The new legislation for the Reserve Bank was tabled yesterday and NZ First Leader, Winston Peters, has ended up with only one of the four things he campaigned to change in the Bank’s new objectives.

The Bank’s objectives are now to be to be “maintaining stability in the general level of prices over the medium term and supporting maximum sustainable employment.”

In opposition, Peters argued consistently for the Bank’s objectives to include “not just control of inflation but also critical macroeconomic factors such as the rate of growth, export growth, the value of the dollar, and employment.”

His focus was always on the value of the dollar and its impact on exporters rather than simply employment.

But that isn’t the only area where NZ First is being over-ruled by Labour over economic policy.

POLITIK understands that NZ First argued through the coalition negotiations for a relaxation of Labour’s proposed Budget sustainability rules which set deficit and debt targets.

NZ First negotiators say that they found the attitude of National and Labour to be virtually indistinguishable on the crucial issue of debt targets.

Peters yesterday, at the weekly post-Cabinet press conference, was placed in the uncomfortable position as Acting Prime Minister of having to defend both the Reserve Bank changes and the debt targets.

As far as the Reserve Bank was concerned he described it as “a very happy compromise.”

“At least it is a start in the right direction,” he said.


Asked for more specifics, he said: “Look, I’m here to speak on behalf of the coalition Government.

“That is what we agreed on.

“That’s it.”

So he found himself yesterday (because he is acting Prime Minister} having to defend the very same economic orthodoxy he so frequently attacked in opposition.

However, he appeared to suggest that the debate within the Government over debt limits was not over.

Asked about his reaction to criticism yesterday of the Budget Responsibility Rules by several commentators including the Labour Party’s own economic advisor prior to the election, Ganesh Nana, Peters questioned the use of the word “rules”.

“It’s the question of the ratio of debt in a sound economy,” he said.

“When you look at Germany it will be over 60 per cent, and they’ve got a powerhouse of exports and manufacturing; the full modern economy,” he said.

“They would have the same equivalence to probably Tonga; one can pay its debt back, the other can’t.

“So the issue for the New Zealand Government is to ensure that we have got enough aside for a rainy day.”

Whether he realised it or not Peters was using one of the favourite phrases of the former National Finance Minister, Steven Joyce, who used it often when defending his determination to have debt set at 20% of GDP by 2020. (Labour have given themselves another two years to reach the same target.)

For example, Joyce told Newshub’s “The Nation” last year: “we’ve got to steadily prepare ourselves for the next rainy day, which we all know is going to come. So all we’ve said at this point, and there are people that think that I’m not being tough enough, is that we’ve said that we’ll get back to a net debt of 20% by 2020.”

Peters listed some of the potential rainy days such as Mycoplasma Bovis.

“So it is with caution that we are proceeding with this,” he said.

“Maybe three years down, when we have had three years to get on top of things, it may be right, but for the time being, I think it is premature to take that position (to relax the targets).

Asked if he was saying that there could be scope in three years to lift the debt limit, he said: “It’s not the debt, it’s what you do with it.

“If your debt is for consumption then you have got a problem.

“But if it is for production; for the growth of the economy, to build new industries, then maybe it is a very sound answer.

“So any increased debt from here, of that nature, would have to be not for consumption but for production and increased wealth creation.

“So it is a very complex question.”

But not only is it a complex economic question it is also a complex political question.

There would seem little doubt that, all things being equal, the Cabinet would like to increase debt so that would ease pressure on the operational budget and thus allow more flexibility to deal with contentious issues like the nurses’ pay claim.

Added to that is pressure on the Government to spend more on infrastructure.

Infrastructure New Zealand CEO Stephen Selwood says capital investment levels are half what they are in Australia, therefore “ongoing congestion, housing unaffordability and constrained economic growth will continue.”

“We need to double investment if we are serious about tackling congestion, improving safety and delivering homes,” he said in June.

 “Major transport projects need to be debt financed. It is not realistic to fund a long-term investment programme by an annual allocation from road user charges.

“Debt should be repaid by beneficiaries – road users, property owners and the Government via GST, income.”

But the political downside of that would have Labour seen as having broken one of its most solemn promises.

And to add to that, Finance Minister Grant Robertson promised both when he launched the rules in March last year and again in this year’s Budget an Independent Fiscal Institution which would monitor Government accounts.

Robertson has been consistently hawkish on reducing debt.

“To give future generations more options, reducing government debt has to be a priority,” he said when he launched the debt target last year.

“By setting a target, we will be able to make responsible debt reductions and invest in housing and infrastructure that strengthen our country and prepare us for future challenges.”

 What may challenge him, even more, is the possibility that current GDP projections are not met as some forecasters like Infometrics are beginning to suggest.

Because the debt target is expressed as a percentage of GDP that would effectively lower the amount of debt that could be taken on.

As if that is not enough, there is also pressure on the Government to relax its fiscal surplus targets.

That criticism is coming from the left.

The Income Equality group Closing the Gap yesterday joined those calling on the government to drop its self-imposed spending cap, saying there’s little hope of putting a dent in inequality if such arbitrary spending limits stay in place.  

Closing the Gap spokesman Peter Malcolm said it was disappointing that the Labour-led coalition hobbled itself with its pledge of capping spending at 30 per cent of GDP.  “As Auckland Action Against Poverty has argued, spending levels should be based on what society needs not on arbitrary caps,” he said.

The blogger “MickySavage” who is a well known west Auckland lawyer and Labour Party member, Greg Presland, yesterday set up a discussion on the responsibility rules.

“Labour’s caution is motivated by political concerns rather than economic concerns,” he said. 

“But we live in times where conventional rules should be disregarded.”

How much longer Robertson will be able to resist pressure like this remains to be seen; the last thing the Ardern Government needs is to be offside with the Labour base.