By Alex Tarrant
Prime Minister John Key is playing down rising inflation, saying controlled government spending and low interest rates are helping New Zealanders hit by higher food and oil prices.
Figures to be released by Statistics New Zealand this morning are expected by economists to show CPI inflation was about 4.7% in the March quarter from a year ago, well above the Reserve Bank of New Zealand's target band of 1-3% for the medium term. Quarterly inflation to expected to be around 1.0%.
Key said the GST increase on October 1 from 12.5% to 15%, which generally increased prices 2.2%, was one factor of the high inflation rate, and which RBNZ Governor Alan Bollard would look through in terms of monetary policy.
"As you would have expected, typically when inflation rises, interest rates rise. Actually the government cut interest rates, so we looked through that," Key said on TVNZ's Breakfast programme.
"But it’s oil prices that are concerning, but they’re around the world, they’re beyond the control of governments. That is putting pressure on inflation, and of course that feeds through to every product that we buy,” he said.
'We are helping'
The government's tax cut package was helping people on lower incomes deal with higher prices, and government was taking inflationary pressures off the economy by controling its own spending, Key said.
“We can do a few things. Firstly our tax cut programme at one level does help. If you earn NZ$50,000 or less, you don’t pay tax in New Zealand if you have two children aged under 18, because of Working for Families. So maintaining that’s been very, very important," Key said.
"The second thing is now, three quarters of the country pay 17.5% or less as tax. So that’s important – let’s just try and make sure people keep what they earn," he said.
However the government could not control some things like violent fluctuation in food or petrol prices.
“But what we can do though, is we can make sure we take the pressure off the system. So, by us controlling our expenditure, then we take the pressure off the Reserve Bank Governor. In turn it’s less likely that he will increase interest rates," Key said.
"That is a big deal, because, if you go back to, let’s say when we came in [to government], the floating [interest] rate was over 10% for your mortgage. If you borrowed a couple of hundred thousand dollars on your home, the difference between that and what you’re paying today is NZ$200 a week less,” he said.
'Problem is when the RBNZ Governor has to react'
Meanwhile on RadioLive this morning Key said if the Reserve Bank Governor had to react to price rises by raising interest rates, then there was a problem.
"There are some bits of that CPI that we worry about that are concerning. And that’s around particularly petrol prices," Key said.
"But where we increased GST, the Reserve Bank Governor looked through that. And you can see that by the fact that instead of actually raising interest rates as some might predict, he actually cut interest rates recently," he said.
"So the worrying thing is when he thinks it’s putting pressure on the overall economy. That’s things like food and fuel prices."
"Again, [there are] certain bits that I don’t worry too much about: if you raise prices of cigarettes, it has an impact on CPI, but we did that deliberately because we want to stop people smoking if we can.”
You also had to take the 2.2% price increase due to the GST hike off the headline CPI figure, Key said.
“When we came into office literally in November 2008 the number was 5.1%, and no one had been compensated for that," he said.
'A man's word is his word'
Meanwhile, Key was asked on Breakfast why the government was not considering putting interest back on student loans or raising the retirement age in the face of borrowing NZ$300 million a week to pay for its budget spending.
"Firstly when you have a look at the budget, you’ll see that we’re getting on top of that debt profile, and I think we did the right thing borrowing that level. Sometimes it was beyond our control, like the two earthquakes we’ve had," Key said.
"But equally if we hadn’t done that, if you roll back to 2009, what would have been the situation? Well it would have been much higher levels of unemployment, and the recession would have been felt even deeper," he said.
“Even the Retirement Commissioner doesn’t think we need to raise the pension age today – she argues it’s in ten year’s time.”
Key has said he would resign as Prime Minister if the pension age was raised under his tenure, something he did not regret.
"And I think your word’s got to stand for something, either you say it and you mean it or you don’t. I think it’s important to have clarity and people need to understand what’s happening," Key said.
"Personally I worry more about the increase in healthcare and the costs that that’s likely to present to the governments of the day than actually superannuation,” he said.
'Trim the edges'
There was alot the government could do at the edges that made a big difference in the student loan area over time.
“[Tertiary Education Minister] Stephen Joyce has already implemented some of those changes, this is going to be another round in the budget.”
Joyce said on Sunday the government was looking at a range of measures to claw back overdue loans, including more use of debt collection agencies overseas. Former New Zealand students now overseas held about 15% of total student loan debt, but owed about 55% of overdue debt, Joyce said on TV1's Q&A (see the transcript here).
Joyce also indicated government was looking at reducing or cancelling the three-year repayment holiday available to people overseas.
'Not good economic policy'
Key said he argued against interest-free student loans during the last election campaign as it was not good economic policy.
“And actually I was right. I mean, it cost a lot more than what [former Finance Minister] Michael Cullen said.”
Asked then why he would not roll the policy back, Key replied: “Bluntly 580,000 people have it [a student loan]. If you go around, turn around and say, ‘look interest is back on your student loan,’ it will have quite a big impact on how long it takes them to repay.
So I acknowledge there’s a trade-off here between extending, considerably, the length of time it takes to repay a loan, visa vie the fact that, what I don’t like about it is the message it sends to young people is, ‘go out there and borrow’.
What happens is, when you’re 19 or 20, you’re a bit bulletproof. You think, ‘borrowing some money, ah that’s not too big a deal, I’ll pay it back when I get a job’.
Then they all of a sudden get a job and they look down the barrel of a twenty, thirty, forty, fifty thousand dollar loan, maybe more and then all of a sudden realise that’s a big burden to carry.
So I don’t like that element of things but there’s very little I can do about that.”
(Updated with Radio Live comments, comments on retirement age, student loans, CPI chart, 'We are helping' section.)
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