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Credit Rating Downgrade—Effect on New Zealand Economy

Tuesday 4 October 2011 (advance copy) Hansard source (external site)

Goff1. Hon PHIL GOFF (Leader of the Opposition) Link to this
to the Prime Minister

Does he stand by his statement that “a credit downgrade of that sort would mean lenders would no longer see us as a good credit risk, they would be reluctant to lend us money and when they did, they would charge us ever-higher interest rates. I don’t want to see New Zealanders weighed down by that burden”?

KeyRt Hon JOHN KEY (Prime Minister) Link to this

Yes, I do. Back in May 2009, when I made that statement, markets were very nervous about lending, and a downgrade could have been damaging. We have just seen Ireland downgraded from AAA to AA+ and their interest rates immediately rose half a percent as a consequence. The global situation is now quite different, and the proof of that is that the bond yields in New Zealand today are unchanged from what they were a couple of weeks ago.

GoffHon Phil Goff Link to this

Who is telling the truth: Bill English, who recently told this House that there is “no doubt” that a credit downgrade would lead to higher interest rates, or the Prime Minister, who said yesterday that it would not?

KeyRt Hon JOHN KEY Link to this

Both of us. The question I was asked yesterday was whether I thought yields would rise, and in the short term I do not think they will. In fact, that is borne out by a graph of bond yields at the moment, which shows it is incredibly consistent, despite the downgrade.

GoffHon Phil Goff Link to this

Is the Prime Minister now saying to the House that the credit downgrade that he did not see coming will lead to higher interest rates, as Bill English has already asserted as recently as Sunday?

KeyRt Hon JOHN KEY Link to this

Over time it might, and that is why New Zealand would always want to strive to have a higher credit rating, rather than a lower one. One of the commentaries, from either Westpac or the ANZ, actually confirms that. Although the short-term impact is unlikely to see interest rates go up, over time they could do.

GoffHon Phil Goff Link to this

Does the Prime Minister still believe his statement to this House that a credit downgrade is “The No. 1 way to see New Zealanders down the road from their jobs”?

KeyRt Hon JOHN KEY Link to this

It would depend on the circumstances. If back in 2009 we had received a credit downgrade in isolation, that would have been more troubling, arguably, than today when we have seen Standard and Poor’s downgrade nine of the last 10 countries, when there is a downgrade taking place because of the international environment and because the downgrade is a result of the fact that that weaker international environment is of concern of the stock of private sector debt. I must say, though, that I would be interested in hearing the view of the Leader of the Opposition about whether he takes responsibility for that large build-up in private sector debt. I am holding a document listing the current account deficits run under the previous Labour Government. That shows they were incredibly high and that they were often about 8 percent of GDP. I remember, in 1999, Michael Cullen saying that the No. 1 thing he would address was the current account deficit in New Zealand.

GoffHon Phil Goff Link to this

When, for heaven’s sake, will the Prime Minister accept any responsibility for the fact that the downgrading of New Zealand’s credit rating by two agencies last Friday was the first downgrading of New Zealand in 13 years, and came 3 years after he became Prime Minister?

KeyRt Hon JOHN KEY Link to this

With the greatest respect, I am not responsible for what happens in Europe and the United States, nor, technically, was I in Government when there was the enormous build-up in private sector debt. What I can say, though, is that both Fitch Ratings and Standard and Poor’s have taken quite some trouble to actually mention in their press releases that the Government—the books of the Government and the pathway of the Government—is not only on the right track but if any future Government were to unnecessarily place more debt on the economy, as Labour is proposing, that is likely to be a very bad thing indeed.

TremainChris Tremain Link to this

Has he seen any reports on the build-up in external debt over the last decade?

KeyRt Hon JOHN KEY Link to this

Funnily enough, yes, I have seen two such reports. One shows that New Zealand’s net external debt rose from 64 percent of GDP in 2001 to 83 percent in 2008, because of huge and persistent current account deficits. The other report backs this up and says: “I do not pretend either that our record was perfect, nor deny that there were significant questions unresolved. Our current account deficit was stubbornly high and the savings deficit … was unsustainable. Productivity growth was too low …”. That was a frank and honest assessment, even if it came too late from David Cunliffe, at “Mood of the Boardroom”.

