Lisa Owen: Well, it's been a trifecta of if not bad, then worrying economic news this week. First Landcorp reined in its planned dairy expansion, predicting increasing price volatility, then Fonterra announced another drop in its forecast payout, and the Reserve Bank cut the Official Cash Rate (OCR) to a record low of 2.25 percent with warnings of risk ahead. As usual, National Party Ministers refused to debate on television, so this morning I'm joined by the leaders of the three Opposition parties, Andrew Little, James Shaw and Winston Peters. Good morning to you all.
All: Good morning.
If I could start with you, Mr Little, this week we've been told that we're in the middle of a perfect storm. The Reserve Bank has warned that our economy is facing many risks, it says. So how worried should we be?
Andrew Little: We do need to be concerned, and when the Reserve Bank, having only a couple of months ago said they didn’t expect to cut the OCR until the end of this year and are now doing it, What, here we are in March, then you know that they are seeing something, that there is something that is quite wrong. So we ought to be concerned. When you have a look at Fonterra too, another downgrade of their milk payout -- that is a concern too. That's less cash in farmers' hands, less cash in the regions. So this is all creating a quite significant issue for the New Zealand economy.
Mr Shaw, the Greens this week have been using the word 'crisis', and you've actually said that the Government's putting the economy at risk. Is that responsible language, or are you crying wolf for political gain?
James Shaw: I'm actually just reporting what other commentators have said, so Westpac have come up with a recent report calling the Government out on its strategy. The Reserve Bank itself has said, for example, that the house crisis up here in Auckland is one of the greatest threats to the economy. So I'm not saying that, you know, the country as a whole faces a crisis, but there are some, as Andrew says, very worrying conditions in some of our key sectors, and we do need to pull our head out of the sand about them.
Mr Peters, you've said that the Government— well, accused the Government of what you call phoney optimism, so what do you think's at the heart of the problem?
Winston Peters: Well, first of all, we didn't learn about it this week. Some of us have been saying it for a long, long time. You see, in New Zealand we have a thing called perception as against reality. The perception is and had a lot of people saying it was a rock star economy. Now, this had to be a joke when you look at the fundamentals, and the fundamentals for New Zealand are real bad and the sooner we address them, the better. But we can’t carry on with the same policies that have so miserably failed.
Is it that bad, though? We've still got around 3 percent growth, unemployment is at 5.3 percent, interest rates are low.
Peters: It's real bad. Look, when you say it there, what does it mean? If you say we've got about 2.5, 2.8, somewhere in that range now, you say that's good; that's better than most of the other world economies. No, it's not. Norway has an economy -- a slightly larger population now than ours, maybe 300,000 people. It has an economy of $600 billion GDP. Ours is $230 billion. Now you see the problem? And Norway, for example, has an economy of $600 billion, the same as Argentina with 40 million people. Now, our problem is we haven’t grown the size of our economy and we have people saying it’s a rock star economy, but no transparency.
But we're higher up the food chain than a lot. There may be some above us, but there's plenty below as well.
Peters: Can I just say one thing? If you look at the OECD small countries – in the OECD that are doing well – they’re all doing far better than us.
Little: We shouldn't kid ourselves about the growth. We’ve had growth because we've had record immigration. We've grown our population. People have brought cash with them. That's helping with consumer demand. And we've had the rebuild of Canterbury. Now, rebuilding Canterbury after a major disaster is not an economic strategy. When you look at the real level of underlying growth and also if you have a look at what's happened with exports as a proportion of our GDP, it's actually fallen under this Government. It was roughly 32 percent in 2008 at the end of the last Labour government. It's now down to just over 28 percent. This Government’s doing nothing in terms of the stuff that's going to generate wealth, create job opportunities and grow the economy.
If you look at the figures, though, exports are up. They’re up to December last year $1.9 billion despite what’s happening with dairy. So, actually, other exports are doing the heavy lifting for us. It’s not just all about dairy.
