, in 1983/84, carried 64 percent of the burden. Today, it is less than 40 percent.

Personal income taxes were eye-wateringly high with 66 percent as the top rate and that started at $38,000 ($106,817 in today’s dollars). Tax avoidance and evasion were rife due to copious tax shelters, dodges and “cash jobs”. 

When it came to business and industry, if it moved it was taxed and regulated. If it stopped moving then it was protected and subsidised.

Looking back this led to some truly bizarre endeavours.

Up until the 1990’s, car manufacturers would build a car in Japan, disassemble it, put it into a container and ship it to New Zealand. Here, it would be reassembled but not necessarily as well. Today, we don’t much use the “Monday” or “Friday” car to denote reliability; indicative of car factory workers keen to get home, or to the pub.

You could also forget JetStar because the government-owned Air New Zealand had a monopoly on domestic air travel.

Trucks were limited to distance and to what they could carry to protect the government-owned railway.

Even then, the railway was legendary for high staffing and ability to wreck or lose goods.

Domestic shipping was protected to shelter the government-owned shipping corporation and the Cook Straight Ferry.

Ports were an inefficient union closed-shop.

Relevant to Labour’s desire to turn the clock back on power, private sector electricity generation was all but banned to protect government-owned generators.

Even courier services were strictly controlled to protect the government-owned Post Office’s monopoly.

As for telecommunications, you could forget moving house and having a phone immediately.

Outside of the state system, occupations behaved like guilds under legislative protection.  Numbers were strictly controlled to ensure that fortunate elite had a good life and an even better income.

In agriculture, subsidies filled warehouses all because government knew much better than the international marketplace.

These helped to create an expression some may still recognise, “the Queen Street Farmer”.

It was wrong but the system was milked until Federated Farmers worked with the Lange Labour Government to row it back.

Then again, the old Producer Board’s reputedly exchanged product for Lada cars made in the defunct Soviet Union.  At that time, I doubt many could have told our respective economic systems apart.

This was a New Zealand where strikes were a union tactic and going out consisted of a buffet restaurant. It was only in the late 1970’s that restaurants and sports clubs found it slightly easier to sell wine with food.

This is why I struggle with those who look back to a past that never was. . .

Those won’t the good old days and a LabourGreen government would take us back there.

Rainfall and logic missing

Could the dairy price rise offset the cost of the drought?

That was the question I asked yesterday to which Roger answered a very clear no.

Federated Farmers is even more forthright in a media release headlined rainfall missing in some areas like economists’ logic.

When this drought does fully break, its effects will be felt for two seasons or more as herds are rebuilt and pasture repaired. The most recent rains may have taken the pressure off some areas, but others remain in a precarious state.

“Farmers I speak to in the areas that have been dry remain concerned,” says Katie Milne, Federated Farmers Adverse Events spokesperson and West Coast provincial president.

“If it rains in central Auckland or Wellington, it does not mean it is raining in Taihape.

“That said things are looking up in the Bay of Plenty but they remain tough in Hauraki-Coromandel.

“The West Coast of North Island, from South Auckland all the way north, remains pretty dry. I can add to that the North Island’s East Coast, parts of the Waikato and the Central North Island. While Manawatu is out of the woods, Rangitikei remains firmly gripped by drought.

“We seem to be getting through the worst of it on the South Island’s West Coast but Southland and Otago could use a good soaking followed by sunshine.

“Yet the cold reality farmers like me know is that it is getting colder. As each day passes we lose vital sunshine hours and if winter does come early, we will swing from one set of conditions not conducive to pasture growth to another.

“While this drought will break it does not suddenly mean it is all over for farmers. Pasture is the engine room of any farm and farmers are drilling in seed like no tomorrow.

“As any home gardener knows, grass growth tails off over winter and winter is close. Getting seed away before the weather flips will be a close run thing.

“With feed at a premium we could be facing a tough winter of constrained feed; a winter of discontent if you like that will put us on the back foot for spring.

“Knowing these effects personally and professionally, I am amazed Westpac’s economists could believe the drought will have no effect on the economy.

