Key the juggler

BY ANTHONY HUBBARD

JOHN Key promised champagne as well as small beer. He told the voters he wanted them to be as rich as Australians. He promised a step change in the economy. Key was not just the cautious copycat, despite his image. He was also big on the vision thing – and he still is.

"Our vision," says the politician, a smile on his face and a bowl of tulips at his elbow, "is to close the gap with Australia by 2025."

The critics jeer at this, because Australian incomes are a third higher than New Zealand's and the gap has not been closing. Key himself says it will be "a big ask. We need to grow at roughly double the per capita growth rate that Australia will grow at," he says cheerfully.

Economist Gareth Morgan says the goal is "huge" and that Key's pledge will haunt his government. He sees no government plan. "If they had a plan," Morgan says, "you would have seen it by now." His message to the PM: "Show us the money!"

Key remains unrepentantly upbeat and never bridles at the critics. He even seems somehow amused by their taunts, and returns their serves with a smile.

The year ahead, he says, will probably be tougher than the first year in office. The recession made the government's job easier in a sense, "because people cut you a bit more slack. They expect less and they are more forgiving, providing you are working to get us out of the recession". But he does have a plan and he's already putting it into action, he says.

Key is relaxed as only a politician with record poll ratings can be relaxed. And he is relaxed by nature, and friendly. It is impossible to dislike John Key. The richest prime minister in our history is eager, as Auckland political scientist Raymond Miller says, to show he is "one of us". In this he has succeeded. When he joshes with the All Blacks he doesn't have to pretend, as the severe intellectual Helen Clark did. It just comes naturally.

Up till now, Key has made a virtue of safety: his government was not the scary slashing National Party of the 1990s. But now Mr Grin has to show his grit. Morgan says the visionary John Key, the prophet of the economic miracle, will collide with the cautious John Key, the steady-as-she goes politician. "One of them is going to look to be a chump. I wouldn't like to say which, but we wait with bated breath."

So which is it, visionary or manager? "You've got to do a bit of both, actually," says Key. Besides, New Zealand has no choice but to catch up with the Lucky Country. That's where the biggest group of expat Kiwis already live, and the borders are open, so "if we don't close the gaps with Australia then we will simply become a breeding ground and a giant educational facility for Australia".

The plan has six parts to it, or perhaps seven, says Key. It does not consist of a single silver bullet. Or take another number, such as 40. "You need to do a lot of things at one time. It's a little bit like being a juggler, but you can't just have two balls in the air, we actually need about 40 of them."

The six "drivers" – Key is as prone to cliches as any other politician – are already in motion. One is infrastructure, and the government is spending billions. Transpower, for instance, will spend $3b over the next four years on the national grid, including money on the Cook Strait cable so the North Island won't run out of power. There's the ultra-fast broadband. And roads, and ...

Key skips the other drivers for the moment and mentions a possible seventh: a network of free trade deals that have been done or will be done by early next year. The result is that by then "40% of Fonterra's worldwide footprint will be covered by a free trade agreement. That makes a huge difference for a highly competitive area and a highly protected one like agriculture".

Tax reform is part of the plan, and here the arguments are sizzling. Morgan, one of the economists on the government-appointed tax review group, notes that Key has swatted away two proposals the group has aired, one for a capital gains tax and another for a broad-based tax on land.

"It seems to me the trouble with John Key is he seems to exclude things almost by instant political instinct so he can stay friends with everybody," Morgan told the Sunday Star-Times. "But, at the end of the day, you've got to show some balls."

The tax system was full of inequities and inefficiencies, with resources flowing to those areas that were untaxed. More and more politicians, says Morgan, could now see the need for a capital gains tax. Key might show in due course, he suggested, that "he has an ability to do an about-turn with some aplomb. That's what you can do when you're top of the pops".

Key says economists are divided over capital gains taxes and shows little inclination to do a U-turn. Countries with capital gains taxes did not avoid the housing bubble, and nor did the tax broaden the revenue base as much as some claimed.

"No politician is going to sign off a capital gains tax on the first or primary residence, and by the time you take farms and other things out of the equation you're left with only a very small piece. Now could you tax it? Yes. Would it actually tax the very wealthy? Probably not. They're the ones who probably could go and restructure their affairs. So all I'm saying is, you've got to be careful what you wish for."

A WEEK AGO Finance Minister Bill English hinted the government could bring in new taxes on rental properties. "We will seriously consider change in the taxation of property," he said. The tax review group had said there was "general agreement that the glaring hole in the current tax system is the rental property sector". Tax revenue from the $200b of rental property was negative, it pointed out. Key is cautious – "Let's wait and see."

Morgan and other figures on the right are calling for Key to take bold economic action; so are some on the left. Kel Sanderson, of the Wellington economic forecaster Berl, wants "transformative" action. "We just keep talking about [increased] productivity – every government has since 1978, because it's a nice nebulous thing and no one quite knows how to do it."

