Why subsidising Kawerau newsprint mill is not good economics.

The government is defending its decision not to step in to help keep newsprint production at full capacity at a Kawerau mill, saying the developments reflect the flexibility of the New Zealand economy.

Norweigian company Norske Skog confirmed last week that it would halve production at its Kawerau newsprint mill, with unions warning the move could lead to the loss of about 100 jobs.

Falling demand for newsprint and unfavourable exchange rates, making large scale exports to Asia unprofitable, were given as reasons for the move.

At the same time, the company announced an A$84 million investment - funded mainly from Australian central and state government - in its Boyer Mill in Tasmania to enable that mill to produce different types of paper.

Speaking on TVNZ's Q&A programme on Sunday, Prime Minister John Key defended the government's economic policies in the face of attack from opposition parties claiming the Kawerau job losses were another indication those policies had failed.

Key said the developments reflected the flexibility of the New Zealand economy. He attacked those calling on the government to subsidise production at the mill to ensure jobs were not lost, saying subsidies led to an economy "which is likely to produce not what the world wants but something quite different; Under that strategy, we’d still be making cars."

'NZ$ level due to fundamentals'

Meanwhile, Economic Development Minister Stephen Joyce told TV3's The Nation programme on Saturday that while jobs would be lost at the Kawerau mill, there were other opportunities in the region and in others like Taranaki and Christchurch.

He said the level of the New Zealand dollar - alluded to by Norske Skog as one of the reasons it was cutting production at Kawerau - was due ultimately to market fundamentals.Norske Skog had not asked the government for a subsidy for the Kawerau newsprint mill, Joyce said.

"Ultimately nobody's going to bid the New Zealand dollar beyond what they consider it should be at. Now even if it bounced through say, for example, the quantitative easing that's coming through at the moment, it will come back again," Joyce said.

"Because fundamentally the value of the New Zealand dollar is determined by what the world believes is the future of the New Zealand economy, and if they bid it up too high, then they will look at it and say well actually we've bid it up too high, and we'll bid it down again," he said.

A significant fall in the New Zealand dollar would lead to substantial rises in living costs in New Zealand as the prices of imported goods rose, Joyce said.

"Unfortunately you only have one exchange rate [as opposed to different settings for exporters and importers]. The exchange rate is the assessment of what people think of the future of the New Zealand economy," he said.

"The quickest way to get it down would be to do some very reckless things that would actually put our economy at risk."

'Flexible economy'

On Q&A, Key said the government's economic policies were aimed at making the economy more competitive. He said jobs were constantly created and lost in New Zealand's "flexible" economy. 

"If you take Kawerau, why is there a reduction in demand for pulp and paper? Well, people don’t buy their newspapers," Key said.

"It’s the same reason why APN have got the New Zealand Herald for sale. It’s the same reason why Fairfax’s print media around the world is struggling. It’s because people are not going to the newspaper in the same way they used to. They go online, and so that’s why the government’s supported ultra-fast broadband," he said.

"New Zealand’s a small economy. It’s flexible in the world. In any one given year, this economy creates about a quarter of a million jobs and loses a number slightly smaller than that. We create net positive jobs.

"So if you want to preserve what we’ve always done, of course you can do that, but that will deliver you an economy which is likely to produce not what the world wants but something quite different," Key said.

"Under that strategy, we’d still be making cars and we’d still be selling legs of lamb to Europe instead of racks of lamb and better cuts and moving up the value chain and Fonterra producing nutraceuticals and all of those things," he said.

There would always be job losses across the economy as its make-up changed.

"There will always be parts of the economy where, for whatever reason, there’s a change in pattern. Years ago, we all did different things from what we’re doing today," Key said.

"In the case of the auto industry, that decision was made a long time ago for New Zealand not to have that on a subsidised basis. And, yes, that caused pain and dislocation for the industry," he said.

"But it also bred a new competitive industry. So let’s look at wine. Years ago, it was a totally protected industry. Yes, we got rid of all that protection, but what did we build? A world-class, highly successful industry based on new types and varieties."

Key said many of the governments in the developed world which were subsidising industry were highly indebted.

"So the whole problem in Europe, the whole reason why you’re seeing countries like Spain, like Greece and right through Southern Europe in the sort of mess they are is they have huge levels of government debt," Key said.

"The answer in New Zealand is not necessarily coming up with a make-work scheme funded off taxpayers’ taxes. It comes off New Zealand having a competitive industry, making sure that we have flexible labour markets, making sure that we are investing in things that will make the economy go faster, like science and innovation," he said.