7. Dr RUSSEL NORMAN (Co-Leader—Green) Link to this
to the Minister of Finance
Which response to the Christchurch earthquake carries a greater risk of a credit downgrade: increased Government borrowing or a temporary earthquake levy?
Hon BILL ENGLISH (Minister of Finance) Link to this
The Government does not really have any choice about increased Government borrowing in respect of Christchurch. The Government has had to start borrowing more money almost immediately to pay for earthquake costs such as the $150 million welfare spend that is going on at the moment, just to put cash in people’s pockets. The real issue is how the Government intends to deal with that increased debt. If we were not borrowing, we would not be able to meet all of those immediate demands, but the Government will outline in the Budget how it intends to deal with that increased level of debt.
I raise a point of order, Mr Speaker. It was a primary question, and it was specifically about the risk of a credit downgrade. I do not believe the Minister addressed that part of the question.
Mr SPEAKERI think the member raises a fair point. The question was on notice, and it asked which would be the greater risk. I realise it is hypothetical to some extent, but I think the Minister should address that issue as it is a primary question.
Well, in our view, we believe that a levy could be just as much of a risk to our credit rating as increased borrowing, because on the one hand it would demonstrate that the Government was not willing to deal with its own spending quality, and on the other hand a levy could make it more difficult for economic growth to pick up. In the long run, economic growth will help to cut debt and rebuild Christchurch.
Is the real issue with regard to a credit downgrade not the level of Government debt, and if a levy were struck to raise around, say, a billion dollars a year, would that not have a significant impact on reducing the amount that the Government needed to borrow, and hence reduce the risk of a credit downgrade?
Regardless of whether we had the earthquake, that is the argument for increasing taxes when the Government owes money. We have argued that it is in our long-run best interests to have relatively low tax rates on incomes, savings, investment, and exports, because that will help the economy to grow. There is an argument that we could put those tax rates up right now to reduce debt, but we believe that that would be detrimental in the long run.
With regard to the short run and the specific circumstances in which we find ourselves, a temporary earthquake levy at, say, 1.5 percent or 3 percent on incomes above $70,000 a year, rather than being a long-term increase in taxation, would just be a short-term effect to deal with the costs we have now, so it is not about the long-term argument; does he still believe we should not go down that path?
Yes, I still do. In respect of the levy, our calculations indicate that a levy of the size that the member refers to would probably have to last for about 8 to 10 years to meet, say, a $6 billion cost. We do not regard that as being short term. It does look as though it is fairly long term.
Does he agree with the advice from Treasury and others that a downgrade would cost an ordinary mortgagee—someone with a mortgage on a house—in the order of a 1 percent increase in interest rates, and that that would be a much greater increase in payments for that household than a temporary earthquake levy?
I have not seen Treasury advice as specific as that, but there is no doubt that a credit downgrade would generally lead to somewhat higher interest rates. New Zealand faces that risk not just because of Government debt. In fact, the credit rating agencies would say it is the large private debt, alongside the Government debt, that gives them some concern about New Zealand. We are very conscious of the risks of a downgrade and believe that we are making the right considered choices to deal with those risks.
Does he agree that a 1 percent increase in interest rates on a person holding a $300,000 mortgage could result in that family paying an extra $60 a week in interest payments, which would be significantly more than the kind of levy we are talking about, so, in fact, people would be better off by paying a temporary earthquake levy than facing higher interest rates?
The member’s calculations may well be right, but I think that in the long run the issue for New Zealand is the amount of debt it owes to foreign lenders. At the moment what is driving up that debt is the growth in Government debt. Most of the advice I have seen has indicated that the best thing the Government can do to deal with that rise in debt is to reduce, where it can, its expenditure in a permanent way, rather than relying on a temporary levy.
Is the Minister saying the Government’s response of spending cuts and increased debt effectively means that it will be a smaller group of New Zealanders who will bear the cost of the quake rebuild—those who will have their benefits cut through Working for Families or something else, and the large bulk of New Zealanders who will face higher interest payments on their home mortgages—rather than having a temporary earthquake levy, which could avoid both of those things?
As I think I have indicated to the member, a short-term levy that was large enough to raise enough money to meet the $6 billion or $7 billion cost would need to be either applied to a much wider range of income earners or applied at a higher rate than he says if we were to meet those costs in the short term. The method that the Government is pursuing will allow us to spread the costs of the Canterbury earthquake over more people over a longer period of time.
If the fundamental choice is between our paying higher interest payments—which will go to overseas-owned banks, so we would be sending money overseas to pay higher mortgage payments—and our paying a temporary earthquake levy to pay for the earthquake, is the latter not a much more sensible approach than simply enriching our overseas lenders?
If those were the trade-offs, then the member might have an argument, but that is not quite how we see it. We believe that we need to have the tax settings and the spending settings that will help to lift the performance of the economy. Increasing taxes probably will not help that, and continuing with ineffective Government spending is not likely to help that. We have been trying to get the tax rates moderate and lower, and to focus Government spending on areas where it can be effective. If we can achieve both of those things, we can get a growing economy and deal with the debt that comes from the Christchurch earthquake.