“It is news to Federated Farmers Rotorua Dairy Chair Bryan Osborne. The drought has cost his farm some 30,000 kilograms of milksolids or around $180,000. We are not using this to get the violins out, but to challenge Westpac over its claim this drought will cost New Zealand nothing.

“Milk production out of the North Island has dropped like a stone and you cannot export what you are not producing, no matter what price you get.

“The effect on sheep and beef farms is also dire. Capital stock numbers have been cut to the bone and these animals provide the basis for a farms future crop. Red meat also happens to be New Zealand’s number two export.

“Unlike cows which went to the bull in October or November, ewes have only been going to rams in the last two months, during the peak of the drought, to get in lamb. This will affect fertility, so sheep farmers will likely be hit with lower lambing percentages next spring.

“Farms are biological systems and not a factory. For sheep and beef farmers capital stock and stocking numbers will need to be rebuilt. That could take several seasons so this drought’s after effect will be felt for years,” Ms Milne concluded.

Droughts are like chronic illnesses, the impact lasts long after the rain comes.

The increase in dairy prices will help to compensate for decreased production and other costs of the drought but won’t cancel them out altogether.

Powering back to socialist 70s

BusinessNZ calls the Labour/Green plan to nationalise electricity wholesalers economic vandalism.

Chief Executive Phil O’Reilly says the proposal would destroy a functioning market and replace it with heavy-handed bureaucracy.

“Inserting an army of bureaucrats between power generators and retailers would destroy price signals, so prices would not reflect the cost of generation.

“In that situation, the taxpayer would continue to pay ever higher subsidies of the electricity system. This is not sustainable.

“The Electricity Authority said only yesterday that the electricity market is as competitive as it has ever been. It can always be improved, and this is where the focus should be.

“It’s only competition that can drive prices down. Governments can’t do this, not without subsidising the sector from taxes.

“A state-controlled sector as envisaged by Labour would drive out private investment. Why would the private sector invest in generators when the state can determine the prices they can charge, while subsidising state-owned competitors?

“The private sector power companies would have to seriously consider their future in the market. Those who have invested heavily would basically find their profits confiscated.

“Interfering in the market in this way would send a signal to the rest of the world that it is not safe to invest anywhere in New Zealand. The knock-on impact from that, on jobs and growth, would dwarf any short-term benefit from artificially reduced electricity prices,” Mr O’Reilly said.

Energy and Resources Minister Simon Bridges says the Labour-Greens power plan is incoherent and will kill competition in the electricity market.

“Under the previous Government, electricity prices increased by 72 per cent. It has taken the National-led Government’s reforms to arrest these ridiculously steep increases on New Zealand households,” says Mr Bridges.

“The 2010 electricity market restructure is working. The market now has more players and much more competition than it ever had under Labour.

“New Zealanders are increasingly taking advantage of greater competition and are switching companies for a better deal – in some cases, saving up to several hundred dollars a year.

Since the Electricity Authority’s What’s My Number? campaign began in May 2011, there have been almost 700,000 consumer switches.

“Why scrap the whole electricity market when consumers can already save more than the economically illiterate promises the Opposition is making?

“These types of policies have been considered in the past and rejected for very good reasons. Consumers should be very afraid of them. They may look simple but all they will ultimately bring is higher costs to households,” Mr Bridges says.

Economic Development Minister Steven Joyce calls it a a half-baked Soviet Union-style nationalisation “plan”:

“This is truly wacky and desperate stuff obviously made up in the last minute in the Koru Lounge between comrades Norman and Shearer,” Mr Joyce says.

“Their crazy idea to have both a single national purchaser of electricity and to exempt Government-owned companies from both company tax and dividends would effectively demolish private investment in the electricity industry overnight. It would also raise real questions as to why any individual or company would want to invest in businesses in New Zealand.

“Even the idea of it is economic vandalism of the highest order, with the timing designed to try and disrupt the mixed-ownership company floats. What we are seeing here is a desperate Opposition that is prepared to sacrifice economic development in New Zealand on the altar of political opportunism.

