1. JONATHAN YOUNG (National—New Plymouth) Link to this
to the Minister of Finance
What advice has he received about factors that lie behind the current turmoil we are witnessing on world financial markets, and what are the implications for New Zealand?
Hon BILL ENGLISH (Minister of Finance) Link to this
Two related factors appear to be at work: a downgrade in world growth expectations, and increasing worry about the creditworthiness of some countries and companies. So we have seen sharemarkets fall sharply while some sovereign debt markets have improved. Credit risk premiums for lower-quality debt have increased, and economically sensitive commodities, such as oil, have seen declines in prices, while gold, which is seen as a safe haven, has risen in price. Our markets are increasingly differentiating between the strong and the weak. New Zealand is among those countries that are seen as having strong creditworthiness. Therefore, the market view of our debt has been improving.
What are the main actions the Government has taken that are helping New Zealand to ride out this crisis and keep interest rates low?
The Government started taking appropriate action back in 2008, because it believed that New Zealand was vulnerable to just these kinds of events. So we have worked to keep net debt below 30 percent of GDP, and to focus on returning to surplus so that our debt will stop increasing. We have continued to protect the most vulnerable, and we have worked on channelling Government spending to where it can be most effectively used, as well as taking a range of measures on the broader economy that will improve our growth prospects.
In any number of ways the New Zealand economy is fundamentally more sound than it was 3 or 4 years ago—in particular, because New Zealanders have changed their view of debt. Through the first decade of this century there was excessive borrowing by households, but New Zealanders have taken the message from the world. They have stopped increasing their borrowing and are increasing their savings. That, alongside Government action, is reducing the vulnerability of New Zealand to these kinds of events.
Given that markets are increasingly distinguishing between countries with strong creditworthiness and those that are weaker, anything that weakens our creditworthiness would be focused on quite intensely in today’s market. The kinds of policies that would take us there would be bigger Government spending, higher taxes, and more debt. We are not going to go down that path.