KEY POINTS:
The economy is ready for another big step up, says National's finance spokesman Bill English.
"We have had a period of consistent growth, which is the fruits of extensive restructuring. But we have had political leadership that takes that for granted and whose focus is on distributing the fruits of that growth. It's time we went back and fertilised the trees again," he told the Business Herald.
"As we roll out policy over the next 18 months the focus will be on restoring a risk-taking environment and pulling back the smothering influence of an over-regulated business environment."
Tax cuts are part of that but people will have to wait until next year to hear anything definitive about their magnitude, nature and timing, he said.
"But the direction is clear. An incoming National Government will be setting out to lower the tax rates.
"We will be prudent about how we do it, because we have to maintain expenditure levels and we don't want to set off some inflationary spiral."
English accepts there is a problem about how to curb inflation through higher interest rates without hammering the export sector. "But it's a problem that's hard to solve, probably that you can't solve. And in speculating about solutions I think the governor [of the Reserve Bank, Alan Bollard] is undermining confidence in the tool he has. If there was an easy way of running monetary policy without affecting the exchange rate he would have done it," English said.
"But it's important that your supply-side policies promote competitiveness and flexibility, particularly in the non-tradeable part of the economy. That's what Governments can do to keep pressure off the exchange rate."
Because of the close ties between the exchange rate and the housing cycle there have been calls for a more stringent tax treatment of housing, but they cut no ice with English.
The tax laws treat someone investing in a rental property as having gone into the landlord business and entitled to deduct the costs, including interest, incurred in earning taxable business income.
And the previous anomaly where there was no capital gains tax on property but there was on investments via managed funds has been addressed by removing the latter.
National leader John Key has talked about another way of skinning the cat: instead of a harsher tax treatment of housing, a more lenient tax treatment of investment.
"We are looking at the whole range of options." English said. "We take a more positive view of the role of tax in the economy, which is to use that tool to promote savings, investment and growth. That's the focus, rather than trying to find politically unacceptable ways of tripping up the housing market."
English tends to agree with those economists who argue that the strong rise in house prices in recent years reflects a step change in how much debt households are willing to carry, which in turn is justified by lower interest rates and greater job security.
"The people who are making these decisions have their life savings at stake and the weekly cashflow they need to feed their families and prepare for their future," he said.
"And I don't believe they are stupid. They will push the limits but there are constraints. As Westpac showed, yields on housing are about where you would expect given the changes in tax rates and interest rates.
"And that's why I think the housing boom will run its course."
Some people would get burned because they are carrying too much debt, as Bollard keeps warning.
"But that's the best way to fix those problems," said English.
A tight labour market was a great problem to have, he said. "It's particularly good for wage and salary earners.
"Businesses that can't get labour are are having to substitute capital - that's a great thing - and also pay higher wages, and that's how real incomes grow.
"My biggest concern in the labour market is the number of people coming into it without basic competencies.
"In the public school system [National has] advocated setting standards for reading, writing and maths so there's a common understanding of the basic competencies required for citizenship, and the ability to then learn the skills needed [for jobs]."
The bar had been lifted, he said.
The transition to a structurally tighter labour market was a fundamental one.
"There is less risk of people missing out altogether. It's a fundamental shift in thinking in New Zealand, actually, to move away from that fear of unemployment - the individual fear and the political fear - to the view that can always get work income."
The other big shift is in the Government's fiscal position.
"Debt is not the big issue it was for 15 or 20 years. That is not the risk. The risk now is getting too complacent and thinking the cash is going to keep flowing if you don't work for it."
He questions Labour's strategy that the Government should be the biggest saver and investor in the economy.
The electricity sector, for example, is over-reliant on Government investment, in his view.
National favours partial sell-downs of the state-owned generators. It would free up capital for investment in other infrastructure, while imposing the disciplines of capital markets on those companies.
"There is some real value sitting in some of the Government-owned organisations: our expertise in renewable energy generation, for instance, which is in worldwide demand. A bit of capital market scrutiny and valuation might release that potential."