“The sad truth is that Labour has no idea how to operate a competitive market that keeps downward pressure on prices. Labour made a number of reforms to the electricity market in the early 2000s and the result was power prices rising 72 per cent over nine years.

“This Government’s reforms have halved price increases while maintaining investment in generation and transmission. Labour’s suggestion today is no more than a belated apology for their mismanagement, with a back-to-the-70s solution that would only make things worse.

“You seriously have to question the quality of economic advice the Labour Party is getting. They really need to get a lot more serious if they are ever to be considered fit to manage the New Zealand economy.”

It’s not just the government questioning the policy.

Colin Espiner asks has Labour actually gone insane? As in stark, raving, Monster Loony Party mad?

I’m assuming the answer is yes, judging by today’s incredulity-creating announcement that, if elected next year, Labour will essentially nationalise the electricity industry. . .

The Opposition says it’s going to create a single buyer, NZ Power, that will buy all the country’s electricity generation “at a fair price” and then onsell it to consumers. 

It’ll pretty much give away a 300KW bloc to every household and then charge for additional units. 

At a stroke, Labour is proposing to dismantle the electricity market, ruin Contact Energy and Mighty River Power and decimate the Government’s share float plans for both MRP and Meridian. 

Oh, and sell thousands of mum and dad investors down the Mighty River, since MRP’s share price would almost certainly plummet if the company was forced to retail only through a government department at whatever price it deemed to be fair. 

Already Contact shares dipped 3 per cent on the news, and that’s just a taste of what would come if this policy was ever implemented.

I’m no fan of high power prices – and I don’t own any Contact or MRP shares – but what Labour is proposing is essentially nationalisation a la Brazil or Argentina. This is Third World, funny-money stuff. Goodness knows what the financial markets will make of it. And what message does it send to overseas investors? . . .

It’s extremely rare that I agree completely with Economic Development Minister Steven Joyce, but his comment today that the plan was “a return to the 1970s-style monopoly provision of electricity…Only North Korea and Venezuela did not think such ideas are nuts” is pretty much spot on.

I agree with Joyce that Labour is virtually sabotaging the economy. 

It is, in my view, also an indication that Labour does not believe it has any hope of winning the next election. In my experience, only political parties that know they have no realistic hope of winning an election propose things they know they will never have to try to implement. . .

There is no virtually about the economic sabotage this policy would inflict.

I was in parliament for Question Time yesterday.

The Government benches were enjoying themselves and Ministers made the most of the opportunity Labour and the Green Party gifted them:

Hon STEVEN JOYCE: The Electricity Authority yesterday released its review of the electricity market in 2012. The report showed 18 percent of customers, around 32,000 people a month, voted with their feet by switching electricity providers in 2012, presumably for lower prices. For the benefit of the Opposition, that is called “competition”. Since November 2008 annual electricity price increases have halved from the 8 percent year-on-year increases suffered by hard-working New Zealanders during the previous 9 years. This follows a number of pro-competitive reforms by this Government, which apparently the Opposition is not aware of. We have reconfigured State owned enterprise assets to increase competition, created the Electricity Authority and made it responsible for promoting competition, allowed line businesses to compete in the retail space, and funded promotion of consumer switching through the What’s My Number campaign.

Todd McClay: Has the Minister seen any other proposals to try to lower electricity prices?

Hon STEVEN JOYCE: Well, weirdly, yes, I have. Just before lunch today I received one report, which I believe came from the “North Korean School of Economics”. Apparently, the suggestion there was that nationalising the entire electricity industry would somehow lead to lower power prices. . .

That got a point of order call from Winston Peters to which the Minister responded:

Hon STEVEN JOYCE: If I could perhaps clarify my answer, I should clarify that I received a report from the local branch of the “North Korean School of Economics”.

I’d like to believe Espiner’s theory that this is the policy of parties which know they’ll lose the next election and therefore never have to implement it.

The only other explanation is that the people promoting them are so economically illiterate they don’t understand what they’re talking about.

