PM Key says housing market concern hit Q4 GDP; 'Zero budget' could hit economy, but govt wants people to keep spending

By Alex Tarrant

Prime Minister John Key is playing down the possibility New Zealand had negative economic growth in the last half of 2010, as the economy took a hit from the September 4 Canterbury earthquake and as a slower housing market took its toll on consumer behaviour.

"If you go back to the last half of last year, Q3 was slightly negative – I think negative 0.1 [percent – it was officially negative 0.2%]. Whether Q4 is plus 0.2% or minus 0.2 actually it’s all in the margin of error," Key said on TVNZ's Breakfast program.

"Basically what it shows you was a weak second half of last year," he said.

Two things drove that weakness from New Zealand’s point of view, with effects of the earthquake adding to the contraction.

"But I think actually in general there was quite a lot of concern around the housing market – it started faltering – and you started seeing people being very concerned going into Christmas," Key said.

"It wasn’t unique in New Zealand, the UK was negative, most other countries were as well," he said.

However there had been reasons to be optimistic.

"Actually, funnily enough I thought we were starting to look a lot more positive coming into this year, and generally the numbers were supporting that – lower exchange rate, lower interest rates helping us, high commodity prices," Key said.

“We’re now going to have effectively a two speed economy. You’re going to have growth around the country, particularly in the rural part of New Zealand, but [a] very weak and contractionary position in Christchurch," he said.

Tough budget

Meanwhile, Key said on the weekend there could effectively be a 'zero budget', with no overal spending increase by government in next year. The budget for the year is due to be delivered on May 19.

“What we’ve done is we’ve said, the previous government spent NZ$2.8 billion extra a year – that’s over on top of everything else. We cut that back to NZ$1.1 billion. When we started the year I said, ‘look, New Zealand’s got this debt position. I’m worried about the fact, not so much at the government level, although that is a factor, and a growing factor, but I’m worried about New Zealand’s overall level of indebtedness," Key said on Breakfast.

"One of the ways to do [fix] that is to spend less, so we [had] decided to increase that expenditure, instead of being NZ$1.1 billion, only to spend NZ$800 million more," he said.

"Now we are going to spend more in health and education, but the view of the Cabinet is that needs to be found, for the most part, from savings in other portfolios. We haven’t considered all of them, we’re working our way through them – we’ve looked at some.

"It’s not going to be a savage attack on one particular thing, so if I was a person that had arts funding, I wouldn’t be terribly concerned that all of sudden that’s going to evaporate," Key said.

The government needed to be very careful.

“There are only a couple of options here. You either tax New Zealanders more, or the government spends a little bit less, because eventually we’ve got to pay that debt back and we’ve got to get on top of our financial position," Key said.

If you’re taking out surely if you’re taking out – if you’re going to have a zero budget – then you’re not putting in NZ$800 million you would have put in, that would also discourage economic activity.

However government not spending an extra NZ$800 million could also discourage economic activity, with that amount not being injected into the economy.

"The question is, 'what’s the marginal economic impact on this stuff?' For instance if we put higher taxes on people, we take money out of the household budget, they definitely can’t spend that money," Key said.

"Sometimes you get less economic benefit from some of the things that government does," he said.

"I’ve seen the Greens going out there and saying, ‘why don’t we just put a levy basically on rich people?’

"That’s all very nice, but actually that doesn’t raise nearly as much money as what you need. And when you really look at what they’re talking about, they’re talking about putting a levy on people that earn about NZ$40,000 a year," Key said.

The Green party's preffered option is for the introduction of a 'disaster levy' on incomes over NZ$48,000 (see the Greens' latest comments on the disaster levy below).

"Now they are New Zealanders, between NZ$40-70,000 a year – middle New Zealand – they’re not feeling richer and they’re really struggling. They’re paying higher petrol prices at the pump, we’ve got all these issues in the Middle East, so that’s unlikely to see lower petrol prices anytime real soon," Key said.

"They’re dealing with other factors, and the government’s quite conscious of their position, and we’re trying very hard to make sure that they can make ends meet. And the last thing they need is another bill from the government," he said.

Here are the Green Party's latest comments on a disaster levy:

The Government’s plan to simply borrow to fund the rebuilding of Christchurch will cost us millions in interest; a levy makes more economic sense, Green Party Co-Leader Dr Russel Norman said today.

Dr Norman was responding to recent remarks from Finance Minister Bill English who said that there was no other option for the Government but to borrow to pay for the Christchurch earthquake. As a result, this year’s operating deficit is likely to balloon to $16 billion with Crown debt expected to exceed 30 percent of GDP by 2014, doubling from just 14 per cent in 2010 when National first took office.

“Now it is more important than ever for the Government to live within its means,” said Dr Norman.

“The Government is being fiscally irresponsible by putting the country into further debt when it could raise some revenue to help pay for the rebuild instead.

“The Government is proposing to borrow a further $5 billion to cover the uninsured cost of rebuilding Christchurch. This will cost an additional $255 million a year to service alone.

“On the other hand, a temporary levy on income could raise an additional $1 billion each year to cover quake-related expenditure avoiding costly borrowing,” said Dr Norman.

The Green Party has modelled a number of different levy scenarios for income earners above $48,000. A levy of 1.5% applied to an individual’s income between $48,001-$70000, 3.0% on income above $70,000, and leaving the corporate tax rate unchanged at 30% would raise $1.026 billion per annum.

People earning $50,000 a year would pay an additional 58 cents per week. People earning $70,000 per year would pay an additional $6.33 per week. People on $100,000 would pay an additional $23.59 per week.

“Australia is raising a levy after their flood disaster and their Government is, financially speaking, in a much better position than ours,” said Dr Norman.

“Australia is also not on a negative credit watch. We are, meaning that there’s a 50:50 chance of a credit downgrade, and this was before the Christchurch earthquake hit.

“Bill English is gambling that borrowing to pay for the earthquake won’t affect our credit rating. If he’s wrong, everyone with a mortgage or loan will be paying an additional 30-100 basis points on their debt.

“A credit downgrade and a subsequent rise in interest rates would mean more money will simply go offshore taking further money out of the local economy and dampening a rebound.

“We don’t agree with Bill English who says that a small levy could stifle economic performance. The levy would target those on higher incomes who typically save or invest their additional income rather than spending it.

“The risks are all with further debt. Raising additional revenue is sensible and New Zealanders desperately want to help Cantabrians re-build their city – helping thy neighbour is a deeply held belief.

“The fastest, fairest, and most economically sensible way for New Zealand to rebuild the livelihoods of those in Christchurch is to introduce a temporary earthquake levy on those who can most afford it,” Dr Norman said.

More information of the levy proposal:

http://www.greens.org.nz/sites/default/files/how_an_earthquake_levy_could_look_green_party_research_1.pdf