DAVID CUNLIFFE and SIR ROGER DOUGLAS interviewed by PAUL HOLMES
PAUL Well now two people who would very much like to be writing this week's budget are our guests now. Sir Roger Douglas has written several of course, including his historic and radical budget of 1984. In that budget Sir Roger ended the wage and price freeze, he floated the Kiwi dollar, he abolished SMPs for the farmers, and as Finance Minister he went on to introduce GST and to make the Reserve Bank independent. All of this stands today, it was a new orthodoxy. With him is Labour's new high flyer, Finance Spokesman David Cunliffe, already a strong critic of the government's handling of the recession. Welcome to both of you.
Well now we know a little bit about some stuff that going to be in Bill English's budget, we know there's extra money for maternity, motorways certainly, money for the cycle way, cycle track, biofuels. What else do you think we're going to see - David Cunliffe.
DAVID CUNLIFFE - Labour Finance Spokesman
Oh I think we're going to see quite a lot scaling back and retrenchment, I think we'll see savage cuts to existing departmental programmes and then re-spending some of it and calling it new money.
SIR ROGER DOUGLAS - ACT Finance Spokesman
Well I think there will be a little of that, but what you have to remember is that 66% of the budget is Health, Education and Welfare, so unless you do something with those three big items then you're not going to get very far.
DAVID You know Sir Roger's absolutely right about that, if National is gonna be taken at its word about having a balanced budget they are gonna have to start attacking Health, Education, Welfare, and of course Superannuation, they can't have it both ways.
PAUL If you were writing it as well you might have to be attacking Health Education Welfare given the present circumstances wouldn't you?
DAVID Well you know I think what the analogy here is like a bus going up a hill, it's struggling with the gradient, and what National's prepared to do is throw the passengers off, what we would do is drop a gear and power up the engine, and that's the way to go.
PAUL Will it be a black budget?
DAVID I think it'll be a dark grey budget, grey Bill English budget, not a multicoloured rainbow John Key budget.
ROGER Look they're going to end up with a ten billion dollar deficit, they're going to do a little bit here and a little bit there, but they're not going to actually tackle the problems that need to be tackled.
PAUL Well they've been in a few months though Sir Roger haven't they, and I mean of course it got suddenly very dark.
ROGER Well I remember in 1984 I only had a few months too, and I think the thing to remember is that you mightn't have caused the problem, the problem was largely caused by a Labour government that spent and spent and spent, that was largely the problem, and but Bill English and John Key are now charged with the responsibility of doing something about it. If you're going to do something about the problems that New Zealand are in you have to cut back on expenditure, and you have to bring competition and choice to Education, Health and Welfare because that the only way you're going to improve productivity.
PAUL Sir Roger's long held beliefs of course, so there you go Labour has been profligate for a decade? Nothing in the kitty when the times got bad.
DAVID Why don't we resort to some facts here. The current government inherited the second lowest debt I think in the OECD and certainly the second lowest unemployment rate, and the 2008 budget was passed on the basis that it would not resort to borrowing to fund tax cuts and it was only after that of course that Laymen Brothers hit the wall and the recession came, and the really interesting thing of course is that National went into the last election knowing that they couldn't afford the taxcuts on top that they had promised.
ROGER Of course you can afford the taxcuts if you do something about expenditure. What is wrong with this country is very simple. Between 1984 and 1996 government spending per person went down by 300, over the last 12 years, under both National but more particularly under Labour government spending per person went from eleven and a half thousand to over eighteen thousand, it went up by seven thousand five hundred per person, up thirty thousand per family. There is no free lunch, you have to make these choices, and the question is what did you get for that thirty thousand, frankly most people listening will say we got nothing.
DAVID Sir Roger wants to cut government expenditure from 35% of GDP around to 20%, almost in half, now to do that he's absolutely right, there's only one way, it means savage cuts to Education, to Healthcare, to Welfare and to Superannuation, and there is no free lunch. Very simply unfortunately Rip Van Winkle hasn't learned the lessons of history. The multiplier on government spending is higher than the multiplier on taxcuts, that is the problem for his theory.
ROGER Look if we don't tackle this problem New Zealand's going down the gurgler. What we saw under Labour was a 50% real increase in Health expenditure, yet doctors' productivity went down by 15%, nurses' productivity went down by 11%, overall productivity went down by 8%, the only part of Health where productivity went up was that part they contracted out to the private sector, and now what you are seeing - what you have to do is bring competition and choice into those areas and then you'll get the increase...
PAUL I know you've dismissed this kinda stuff for years, but it does seem to work as he says.
DAVID Well thank you Paul, but the argument's two parts. The first thing is that Labour increased spending in Health and of course the outputs did go up, productivity he says went down slightly, well what does that exactly mean?
ROGER 15% doctors' slightly, come on.
