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Budget Should Address Sagging Growth Rate

Budget Should Address Sagging Growth Rate

“The challenge facing the government in this week’s budget is to recognise and take action to address New Zealand’s deteriorating medium-term economic outlook”, Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

He pointed out that the warning signs are becoming more and more evident:

- The 2005 Budget Policy Statement projected real growth in gross domestic product (GDP) to average 2.8 percent per annum to 2010, and growth in real GDP per capita to be only 1.9 percent per annum. These growth rates are well below the averages for the post-1993 period.

- Recent productivity statistics from Statistics New Zealand showed that New Zealand’s productivity growth improved substantially following the earlier economic reforms but has subsequently fallen away. (Multifactor productivity growth in the business sector has averaged only 1.1 percent per annum in 2000-05, barely half the 2.1 percent rate achieved in the decade 1990-2000.)

- New Zealand has fallen in international competitiveness rankings (to 22nd position in the latest IMD report). This is a factor behind the high current account deficit. It has also fallen in the Heritage Foundation/ Wall Street Journal rankings of economic freedom (to 9th equal position from 2nd equal position a decade ago.) This foreshadows a weaker growth performance.

- Currently the economy is slowing while growth in Australia and the rest of the world is strong, the unemployment rate has started to increase, and the Reserve Bank is having to keep interest rates high to curb inflation.

These warning signs support what the business sector has been saying for a long time: the government’s policies have not been positive for growth. High rates of growth of spending and taxation and re-regulation in areas like banking, electricity, telecommunications and electricity are taking their toll. The emphasis has been on redistributing income not increasing income growth.

Mr Kerr said that policy moves by the Australian government to reduce taxation, review business regulation and make more use of the private sector in providing infrastructure and social services were improving its economic prospects relative to New Zealand’s.

Last week’s Australian budget announced multi-year tax reductions totalling A$37 billion. The Business Roundtable, Federated Farmers and the New Zealand Chambers of Commerce, supported by the New Zealand Institute of Chartered Accountants, had recently advocated cutting income tax rates in New Zealand (to 28 percent for personal rates and 25 percent for the company rate) at an estimated medium-term annual cost of $3.3 billion.

“The Business Roundtable will be looking for an acknowledgement by the government in Thursday’s budget that it is not on track to achieve its goal of substantially raising New Zealand’s relative income levels”, Mr Kerr said.

“Given that, it would welcome a closer dialogue with ministers and other political parties about more effective strategies to do so, and to avert the serious risk that New Zealand will become an economic laggard again.”

15 May 2006


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