Sanderson says he is "very much behind the vision thing. We've always been too short-term".

However, he does not expect any usable recommendations to come out of the committee Key appointed to decide how to close the gap with Australia. The chairman, he notes, is the free-marketer Don Brash; one of its members is economist Bryce Wilkinson, who comes from the same ideological stable.

"How are we going to have transformative stuff out of people who would have been totally at home in [National finance minister] Ruth Richardson's economy of 1990 to 1995? It bloody nearly killed us," Sanderson says.

Key says the government told Brash: "You need to come back with practical things we can implement. This isn't a theoretical university workshop. That doesn't mean that all of the recommendations he makes will be implementable or acceptable to the government. But if they're all in the camp of politically unsaleable, it'll be a waste of time."

He doesn't seem troubled. "Let's see," he says, and smiles.

Key says the Ruth Richardson era certainly caused National political damage. However, the liberalisation of the then closed economy by Richardson and Labour's Roger Douglas "may well have been the right prescription for the time, but a different prescription is required today". Labour's attempt to paint him as a neo-con had failed, he said, because "your true personality will always show through". He is a centrist and pragmatic politician, he says, with no hidden agenda.

How about his pledge not to sell state assets during his first term? Doesn't that mean privatisation might be on the agenda in the second – and, as Victoria University political scientist Nigel Roberts notes, the chances of National losing the next election are "very low"?

Key says he has no ideological problem with asset sales but sees no call for them as a catalyst for economic growth at present. If that changes, "that's a decision the caucus will make and we will campaign on it".

Victoria University political scientist Jon Johansson says: "The 2010 budget will be the test of the Key government. Hard decisions were deferred in '09, and if National is to arrest its deteriorating fiscal position it will be forced to make difficult and politically unpopular decisions. The question is: will it?"

Key says the government has already made hard decisions. "No one wants to be telling New Zealanders their levies for ACC have to go up and their entitlements are reduced. I didn't necessarily want to be the prime minister who said that tax cuts were going to be delayed. Sending the SAS to Afghanistan wasn't necessarily a popular decision, but I believe it to be the right one."

National promised "an independent foreign policy", but Johansson notes it decided to commit the SAS to Afghanistan before Barack Obama had made crucial decisions about American stategy there, including whether to grant American military leader Stanley McChrystal an extra 40,000 troops.

Defence Minister Wayne Mapp "has been quoted as saying he's happy with the strategic direction advocated by General McChrystal. Dr Mapp is showing more confidence in McChrystal than US decision makers", says Johansson.

Auckland political scientist Barry Gustafson draws a parallel between Key and long-serving National prime minister Keith Holyoake, a man Key admires.

Holyoake resisted American pressure to send troops to Vietnam as long as he could, says Gustafson, and "when he gave in, he gave the minimum that was needed to quieten them down."

Gustafson notes that the SAS tour of duty in Afghanistan is also due to end in 18 months, which means the troops will come home "before the next election. Key won't be facing calls from the opposition to bring the troops home by Christmas".

Key sees it differently. The fact the decision was made before the US had decided its strategy showed it acted independently: it had not waited for Washington. Nato countries were asked to increase their commitment, and many had done so. The SAS's 18-month tour resulted from the chief of defence force's advice that "that was about the maximum amount of time, given the size of the commitment, to have them out of New Zealand. It wasn't to do with the election".

That's how it is in politics: the politicians have their views, the people have theirs. Inevitably, the government's plans will seem to it bigger, more comprehensive, more persuasive.

Nigel Roberts expresses the view of many lay people when he says: "None of today's crop of politicians is going to be around to see the result in 2025. I'm prepared to bet now we will not be on parity with Australia by then."

Labour, after all, promised repeatedly that it would shift New Zealand from the bottom half of the OECD, the rich countries' club, into the top half. By the end of its nine long years in power, it had stopped mentioning this goal.

Will Key's plan work where Labour's failed?

As Key cheerfully puts it, when discussing the plans of others: "Let's see."

Crunch time

Eight challenges for John Key in his second year:

Foreshore and seabed. How to replace the law with something that satisfies his Maori Party partner but doesn't frighten National's Pakeha voters.

The recovery. Will it be big and robust or small and disappointing?

Tax. If he does agree to put new taxes on rental properties, how will he deal with the protesting middle class?

Afghanistan. Will he persist with helping Uncle Sam if the body bags start arriving home?

Rodney Hide. How long can Key keep smiling while the Act leader runs rampant?

The Supercity. What say the new Auckland government ends up costing more money, not less?

Cutting government spending. Pressure will be on to make much deeper cuts, as Treasury warns of rocketing debt. But, as Key says himself, "Every dollar the government spends has a constituency."

The long, long honeymoon. How can the polls possibly stay this high for another 12 months?

- © Fairfax NZ News