Elections in France and Greece, where the incumbent pro-austerity governments have been voted out, highlight the need to make tough policy changes upfront rather than letting problems accumulate, Prime Minister John Key says.
Not doing so would eventually lead to a situation like that in Greece, where international bankers from the International Monetary Fund had effectively taken control of the country's policy-making.
French President Nicolas Sarkozy was this morning voted out of office, with Socialist candidate Francois Hollande beating the incumbent by 52% to 48%. Hollande has campaigned on introducing a top tax rate in France of 75% on annual income above one million euro. See more here at Bloomberg.
Hollande has also promised to renegotiate the EU's budget discipline treaty signed in March, arguing it needed to allow for more pro-growth measures. This is seen at odds with German chancellor Angela Merkel, who has led the EU fiscal austerity drive.
Meanwhile in Greece, the incumbent socialist Pasok Party, which oversaw the introduction of IMF and EU austerity measures for receipt of bail-out funds, looks set to come in third behind the conservative New Democracy party - which had its traditional vote cut back significantly - and a radical left-wing anti-bailout party, Syriza. See more here at Bloomberg.
Market commentators are suggesting the vote could be putting the Greek government's latest 130 billion euro IMF/EU bailout - to which New Zealand is contributing - at risk.
New Democracy and Pasok, which both supported the austerity measures, have alternated with each other in government in Greece for decades, and exit polls suggest they may not be able to form a bail-out-saving coalition together.
'It shows you need to take the hard choices'
Speaking on Newstalk ZB on Monday morning, New Zealand Prime Minister John Key said the results had added to the challenges in Europe. They showed governments needed to have made hard economic decisions to deal with growing debts and unsustainable public spending, he said.
“If you don’t take the hard calls up front, and you allow them to accumulate, then it becomes harder and harder and harder because people just don’t want change," Key said.
“In the case of France, I think they’ve had some real luxuries for a long period of time. Ultimately they don’t want to let those good things go," he said.
“It’s the same thing with places like Greece. They’ve built up massive amounts of debt. Now they’re being forced by the IMF and others to go through an austerity package they don’t want."
New Zealand in context, was "a million miles away from that."
"[But] that’s why the government’s having a zero budget this year, it’s why we had a zero budget last year, it’s why we’ve spent very little new extra money in the four years we’ve been in office," Key said.
"Yes, it’s hard when you’re doing it, but it means our debt levels don’t rack up, and that we call the tunes for New Zealand, not some international banker,” he said.
Top French tax rate 75%
In response to Hollande’s policy to hike France’s top tax rate to 75%, Key said history in New Zealand showed when the government imposed very high top personal rates, people either left the country, stopped working, or found ways around paying.
“I don’t think that’s sustainable," he said.
Key noted a study looking at the correlation between how progressive tax rates were, and how much people paid.
"What it basically shows is, the more you lower your taxes, the more people actually pay in physical tax because they spend less time trying to avoid it," he said.
'We're better off than most'
Meanwhile, speaking on TVNZ's Breakfast programme, Key said any government would always want to spend more money as that's what voters liked.
"But in the end it’s where that money comes from [which is the problem]. If you’re borrowing from overseas and putting more debt on future generations, that’s a really irresponsible thing to do," he said.
“In four budgets we will have effectively spent very little new money. Contrast that with Labour in their last four years, they spent about NZ$15 billion more. Is that easy, no, are there some people who’ll be disappointed, yes.”
A rising unemployment rate last week - it rose from 6.4% in December to 6.7% in March as more people began actively looking for work - and low growth needed to be seen in context.
“We’ve grown in ten of the last eleven quarters, better than most other countries,” Key said.
The UK was back in recession, US jobless numbers last week were weak, and Europe’s problems were continuing.
“In terms of the unemployment rate, it’s a very weird one at the moment. We are growing jobs – we grew 9,000 in the last quarter and on track to create 170,000 in four years," Key said.
“What’s happening is the number of people looking for work or in work, is at virtually a record in New Zealand – second highest rate ever. What that shows you is New Zealanders are more confident that the economy’s coming right, and therefore bothering to actually go and look for work," he said.
“I know it sounds crazy, but in the US part of their unemployment rate coming down has been because people have given up looking.”
'We've been Keynesian enough'
Asked whether the government should be doing more to stimulate jobs growth in the economy, Key said there was a question of what the government could do.
“We can’t control monetary policy – interest rates, the amount businesses pay when the borrow money – that’s the Reserve Bank’s job. But they’ve got a pretty low rate, and they have for quite some time," he said.
The government could affect things through regulations of labour laws, and was running job creation policies like allowing construction of the Sky City convention centre, more mining and exploration, irrigation, and as Australian companies moved over here.
“Labour have rejected every one of those, and so plenty of other people have been opposed, but they will create jobs.
“In terms of the overall economy, we are growing, and getting back to surplus is very important. It gives New Zealand future strength," Key said.
That was what New Zealand households were practicing too. They had borrowed too much during last decade, were worried about the international environment, and were looking to pay that debt off, he said.
“So they’re being very conservative. If we went out there and spent like a drunken sailor, they would say, ‘there’s something very wrong with the government, they’re in denial.’"