NZ needs to focus on competitive advantages, PM Key says; Defends surplus track; Notes Reserve Bank would be cutting OCR if growth outlook bad

By Alex Tarrant

New Zealand needs to focus on areas where it has a competitive advantage - food, tourism, high-tech manufacturing and the services industry - in the bid for economic growth, Prime Minister John Key says.

However, stronger growth rates were dependent on the state of the global economy, which still faced headwinds at the moment, he told TV3's The Nation programme in the weekend.

Most countries around the world would welcome New Zealand's forecast growth rates, despite earthquake rebuilding activity being the major driver of growth over coming years, Key said.

But growth picks were still not as high as the government would like to see.

"I think we’d all admit that. But we are a quarter of one percent of global growth. We are a tiny, tiny, fraction," Key said.

"I can’t, even if I wanted to, make the United States go faster, or Europe go faster, or even solve some of the problems that are there in Asia," he said.

"All I can do is prepare New Zealand to be in the best shape it can be to basically go out and compete on a world stage, and to grow by being more competitive, more productive on a world environment.”

While initial estimates for the cost of the Christchurch rebuild were about NZ$20 billion, it now looked like it would be "a lot more than that."

"So there’s a lot of stimulus to happen for a long period of time," Key said.

Asked about Reserve Bank growth projections picking expansion would slow in 2015 after an earthquake-led burst, Key said projections needed to be taken with a grain of salt.

"If the Reserve Bank really believed that there would be no growth beyond 2013 to speak of, then the Reserve Bank would cut interest rates. Because we still have interest rates at one of the higher levels around the world," he said.

"I actually don’t accept that argument [that growth will disappear]. But what I can tell you is, the pattern that we’re seeing this year is actually quite similar to the pattern we’ve seen over the last couple of years."

"Globally, everybody gets out of bed in January and says, it’s a new year, let’s feel a bit more confident. And what ultimately has happened in the second half is we have seen a slowdown. Now next year, they are talking about the entire growth rate of Europe being 0.1%. They’re talking about Germany being under 1%," Key said.

"Look at the United States; this week we’re going off to the East Asian summit, I’ll see President Obama in Cambodia, and the obvious question for the President is, what are you going to do about the fiscal cliff? Because if they get to the end of the year and the Bush tax cuts roll off and the spending initiatives that they have roll off, then that means, in theory, the US economy contracts by 4%," he said.

"So my only basic point here is, not to say ... we should feel sorry for ourselves, not to say there’s nothing we can do; we’ve actually done a lot. My point is simply, in the end, we are a nation that sells to the world. And if the world is slowing down, then we slow down."

"And you saw that with China, who are very, very Europe dependent. For all of the good will and desire to grow in China, they’ve been slowing down this year because Europe’s slowing down."

Competitive advantages

“We have to go away and say, where does this country have a competitive advantage. Where can we compete against the world," Key said about ways to encourage growth.

“The answer is: production of food, tourism, some high tech manufacturing areas, and the services-based industries which the internet can allow us to achieve," he said.

"To do that, we have to deliver New Zealand companies an environment and a platform that allows them to invest and grow. When we do that, New Zealanders will get jobs. And in the last three years, even all the worst of these conditions, we’ve still created 65,000 jobs, we still have a high participation [rate].

"Again, if you look at New Zealand versus Australia a lot more New Zealanders are actually in employment," Key said.

"Governments can make work schemes if they want. They could throw some money at things and they can encourage a few in work. We’ve done a few of them and I’m not ruling out we’d do them again," he said.

"But I’m telling you, we have an economy of 2.2 million full-time jobs. If you want people out there getting more employment, we have to encourage all of those small companies, all of those big companies, to invest."

Surplus track

Key defended the government's quest to hit a fiscal surplus in the 2014/15 year, despite criticism that track could be holding back potential economic expansion.

“We think that over the period from about 2000 to 2008 where government expenditure increased enormously – I think by about 50% under the last five years of Labour – they actually squeezed the private sector out," Key said.

“And a combination of more regulation, more red tape and bureaucracy, coupled with a lot of government expenditure, put a lot of pressure on," he said.

"There is one other factor that’s worth mentioning. The government is wanting to get to a point where it saves again. By that, I mean running a surplus. We ran an NZ$18 billion [deficit] last year, largely the Christchurch earthquake, but a fair bit there."

"We’re NZ$9 billion this year. By 2014/15 we’re on track to be back in surplus. Now some people will argue, ‘well you should just keep spending money.’"

"Our debt to GDP levels by then will top at just under about 30%. In other words, we’ll be relatively lowly indebted compared to countries like America and Europe," Key said.

"But I’d put it to you: We’re a small open economy, we have high levels of private sector debt, mum and dad have borrowed that debt effectively from foreigners because their local bank has sourced that from foreigners; Does New Zealand want to be in a position where it’s highly indebted?

"We have to pay for the Christchurch earthquake, and we have to pay for the recession. We’ve done that," he said.

Key noted a speech he gave at the start of the year in which he said he was concerned about Europe's economic prospects. In the January speech Key said if the surplus target would lead to too sharp a contraction in demand, the government would look to ease the target. He had been proven to be correct about the European situation, he said.

"Our aim is to get back to surplus. We won’t do that come hell or high water, but we will do it if we can. It’s the right thing to do for New Zealand, to be back in surplus. But if required, and if we had to stimulate, and if there were other conditions, we would do that," Key said.

"So we’re not saying we’re completely belligerent about it. But ... go and have a look at what the rating agencies are saying about New Zealand. Go and have a look at what will happen to the United States. If they continue to borrow deficits of a trillion US dollars a year they will continue to be downgraded," he said.