Vote ACT to Save the Kiwi (Dollar)

Speech to Gravity Credit Management - Vote ACT to Save the Kiwi (Dollar)

The dollar’s election season decline

Political commentators missed a chilling op-ed by one of New Zealand’s best economists this week.

Dr Bryce Wilkinson is understated and clinical, someone worth listening to in a sea of less-qualified economists chasing their fifteen minutes of fame.

His op-ed points out that the New Zealand dollar has fallen against all 17 currencies the Reserve Bank monitors for the past six weeks.

Worse, the Reserve Bank in its Monetary Policy Statement appeared to miss this. They anticipated our dollar being over 2c higher than it now is. The Treasury thought it would be 3c higher. These are the people advising the Government.

Normally the Kiwi dollar tracks the Aussie, but it is at the lowest point since the Canterbury quakes knocked it for six.

Dr Wilkinson points out why this matters to the cost of living. Even things consumers buy from New Zealand are more expensive when the dollar falls. Milk is traded in USD, so when the dollar falls, the price of butter at the Four Square goes up.

Since the second to last week of August, MBIE reports that a litre of Regular Petrol has risen from 3.02 to 3.48. I calculate a quarter of that increase, about 11c, is thanks to the dollar falling from 60c to 56c over the same period.

A weak dollar is an immediate problem for the cost of living, but it’s also a message from the world to New Zealand. This message matters even more than immediate cost pressures, because it has no obvious explanation.

There’s been no earthquake, commodity prices are high. We are as far as you can get from the various conflicts around the world. If anything, the New Zealand dollar should be strong right now, but it’s falling against everything. Why?

As Dr Wilkinson says, “The world is telling us something specific to us. But what is it?”

People hold New Zealand dollars so they can buy stuff from New Zealand. The value of the dollar is partly about monetary policy, and partly about fiscal policy, but ultimately it’s a share price for the country.

What is the value of future goods and services people might buy from New Zealand? The higher the value, the greater the attraction of holding New Zealand dollars.

His answer is that the Government’s economic management is not good enough, and perhaps it faces a credit downgrade from the ratings agencies. I’ll come back to that.

Political panic stations

He may be understated and clinical, but I am a politician. I have another theory.

The currency markets are watching our election, and they’re seeing two ugly things.

The Herald’s poll of polls is faulty, for reasons I won’t go into today. Nonetheless, it has been widely reported as forecasting the election. It has reported an ongoing decline in the likelihood of the coalition being reelected. It first reported the Coalition’s chance of being re-elected below 50 per cent on August 25, just before the currency slump set in.

Much uglier is the dumpster fire of a policy debate New Zealand has descended into over the past five weeks.

Here’s what it looks like to the outside world.

One party wants to nationalize a third of the country’s supermarkets. They also want to let councils auction off commercial property if the property owner doesn’t rent them out. There are serious suggestions that party’s leader, who’s led antisemitic chants, could become the Minister of Finance.

Another party calls them communists, but wants to buy a bank that’s not for sale. The same anti-communist party also wants to break legitimate supermarket businesses in half vertically, and electricity companies horizontally.

Yet another party says it will control the price of groceries, and split up legitimate supermarket businesses. The same party sees no problem with the Government over-riding contracts signed between retirement villages and their residents to retrospectively change the terms.

There’s another party in Parliament that is all over the show. Their policies aren’t serious but when they get upset they do war dances on the floor of Parliament.

Perhaps most damagingly, the largest party has adopted a version of the others’ supermarket policy. The party that wants to nationalize them is literally saluting the traditional party of big business and calling them ‘comrade!’ Perhaps they really are communists?

The fiscal track is no better.

The Government is borrowing $9 billion, or two per cent of GDP, this year. Don’t worry though, as usual, it is promising a surplus in two years’ time. This relies on heroic revenue assumptions, such as the Government taking in $12 billion more this year than last year.

Three parties are promising some form of new tax on capital, four if you count another one that might get into Parliament.

The problem has shifted from the possibility of the coalition losing, to nearly every party proposing policies that are just as bad.

Around one-in-ten voters say they will support the only party that stands for property rights and the sanctity of contract All. Day. Long.

It’s no wonder the New Zealand dollar is in trouble. It’s not just that the coalition might lose office. Ninety per cent of the political spectrum has lost its mind.

More precisely, they’ve lost sight of where wealth comes from. They are panicking in the face of high inflation and low productivity growth. They’ve called it a cost-of living crisis and failed to diagnose the underlying problem.

