PAUL Well as if we didn't know things were difficult economically, we had the OECD report this week and it painted a dim picture of the next few years and so with us is Don Brash, of course long time Reserve Bank Governor of New Zealand and former leader of the National Party. How seriously do you take that OECD report.
DON BRASH - Former Reserve Bank Governor. Oh very seriously indeed, the OECD is a reputable organisation they've got a long history of commenting sensibly on economies around the world, so I take it seriously, but let's also say that New Zealand has some very good things going for it.
PAUL Such as?
DON Well we started this crisis with a very low level of unemployment, even now our unemployment rate begins with a five, in both the US and Europe it begins with a eight, secondly we have
PAUL I think Ireland at the moment is ten.
DON Well that's right, there's some very much worse countries than we are, secondly we have very good levels of government debt when the crisis began, thanks to 15 years of government surpluses and of course privatisation which no one wants to talk about back in the 80s and 90s, we have very strong banks, we have banks which are credit worthy which are sound, which are still lending unlike the situation in the United States and Europe, and of course when the crisis began we also had high exchange rate, high interest rates with lots of scope to have those eased and of course they have been eased quite aggressively in the last six months.
PAUL The OECD report acknowledges all of this but says things are catching up very fast to New Zealand, and it says we have three basic problems, we have the looming cost of - this is over the medium term I spose - we have the looming cost of superannuation, the looming cost of health and despite the increase in our health spend it says there've been no really significant improvement in output. So we have the looming cost of superannuation, we have under-productivity in our production and of course we have the recession, does that look to you like we could have building a kind of economic perfect storm over the next few years?
DON Well I used that term 'the perfect storm' in a speech I gave to the Auckland Rotary Club about two months ago, I think there are real issues, one is the international crisis that you refer to, I think we've got a housing bubble which the OECD alludes to, our house prices went up more relative to incomes than in any of the other 18 countries they looked at so there's still scope for those house prices to come back and if they do consumer spending's going to be weak and so on, and of course they also make a good point that we've got very large external indebtedness, not government indebtedness but private sector indebtedness at a time when world capital markets are very twitchy.
PAUL How serious is the situation. Let me put it to you this way, do you think New Zealanders yet appreciate how serious the situation is?
DON No I don't, no I don't, I think it is quite serious both in a short term sense, the crisis the OECD talks about but also the other crisis they allude to namely we've had poor productivity growth for a long period of time particularly the last decade, we are gradually drifting off the pace viz a vie Australia for example and we've seen increasing exodus of New Zealanders. Now I guess the good thing is that the government appears to be dealing with some of those issues.
PAUL See as the recession bites the government's tax take is going to be reduced isn't it obviously, making it more necessary I guess to borrow to pay even more - to pay for what it spends, in fact the government are talking about 40 billion dollars of borrowing to pay for what it borrows, how serious, how bad is that situation.
DON Well I think Bill English is saying the first budget will be crucial in establishing a track back to a sustainable fiscal position and he's absolutely right about that.
PAUL Are services going to be have to be cut inevitably do you think?
DON Ah well the rate of growth of services is clearly going to spiral and we have to get better outcome for the dollars we spend and I think health is a very good example. Tony Ryall is very much aware of the fact that health spending has increased very rapidly indeed in the last decade and as the OECD points out and as Tony Ryall is certainly aware, productivity in the health sector has been growing very slowly in fact it's been negative in some years.
PAUL So what do you think's gonna happen, give us the six months to a year, are we in for a second wave of crisis, are we in for a crunch?
DON I don't think we're in for a crunch in the sense that we're likely to see unemployment rocket through the roof, but I think unemployment is still rising and I've been among those who think that the typical forecasts around the New Zealand economy about unemployment have been too optimistic. I think we do see a prospect of it, I see a prospect of unemployment going quite a bit higher than it is now.
PAUL Like to what?
DON Ah well it went to 7�% in the Asian crisis in 1998, it went to 10.9% in 1992, so I think we could well see a number closer to ten than to seven.
PAUL It's been said that with the new state ownership of some of the major financial institutions around the world there's gonna be a kind of a protection creep happening there that those institutions will now feel obliged to lend to their own people, is it going to become difficult do some say for New Zealand to get access to credit?
DON Well I think it was quite difficult late last year, international capital markets seized to a significant degree, the New Zealand banking system derived sort of like 35 to 40% of its total funding from offshore capital markets, so that is a real threat to us but as I say fortunately our major banks are all of course Australian owned, they are regarded as highly credit worthy, they have good credit rating still and they can still borrow.
PAUL And of course they have a guarantee, the Australian government of course will never let them go down.
