Talking to Austin Mitchell MP

26 April 2006

It`s pretty unusual for the Governor of any Reserve Bank to become Leader of the Opposition.  In fact I`m the only example I’m aware of, but I had been politically active before I became Governor.  I stood for the National Party in a by-election back in 1980 and in the General Election the following year.  I didn`t win even though I was the third highest polling National Party candidate in the country in 1981 because the Labour vote collapsed and the protest vote went to Social Credit.

I decided after that that I would withdraw from politics and I promised my wife that having stood twice and failed I would not stand again.  I withdrew from any active political involvement in the early eighties.  I then worked for the Labour Government with David Lange for several years.  I designed our Value Added Tax in NZ which I think is still one of my finest achievements.  I designed a number of other tax reforms which closed tax loopholes extensively. Then out of the blue I was approached to be Governor by the Labour Government.

I think it`s fair to say that I ran monetary policy without any regard for politics at all.  The NZ model, which the Bank of England has now adopted, involves the Minister of Finance stipulating what inflation target he or she wants.  That`s absolutely appropriate in a democracy.  We know from experience that governments do a lousy job of controlling interest rates.  They manipulate them to win political influence.  Monetary policy is classically designed for political manipulation.  Low interest rates this year makes things feel good for the government, but the effects on inflation are next year.  It takes about 18 months for those to come through.

So it`s designed for the cynical politician.  The Labour Government of the eighties said we don`t want that happening in NZ, it`s damaging for the country and its people.  The Treasury was instructed by the then Labour Minister of Finance to remove the political influence from monetary policy and give the central bank Governor (in our case – the MPC in your case) authority to deliver the government`s chosen targets.

Monetary policy either restrains or stimulates activity, depending on whether demand is above the economy`s capacity or below.  As long as the government has chosen the target the officials are simply fulfilling it.  That`s what I did.  I kept the inflation rate within the government`s mandated target.  Did I run monetary policy too tightly, as some have suggested? Hardly.  In the 14 years I was Governor, I was only once in the bottom half of the target range and in a few cases I was above the top of the range..  So I think I can fairly claim to have run monetary policy professionally and without regard to politics.  For instance in 1999, two weeks before the General Election, the then-National Government was looking very shaky politically, but higher interest rates were entirely appropriate in my judgement given the inflationary position at the time.  I`m sure they hated my guts.

I recommended the model to Britain.  Not only the UK, but Australia and Canada now have the same model, essentially, and follow what NZ did on monetary policy with the public contract between the elected government and the central bank.

We also pioneered inflation targeting when I was Governor.  The Reserve Bank of New Zealand, like many other central banks, used to be full of mumbo jumbo, and no-one outside the Bank knew quite what we were doing.  We used to talk about money supply and other things.  We said look, what we really want to deliver is low and stable inflation.  Right, if that`s what we want to do, let’s explicitly and publicly target inflation, and make the central bank accountable for that result.  In our case, the Governor could be fired if he didn`t deliver that without some plausible reason, such as VAT changes or oil prices going through the roof.  But without a plausible excuse I could be fired.  In the NZ model, the government always retains the final decision and has the explicit right to over-ride the Bank, but must do so transparently.  There’s been no use of the “over-ride” since the legislation was passed in 1989.

Did this give the Governor too much power?  In some ways, I was very powerful at the Reserve Bank but only as an official implementing government policy in a very narrow, albeit an important, area.

But in my view the challenges facing NZ now are not keeping inflation low: I think the model`s working brilliantly and I think other people can run that.  The problems facing NZ now are to do with race relations and with living standards, and education .  Those things are really important issues and as Governor of the Reserve Bank I could do nothing about them.  As Prime Minister I can.  I`m not yet Prime Minister but clearly that`s what I want to be, and leading the Opposition is the stepping stone to that.  I don`t think anyone wants to be just Leader of the Opposition per se unless he`s a masochist! But I`m thoroughly enjoying the job.  I would prefer to be Prime Minister but being Leader of the Opposition is a good second best.

Jonathan Hunt, the High Commissioner for NZ in the UK, was Speaker of the NZ Parliament when I became Leader of the Opposition, and I recall his telling me that it was the worst job in politics.  You are expected to have an articulate and informed opinion on everything which the Prime Minister has an opinion on, and with a small fraction of the Prime Minister`s resources to inform him.  So it`s a difficult position but I`m now thoroughly enjoying it.

I didn`t ever expect to hold the position when I went into politics in 2002.  In fact I decided to accept an invitation to go into politics exactly 4 years ago today and entered Parliament in the July 2002 General Election.  The National Party was not in good shape at the time and 15 months later I became Leader.  I`ve no regrets.  You know in politics there are odd days when you think why the hell am I doing this?  Yet most of the time I`ve no regrets at all.

There is certain risk in opposition of formulating too much policy so that government shifts attention to your policies.  No question about that.  It`s a question of striking an appropriate balance.  Some of my colleagues have said look, if you have a 3 year term of opposition in front of you, you should spend the first year exposing government failings, the next year opposing government policies, and the third year proposing your own policies.