Political panic about the cost of living is engulfing this election. Ironically, the panic is making worse the very problem it is supposed to solve.

There are other signs of declining confidence. The largest house price decline since the 1970s. Support for the two oldest political parties lower than at any time since the 1930s. 

What will it take to restore confidence?

Balancing the budget with no new taxes

Number one, the Government needs a credible path to surplus. That means balancing the books with no new taxes.

It means breaking down where the spending is at and reducing it.

The Government budget is not complicated. In total, government will spend just over $155 billion this year.

There is $53 billion on welfare, about half on super, half on a potpourri of other items like unemployment benefits and accommodation supplements.

There is $35 billion on healthcare.

There is $22 billion on education.

Those three make up $110 billion.

Everything else fits into the remaining $45 billion.

The spending is too high. Why do I say that?

This year’s spending is 32.2 per cent of GDP. The spendthrift pinko socialist Grant Robertson spent 28 per cent in 2019, before he lost the plot on COVID and raised it to 34.4 in 2022.

Extraordinarily, after three Nicola Willis budgets, we are two thirds closer to peak COVID spending than pre-COVID spending.

Yes, we are paying interest on Robertson’s debt. Yes, we are spending more on healthcare and superannuation. But those don’t explain the whole gap. There is an underlying loss of efficiency that we have not got on top of.

If you take the amount government spent in 2017, and adjust spending up for inflation, the Labour Cost Index, and population growth, you will find that government spending today is $18 billion higher than it should be.

If you exclude the politically sensitive areas of Health, Education, Police, Defense, and the Ministry for Children, spending is still $5.6 billion higher than it should be. That’s just over 10 per cent of the $45 billion I mentioned earlier.

We cannot balance the budget when non-health, non-education, non-transfer spending is over ten per cent higher than it should be.

The next government will need to assess where efficiency has gone wrong in the past decade and work out how to be at least as efficient as we were ten years ago.

You might ask why I’m saying this now after being part of the Government for three years. Our party signed up for a 2017 baseline exercise three years ago, but most of the Government refused to implement it.

Today, reality is calling and wants its money back.

One of the reasons spending is out of control is nobody is in control. In the spaghetti diagram that passes for an org chart of the Government of New Zealand, one minister has 10 portfolios, one ministry answers to 23 ministers.

Nobody can be across ten portfolios. Even the most talented Chief Executive cannot answer to 23 stakeholders.

Besides, Chief Executives answer to the Public Service Commissioner; not the Ministers, who are along for the ride. Everybody and nobody is responsible for everything and nothing.

That’s why we need a reduction to 18 Ministers and 19 Departments, with each Minister responsible for one department, and empowered to fire the CEO. Without that transformation in governance, we will not see the efficiency we need.

Then there’s transfer spending. The superannuation bill is rising at nearly $2 billion each year.

Longer lives. Fewer kids. Only two taxpayers per superannuitant by mid-century. Something has to give, and it will. The only real question is whether we plan the change and make it gradually on our terms, or let it happen to us fast amidst a fiscal crisis.

Raising the age of entitlement to superannuation is inevitable. The Government should be proactive and raise it carefully and slowly, with three conditions:

• Kiwisaver remains available at the current age of 65

• There is an early compassionate access scheme for people who have worked more than 20 years in a physical job

• The tax is taken off Kiwisaver investment returns so saving for retirement is easier, and balances stay higher for longer after retirement.

Adjusting by three months saves about $400 million. Adjusting two years would save over $3 billion a year, nearly three quarters of a per cent of GDP.

That, along with core government efficiency, would close the gap between today’s spending and pre-COVID Robertson by two per cent.

The remaining gap, around two per cent of GDP, is the $9.5 billion spent paying interest on debt that Grant Robertson borrowed at two per cent, with 10-year Treasury bonds now attracting five per cent interest.

The biggest cost driver, that I haven’t mentioned, is Health. The level of structural adjustment that’s really needed is beyond what ACT can promise this election.

What we can and should do is protect spending on primary care. The emergency departments are filled with people who should have seen their doctor four weeks ago.

GP funding should be protected as a proportion of the health budget. Pharmacies should be paid a fee for service if they take minor ailments off GPs. People once said pharmacies couldn’t do immunization. Today I say they could do bloods, check skin lesions, among many other ailments.

The medicines share of health spending should be progressively raised to match Australia’s. Currently they spend 12.2 per cent of health funding on medicines to our 4.9. Medicines can go a long way to saving money down the track.

