26 April, 2012
Speech to the Wellington Employers’ Chamber of Commerce
Good afternoon. Thank you to the Wellington Employers’ Chamber of Commerce for inviting me back to speak to you again this year – it’s a pleasure to be here.
Our ministers value opportunities like this to share ideas about how we can meet the challenges we face as a nation - and how we can grasp the many opportunities we have.
So I look forward to your comments and questions at the end of this session.
In exactly four weeks, the National-led Government will deliver its fourth Budget. It will set out the next steps in our economic programme, which you will be familiar with by now.
Over the past three-and-a-half years, we’ve successfully steered New Zealand through the domestic and global recessions we inherited in 2008.
We continue to stand beside the people of Canterbury after the series of devastating earthquakes.
We’re making good progress in putting the economy on a more productive and competitive footing. And we’ve made early progress dealing with the long-term, structural challenges facing many countries around the world.
In particular, we need to break our old habits around debt and consumption that marked much of the 2000s. And we must build our future around innovation, higher savings and exports.
That’s the only way we can create a more competitive economy selling more to the rest of the world – an economy that delivers more jobs, higher incomes and opportunities here at home.
As one of the most indebted developed economies in the world, we don’t have a choice about that. Global markets will remain extremely nervous about debt for years to come and banks won’t be prepared to lend on the scale of the previous decade.
As we’ve seen in the recent past, sustainable growth and new jobs in New Zealand won’t come from the Government.
This can’t happen. The Government cannot afford to keep borrowing and spending at the rate of the past 10 years.
Instead, growth and new jobs must come from businesses like yours’ having the confidence to invest, grow and hire new staff.
This Government is working hard to give you that confidence. That means doing a lot of things well, rather than trying to find one or two silver bullets.
The Prime Minister has set out a clear and comprehensive economic programme to achieve that.
Our main priorities are:
- Responsibly managing the Government’s finances.
- Building a more productive and competitive economy.
- Delivering better public services within tight financial constraints.
- Rebuilding Christchurch.
The Budget on 24 May will focus on implementing that plan.
NEW ZEALAND IN GOOD SHAPE
Before I talk about those priorities – and particularly the importance of getting back to fiscal surplus – I want to comment on New Zealand’s current position in the world.
Compared to a lot of other countries, we’re in pretty good shape.
We have stable political leadership and the New Zealand economy will continue to expand in 2012.
It has now grown in 10 of the past 11 quarters, despite a number of headwinds – including the ongoing European debt crisis, the Canterbury earthquakes and a high exchange rate.
Rebuilding Christchurch will help drive domestic activity.
Earthquake damage amounts to about $20 billion – or around 10 per cent of GDP. We’re only in the early stages of this huge and complex project.
In addition, our two largest trading partners, Australia and China, are forecast to maintain relatively high growth rates.
Our terms of trade are expected to remain elevated on the back of demand for our major export commodities from emerging markets.
So we have a sound outlook and we’re making progress, despite the headwinds.
It’s also important to keep New Zealand’s outlook in context.
We are expected to grow more strongly over the next two years than the Euro area, the United Kingdom, Japan, the United States and Canada.
That has been recognised in recent weeks by some Australian businesses investing here and moving jobs to New Zealand.
But global risks remain and we’re likely to see confidence bounce around for some time.
International economic and financial market conditions have shown signs of improvement. But the environment – particularly in Europe – remains fragile and vulnerable to negative shocks.
We’ve seen that in recent days with news that the United Kingdom has slipped back into recession.
Our economy would be affected if global growth weakened and export markets slowed further; if growth in China slowed; or if New Zealand was struck by another significant natural disaster.
BUDGET 2012 – INVESTING IN OUR FUTURE
So it’s within that economic backdrop that we’re drawing up the Budget.
The Budget will strike a balance - as this Government has throughout its time in office.
It will strike a balance between investing in New Zealand’s future, protecting the most vulnerable, and getting the Government’s own finances in order.
It will target spending to ensure we invest in priority areas like health, education, science and innovation and improving incentives around work and welfare.
Budget 2012 will continue to responsibly manage the Government’s finances.
Let me explain why that is one of our priorities - and in particular meeting the challenging goal of getting back to surplus in 2014/15.
First, as I’ve said, we’re one of the more indebted countries in the world, as measured by our net international investment position.
While they have fallen in recent years, our net international liabilities, including households, business and government, remain high at 72 per cent of GDP.
This is not too far behind Ireland, Spain and Greece. The composition of our debt is different, but the risks are similar.
Every New Zealand household and business now knows how important it is to live within their means by budgeting carefully and deciding on priorities.
It’s no different for the Government, despite our political opponents still promoting billion-dollar lolly scrambles that would require us to go cap in hand to nervous overseas lenders.
Households and businesses have started to pay down their debt. But the Government will continue to borrow and add to national debt until it gets back to surplus.
Second, we need to get back in surplus so we can start rebuilding a buffer for when the next global crisis comes along, as it most surely will.