There`s something in that but I think the reality is unless you are also proposing alternatives the public don`t take you seriously.  The National Party in NZ in 2002 seemed to the public to be unclear about what they stood for.  We tried to market far too much policy.  I recall as a candidate that year getting my 54th policy email 6 days before the election.  I couldn`t read it let alone sell it!  I think if you have too many policies the public are totally bamboozled.  In the most recent election, last September, we focussed on 5 key policy themes.  We had to have policies on other issues as well, but we focussed our campaigning on 5 themes.  I think that worked very well.

In the last 20 years there have been very far reaching changes in the NZ economy, and by and large those reforms have been accepted by both major parties.  There`s no mood in NZ to go back to a fortress economy.  No mood to go back to subsidising agriculture, subsidising exports, protecting manufacturing by import controls or higher tariffs.  There`s no mood to go back to a highly inflationary monetary policy.  All of those changes were put in place during the late eighties and early nineties, first by a Labour government and then by a National government.

So there`s a challenge always for an opposition party: how much do you accept of what`s gone before and how much do you seek to change?  In the NZ case, we think reduction of taxes is an important part of the platform.  We saw tax reductions in two dimensions.  One was leaving more money in the hands of those who earned it, and that did have political resonance at the last election.  The second dimension to it was a different one and that is how do you increase the incentive for people to get ahead themselves, and thus increase the growth rate of the NZ economy?   So we proposed to drop the marginal income tax rate at the average wage, from 33% to 19%.  That makes a material difference to how much money you get to keep from overtime or from a second job.  Had our tax package been adopted, it would have meant 85% of taxpayers would have paid a marginal tax rate of 19% or less and that appeared to have considerable political appeal also.

We wanted to look at the incentives for people to get off a benefit, and in particular the incentives facing those in long term dependency.  So we had a Welfare Reform package which we thought was attractive.

On Education, our record sounds rather like Tony Blair.  We just said, look, the problem at the moment, as in the UK, is that the only people who have choice about where their children go to school are the very affluent.  They can send their kids to fee-paying schools or they can find the right areas where the best state-funded schools are.  I can afford to send my children to any school that I want to, but most can`t.  We were very keen to give parents more choice about the school that their child went to.

We had a Law and Order policy which toughened up on prisoners who are repeat offenders and violent offenders.  We argued that first-time non-violent offenders should be eligible for early release from prison for good behaviour, but repeat offenders, and violent offenders, should be required to serve their full court-imposed prison sentence.

Finally we raised what critics said was a race issue but was really about how the Treaty of Waitangi should be interpreted.  Article 2 of that Treaty says the Crown will guarantee property rights but property rights were abused in the nineteenth century by successive governments, so we said it`s totally appropriate that compensation be paid.  But we also said that Article 3 of the Treaty says that all NZ citizens have the rights and responsibilities of British subjects, which to us means government should treat people on the basis of their need not on the basis of their race.  I was accused of being a racist, which I totally reject.  I want every New Zealander, be they Asian, Maori, Pacific Islander or of European descent, to get the same treatment.

The Labour Government said that we could only afford tax cuts by radical cuts in health and education.  We said we will make room for tax cuts and we spelled out quite precisely how we would do that.  There were to be no cuts in healthcare or education but we were going to be increasing spending in those areas slightly more slowly than the Labour Government proposed.  The Government has increased health spending at a very rapid rate in the last 5 or 6 years, and the evidence we`ve improved health outcomes is almost non-existent.  So we were confident that with a slower growth in those areas we could reduce taxes without any reduction in real spending on health or education.  Indeed government spending as a proportion of GDP would have been going up under our programme, not going down, but not going up at the same rate as Labour intends.

Our policies were very attractive to the electorate.  We didn`t win the election, but we almost doubled our share of the vote.  So we don`t think a major  policy re-think is required.  We don`t think we lost because of policies; we think we lost for two other reasons.  Before, with only 27 members in a 120 seat Parliament, we were not really credible as an alternative government.  Now with 48, which is almost exactly the same number as Labour has with 50, we are credible to govern in a way we were not previously.   The second thing was that, largely because of very strong export prices, the economy has been quite buoyant in recent years, so the great middle slice of the electorate who don`t actually much focus on politics can see their jobs secure, their house prices going up.  Why rock the boat?  I think for that reason there was a general reluctance to make a change.

I believe it will be quite different in the next election.  In the nine months to March, the NZ economy has not grown at all.  We know it didn`t grow in the six months to December, and the indications are that the March quarter saw minimal growth also.  So the people will be feeling less happy about the state of the economy and the state of their job security and so on in two years` time than they were last year.  So, no, we`re not looking at a radical rethink.

I don`t see any threat to my job even though NZ parties are pretty tough on leaders.  Before the election last year I was quite open about the fact that I didn`t expect to be asked to stay on as Leader if I lost the election.  I wasn`t uptight about that.  But it was made very clear to me after the election that while we had not won, but we had done better than we had done in any election since 1990.  In that sense it was a great achievement and the caucus was very strongly of the view that I should stay on.  So I stayed on.

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