Currently, only 10 per cent of the health budget is spent on GPs and pharmaceuticals. That doesn’t sound like a productive system focused on prevention.

If we take these steps, we can restore confidence in the Government’s ability to balance the budget with no new taxes.

On Sunday, ACT will release its fiscal plan and it will include the choices I’ve just spoken about. It will show how New Zealand can get back to surplus, reduce wasteful spending, protect the services people rely on, and do it with no new taxes. It will show what we can achieve by locking Labour’s spending habits out of Government and unlocking New Zealand’s potential. We will become a wealthier nation by making Government live within its means, leaving more money with the people who earned it, and freeing New Zealanders to build, invest, work, save and get ahead.

Follow the Regulatory Standards Act

Besides the fiscal situation, there are the reckless regulatory proposals I mentioned earlier.

Thankfully there is a standard the next Government could adopt to reassure people it is committed to respecting people’s rights.

Here are some of the rules for responsible regulation in that standard.

• the law should not adversely affect rights and liberties, or impose obligations, retrospectively:

• every person is equal before the law:

• issues of legal right and liability should be resolved by the application of law, rather than the exercise of administrative discretion:

• legislation should not unduly diminish a person’s liberty, personal security, freedom of choice or action, or rights to own, use, and dispose of property, except as is necessary to provide for, or protect, any such liberty, freedom, or right of another person:

• legislation should not take or severely impair, or authorise the taking or severe impairment of, property without the consent of the owner unless—

• there is a good justification for the taking or severe impairment; and

• fair compensation for the taking or severe impairment is provided to the owner; and

• the compensation is provided, to the extent practicable, by or on behalf of the persons who obtain the benefit of the taking or severe impairment:

• legislation should make rights and liberties, or obligations, dependent on administrative power only if the power is sufficiently defined and subject to appropriate review:

• the importance of carefully evaluating—

• the issue concerned; and

• the effectiveness of any relevant existing legislation and common law; and

• whether the public interest requires that the issue be addressed; and

• any options (including non-legislative options) that are reasonably available for addressing the issue; and

• legislation should be expected to produce benefits that exceed the costs of the legislation to the public or persons:

• legislation should be the most effective, efficient, and proportionate response to the issue concerned that is available.

Now some good news. If you like those ideas, they are current Government policy. In fact, they are lifted verbatim from the Regulatory Standards Act, a law passed by Parliament.

None of the crazy policies being threatened this election above would pass the tests in the Regulatory Standards Act. None of them have been carried out under the current government.

The next government recommitting itself to the principles of responsible regulation would do a lot to reassure the world, including New Zealand citizens, that New Zealand is an industrialized democratic state practicing the rule of law, not a kind of early-stage British Venezuela.

I’m proud ACT introduced that law and Parliament passed it. It is the kernel of a new political culture of respect, rather than knee jerk regulation, that has the potential to make us much, much wealthier as a nation.

Conclusion

We can only hope that the dollar rebounds in the weeks to come. The world needs to know there are adults in the room, and the good news is there are, just not enough.

I’m proud that my party has kept its head when others around us have lost theirs.

I regret that we haven’t saved more than $14 billion. The fact Labour find it so easy to cosy up to our Government’s fiscal track is a teling sign. Labour and National fight like two bald men fighting over a comb, but they’re not so different.

I regret that the political environment has become so panicked that threatening businesses who’ve done nothing wrong has become a legitimate political strategy.

I do, however, have great hope. I hope more voters find courage and wisdom to come out in support of sound principles.

Balance the books. Don’t raise new taxes. Don’t legislate or regulate away people’s rights. Create the fiscal and regulatory environment where investors face commercial risk, but not political uncertainty.

Those are the bare minimum to restore confidence in this country and its dollar, so life can be affordable again. These are the ideas which we have built our fiscal plan around.

They are also ACT ideas. They are in the arena thanks to the one-in-ten New Zealanders supporting sanity this election.

If you’re one of them, or you’re curious, join us and grow the movement. We know this country cannot legislate itself rich, because no country can. We certainly can’t borrow our way to wealth, because nobody can.

We can, however, choose to save the Kiwi, dollar that is, by voting ACT.

Ladies and gentlemen, if you know even a little economics and love this country, I have a request. Please give your Party Vote to ACT this election. It’s a Party Vote to re-elect the coalition and make it go further and faster on the issues you care about.

Thank you.