Either way, it shows they haven’t learned from history because these policies would power us back to the socialist seventies and it would be all downhill from there.

Could dairy prices counter impact of drought?

Westpac economists say steep rises in dairy prices could more or less offset the net impact of the drought on the economy.

Westpac said in a commentary that the drought would hit agricultural production in the June and September quarters. “But incredibly, the net cost to the economy of the drought could be close to zero,” it said. “World dairy price increases could offset the costs of lost production due to drought.”

Individual dairy farm incomes for this season will vary widely from the nationwide average – particularly depending on access to irrigation.

The impact of the drought on the meat sector to date is negative and closer to the historical experience.

Higher dairy incomes would go a long way to offsetting lower production in both the dairy and meat sectors, particularly from the second half of 2013, the bank said.

“However, because this particular drought has had such unequal impacts on different parts of New Zealand’s farm sector, there’s also still some uncertainty around the flow-on effects on confidence and spending – those whose incomes get a boost may not raise their spending by as much as those whose incomes have taken a hit curtail theirs.”

As the timing of higher payments to dairy farmers may lag behind the hit to production and as confidence takes time to return, dairy incomes may boost GDP later rather than sooner. Overall, the bank expects that the drought will have an impact of up to 0.6 per cent of real GDP over 2013. . .

Prices have risen steeply but on much smaller volumes because many farmers in the regions affected by drought have gone to once a day milking or dried their cows off completely.

That economists think the dairy price rise could offset the economic impact of the drought shows the decline in the relative importance of the sheep and beef industries.

However, the worst impact from that sector won’t show until next season when the decrease in breeding stock shows up in decreased lamb and calf numbers.

The drought hasn’t broken in all regions, and even if it had, the impact continues long after the rain comes.

Confidence up, south leads

Business confidence is at its strongest since June 2007, when the domestic economy was starting to turn down ahead of the global financial crisis in 2008, according to the latest Quarterly Survey of Business Opinion from the New Zealand Institute of Economic Research.

The March quarter survey shows economic recovery broadening beyond Auckland and Christchurch, and no apparent impact from a string of corporate restructuring announcements in the first three months of the year, and the collapse of the Mainzeal construction group.

A net 23 percent of firms expect better trading conditions in the next quarter, up from 20 percent in the previous quarter, while a net 32 percent firms are optimistic in March, seasonally adjusted, compared with 19 percent previously. . .

A Grant Thornton International Business Report (IBR) shows southern businesses are more confident than those in the north.

. . . 16.8% of South Islanders are very optimistic about the economy in the next 12 months compared with 8.10% of the North Island.

Simon Carey, partner, Grant Thornton New Zealand Ltd, said that the gap narrows when talking about optimism overall with 65.2% of South Islanders being optimistic compared with 61.6% of North Islanders.

“These optimism figures are supported throughout the survey with South Island firms expecting to generate more revenue than North Island companies (68.4% to 66.7%), generate better selling prices (46.3% to 38.4%), employ more staff (44.2% to 34.3%), invest in plant and machinery (62.1% to 54.5%) and pay higher wages with 80% looking to increase salaries in line with inflation and above compared with 72.7% for the North Island. At the generous end, 22.1% of South Island firms will increase salaries at levels above inflation compared with 19.2% for the North Island.

 “Optimism in the South Island has been trending ahead of the north for some time as evidenced by the research which revealed that 45.3% of South Island firms employed extra staff in 2012 compared with 29.3% for the north. These employment figures were further reinforced by the fact 25.3% of North Island firms decreased their staff in 2012 compared with 16.8% for the south.” . .

Confidence is important not just for the businesses but for the wider economy. The more positive a business is, the more likely it is to increase investment and take on more staff.

The global outlook is still uncertain but these reports reflect the positive view the IMF has of our economy.

Very promising

Quote of the day:

“All I can tell you is the IMF is very supportive of what is being done by the Government in that respect.

“If you look at the numbers, if you look whether it is growth, whether it is employment, whether it is inflation, whether it is debt, overall it is very stable and it is also very promising.

