Key, Parker both wary of NZ's private debt; Key says controlling public debt will keep mortgage rates down, Parker eyes private savings, CGT

Prime Minister John Key and Labour Party finance spokesman David Parker appeared to be singing from the same song-sheet Tuesday morning, both noting the problem with New Zealand's debt composition was the level of private debt in the economy.

But the two have different solutions to the problem.

Key maintained National's focus on controlling public sector debt, saying this would help protect private debt holders against the possibility of higher interest rates if rating agencies downgraded New Zealand's credit rating due to its overall debt levels.

Parker pushed Labour's election 2011 policies: A capital gains tax on property investment, and a forced increase in private sector savings through vehicles like KiwiSaver to build up a domestic pool of capital.

Control public debt

Speaking on TV3's Firstline programme, Key defended the government's position to focus on its own debt profile - public debt.

“Whenever you borrow money you have to repay that. And you have to repay that with interest. What happens when you build a big enough stock of debt is, that over time, more and more of your taxpayer dollars goes on paying the bankers and their interest, and not paying for things that you actually want – education, health, law and order," Key said.

The government had taken an orderly stance over its budgets, having run a deficit reflecting the affects of the global financial crisis, and costs stemming from the Christchurch earthquakes.

“There’s no question it’s the right thing to do, to balance the books. In the end, if you spend more than you earn, it’s called Greece,” Key said.

When credit rating agencies looked at New Zealand, what they liked about the country’s debt figures was the strength of the government accounts.

“What they don’t like is the level of private sector debt.”

“There’s hundreds of billions of dollars worth of private sector debt there. That’s what backs up your house mortgage, your borrowing against your buildings or your business," Key said.

“If, at the end of the day, if we’re not careful as a government, then ultimately that leads to a lower credit rating, and, over time, leads to higher interest rates," he said.

“So there’s no free lunch here. It is quite a direct impost on the home-owner if we don’t get this right.”

Control private debt

In a Budget-week speech in Auckland, Parker said while the government kept talking about the risk of ending up like Greece, Spain, Ireland and Portugal, the debt problems in those countries stemmed from their public debt, whereas in New Zealand private debt was the worse of the two.

He continued Labour's focus on New Zealand's current account deficit.

"Government debt here is low, in no small part because the last Labour government ran large budget surpluses year after year. Labour's philosophy was to save in a time of plenty to have reserves for the bad times. Unpopular at the time, but recent history shows it was wise," Parker said on Tuesday morning.

"Even though this government will limp back to surplus by 2014/15, that won’t cure our fundamental problems. Labour would get to surplus in the same year too. But under National what problems will New Zealand continue to have?

"Our creditworthiness was downgraded at the end of last year, largely because of the outlook for our external deficit," Parker said.

"Treasury, the Reserve Bank and the IMF all predict New Zealand will keep spending more than we earn overseas. This means more borrowing, more debt, and more asset sales to foreign buyers," he said.

New Zealand had run four decades of external deficits with the rest of the world, and in that time had nearly lost all local ownership of its financial sector.

A large part of the reason New Zealand was in its current situation was because of the entrenched orthodoxies in tax and savings settings, and monetary policy, Parker said.

A government needed to be bold and introduce a capital gains tax, Parker said. More also needed to be spent on private sector research and development.

Private sector savings also needed to rise to increase the pool of domestic capital.

"New Zealanders – young and old - need better savings for their own security, to buy their own homes and to have a better standard of living in retirement. Our exporters need the capital," Parker said.

"That’s one of the benefits of the improvements to KiwiSaver which Labour proposed last year. Labour started KiwiSaver and we wanted to take it further by enrolling all employees in a universal savings scheme, with limited opt outs," he said. See Labour's election 2011 KiwiSaver policy on our policy pages here.

"Australia, after all, has deep pools of savings capital and they are strengthening their savings scheme - from 9% of income to 12% in less than a decade," Parker said.

"Access to that capital is one reason the Australian economy performs better than ours. Its investors come over here and buy our companies, and their international investment position is stronger than ours," he said.

'Broaden the monetary policy target away from just inflation'

Parker noted Labour's policy to change New Zealand's monetary policy stance from just targeting inflation to also incorporating more targets like export sector growth, and that more be done to try and limit exchange rate volatility.

"Around the world other countries are competing to increase their exports too and the dominant players are manipulating their exchange rates," he said.

"The USA is printing money, in part to deflate its dollar as it competes against the Chinese renminbi, which is set at a low rate despite enormous trade surpluses. Germany too has run huge trade surpluses on the back of a euro held down by a currency union that has slaughtered exporters in other parts of Europe. The Swiss spent billions to curb the overvaluation of their currency.

"Competitive devaluation is alive in the world," he said.

But New Zealand operated monetary policy as if the history of the last two decades didn’t happen.

"Our Reserve Bank Act was written in a time when the main economic threat was inflation," Parker said.

"But is there anyone who believes it is still a more desperate economic scourge today than New Zealand’s total overseas debt? Worse than our persistent under-performance in export growth? More of a problem than our slide down the OECD rankings? You don’t have to be soft on price stability to recognise that we have other problems to solve," he said.