GoffHon Phil Goff Link to this

When did a Government spend $18 billion more than it earned in revenue in a single year, as this Government is doing in this financial year?

KeyRt Hon JOHN KEY Link to this

To the best of my knowledge, never—although I have not checked that. I say to New Zealanders that that is a very telling question from Mr Goff, because half of that deficit was for the rebuild of Christchurch. This party and this Government stand for the rebuild of Christchurch. This party and this Government stand for helping New Zealanders through tough economic times. The Opposition does not, and that is a very telling statement 8 weeks out from an election.

SmithMr SPEAKER Link to this

The House will come back to order.

GoffHon Phil Goff Link to this

Is it correct that New Zealand’s credit rating with those two agencies is now the same as Spain’s—a country that National has constantly derided as being an economy in trouble?

KeyRt Hon JOHN KEY Link to this

I cannot confirm that. It may well be; it sounds logical. But let me quote this from Fitch Ratings: “New Zealand remains well placed amongst the world’s highly-rated sovereign credits, with its creditworthiness supported by moderate public indebtedness, fiscal prudence, and strong public institutions.” But I will say this: when Standard and Poor’s was giving a meeting in New Zealand about a month ago, what it did say was that there was about a 30 percent chance that we would be downgraded. That is what happens when one is on a negative outlook. It did go on to say, though, that if there was a change of Government, that downgrade would be much more likely.

SmithMr SPEAKER Link to this

The Hon John Boscawen. [ Interruption] How can the member at the back of the House be heard asking his question?

BoscawenHon John Boscawen Link to this

If the Prime Minister is not responsible for what happens in the United States and Europe, does he accept that he and his Government are responsible for public policy settings in New Zealand; if so, how does he reconcile Standard and Poor’s statement that one of the reasons for its lowering New Zealand’s rating was “emerging fiscal pressures associated with an ageing population” with his statement from 19 September that “All of our forecasts, all our models build in a retirement age at 65. On the calculations we have it is affordable”?

GoffHon Phil Goff Link to this

Was it part of National’s strategy to avoid a credit downgrade by imposing 20 percent more tax on New Zealanders’ spending, as Bill English suggested on Q+A; if so, has it worked?

KeyRt Hon JOHN KEY Link to this

One of the policy initiatives that came out of the rebalancing of lowering personal taxes and increasing GST was actually to give New Zealanders much greater choices to save, to pay off their mortgage, or to do whatever they want to do. The answer is yes, it has actually worked, because, funnily enough, New Zealanders are saving more at the moment.

BoscawenHon John Boscawen Link to this

Does he agree that increasing the retirement age beyond 65 would ease the emerging fiscal pressures associated with New Zealand’s ageing population, as cited by Standard and Poor’s; if so, does he think New Zealand’s credit downgrade proves that his policy to not touch the retirement age is short-sighted?

KeyRt Hon JOHN KEY Link to this

In terms of the latter part of the question, no. I think it is quite clear from all of the statements made by both Fitch Ratings and Standard and Poor’s that the reason for the downgrade was that the international environment is more fragile, and that New Zealand had high levels of private sector indebtedness. In terms of the former, the Government is comfortable that the retirement age at 65 is affordable. It is modelled to 2025, and that is about as far out as we need to go.

BoscawenHon John Boscawen Link to this

I seek leave of the House to table a statement by Standard and Poor’s in which it states that the emerging fiscal pressures associated with the ageing population has led to New Zealand’s credit downgrade.

SmithMr SPEAKER Link to this

Leave is sought to table that document. Is there any objection? There is no objection.

Document, by leave, laid on the Table of the House.

BoscawenHon John Boscawen Link to this

I seek leave to table a statement from the Prime Minister on 19 September—

SmithMr SPEAKER Link to this

Is this a press statement, or a statement published by the press?

BoscawenHon John Boscawen Link to this

It is a statement from Mr Key, as quoted on the 3 News website.

SmithMr SPEAKER Link to this

On what site?

BoscawenHon John Boscawen Link to this

On the 3 News website.

SmithMr SPEAKER Link to this

We do not table statements off websites of the media.