Surpluses give us choices we simply don’t have while we’re running deficits. They allow us to pay down debt to get ready for the next recession, resume payments to the New Zealand Super Fund or invest more in public services.
Third, when the Global Financial Crisis struck three years ago, we said it was entirely appropriate for the Government to continue spending to absorb some of the shock on its own balance sheet.
We had already inherited a pattern of strong year on year growth in government spending.
Here are some startling figures: Between 2000 and 2009, total core Crown expenditure jumped more than 80 per cent – from $35 billion to $64 billion.
If we exclude earthquake costs, core Crown expenses will increase by another $7.4 billion to a forecast $71.4 billion in the three years to June this year.
Four years ago New Zealand’s net public debt was about $10 billion. Today it’s just over $50 billion. In three years it will be more than $70 billion.
We have made it clear this spending and borrowing cannot continue. The Government has to tighten up its spending and stop increasing public debt.
We’re now at that point. That means we’ll see quite a change in how public services are delivered.
And finally, getting the Government’s finances in shape and improving public services will help the economy and support business growth.
The public sector represents about a quarter of the real economy and it has been a drag on overall productivity. That needs to change.
THE CHALLENGE OF RETURNING TO SURPLUS
Returning to surplus by 2014/15 is a big challenge. It will require tight control over spending for the foreseeable future.
Let’s remember the Government’s operating deficit before gains and losses last year was more than $18 billion or 9 per cent of gross domestic product – about half of which was devoted to the earthquakes.
The Budget Policy Statement in February forecast the deficit would be about $12 billion in the current June year, before roughly halving in each of the subsequent two years before we return to surplus.
The scale of this challenge was again highlighted in preliminary Budget estimates ministers received in recent weeks.
They revealed a $1 billion deterioration in preliminary forecasts of the operating balance before gains and losses in 2014/15, compared to the Budget Policy Statement in February.
In other words, the preliminary Budget estimates showed a $640 million deficit in 2014/15, compared to the $370 million surplus predicted in the BPS.
This reflected a number of factors, such as the impact of lower global growth on short-term New Zealand growth forecasts. This in turn flowed into lower government revenue expectations.
We’re also seeing downward revisions to expected New Zealand Super Fund revenue and State Owned Enterprises profits, and an expected rise in finance costs and higher earthquake costs.
But ministers remain focused on staying on track to surplus in 2014/15, for all the reasons I’ve outlined.
They are making decisions to achieve that. As a country, we can’t afford to spend money we don’t have.
So, as the Prime Minister has said, we will run very close to a zero Budget this year. That means there will be little new net government spending out to 2015/16 in Budget 2012.
We’ll continue to reprioritise existing spending into higher priority areas to ensure New Zealanders receive better public services, especially in health, education, welfare and law and order.
Ministers are also considering the appropriate level of future operating allowances, while ensuring we can deliver better services.
All of this is on top of $1 billion in public sector savings over the next three years, which we announced in last year’s Budget to give chief executives time to plan. Those savings begin in 1 July this year.
But on the positive side, we’re now seeing the revenue benefits of closing tax loopholes and improving the fairness of the tax system.
For example, Budget 2010 made property tax changes that will generate at least $2.5 billion of extra revenue over four years.
Budget 2011 signalled fairer treatment of employee benefits, new rules for mixed use assets such as holiday homes, and a new approach for livestock valuation.
CHANGES TO THE PUBLIC FINANCE ACT
The Budget next month will also set out changes to the Public Finance Act so there are more checks and balances on ministers’ spending decisions and their long-term effects.
The fiscal responsibility provisions of the Act have served New Zealand well in maintaining a focus on low debt since 1994.
However, the global recession and events preceding it suggest we need a broader focus.
Specifically, in times of surplus, governments come under pressure to increase spending, which puts extra pressure on the economy, leading to higher inflation, higher interest rates and a higher exchange rate.
The proposed changes will require governments to:
- Consider the impact of their fiscal strategy on the broader economy, in particular interest rates and exchange rates.
- Set out their priorities for revenue, spending and the balance sheet.
- Take into account the impact of fiscal policy decisions on future generations.
- Report on successes and failures of past fiscal policy.
The Government is also proposing a spending limit to restrict spending increases to population growth and inflation.
This was set out in the National-ACT confidence and supply agreement after the last election.
This limit will exclude spending on natural disasters, finance costs, the unemployment benefit and asset impairments. These are either outside the Government’s control or they help stabilise the economy in a downturn.
If a government exceeds the spending limit, it will need to explain why and outline how it intends to keep spending increases within the limit in future.
The Government will consult other political parties on the proposed changes, which we will include in a Bill to be introduced around the middle of this year.
So you can see that this Government is serious about getting back to surplus by 2014/15.
PROTECTING THE MOST VULNERABLE, GETTING RESULTS
I want to stress here that while we’re making some challenging decisions to get back to surplus, we will continue with the same balanced approach we’ve adopted for the previous three Budgets.
