By Bill English The Government is acutely aware that the New Zealand dollar's rapid rise over the past six months is unhelpful for exporters, local producers who compete with imports and economic growth as a whole. Part of New Zealand's current problem is that growth over the past five years was largely based on a boom in domestic spending at the expense of our internationally competitive industries. Government, services and retailing grew strongly, while exports and manufacturing stagnated. If we are to have a strong recovery that leads to sustainable jobs we need to reverse this trend. The Government has a plan to do this, however the rise in the exchange rate is not helping this adjustment. So why is it happening? Let's look firstly at what is happening and then at what the Government is doing.
Firstly, the currency is not as out of line with historic averages as some might think. In fact, New Zealand's real exchange rate - adjusted for inflation - is only about 10 per cent above the long term average. However this is not the whole story. Since 2004 the real exchange rate has experienced its highest five-year average since the 1960s. With such a persistently high dollar, it is little wonder that exporters have struggled. Since 1987, the floating exchange rate has proved fairly successful at stabilising the economy. It has tended to rise during periods of strong growth and fall during recessions. This has been helpful for both growth and inflation. However this is the first time we have seen the currency at elevated levels during a recession. Much of this can be put down to the weak US and UK economies, but it is worth pointing out that the New Zealand dollar is not high against all currencies: Against Australia the New Zealand dollar is actually below its long term average. Against both Japan and the Euro the New Zealand dollar is somewhere around its long term average, though those individual cross rates have been volatile. Against both the US Dollar and Sterling the New Zealand dollar is particularly strong at this point in the economic cycle. This accounts for most of the recent appreciation in the Trade Weighted Index. These rates largely reflect those regions' respective economic performance during the recession. Australia is close to the best performing developed economy in the world and was the first G20 economy to raise interest rates this year. Many New Zealand manufacturers have benefited from the Australian economy's robust peformance. By contrast, the US and UK economies are both under severe stress. I have visited both countries in the past two months and policy makers there are under no illusions about the vast challenges they face in bringing public spending and debt under control. New Zealand, with a stable banking sector, moderate unemployment and a clear plan to control Government debt, looks attractive by comparison. So some of our currency strength simply reflects the fact that foreign investors currently see New Zealand as a pretty good bet. But there are other factors. Despite the recession, New Zealand's terms of trade remain relatively strong. Although slightly down on the highs of 2007/08, they remain well above the average over the previous decade. In addition, New Zealand's interest rates remain high by world standards. This reflects a risk premium on the New Zealand Dollar and that our Official Cash Rate, at 2.5 per cent, is still high by international standards. One of the reasons the Reserve Bank has not cut interest rates further is that this would encourage consumption and discourage savings. This is the fundamental imbalance the Government is trying to address. Both interest rates and the currency will remain higher than would otherwise be the case as long as we continue to spend more than we earn. In recent weeks I've read a variety of suggestions of how we could lower the dollar. But most are impractical or just force the problem sideways into other parts of the economy. The reality is there is no magic wand - if there was it would have been used years ago. The Government is concerned about the high dollar. It reinforces the need to rebalance our economy so exporters and productive industries are the ones leading us out of recession. Looking ahead, the best action Government can take is to keep its own house in order and ensure that others have incentives to do the same. We have clear plan to control public spending and debt. This reduces pressure on the exchange rate "“ directly, through less borrowing and indirectly by easing pressure on interest rates. We are also firmly focused on lifting New Zealand's rates of productivity, which have languished in recent years. We are doing this by systematically cutting the red tape that has been holding businesses back, demanding better public sector performance, lifting the skill base of the economy and helping New Zealand businesses to innovate. We are also reviewing the tax system to ensure we have the right mix of taxes to support economic growth. Taken together, these measures will help exporters become more competitive and give them to confidence to invest and create sustainable jobs. * Bill English is Finance Minister in the National-led Government.