Good evening – it’s a pleasure to be here tonight. And it’s really good to see so many familiar faces.

Can I start by welcoming Deloitte’s initiative in setting up the South Island index. It provides a valuable insight into the performance of South Island listed companies in what are clearly challenging market conditions.

As a proud Mainlander, I know first hand just how resilient and resourceful the business community is down here.

I’m keen to see business and investment recognised in the South, which has provided New Zealand with some of its most iconic companies and outstanding business leaders. I see several of them represented here tonight.

Note: Video contains comments on the budget, produced 30 April

The Government understands just how challenging it is right now for businesses and that many of you will be anxious about both the global and domestic outlook. The difficult economic and market conditions are reflected in the South Island index’s 27 per cent fall in the year to March 2009.

I quote from the index summary: “Red downward arrows have become the norm and volatility has been a recurring theme”.

The same could be said of the Government’s books.

I do understand what you’re going through - we’re in this together. That’s why I will deliver a responsible Budget on May 28 that sets out a credible road to recovery for New Zealand.

I’ll come back to the Budget shortly.

But first, I’d like to talk about why the Government is confident about New Zealand’s prospects over the next few years. I believe we have a genuine opportunity to emerge from the recession in a stronger position than most other countries.

One of the reasons I say that is the resilience I’m seeing from New Zealanders as I visit businesses and talk to ordinary Kiwis across the country.

Most people are doing what they need to do to get through the current challenges. That wasn’t what I saw during the recessions of the 1980s and 1990s, when I remember feeling that many people were paralysed by the economic conditions and put off making decisions.

I’m not saying that the rest of 2009 and 2010 will be easy. Conditions will remain difficult and employment conditions will be tough. You will know that from your own businesses.

But the vast majority of New Zealanders, who have kept their jobs, have actually got a bit more cash in their pockets than they did six months ago.

They’ve seen the tax cuts last October; another round of tax cuts by this Government on April 1; and many people with a mortgage have already benefited from the sharp fall in interest rates triggered by the Reserve Bank’s unprecedented monetary policy easing.

The Government’s focus now is to build on those initiatives and set New Zealand down a path of strong recovery, improved economic performance and rising incomes.

New Zealand must be ready to make the most of the recovery when it comes – as it surely will. The past nine years have been littered with wasted opportunities. It’s now time for this country to take every opportunity it can to raise living standards and incomes.

This Government will do everything it can – recognising constraints imposed by the economic and fiscal environment – to help individuals and businesses meet the very real and personal challenges they face.

In preparing the Budget, we’ve had several goals in our sights:

• We’ll get our rising debt under control and turning down
  
• We’ll help create new jobs to replace those being lost in the current market
  
• We’ll improve New Zealand’s international competitiveness
  
• We’ll create an environment where businesses thrive and where people want to live and work
  
• We’ll raise New Zealanders’ living standards
  
• And we’ll create a government sector that provides better services and delivers better value for taxpayers.

The Prime Minister has made clear this Government’s aspirations for an economy that values enterprise, rewards people for effort and encourages them to get ahead under their own steam.

In the current environment, that will be challenging – there is a huge degree of uncertainty about how long the recession might continue. But we’re up for the challenge.

During the new Government’s busy first five months in office, the economy has understandably taken centre stage.

Running your own businesses here in the South, you will be very aware of why that is.

What started last year as a crisis in the financial markets of the United States and Europe has quickly developed into a concerted economic recession across the developed world.

New Zealand has clearly not escaped the global downturn – but fortunately the impact here has been far less severe than we have seen in parts of the United States and Europe.

That’s due in large part to the stability of our banking and financial system, which along with Australia’s and Canada’s, are among the most stable in the world.

This Government came into office with a plan to lift New Zealand’s economic performance after a decade of under performance. The deepening global recession has reinforced the need for us to implement that plan with even more urgency and focus.

On that score, our Jobs and Growth Plan has two elements:

Firstly, to cushion the hardest hit New Zealanders from the effects of the recession. The Government is focused on helping businesses protect jobs – or giving New Zealanders who lose their job the best possible chance of finding a new one.

New Zealand’s fiscal stimulus combined over this financial year and next will amount to about 5 per cent of gross domestic product – which is high by world standards.

The Government is borrowing a significant amount of money and pumping it into the economy to maintain entitlements and services, and support jobs.