For example, we’re keeping up entitlements to welfare and New Zealand Superannuation, and continuing with large programmes like Working for Families and interest free student loans.
We will invest more in health and education.
We promised New Zealanders we would do that.
We’re investing money up front to support New Zealanders out of welfare. We’re also remaining strong on law and order and demanding better, more innovative public services.
This Government has a strong track record in these areas.
BUILDING A MORE COMPETITIVE NEW ZEALAND ECONOMY
Another of the Government’s economic priorities is building a more competitive and productive New Zealand economy.
The Government’s main role here is to look out over the next five years or more and set a policy framework that helps the economy become more competitive and productive in the longer term.
I’m confident this will improve New Zealand’s international competitiveness over the next few years and give businesses like yours the confidence to invest and create new jobs.
Take, for instance:
- Our tax package in the 2010 Budget which increased taxes on consumption and property speculation, and reduced taxes on work, companies and saving.
- Our changes to regulations – for example, resource management laws, building laws and industrial relations laws.
- Our multi-billion dollar infrastructure programme in rail, roads, electricity transmission and ultra-fast broadband.
- Our focus on changing the incentives around welfare and work.
- And reducing government-imposed costs on business – ACC levies on employers and the self-employed will fall by 22 per cent this year, reducing total costs to business each year by about $250 million.
All of these long-term policies are aimed at building a more productive and competitive economy.
Looking ahead, the Government’s Business Growth Agenda will continue that momentum.
It has six key areas:
- Innovation and ideas
- Skilled and safe workplaces
- Natural resources
- Export markets
- Capital markets
The Budget will set out some next steps in the Business Growth Agenda, particularly in innovation and ideas.
BETTER PUBLIC SERVICES WITH NO NEW MONEY
The Government’s third priority is delivering better public services within tight budgets. We’re turning our public service model around to focus squarely on results.
We will continue looking across all areas of spending to see where we can deliver better results. For the vast bulk of them, that will be done with little or no extra money.
So we have to do things smarter.
In health, that means delivering more operations and continuing to reduce waiting lists. In education, it means higher achievement standards for our young people.
Last month, the Prime Minister set 10 challenging results for the public service to achieve over the next three to five years.
They include reducing long-term welfare dependency; supporting vulnerable children; boosting skills and employment; reducing crime; and improving interaction with government.
Governments around the world are grappling with these issues.
We will issue specific and measurable targets for each result area by the end of June. They will be reported on regularly so New Zealanders can assess progress.
We’ve already announced one of those targets: 85 per cent of 18-year-olds having NCEA level 2 or equivalent in five years – up from 68 per cent currently.
So you can see some of these targets will be challenging. That’s how they should be.
We’ve also agreed to set up a single business-facing government department – the Ministry for Business, Innovation and Employment.
It will bring together the Ministry of Economic Development, the Department of Labour, the Ministry of Science and Innovation and the Department of Building and Housing.
The new ministry will strengthen the public service's ability to work on business policy, regulation and engagement.
And it will make it easier for New Zealand businesses to engage with government, rather than dealing separately with a number of different agencies.
Finally, the Government’s other main priority is rebuilding Christchurch. We remain absolutely committed to rebuilding our second largest city.
Here are some figures to consider:
- More than 100,000 homes - or about half the housing stock in Christchurch - have been damaged.
- 7,000 homes have been “red zoned” and the Government is in the process of buying them
- More than 3,000 of the 5,000 businesses within the CBD have been displaced.
- And about 1,000 CBD buildings will be partially or fully demolished.
- 12 schools or parts of schools have had to be relocated.
The Government has moved decisively to support the people of Christchurch. It is the largest economic project in New Zealand’s history.
We set aside $5.5 billion in Budget 2011 for the Canterbury Earthquake Recovery Fund; we set up the Canterbury Earthquake Recovery Authority; and we passed special legislation so the Government can step in where required to remove barriers to reconstruction.
And the Earthquake Commission expects to pay out more than $7 billion in earthquake claims from its Natural Disaster Fund, excluding reinsurance.
So all up, the Government’s share of Canterbury earthquake costs is approaching $13 billion.
Progress is being made – although not as quickly as many Christchurch people would like.
Construction is underway on more than 20 significant commercial buildings within the CBD.
Work on around 80 per cent of the 1,500 buildings required to be partially or fully demolished in greater Christchurch has been completed.
More than 300 infrastructure repair projects, worth more than $700 million, are underway or about to be completed across the city.
Residential settlements are progressing well. About 60 per cent of the more than 7,000 property owners in the residential red zone have formally accepted the Government’s offer to purchase their properties.
As the rebuild gathers pace, this will provide a significant boost to the Canterbury and New Zealand economies.
So you can see the Government has a busy economic programme.
It’s aimed at slowing the growth in government spending and getting back to surplus so we can start repaying debt.
It’s about investing in areas that are important to New Zealand’s future such as health, education and innovation.
And it’s about building a more productive and competitive economy that supports more jobs, higher incomes and opportunities for New Zealanders.