By Alex Tarrant
The government came under fire in Parliament today as Opposition parties Labour and the Greens sought to score points off Friday's double credit rating downgrade from Fitch and Standard & Poor's.
Parliament is in its final sitting week before rising for the November 26 general election. As a win for National looks likely, Labour is trying to lift its stocks by painting the downgrade as a sign of economic mismanagement by a government which had frequently attacked Labour's policies as likely to lead to a downgrade.
National and Labour blamed each other for the downgrade with the government pointing to current account deficits under Labour, while Labour said the National government had not done enough to ward off the downgrade. See Bernard Hickey's view on the Double Downgrade here.
Labour Party leader Phil Goff kicked off procedings by asking Prime Minister John Key how his comments in 2009 that a downgrade would raise interest rates by 1-2% compared to a comment yesterday that rates might not rise in the short-term.
Key responded by saying global markets were more nervous about lending in March 2009 than they were now and that a downgrade would have been damaging.
"The global situation is now quite different," Key said.
The proof was that bond yields for New Zealand today were unchanged from a couple of weeks ago, he said. However, over time interest rates could rise, Key said, which was why the government would always strive to have a higher credit rating.
'It's Labour's fault'
The Prime Minister then tried to turn the blame onto the previous Labour government for overseeing the build up in private sector debt during the housing boom through the 2000s, which the rating agencies had pointed to as their reason for downgrading the government's rating. New Zealand's net external debt rose from 64% of GDP in 2001 to 83% in 2008 "because of huge and persistent current account deficits," he said.
"I would be interested in hearing the view of the leader of the Opposition about whether he takes responsibility for that large build up in private sector debt, because...the current account deficits run under the previous Labour government...were incredibly high, they're off at around about 8% of GDP," Key said.
"I remember in 1999 Michael Cullen saying the number one thing he would address was the current account deficit in New Zealand," he said.
Goff pointed out the downgrade was the first for New Zealand in 13 years, and came three years after the government came to power, to which Key replied he was not responsible for what happened in Europe and the United States.
"Nor technically was I in government when there was the enormous build up in private sector debt. What I can say is both Fitch and Standard & Poor's have taken quite some trouble to actually mention in their press releases that the books of the government and the pathway of the government is not only on the right track, but that if any future government was to unnessecarily place more debt on the economy, as Labour is proposing, that is likely to be a very bad thing indeed," Key said.
New Zealand's credit rating was now the same as Spain's, Goff said, adding National had constantly derided Spain as being an economy in trouble.
"It may well be, it sounds logical," Key said before quoting a line from the Fitch release which noted New Zealand was well-placed among the world's highly rated sovereigns.
"I will say this," he added. "When Standard & Poor's were giving a meeting in New Zealand about a month ago, what they did say was there was about a 30% chance we would be downgraded - that's what happens when you're on negative outlook. They did go on to say though, if there was a change of government, that downgrade would be much more likely."
'Raise the retirement age'
ACT's John Boscawen then asked the Prime Minister about "emerging fiscal pressures" raised by Standard & Poor's, and whether this warranted a rise in the retirement age.
The government was comforable that the costs imposed by the retirement age, which were modeled out to 2025, were affordable, Key said. "That's about as far out as we need to go."
'It's Labour's fault'
It was then Finance Minister Bill English's turn to field a patsy question from one of his own MPs on the government's credit rating, noting New Zealand's rating had been AAA up to the early 1980s, and dropped down to AA- in the late 80s and into the early 90s before steadily improving through the 1990s.
"And it's disapointing to see that the mis-judged economic policy through the last decade has led us to the situation of a further ratings change," he said.
"The ratings agencies have stressed for some time that their view of New Zealand is determined by New Zealand's large external liabilities, most of which is private debt. It has built up gradually over several decades, but in the time from 2000 to 2008, we had record excessive government spending, we had a current account deficit of over 8% for four years, which is almost a record for any country. During that time New Zealand households were spending around NZ$1.11 for every dollar that they earned, and the tax system was encouraging rampant debt-fuelled property speculation.
"Since then the government has taken several measures to change these dynamics in the New Zealand economy with some success. But because of the deteriorating global outlook, ratings agencies have become more sensitive to what are now lower external debt levels," English said.
Labour's finance spokesman David Cunliffe raised the point that Finance Minister Bill English was Associate Treasurer in September 1998 at the time of the government's last sovereign rating downgrade. Yelling across the house later, Cunliffe gave English the title "Minister of Downgrades".
"I'm very pleased that was during a period when New Zealand made considerable progress in productivity growth, in export growth and employment growth, and that was all squandered by the Labour government who came afterwards," English said in response.
Can we trust the forecasts?
It was then Labour deputy leader Annette King's turn to question English about the upcoming forecasts for job creation in the Pre-election Update due later this month.
Treasury's projection of 170,000 jobs created over the next four years still looked feasible, English said.
"I don't expect the projections will be greatly different from those in the Budget," he said.
'We need a quake levy'
The Green Party chimed in, by questioning the government's unwillingness to impose a levy on taxpayers to help pay for the Christchurch earthquake rebuild - something the government is funding through borrowings. A levy on taxpayers would have reduced the government's borrowing requirements and therefore New Zealand's net external debt, which could have helped placate credit rating agencies, Green Party Co-Leader Russel Norman said.
Although Finance Minister Bill English continued to dismiss the levy idea, he praised the Greens for being more economically logical than Labour. This cordial approach from the Finance Minister had Labour MPs yelling across the House about the possibility National might be forced to call on the Green Party in order to remain in government following the election as its coalition partners ACT and the Maori Party were looking like returning fewer MPs than in 2008.
Norman had asked English how much the weekly cost of borrowing would rise for someone with a NZ$300,000 mortgage if their interest rate rose 0.3% due to the ratings downgrade. The cost would be about NZ$17 a week, English said.
Norman argued that would be much higher than NZ$1 a week an average-wage earner would pay for the Green Party's earthquake levy. He asked the Finance Minister whether he had seen the Standard & Poor's comment that the responsibility for the downgrade laid in part with the government because "the country's fiscal position has been weakened by Christchurch earthquake-related spending pressures."
English said he did not think that was the case, and said a levy would not have made a difference to earthquake funding enough to change the ratings agencies' decisions.
"The fact is that the levy as he proposed...simply wouldn't have raised the cash needed now to meet both the welfare requirements, the payouts for instance for the redzone, the ongoing funding of infrastructure rebuilding, the ongoing operation of EQC, which is now very large. It simply wouldn't have raised the cash in time," he said.
"There will of course be effective levy increases as a result of the earthquake. People who are renewing their insurance premiums right across New Zealand are finding that, and it's likely the EQC levy may have to increase significantly as well."
Dow Jones reported Standard and Poor's said it would have downgraded New Zealand even if there had not been the devastating earthquakes over the last year.