“If you compare the potential growth rate of New Zealand and thee forecasts we have which I will not disclose because they will be disclosed in a couple of weeks time, it’s certainly a lot better than what we see in other parts of the world.

“An economy grew on the basis of its components – resources, manpower, capital, financial markets and policies and policies and the policies we believe are sound and solid.” IMF managing director Christine Lagarde.

 

Books better than forecast

The government books are in a better state than expected:

Higher than forecast tax revenue continues to underpin an improvement in the Government’s finances, compared to the Half-Year Update in December, Finance Minister Bill English says.

The operating deficit before gains and losses for the eight months to 28 February was $3 billion, or $556 million smaller than the $3.6 billion deficit forecast in December.

“The other pleasing aspect of the financial statements is that government spending remains under control,” Mr English says. “That is important as we remain on track to surplus in 2014/15.

“It will remain important beyond then, because we will need to build up sufficient surpluses to provide choices around repaying debt and investing more in priority public services.”

Overall, core Crown tax revenue was $719 million higher than forecast at $37.6 billion for the eight months. Source deductions were $266 million above forecast due to a higher effective tax rate paid by those in the workforce, and tax from other individuals came in $326 million above forecast.

Compared with the eight months to February 2012, tax revenue has increased by $2.2 billion, mainly reflecting wage growth, higher effective tax rates and a rise in GST receipts due to growth in nominal consumption and residential investment.

Core Crown expenses were $370 million below forecast, reflecting broad-based spending control and delays in Treaty of Waitangi settlements.

Higher than expected net gains from Government investment funds delivered a $4.3 billion operating surplus for the eight months, which was significantly better than the $481 million forecast operating deficit.

There is still along way to go but the changes the government has made has New Zealand heading in the right direction again.

Had we had a Labour/Green government after the 2008 and 2011 elections the books would be in a far worse state..

New Zealand was in recession before the global financial crisis because of the Labour led government’s high tax, high spending and debt-fuelled consumption.

The policies it and its potential coalition partner, the Green Party, have championed since the 2008 election show no understanding of what contributed to our problems and the changes needed to solve them.

They’ve opposed every move National has made to reduce spending and promote sustainable, export-led growth.

They continue to promote polices which would take the country back to higher taxes, higher spending and lower growth showing they are still far better fitted for opposition than government.

IMF says NZ has right balance

The International Monetary Fund has given New Zealand’ policies a tick of approval:

Finance Minister Bill English has welcomed the International Monetary Fund’s conclusion that the Government’s deficit reduction programme strikes the right balance between supporting growth and limiting public debt.

In its Preliminary Concluding Statement the IMF says New Zealand’s macro-economic policy stance is appropriate and that the monetary policy should continue to be the first line of defence against adverse shocks.

And it notes that economic growth appears to have strengthened in the last few months of 2012.

The IMF says: “We regard the planned pace of deficit reduction as striking the right balance between sustaining output growth and limiting public debt growth, and consistent with a policy setting where monetary policy plays a primary role in managing aggregate demand. The benefits of the plan are many.”

Mr English says the IMF’s assessment reflected the balanced and pragmatic approach the Government had taken with its economic programme over the past four years.

“The IMF notes there are many benefits to the Government’s plan. It is withdrawing fiscal stimulus at the right time by making room for private sector and earthquake-related reconstruction spending.

“It has also improved the macro-economic policy mix by reducing pressure on monetary policy. The programme also allows New Zealand to deal with aging and healthcare costs, and to cope with any future shocks.

“Finally, as the IMF concludes, the programme could help to increase national savings, reduce the current account deficit and limit the increase in New Zealand’s foreign liabilities.”

This was the subject of questions in parliament yesterday:

Hon STEVEN JOYCE: The IMF identifies two main near-term risks to the New Zealand economy. These are potential weaknesses or a worsening in the financial conditions in the world economy. The IMF also identifies risk in the New Zealand housing market, noting that supply bottlenecks persist and prices remain elevated. The IMF notes that New Zealand has room to respond to shocks with its monetary policy, and the level of public debt leaves room for fiscal policy response. The floating New Zealand dollar is also seen as an effective buffer. The IMF also says that our fundamentals have improved since the global financial crisis. Household and business balance sheets have strengthened, and banks have reduced their foreign funding and been assisted by a strong growth in deposits and slower growth in credit.