Shaw: They are, but a lot of that export growth is tourism dollars. Andrew's right. If you actually minus out the effect of record high immigration and you minus out the effect of the Canterbury rebuild, then the rest of the economy is as in in aggregate not growing at all. And so Winston's correct, the underlying fundamentals, the, kind of, the real economy, isn't actually doing what it needs to do. The wheels are spinning. Manufacturing is having a really good time at the moment, but even that is being driven largely by the construction sector, so even that is a temporary thing that’s tied to the Canterbury rebuild.
So what are you all saying? That we need to diversify?
Peters: I'm saying there’s too many false prophets in this country, and you just repeated one of their statements, that exports are up. No, they're not.
Last year they were -- to December of last year.
Peters: No, compare our exports with, again, Singapore per capita or, for example, Norway per capita. They are dramatically nowhere near what these other countries are doing. Now, one time we used to be way ahead of them, and we’ve failed to keep ahead with smart policies. We've adopted, of course, a non-transparent system of economics. We don’t compare ourselves with any other economy but just insiders saying everything’s fantastic, everything's fine, in fact, we are living through a rock star period. But I notice they're not saying that any more, are they?
Little: In terms of your issue about diversification.
Little: that’s absolutely the key. And what we've had in the last few years, every incentive has been about ploughing more and more money into agriculture, particularly dairy, and so they've had a free ride in terms of the emissions trading scheme, in terms of water standards and in terms of tax treatment. So no wonder and we shouldn't be surprised when not only the investors but the banks themselves who have aided and abetted all this this have seen, you know, billions of dollars ploughed into the dairy sector when we know that largely it's a sector dependant on commodity prices and we’re now in the situation that we’re in.
All right, if you’re all in agreement that we need diversification.
Peters: Now, the problem with that is Andrew's quite right, excepting this. You have to have ploughed money in, to do what? To sell at the lowest common denominator of the product, milk powder.
Little: That’s right.
Peters: Now, the infant formula—
It's what we’re good at, though, Mr Peters. It’s what we’re good at.
Peters: Can I just give you some information from the farming community, where I come from now?
Peters: Well, yeah, but I come off a dairy farm. I know one end of the cow from the other.
But we’re good at dairy, so why not stick at what we’re good at?
Peters: Excuse me. We're not good at added-value dairy, where all the money is. Infant-formula industry, for example, in three years flat, under National, is now controlled by the Chinese. That’s the- These are the dramatic mistakes being made right under our nose.
Shaw: You look at the strategy, right? It’s only- Only now Fonterra’s starting to offer farmers an actual market rate for organic, and organic’s selling for about $14,000 a ton as compared to about $2800 a ton for regular, and so there's been a mismatch in the price that farmers have been rewarded for that between what we’ve been able to get on the international market, and this is something that we've been saying for a very long time.
So has Fonterra got it all wrong? Is that what you're saying?
Peters: Of course they have, and for a long time.
Shaw: Well, so Fonterra's got part of it wrong. I actually think that Andrew's completely right -- that the Government incentives have completely skewed the economy here. The other subsidy that he didn't mention was about $400 million to go into massive irrigation projects as well, which has incentivised farmers to take, frankly, quite risky investments and to be farming in areas where they've got high production costs, and now their production costs are well in excess of what they can get on the international market.
Mr Little, a lot of dairy conversion happened under the Labour Government. Between 2003 and 2007, the Reserve Bank said that dairy debt almost trebled because of a flurry of conversion, so doesn’t your party have to wear some of that?
Little: Yeah, and it was under the Labour Party that Fonterra was created as a statutory beast, so, yeah, and that was -- at that time, there were prospects for dairy, and it was the right time to grow the dairy sector. It has carried on for the last eight years in complete ignorance of actually what’s happening in the world. So Europe has now lifted its dairy quota. It's now ploughing more and more dairy product into world markets. The US is about to become a significant dairy exporter. We've got Fonterra now geared up to play in a paddock with much bigger players and just flooding the market. The whole promise of Fonterra was that with scale, it would not only be a good international marketer; it would get into the high-value products -- the lactoferrins, the specialty cheeses. Most of its increased capital that is borrowed to increase its processing capacity has gone into more production of whole-milk powder, the commodity product that we actually should be getting out of.
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