DON Well the Australian government's guaranteeing the Australian liabilities, the New Zealand government of course is guaranteeing the New Zealand liabilities.
PAUL The OECD report just to harp on about that a little bit longer says well there's always the option for the Reserve Bank Governor to come down further on the interest rates, would you reduce now if you were still the Reserve Bank Governor, should Dr Bollard?
DON I'm always reluctant to tell my successor what we should or should not do, but I think the expectation is that he will reduce further the 3% rate but as he's pointed out there's not a lot of scope to reduce it much further, I think the expectation is he might go to 2�% at some stage, conceivably even 2% but I'd be surprised if he goes further than that.
PAUL How difficult do you think Bill English's job is at the moment?
DON I think it's very tough, very tough, I mean he's got a situation where thanks to the last government, government spending is rising very rapidly, thanks to the recession government revenue is falling off very rapidly and while we began this crisis as I mentioned earlier with a low level of government debt the government debt will increase very substantially indeed on present policy, so he's got a difficult balancing act.
PAUL Are you pleased you don't have his job at the moment?
DON Well he's certainly got a tough job.
PAUL Are you pleased you don't have John Key's job at the moment?
DON He's also got a very tough job, his difficult job is persuading New Zealanders that this is a serious problem without so scaring them that they all stop spending completely, I mean the paradox is he wants them to keep spending in the short term but to save more in the longer term.
PAUL Will Bill English be finding the numbers scary every morning he looks at them?
DON I'm sure he will be, I'm sure he will be, and he's made that very clear, he said look there isn't scope to suddenly go on a great campaign of increased spending, but as I say he's made it clear that he has to make some changes there, we've got changes in the Resource Management Act coming through, we've got changes in the transport system coming through, Tony Ryall's focused on health sector productivity, I mean I'm very optimistic that the government understands the seriousness of this problem.
PAUL What about tax cuts in the medium term tax cuts next year the next round of tax cuts they're surely a goner?
DON I expect they are, I don't think the government wants to say that quite yet, but I suspect they are a goner.
DON So what are the main things you want to see expressed by the National government when they present their budget when Bill English presents his budget?
DON Ah what I'd like to see him do is convince the country this is a serious both short and long term problem and only some significant changes in policy will actually cut the mustard.
PAUL On a scale of one to ten, ten being worst case scenario how bad is the recession going to be?
DON Ah I think this is - in New Zealand's case and compared with other countries I think we're about a six.
PAUL What kind of significant changes to policy do you think we're going to see, how much is it going to have to go back on what was promised say in the campaign of last year?
DON Well I think the most likely compromise will be around tax as we mentioned a moment ago, I think fortunately some of the things they promised in the campaign last year like Resource Management Act reform, like infrastructure and roading and so on, those things were part of the election campaign and I think they will need to be certainly delivered on and indeed some cases accelerated.
PAUL What about the Super Fund, might they not pay in this year?
DON I think they probably won't pay in this year, and I think that makes good sense, I mean the Super Fund was a device to ensure that some of the budget surpluses were set aside for the future. If you've got a budget deficit the logic of that doesn't exist.
PAUL No. A couple of other extra things, National and the Maori Party now seem to have a very very confident and secure relationship, what do you make of it just briefly.
DON Well I'm delighted about that, it's often not recognised of course that even after the 05 election the Maori Party and the National Party to my own surprise I admit developed quite a strong relationship and indeed they signed a letter to Mr Peters saying they would prefer me as Prime Minister than Helen Clark, so the relationship is not a brand new one and I'm very pleased it's developing so well.
PAUL But when you look back to Orewa, strategically not tactically, cos it worked tactically but strategically was it a mistake?
DON Ah no, I don't think so.
PAUL Who stole your emails?
DON That I don't know, I'd love to know that question.
PAUL Well the Police have done their investigation haven't they and they've got findings?
DON They've done what I regard as a rather cursory investigation to be frank over a long period of time, I don't know yet what that report contains I haven't seen it.
PAUL Are they stone walling you?
DON Ah well they told me April last year that I would get a copy of the report shortly, I haven't got it yet, but I have been reassured since recent media focus on this that I will get it shortly.
PAUL So who do you think stole your emails? Was it a hacker, was it Labour, was it one of your own?
DON I don't believe it was one of my own, no, I don't believe it was a National Party person, as Hager of course contends, I think that's extraordinarily unlikely, I think it's much more likely to be a hacker who he was working for or she was working for I don't know.
PAUL Do you know?
DON No I don't, I wish I did.
PAUL Do you miss politics?
DON Of course I do, everyone who's been in politics misses politics, but there are some days when I'm more than delighted to be out of it.
PAUL Very good, Dr Don Brash thank you very much for coming in.