Maggie Barry: What does the IMF say about the value of the New Zealand dollar?

Hon STEVEN JOYCE: The IMF shares the Government’s view that the dollar is at a high value, largely because of factors outside our control. In particular, the strength of the New Zealand dollar is determined by the relative weaknesses of other currencies and other economies, many of which are printing money. As it says, if global monetary policy were to become less stimulatory, the exchange rate would likely depreciate over time. The IMF also notes that the Government’s return to surplus is easing pressure on the exchange rate by boosting national savings.

Hon David Parker: Does he agree with the IMF that “… New Zealand has run persistent current account deficits resulting in net external liabilities which are high by international standards. The deficit is expected to widen this year despite relatively strong terms of trade …”?

Hon STEVEN JOYCE: Yes, and I would note that those were largely due to the previous Government when the balance of payments deficit rolled out to over 8 percent of GDP. I really think the member should stop this line of questioning because all he does is point out that the Opposition are lousy economic managers.

Quite where the deficit would be had a Labour-led government still been in power is a very scary thought.

Two choices

Voters next year have two choices.

A National-led government that understands the importance of low inflation:

. . . These forecasts of low inflation are good for New Zealand households, particularly those on lower or fixed incomes. In addition, average floating home mortgage interest rates are now around half what they were 5 years ago in 2008. For a family with a $200,000 mortgage, that is saving them around $200 a week.

Or the alternative:

Hon STEVEN JOYCE: Well, there are a number of alternative policies that would put substantial benefits of current low inflation and low interest rates at risk, and that would, of course, cost New Zealand households dearly—for example, trying to artificially and substantially devalue the exchange rate or going soft on inflation; or, for example, opposing the Government’s share offer programme and instead borrowing billions of dollars more to pay for priority assets like schools and hospitals; or, for example, just pulling out the photocopier and printing more money. All of those things would send interest rates and inflation through the roof, directly affecting New Zealand households and families. They are, of course, the cornerstones of the Labour-Green opposition—

Oh yes, the Green Party still wants to print money:

So NZ is borrowing other countries (sic) freshly printed money and paying them interest for the privilege. So why don’t we print some of our own?

Confidence high in spite of drought

The second BNZ Confidence Survey for 2013 has found that in spite of the spreading drought, export-suppressing high exchange rate, and worries about housing affordability, sentiment regarding where the economy is heading has improved to the highest level since July 2011.

A net 41% of businesses are confident about the year ahead compared with a net 32% in February.

In the construction and civil construction sectors activity is noticeably strong or picking up, and residential real estate remains buoyant with the long noted shortage of listings broadly continuing. The forestry sector is again reported to be in improving condition. But substantial caution prevails in the agricultural sector with worries about the drought.

One noticeably newly strong sector is recruitment. All six comments received were on the positive side so maybe this is an early indicator of things solidly cyclically improving.

The drought is spreading. Its impact won’t just hit farmers and those who service and supply them, it will have a  big impact on the tax take and the wider economy.

That business confidence is high in spite of that is encouraging.

Full results of the survey are here.

Drought pin to prick dollar balloon

Quote of the day:

. . . Right now our dollar is a balloon and drought declarations ought to be the sharp pin. Given the droughts of 2007-9 cost New Zealand $2.8 billion and were tipping points for the last recession, investors buying the Kiwi ignore reality at their peril. Bruce Wills, Federated Farmers president.

He was writing on the impact of the drought which ANZ puts it at $1 billion and counting.

Which manufacturing crisis?

The Labour/Green/NZ First/Mana opposition has been doing its best to manufacture a crisis about a manufacturing crisis.

Which crisis it is they’re concerned about is unclear because manufacturing here kept growing in the December quarter despite falls in sheep and dairy industries.

