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Sat, 13 Nov 2010 2:34p.m.
Transcript from TV news
SEAN Well the Savings Working Group has been tasked by the government with finding new ways to boost the country’s very poor savings record. It's just held a briefing for media and it's reporting back to the government early next year. Chairman Kerry McDonald joins us now live from our Wellington studio. Kerry welcome to The Nation. I want to start just with I guess the most stark figures because if we don’t save it means we've gotta borrow, 180 billion dollars in debt now for the country and projections that by 2014 that is 250 billion. Without change is that sustainable for the New Zealand economy and for this country?
KERRY McDONALD – Savings Working Group Chairman
No it's not and that really is the key issue. We've been gradually getting into a worse position over about three decades and we've pretty much run out of road now. One of the sayings is we've maxed out on our credit card, and I think that sums it up pretty well.
SEAN We look at the things that make us money and we're an agriculture nation, we're an exporting nation, but since 1974 in real terms our exports have been decreasing?
KERRY Yes that’s right, and the structure of the economy has been changing quite markedly, so the non-tradable areas of the economy are the things that we don’t export, or that don’t compete against imports, have been growing very strongly, and basically since the early 2000s the tradable goods sector, manufacturing, agriculture, and to some extent tourism, have all been contracting and we've had no net employment growth in those areas for a decade.
SEAN Yet Kerry New Zealanders have been maintaining or in some ways improving their standard of living in that time. Does that explain why we're such poor savers, we are spending all we have got to sustain a standard of living which we simply cannot afford?
KERRY Yes, there's some truth on that, and you'll also get the comment that it doesn’t matter that we're not saving enough, because we can always borrow offshore and use foreign capital. Well we are at the point now whereas I said before, we've run out of road, we're facing very high interest rates, which will continue to rise if our level of net external liabilities continues to rise and equally it's having an adverse impact on the exchange rate. So yes we've been spending a lot and we've been able to get away with it because foreigners would lend to us. We're now in a situation where we can't take that for granted.
SEAN Alright if we save, if we can turn this around and as individuals and as a nation spend less and save more, does that solve the structural economic problems we have?
KERRY Not of itself, but the Savings Working Group has now got to a point where we're starting to see some quite – some tentatively attractive solutions, and one of the critical areas is productivity, and we believe that there is a package emerging which would mean some reduction in the level of consumption, which would stabilise the growth in net foreign obligations, particularly the level of debt, and there are likely consequences for the cost of funds, in other words the external interest rate and for the exchange rate, that are likely to be positive.
SEAN In layman’s terms if we tighten our belts and spend less it will cost less for us to borrow money from overseas?
KERRY Yes, and that in turn will encourage investment, our productivity is very low compared with a lot of other economies, we don’t invest enough in productive capital, and so part of that change process will be an increase in investment, and the other effect that is likely to occur is an increase in exports. So there is quite a virtuous package there and we're still working our way through whether we think this will actually be viable or not.
SEAN Kerry I know the modelling you're doing also looks at what that sort of change or achieving that virtuous state in the economy, how you get there, and I know a lot of the modelling suggests that New Zealanders are going to have to accept a flat line or indeed a reduction in what they get by way of services from the government, essentially I guess their standard of living, to reach that solution point, and that that reduction or that flat lining may last for five to eight years.
KERRY Well on current Treasury projections, if the government stays within a sustainable debt level, the annual reduction in services from the government may last for 30 years, and part of the benefit of the solutions that we're looking at, is there are productivity approaches that could mean, instead of having a sharp dip in services from the government to the community, you could maintain a flat rate of supply, in other words no contraction, and then get back into growth again quite quickly. But to do that we really would have to be serious about productivity, starting in the state sector, starting with the government, and then gradually moving into the private sector.
SEAN And that’s where I want to go next, you say starting in the state sector, you are talking about real savings and more than just a bottom line review of the public sector aren’t you? You're talking about really looking hard at what we spend there and how it's spent?
KERRY Yes, that’s right, and there's plenty of anecdotal – I mean I chaired the state sector Standards Board in the early 2000s, our reports basically said look there's a lot of room for improvement in the government sector and really not much has happened since then, although there are a few things starting to get traction.
SEAN Kerry I've gotta say to you the biggest area that we spend in the public sector is obviously health and welfare. So they are gonna feel the chill wind of this adjustment?