DAVID No what does that mean? It means that as you push your theatres, your hospitals, closer to capacity, you will get slightly less operations out per person, but you must realise that we of course spent on primary healthcare as well, that is we are keeping people well, we are reducing tomorrow's burden on the health system by education, by better nutrition, by getting out into the community, it is a health system not just a hospital factory...
PAUL Just come back to this budget, I mean how important is it they get this budget right? How important is this budget this time in a country's history.
DAVID Hugely important, and I do agree with commentators who say that it's one of the most important budgets since the one that Roger brought down in 1984, let's hope the prescription is different, it is a serious situation, there is no doubting that, it is a time for responsibility and it would be under a Labour government, but it is very very important that we put jobs first, we put real New Zealanders first and we provide a game plan that gives confidence to this economy, it cannot be about shrinking the government's books and thinking that that is an answer for the whole economy, it is not, and it never has been.
PAUL What's wrong with in a difficult time borrowing a bit now and you know so that you can pay it back in the good times, it keeps money going round?
ROGER I really am amazed at this philosophy that says when times are good we've got an opportunity to spend up as we have, 18 billion dollars over and above inflation, now things are tough, oh well we'd better spend up some more, it is a nonsense.
DAVID Let's ask who's philosophy the gentleman is talking about, because it certainly wasn't Labour's. Labour's philosophy was on a good year you salt stuff away for a rainy day, and it was the right wing of New Zealand politics, Bill English and Mr Douglas's acolytes and supporters, who called for taxcuts which would have made today's problem worse. Now thank goodness Dr Michael Cullen didn't listen. The stimulus that people are arguing about now in the economy was actually 4/5ths stimulus from the taxcuts in the 2008 budgets in 1 April this year. By international standards we've had a lot of taxcuts, what we've not had is a lot of direct stimulus in productivity, in jobs, in skills, in research. Think about that bus analogy going up the hill, you want the engine to go faster, if you want it to carry all the passengers, not just the rich ones, you've got to drop it down a gear and get the revs up, that's what we need to do and the way to do it is through smarts and skills and exports. This is not a government deficit problem, this is a twin deficit problem, that's what Moody says, that's what Standard and Poor says, and the other deficit that Sir Roger is conveniently forgetting about is the export deficit, the current account deficit.
ROGER That is largely because of the government spending. Let's have some facts. Under Labour government expenditure over and above inflation was 18 billion dollars, they made a choice to take 18 billion dollars from the private sector and to spend it themselves. The consequences of that is productivity in this country dropped from around 3% to 1%, that made us all poorer, this budget has gotta be about improving productivity.
PAUL Improving productivity exactly to deal with the hard times. A couple of last points because I've got to bring things to a close. Is this a budget that could affect our credit rating internationally?
DAVID Well if it were played wrong, yes, but there are two ways to play it wrong.
PAUL And would it matter?
DAVID Well yes it would matter, it would matter to the tune of some hundreds of millions of dollars of interest and it would affect the borrowing capacity of many of our private borrowers who are very important.
PAUL Sir Roger, could it affect our credit rating?
ROGER I think it could, I suspect that it's going to be neutral and we might still be on watch, we won't be off watch, but I don't believe we'll get a credit rating number.
PAUL The budget coming up, this week's budget, yes or no are we expecting much?
ROGER Not a lot because largely John Key ruled this budget.
DAVID A grey Bill English budget, not one that will inspire New Zealanders.
PAUL Quick final question on trade matters, which are also finance matters of course. The Americans have moved overnight to reintroduce dairy subsidies on 92,000 tonnes of dairy exports, not a massive figure, but nevertheless it's in retaliation to an increase in European subsidies, should we worry about this.
DAVID De ja vu for me, I was working out Washington Embassy last time they tried it, it's going to require patient work to make sure that those subsidies and surpluses are not dumped in our markets, and to get them scaled back by negotiation, that means we have to push ahead with the Dohar round, the US government has deeper pockets than us, it's not about New Zealand going back to export subsidies, but we do have a current account problem, we do have to engage with the dairy sector and other export sectors to get our game up.
PAUL Your quick response if you would to the Americans bringing the subsidies back on.
ROGER Well I think it's an issue that Tim Groser and government officials have gotta take up, it's micro issue, it's not an issue...
DAVID Micro issue?
PAUL It's a serious issue Sir Roger.
ROGER Well it is, but it is - look if you're thinking about the budget this is an issue that will crop up from time to time and it has to be dealt with, the big things for the budget are what are you doing about productivity, what are you doing about government, getting competition within government, what are you doing about central planning in areas like roading. This is an issue you deal with just in the normal course of government.
PAUL This is a flea?
ROGER Yeah, relatively.
DAVID Are we going to tell Mr Obama he's a flea, I don't think we will.
PAUL No I'm not telling Mr Obama he's a flea, no no, the issue is a flea. David Cunliffe and Sir Roger Douglas thank you both very much for your time.