The second part of our Jobs and Growth Plan is setting out a credible road to economic recovery, so that we emerge stronger from the recession than we went into it. This includes longer-term measures to lift productivity, improve competitiveness and sharpen New Zealand’s economic performance.

Only then will we raise New Zealanders’ incomes and begin to narrow the income gap that has opened up with Australia and other trading partners.

Since 2000, we’ve managed to increase our labour productivity by a meagre 1 per cent a year - well below levels of our trading partners and our poorest performance for 30 years. That’s simply not good enough.

It goes without saying that the Budget is being prepared against a backdrop of global and domestic economic conditions considered unthinkable – even by the most pessimistic forecasters - just a few months ago. Just about every unlikely event has occurred and every worst case scenario has become reality.

We are a small trading country and many of our trading partners are in worse shape than we are.

The economies of the European Union, the United States and the UK are forecast to shrink by around 3 per cent or more in the year to the end of April 2009.

The situation in Asia is even more severe – Japan and Singapore are facing economic contractions of at least 6 per cent this year, and Taiwan more than 5 per cent.

Australia’s economy, which is not yet technically in recession, is faring relatively better – its economy is seen slipping by just 0.6 per cent this year.

In New Zealand, we had already gone into recession before these other countries – we’re now in what we expect to be our sixth quarter of recession.

No one could have picked such a coordinated global downturn. In recent weeks, the OECD and the IMF have talked about the increasing scale of the global recession, but they were much less gloomy just six to 12 months ago.

As I pointed out in a speech in Auckland last week, all of this means the Government’s books are undoubtedly in worse shape now than Treasury predicted in its December downside forecasts.

Let me quickly run through the situation for you here tonight.

We are now facing ongoing budget deficits and an expected doubling in Crown gross debt over the next three years.

To put the recession into context, we now expect the New Zealand economy to permanently lose about $50 billion of output over the three years to 2012, compared with what would have happened without the recession.

That’s $50 billion we will not recover as a nation – and $50 billion that cannot be taxed by the Government.

While the forecasting environment is uncertain and volatile, the arithmetic behind the worsening fiscal outlook is relatively simple. Like all households and businesses, if the Government spends more than it earns, we must make up the difference by borrowing.

Householders know all about that. They’ve fed their appetite for buying houses and consumer goods by borrowing and pushing the current account deficit to a record $16.1 billion in calendar 2008 – or 8.9 per cent of GDP.

Fortunately, there is more recent evidence that New Zealanders are now starting to save and are reducing their debt levels.

But the combination of an already high current account deficit and deteriorating Crown accounts leaves us especially vulnerable. That’s why we must act now.

When we lose $50 billion of GDP it makes its mark on the Government’s books. Our tax revenue and receipts for the eight months to February were $1.8 billion lower than forecast in the pre-election forecasts. Our revenue will remain under severe pressure until the economy recovers.

On the spending side, it’s now clear that year-on-year increases in Crown expenditure cannot continue at the same levels we have seen in recent years.

Core Crown expenditure in the current year to June 30 is expected to be $63.5 billion – up $21.6 billion or 51 per cent in the past five years.

By contrast, the economy is estimated to have grown by just 23 per cent in that time – and tax revenue by just 24 per cent.

Let me say that another way: Crown spending has jumped by more than double the rate of both economic growth and tax revenue in the past five years.

While the previous Government refused to use surpluses for tax cuts, they did use them for permanent spending increases.

The point I’m making is that Government spending growth cannot continue at this rate, particularly with revenue falling so significantly in the current environment.

If we had continued on the same spending track, preliminary Budget forecasts show recurring operating deficits of about $10 billion a year indefinitely.

With no policy change, Crown gross debt would hit 45 per cent of GDP by 2013. In other words, the Crown would have to borrow an extra $50 billion in the next four years, taking gross debt to more than $90 billion. By 2023, Crown debt would hit more than 70 per cent of GDP.

Most worrying of all, debt would continue climbing, with no sign of levelling off.  Let me ask you: How many of you would even contemplate running your business like that?

At the predicted 2023 level, gross debt would equate to about $30,000 more for every New Zealander - and it would force the Government to pay $8 billion a year in extra interest costs - than forecast in the pre-election update.