KERRY Well the approach we've taken is to explore productivity gains without any reduction in the services provided. Now for example there's work by Treasury that says the way capital is spent in the government sector is often quite wasteful. We don’t target our capital expenditure as well as we should, so my view is there are quite a few areas that we can look at with a high probability of getting some productivity gains and we're only looking at a long term improvement of about 1% a year initially through cost and then subsequently through improvements ….
SEAN But when you say cost doesn’t that mean public sector jobs and delivery of services to New Zealand citizens?
KERRY Well it may mean some jobs, but government expenditure since 2005 has grown by 50%, now we simply can't afford that, so you know there is no alternative in the government sector to trim the sails to some extent, and our thinking at this stage it's not dramatic, but it's eliminating waste and it's getting much more focused on the systems based improvement to do things better, and this stuff is just routine in the private sector, and compared with Australia our non-tradable sector productivity, including the government, is going backwards at a very rapid rate.
SEAN So you're saying turning that round is the solution, and I understand from our discussion yesterday, you're also saying that compulsory Kiwi Saver or compulsory investment in New Zealand by super funds isn’t the answer, it's this more structural fund change that is the way ahead?
KERRY Where we've got to now on compulsion is that it doesn’t look attractive because it doesn’t seem to work, but that’s not a final conclusion. We're still waiting for quite a bit of additional information from offshore. We can see some potential for tax changes, reallocation of tax effects, to have a positive impact on savings, so again that’s work in progress.
SEAN Ultimately though this is all about New Zealanders accepting that their standard of living has been too high for too long, we've gotta bite that bullet and bite it now.
KERRY Yes that’s right. I mean basically as I've said we've run out of road. We've consumed all the head room, all the cushion that we had, we're right at a margin where the consequences of not changing could be very serious. The sort of thing we're seeing in Greece, Ireland, the sort of changes we're seeing in the UK now, now New Zealand’s position statistically in terms of net foreign liabilities is very close to Greece and Ireland, and that is not a viable position.
SEAN Kerry, thank you very much indeed, Kerry McDonald there, Chair of the Savings Working Group
Transcript from TV news
SEAN Well the Savings Working Group has been tasked by the government with finding new ways to boost the country’s very poor savings record. It's just held a briefing for media and it's reporting back to the government early next year. Chairman Kerry McDonald joins us now live from our Wellington studio. Kerry welcome to The Nation. I want to start just with I guess the most stark figures because if we don’t save it means we've gotta borrow, 180 billion dollars in debt now for the country and projections that by 2014 that is 250 billion. Without change is that sustainable for the New Zealand economy and for this country?
KERRY McDONALD – Savings Working Group Chairman
No it's not and that really is the key issue. We've been gradually getting into a worse position over about three decades and we've pretty much run out of road now. One of the sayings is we've maxed out on our credit card, and I think that sums it up pretty well.
SEAN We look at the things that make us money and we're an agriculture nation, we're an exporting nation, but since 1974 in real terms our exports have been decreasing?
KERRY Yes that’s right, and the structure of the economy has been changing quite markedly, so the non-tradable areas of the economy are the things that we don’t export, or that don’t compete against imports, have been growing very strongly, and basically since the early 2000s the tradable goods sector, manufacturing, agriculture, and to some extent tourism, have all been contracting and we've had no net employment growth in those areas for a decade.
SEAN Yet Kerry New Zealanders have been maintaining or in some ways improving their standard of living in that time. Does that explain why we're such poor savers, we are spending all we have got to sustain a standard of living which we simply cannot afford?
KERRY Yes, there's some truth on that, and you'll also get the comment that it doesn’t matter that we're not saving enough, because we can always borrow offshore and use foreign capital. Well we are at the point now whereas I said before, we've run out of road, we're facing very high interest rates, which will continue to rise if our level of net external liabilities continues to rise and equally it's having an adverse impact on the exchange rate. So yes we've been spending a lot and we've been able to get away with it because foreigners would lend to us. We're now in a situation where we can't take that for granted.
SEAN Alright if we save, if we can turn this around and as individuals and as a nation spend less and save more, does that solve the structural economic problems we have?
