Herald interview with John Key

A lengthy interview with John Key in the NZ Herald. Some extracts:

You personally met the main bankers to talk about liquidity; you pick up the phone to call F & P when business looks bad. Is this the behaviour of a Prime Minister or a chief executive?

In my opinion it is the behaviour of a Prime Minister but one that reflects that we are in very difficult economic conditions and the Government will be, rightfully so, judged on its ability to show leadership and try and combat the global recession. It is not the behaviour that will always be necessary but these are not normal times.

I think that there is an element of chief executive behaviour in the approach John brings to the job. That is not actually a bad thing. In fact I find it pretty reassuring that we have a Prime Minister who absolutely understands how business works.

If the recession is deep and prolonged will you go higher?

Some of the very long-term predictions, those in the 2025 forecasts at the moment, where a case for the debt to GDP is very, very high … is totally unacceptable. But I think you need to put those forecasts into a bit of context which is to say that beyond the three-year forecast period, into the projected period, there are an enormous number of assumptions built into the models, and I don’t think those assumptions actually all reflect actuality – in the same way that if you looked at the very same models a year ago, they would have predicted that New Zealand had no debt in about 10 years. So they are highly volatile and we need to take them with a grain of salt.

This is very true about the long-term forecasts. However the more time that goes on, the harder it is to change them. A reduction in spending now, will have better flow on effects, than doing it in five years time.

Why doesn’t the Government cut its overall spending, as Sir Roger Douglas and Roger Kerr are arguing?

In effect, at one level we are – cutting the increase in Government expenditure. If we live to a $1.75 billion new budget spend then the relative overall size of the Government compared to the economy reduces and certainly that’s a much slower spending track than has been in place in the last at least six years. So in essence we are doing that. But also there is a danger that if we really take an axe to Government expenditure we are also a significant part of the economy and we will slow things down. In fact that [cutting expenditure] runs counter to the view that even the rating agencies have been saying, that this is a time that Governments should be reasonably fiscally expansionary a.k.a. spending more money.

Not even ACT asks for an absolute reduction in Government spending. ACT advocated it should only increase by the rate of inflation and population growth, which currently is around 6%.