English opens up - what's really going to happen with the economy

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On the eve of a major speech, tomorrow about the future of the dairy industry Finance Minister Bill English has been rehearsing some of his views on where things are going with dairy prices.

Though his predictions are gloomy, he is bullish about general economic growth. 

So much so, that he warned delegates at his party’s Southern Regional Conference at the weekend that the Government’s finances could see multi billion dollar surpluses within two or three years which meant that the Government might need to start spending again if it wanted to retain credibility.

But his views on dairy were not so upbeat.

PRESSURE TO COME ON DAIRY FARMERS IN SEPTEMBER

“Getting into the last quarter this year is when the pressure is really going to go on because the price track will be reasonably clear,” he said.

"You will have some farmers who will have had three years of hardcore debt.

“Farm values will drop off.

“They are dropping off a bit now but they will get really tested in September – October.”

(The Reserve Bank’s Financial Stability Report last week suggested that dairy farm values could drop between 19 and 49% from their peak.  The Bank noted that already farm values are 13% below their peak.)

And Mr English was not optimistic about prices through next year.

"We'll have a better idea in September-October but six  dollars sounds optimistic,” he told POLITIK.

“It’s one of those things where it will be tougher when it actually happens and I think we need to be ready for that in the rural communities.”

(POLITIK understands that at least one major bank believes that anything less than $6 would see its clients go into a fourth season  --- 2017/18 --- of losses.)

But for all that, and the warning about the impact on rural communities, Mr English believes that all is not negative in provincial New Zealand.

“Apart from dairy the rest of the primary sector is pretty good,” he said. 

THE TOURISM BOOM

He said that the Prime Minister's cycle trail was the single most positive thing in regional and sub-regional New Zealand that had happened for decades because of the tourism that it brought to those areas. 

And he was not the only speaker at the conference to point to the benefits of the tourist boom the country is currently enjoying.

The conference was opened by well known Queenstown tourism entrepreneur, Jim Boult, who gave delegates a first-hand account of the impact of the tourism boom on Queenstown.

The Queenstown Southern Lakes district is New Zealand's second-biggest tourist magnet after Auckland and guest nights have been up by double digits every month this year on the same period last year.

The biggest growth area is high-spending Chinese tourists.

But with a population of only 30,000 Queenstown is finding it difficult to service the influx which last year came to over one million visitors.

In his address to the conference, the Prime Minister (who is also Minister of Tourism) was happy to report on the tourism boom and with an anecdote about a recent visit he made to the King County to point up the impact that tourism was having on small towns by  providing customers for businesses in the towns.

Over the weekend, he also announced $12 million for small Councils to deal with the impact of tourists, particularly freedom campers and then yesterday another $25 million for cycleways of which $13 million is to be spent in the Queenstown Lakes District.

And that theme of buoyancy is also going to evident in the Budget.

MULTI BILLION DOLLAR SURPLUSES IN THREE YEARS

Mr English said the Government – and New Zealand – had done a pretty good job of getting the Government accounts back to surplus “and now the surpluses look as though they are kind of locked in.”

“So now the political landscape is rising surpluses,” he said.

“So we can’t run the argument that there is no money because I'll be showing numbers in a couple of weeks which show two or three years out, $6 billion surpluses

“That's big so we are not going to be able to say there’s no money.

“We will have to compete with our opponents on the idea that we can do a better job with that money.”

And Mr English’s social investment programme is critical in that respect.

He has made the point before that one of the spin-offs[ from his social investment programme is that it occupies political ground normally occupied by Labour because it links National  with many social sector NGO's who usually oppose National  Governments.

From the way Mr English spoke at the weekend, it seems the Government believes that the impact of the dairy downturn can be contained to regional New Zealand.

It is clear that thee extra tourism investment, because of the way it is targeted, is aimed at those same regions as a sort of counter-balancing force.

But there was one possible impact of the dairy downturn that Mr English believed could impact into the cities, particularly Auckland.

HOW AUCKLAND HOUSE PRICES COULD FALL

He warned that in three years time, the impact of the dairy prices and a possible turn around in net migration could see Auckland house prices start to come down.

“That will be a challenge for our growth,” he said.

“Over the next six months, we will  have to get to grips with this Auckland housing issue because  of the macro economic risk of a slowdown.”

He[  said that there would be an ongoing debate with the Reserve  Bank over its proposals to introduce income to debt ratios but he told POLITIK  that if the Auckland Unitary Plan came forward with coherent logic and sufficient supply “that will be a very big step forward.”

“the Government is looking at what tools there are to first encourage the Council to accept a plan that allows sufficient supply and then we are thinking a little about what we might do if the plan doesn’t deliver.”

But as he also explained to the conference --- with the exceptions of the concerns about dairy, the rest of his challenges were largely the challenges of growth.

And given what other economies around the world faced at present, that wasn’t a bad situation to be in.

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