KERRY Not of itself, but the Savings Working Group has now got to a point where we're starting to see some quite – some tentatively attractive solutions, and one of the critical areas is productivity, and we believe that there is a package emerging which would mean some reduction in the level of consumption, which would stabilise the growth in net foreign obligations, particularly the level of debt, and there are likely consequences for the cost of funds, in other words the external interest rate and for the exchange rate, that are likely to be positive.
SEAN In layman’s terms if we tighten our belts and spend less it will cost less for us to borrow money from overseas?
KERRY Yes, and that in turn will encourage investment, our productivity is very low compared with a lot of other economies, we don’t invest enough in productive capital, and so part of that change process will be an increase in investment, and the other effect that is likely to occur is an increase in exports. So there is quite a virtuous package there and we're still working our way through whether we think this will actually be viable or not.
SEAN Kerry I know the modelling you're doing also looks at what that sort of change or achieving that virtuous state in the economy, how you get there, and I know a lot of the modelling suggests that New Zealanders are going to have to accept a flat line or indeed a reduction in what they get by way of services from the government, essentially I guess their standard of living, to reach that solution point, and that that reduction or that flat lining may last for five to eight years.
KERRY Well on current Treasury projections, if the government stays within a sustainable debt level, the annual reduction in services from the government may last for 30 years, and part of the benefit of the solutions that we're looking at, is there are productivity approaches that could mean, instead of having a sharp dip in services from the government to the community, you could maintain a flat rate of supply, in other words no contraction, and then get back into growth again quite quickly. But to do that we really would have to be serious about productivity, starting in the state sector, starting with the government, and then gradually moving into the private sector.
SEAN And that’s where I want to go next, you say starting in the state sector, you are talking about real savings and more than just a bottom line review of the public sector aren’t you? You're talking about really looking hard at what we spend there and how it's spent?
KERRY Yes, that’s right, and there's plenty of anecdotal – I mean I chaired the state sector Standards Board in the early 2000s, our reports basically said look there's a lot of room for improvement in the government sector and really not much has happened since then, although there are a few things starting to get traction.
SEAN Kerry I've gotta say to you the biggest area that we spend in the public sector is obviously health and welfare. So they are gonna feel the chill wind of this adjustment?
KERRY Well the approach we've taken is to explore productivity gains without any reduction in the services provided. Now for example there's work by Treasury that says the way capital is spent in the government sector is often quite wasteful. We don’t target our capital expenditure as well as we should, so my view is there are quite a few areas that we can look at with a high probability of getting some productivity gains and we're only looking at a long term improvement of about 1% a year initially through cost and then subsequently through improvements ….
SEAN But when you say cost doesn’t that mean public sector jobs and delivery of services to New Zealand citizens?
KERRY Well it may mean some jobs, but government expenditure since 2005 has grown by 50%, now we simply can't afford that, so you know there is no alternative in the government sector to trim the sails to some extent, and our thinking at this stage it's not dramatic, but it's eliminating waste and it's getting much more focused on the systems based improvement to do things better, and this stuff is just routine in the private sector, and compared with Australia our non-tradable sector productivity, including the government, is going backwards at a very rapid rate.
SEAN So you're saying turning that round is the solution, and I understand from our discussion yesterday, you're also saying that compulsory Kiwi Saver or compulsory investment in New Zealand by super funds isn’t the answer, it's this more structural fund change that is the way ahead?
KERRY Where we've got to now on compulsion is that it doesn’t look attractive because it doesn’t seem to work, but that’s not a final conclusion. We're still waiting for quite a bit of additional information from offshore. We can see some potential for tax changes, reallocation of tax effects, to have a positive impact on savings, so again that’s work in progress.
SEAN Ultimately though this is all about New Zealanders accepting that their standard of living has been too high for too long, we've gotta bite that bullet and bite it now.
KERRY Yes that’s right. I mean basically as I've said we've run out of road. We've consumed all the head room, all the cushion that we had, we're right at a margin where the consequences of not changing could be very serious. The sort of thing we're seeing in Greece, Ireland, the sort of changes we're seeing in the UK now, now New Zealand’s position statistically in terms of net foreign liabilities is very close to Greece and Ireland, and that is not a viable position.
SEAN Kerry, thank you very much indeed, Kerry McDonald there, Chair of the Savings Working Group
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