Total manufacturing volumes rose for the December 2012 quarter, despite a small fall in meat and dairy product manufacturing, Statistics New Zealand said today.

After adjusting for price changes and seasonal variations, the volume of total manufacturing sales rose 1.5 percent, while the meat and dairy manufacturing sales volume fell 1.1 percent.

“While still an increase, this is something of a reversal from the previous quarter, when high meat and dairy manufacturing sales more than compensated for falls in other manufacturing industries,” industry and labour statistics manager Blair Cardno said.

“This quarter, seven of the other 12 manufacturing industries contributed to the overall increase.”

The largest increases this quarter were:

• metal product manufacturing, up 5.4 percent
• petroleum and coal product manufacturing, up 6.4 percent.

These two industries partly recovered from decreases in recent quarters.

The trend for the manufacturing sales volume, which gives a longer-term picture of movements, has been rising since late 2011.

In current prices, the total manufacturing sales value was flat, up just $1 million to a seasonally adjusted $22.8 billion.

Other figures support the case for optimism.

Doug Steel, economist at Bank of New Zealand, said the increase in volumes continued the trend of the past three quarters, though “prices were not all that flash.”

“The rundown in stocks give you a bit of optimism for 2013 if demand does strengthen on construction,” he said.

The official government figures come the same day as a New Zealand Manufacturers’ and Exporters’ Association survey showed an increase in export sales in January compared to a year earlier.

The NZMEA has been a vocal critic of the government and Reserve Bank for not providing more support for local firms competing with cheap imported rivals and reduced competitiveness abroad due to the strength of the currency.

Last month, the Bank of New Zealand-Business NZ performance of manufacturing index showed the sector grew at its fastest pace in eight months in January, with the strongest growth in Canterbury/Westland probably reflecting demand for building materials.

Some sectors aren’t doing so well, some are doing better.

That’s normal and while a decline in a sector and job losses are hard for those involved they’re not symptoms of a crisis.

Would they buy them back?

Labour and the Green Party are still wasting their time gathering signatures for their petition opposing the partial sale of a few state assets.

They need to explain if they are going to present the petition and, if it has sufficient signatures, force the expense of their politicians’ initiated referendum on us when it will be too late to achieve anything.

Mighty River Power, is expected to be floated by mid-May, long before a referendum could take place, so why are they bothering to collect more signatures?

Truth points out in its editorial Labour  and the Greens need to come clean on asset sales:

. . . We know what the government thinks. We can all read the prospectus when it comes out for Mighty River Power, but what investors don’t know is what Labour intends as its policy towards these sales.

We know they oppose them, but what is their policy moving forward.

Investors and voters need to know if Labour intends opposing the sales in actions and not just words.

Will Labour commit to forced buy-back of the shares, essentially a re-nationalisation of the asset. Before readers poo-pooh that suggestion remember Air New Zealand.

Helen Clark even flirted with securities laws by advising on national television for Mum and Dad investors to keep their shares in Air New Zealand…that everything would be alright. As we know everything wan;t alright and some weeks later the government forcibly acquired as many shares as it could and left about 25% of shareholder mired without any sort of say in the company.

Would Labour do this again with the listed power companies…and if so how much would they pay for the shares…The listing price? The market price (unlikely)?

Labour and their hangers-on who oppose asset sales need to clarify before even a single share is sold what their intentions are.

I suspect that their policy will be as bankrupt as their position so far has been. Words not Deeds. . .

Winston Peters, a likely coalition partner in a Labour/Green government wants to buy the shares back:

. . . New Zealand First will use its influence on the next coalition Government to buy back our state-owned power companies which are being flogged off by National and we are committed to buying back the shares at no greater price than paid by the first purchaser.

Labour and the Green Party haven’t let us know their plans yet.

If they go ahead with the petition without making a commitment to buy the shares back they are adding yet more proof to the contention they’re after publicity for themselves not a change in policy.

If, however, they plan to buy back the shares they will sabotage any efforts they make to pretend they have any interest in the careful management of public finances and any concern for investors.