Key sees healthier, optimistic UK

02:50, Sep 23 2013
John Key and the Queen
SMALL TALK: Prime Minister John Key and the Queen seized on the topic of conversation most people turn to in awkward social situations during their formal meeting at Balmoral Castle yesterday – the weather. The Queen asked if he and his wife had been cold during their stay at the castle, but Mr Key assured her: "It's been absolutely beautiful. It's a magnificent property. It’s a great privilege to be here."

A week after Chancellor of the Exchequer George Osborne proclaimed that Britain was turning an economic corner, Prime Minister John Key has had a chance to witness the turnaround.

Mr Key has visited the United Kingdom almost every year since he was first elected prime minister in 2008. On each occasion, Britain and Europe's precipitous economic decline provided the backdrop.

This time, however, he has discovered a more optimistic mood as he has met with British Prime Minister David Cameron, with the foreign secretary, William Hague, and London Mayor Boris Johnson.

With only occasional exceptions, the Conservative-Liberal Democrat coalition government has been lowering net debt in every quarter since 2010 from a peak of 151.7 per cent of gross domestic product in 2010 down to 135.1 per cent now. In New Zealand, by comparison, the Key Government has actually allowed net debt to climb - but to a far less alarming 26.4 per cent of GDP.

New Zealand returned to growth in March 2011 and has been ambling along at about 0.5 per cent growth in each quarter since. In the UK, the ride has been much rockier with growth bouncing under and over 0 per cent repeatedly since 2008.

Mr Osborne's political opponents argue that his austerity programme made the troughs deeper and delayed the recovery. A retreating public sector climbed on top of a drowning private sector, forcing the UK economy further under when it desperately needed buoyancy, the argument goes.

Advertisement

The New Zealand Government's narrower programme of public sector cuts and its more even recovery might lend some weight to that argument - but Mr Key doesn't think so.

"Every country has got its own challenges," he says.

"Sometimes for a smaller economy, a speedboat is quicker to turn around than an ocean liner."

In both countries, there have been calls to rebalance the economy. Mr Cameron is currently fixated on "the global race", where the leading countries are exporting more than they are importing and working more efficiently than their competitors.

New Zealand is similarly targeting an increase in exports of between 5.5 and 7.5 per cent a year and a lift in productive savings and investment. But New Zealand continues to carry a large current account deficit - 4.8 per cent of GDP on the latest figures. In the UK, it's about 3.8 per cent of GDP.

Perhaps more alarming is the prospect of dangerous housing bubbles reappearing in both the UK and New Zealand. In both London and Auckland foreign buyers are ploughing in cash on property, encouraging prices to rise. The two governments diverge over the existence of, and desired response to, their respective bubbles.

"We do worry that there is a bubble that's created in Auckland and long term that could cause the problem you saw in the United States where the housing market - ultimately the bubble burst and as a reflection of that, you could have a lot of first-home buyers massively under water," Mr Key said.

Mr Osborne, by comparison, has been labelled "in denial" over London's house prices.

"What I see is not only house prices 25 per cent lower than they were, but mortgage approvals half what they were, transactions two thirds of what they were. In other words, we are a long way from a housing boom."

Fairfax Media