We made it clear in December that the predictions – even as they stood then - were unacceptable. The fact remains that every dollar borrowed today must be repaid eventually, with interest, by future taxpayers. It will represent a cut to their living standards.

Borrowing and hoping is not an option for this Government.

Many of you will remember the long and painful experience of paying down Crown debt in the late 1980s and early 1990s. We don’t want to be in that position again.

If debt was allowed to rise to currently forecast levels, it would eventually require radical steps to bring it under control. We will not let that happen.

I’ve said many times – and I’ll confirm this again for you tonight – this Government is committed to retaining social entitlements and improving public services. But to continue to do that effectively, we must take active steps to ensure that Crown debt does not get out of control.

The Budget will set out a plan to do that – and it will require some trade offs, which we will make.

There will be considerable new spending in this and future Budgets. But annual increases will have to be less than we have seen in recent years. We will also reprioritise spending to ensure we meet the commitments we made before the election and to maintain entitlements.

I will set out those parameters in the Budget itself – and I’ve sent a clear message of restraint to both Ministers and to public sector CEOs.

Furthermore, we’ll change the way we do things in Government. We’ll need to put a much sharper focus on improving the quality of our spending – delivering better, smarter services with little more money.

In preparing for Budget 2009, we’ve also focused on reprioritising large sums of low quality spending into higher priority initiatives. I’ve actually been quite surprised by how much of this low quality spending we’ve found and we’ll continue doing this in future Budgets.

Because of the difficult economic and fiscal circumstances we face over the next few years, we’ve signalled that we are considering the future of income tax cuts planned for 2010 and 2011, as well as the Government’s contributions to the New Zealand Superannuation Fund.

I’d like to briefly talk about the Super Fund contributions. It’s important to understand this issue in the context of the Government’s broader savings policy framework and our already sharply increased borrowing.

Our bottom line is that New Zealand Superannuation entitlements will be maintained at a minimum 66 per cent of the average wage and paid from age 65. That is guaranteed – no matter what happens to Super Fund contributions in the short term.

This issue is quite separate from any decisions about contributions to the New Zealand Super Fund.

When it was set up, the idea of the Super Fund was to invest Budget surpluses. The Government was then in surplus and expected to stay in surplus for the foreseeable future.

The Super Fund was a way for the Government to set aside some of those surpluses so that in time, when the population ages, it could be used to help meet rising Superannuation costs.

Those Budget surpluses have disappeared. The Government will run a deficit this year, and will do so for the foreseeable future. That changes the whole picture.

The Government will have to borrow quite a lot of money to makes its full Super Fund contributions. Next year we would have to borrow around $2 billion, or around $40 million a week to put into the Fund, to be invested in what are currently uncertain global financial markets.

That’s why we’re considering this issue, and that’s why the Fund’s rules allow the Government to vary its contributions to reflect changing fiscal conditions.

Households and businesses facing the same kinds of decisions will understand the trade offs. They tend to save and spend during times of plenty, and cut back when times are hard.

We’re seeing many people under financial stress looking to suspend some of their savings or superannuation contributions during the recession – and that’s entirely understandable.

I cannot stress too much, however, that the bottom line for this Government is preserving current entitlements to New Zealand Superannuation.

It will not change because altering Super Fund contributions, either in the short term or in the longer term, does not have any impact on New Zealand Superannuation entitlements. The two are simply not linked.

Changes to Super Fund contributions alter only the mixture of funding sources for New Zealand Superannuation.

In other words, future Superannuation entitlements will be funded one way or another and the Super Fund is just one way. Limiting debt can be as good as building up assets – and considerably less risky.

Actually, what is more important for funding Superannuation in the future is having a growing economy which provides a healthy tax base.

So that is why we are considering the issue of Super Fund payments in this year’s Budget.

Can I finish tonight by summarising three overriding goals for the Budget on May 28:

First, we will continue with the steps we’ve taken already to help New Zealanders through the current global downturn.

Second, we will put in place longer-term initiatives to lift productivity, improve competitiveness and sharpen New Zealand’s future economic performance.

And third, the Budget will take steps towards consolidating the Government’s fiscal position and implementing policy changes to ensure that growth in Government debt is minimised and brought under control.

We have a unique opportunity to improve New Zealand’s standard of living and economic performance relative to other countries.

The National-led Government intends to take that opportunity.

Thank you very much.