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Cullen Address to Whakatane Labour Party Forum

Michael Cullen Address to Whakatane Labour Party Public Forum Whakatane Motor Inn, 34 Domain Road, Whakatane

Budget 2004 was in many ways a budget the Labour-led government has been working towards for five years. It is a budget that sets a course towards a robust, well-performing economy based on a skilled workforce and a thriving export sector. And it also sets a course towards building a nation of resilient communities based on strong families who are well able to nurture the next generation.

Many of us in government would have liked to have delivered this budget in 2000. However, the economy was in a weakened state. Growth was slow, the economies of our major trading partners were stagnating, and the government’s financial situation was overshadowed by a mountain of debt and weakened by the National-led government’s 1996 tax cuts.

We knew we had some work to do before we could implement fully our vision for New Zealand. We did not want to fall into the trap, that many previous governments have fallen into, of making unsustainable budget commitments and then being forced to renege on them. At two successive elections we have gone to the nation with a specific set of promises, and on both occasions we have delivered on those promises.

We valued above all else the confidence of the New Zealand people, and saw the need, after a decade of governments that promised one thing and delivered another, to focus on what was achievable and to live within our means.

That is why my government has (ironically, some would say) been one of the most fiscally conservative of recent decades. We have kept a tight rein on government spending and have run significant surpluses.

This year is no exception. As a result of prudent management, total core Crown operating expenditure is at $42.2 billion, or around 30 per cent of GDP. This is down from 35.2 per cent when we took office in 1999, and even with the new spending announced in the budget this will increase only to 31.6 per cent in 2007/08.

We have – as you would expect – resisted the calls from the right to squander the gains on tax cuts for the rich. We are convinced that the current generation of New Zealanders can and should pay its own way by banking surpluses for the future, rather than pushing out a bow-wave of costs for future generations to wear.

So we have used the surpluses to stabilise the country’s long-term financial situation. We have reduced our debt significantly and established the New Zealand Superannuation Fund to pre-fund a portion of our commitment to older New Zealanders on New Zealand Super.

Government debt was 33.7 per cent of GDP when we took office. It is now down to 24.7 per cent, based on the current June forecast. What this means is that whereas we used to spend 2.4 per cent of GDP servicing government debt, we now only have to 1.6 per cent. That may not seem a lot, but it is a significant amount that is freed up each year for other purposes.

Alongside reduction of debt, we are continuing to make contributions from our operating surplus into the New Zealand Superannuation Fund. Transfers into the Fund will be $2.1 billion in 2004/05, and at June next year the Fund is forecast to total $6.3 billion.

The important point to grasp about the Fund is that it is not an attempt to fully fund the future cost of New Zealand Superannuation. It is primarily a way of ensuring that future governments can fund a basic universal retirement income without facing impossible choices either to increase taxes, increase debt or tamper with the elderly’s entitlements and conditions.

By 2040, for example, the Fund will be in a position to offset the current cost of superannuation by about a third. If that cost were to be borne by taxpayers of the day it would be a very significant impost, severely constraining the options available to the government of the day. Those who oppose the Fund and advocate that it be wound up and its assets used for current consumption have to be equally explicit about what they would put in its place, what level of tax increase they are happy to impose upon future taxpayers, or what degree of cuts to superannuation entitlements they are willing to contemplate.

By getting debt down and making contributions to the Fund we have now put the country’s finances on a very firm footing. Indeed, when we take into account the Fund’s assets, the net government debt is forecast to be down to 8.7 per cent of GDP by 30 June this year. What is more by the end of the forecast period this will fall to zero, as financial assets equal gross debt. This will be the first time in decades that the government has been in the black in net terms.

So we have stabilised the country’s finances and put ourselves in a position where we can invest strategically for the future. We have done all of this while maintaining and indeed increasing spending on important public services such as health, housing, law and order and education.

For example, over the next four years the government plans to double the number of major hip and knee replacement operations done in the public health system.

Extra assistance for housing will mean another 1054 state houses next year and improvements to a further 856.

So by careful management we have put the country in a much better place.

Our economy is forecast to grow by 2.8 per cent in the year to March 2005, and 2.5 per cent in the year ended March 2006. This represents a slow down from the 3.5 per cent growth we posted for 2003, although it remains in OECD terms a very creditable performance. After 2006 growth is forecast to pick up to 3.4 per cent in the following year.

Since these forecasts were prepared the news from the world economy keeps getting better. There is now strong growth in the United States and Japan, which should underpin continuing growth in our export volumes. Meanwhile our dollar has fallen from its unrealistic high in February, and is heading slowly back to something near its true value.

This improves the prospects for many of our exporters who were battening down the hatches for a very rough ride. So too does the ongoing strength in commodity prices which should lead to an improvement in export earnings.

So we are cautiously optimistic about the medium term economic outlook, and very optimistic about the government’s capacity to invest in New Zealand. That is where Budget 2004 comes in. It is a budget that is focussed on investing in New Zealand families and New Zealand’s economy. In total it commits us to new operating spending of around $2.4 billion in 2004/05, rising to $3.8 billion in 2007/08.

The centrepiece is the Working for Families package, which provides greater income security for 300,000 New Zealand families and stronger incentives for those families to derive their income from the labour market. It does so by lifting Family Support, and Family Tax Credit, by changing abatement levels for family income assistance, and by replacing the Child Tax Credit with a large In Work Payment for working families.

It is a phased package, costing $221 million in 2004/05 and rising eventually to $1.1 billion in 2007/08 and outyears. Once it is fully implemented over 60 per cent of families with dependent children will be financially better off, with an average gain of $66 per week overall, and a gain in the $25,000 to $45,000 a year bracket of around $100 a week.

The package places workforce participation at the heart of a strategy for the long-term well-being of families. Indeed the majority of the expenditure will be on families who are in work. The package is about altering the factors that make it hard for low-income New Zealand families to remain attached to the world of work.

That is why, for example, improved access to good quality childcare is an important part of the package. Childcare Assistance thresholds will be increased by about 50 per cent in October this year, immediately making a large additional tranch of families eligible. The Childcare Assistance rates will also increase, by 10 per cent this year, and a further 10 per cent next year.

In addition an extra $365 million over four years will be spent on early childhood education, including, from July 2007 an entitlement to 20 hours free education per week for all three and four year-olds. This commitment represents an increase of 79 per cent over government spending in 1999.

It has been suggested that much of the Working For Families package could have been delivered via a cut in personal income tax. That, I am afraid, is simply not true.

Under the Working For Families package a family with four young children and a single income of $55,000 a year will be better off by nearly $150 a week once it is fully implemented in 2007. To deliver that amount of additional after tax income by a rate reduction would be impossible. A 20 per cent flat tax rate, which has been suggested, would give that family just $39 for a fiscal cost of some $5.5 billion.

The simple fact is that tax cuts are an incredibly blunt instrument when one is trying to assist low to middle income families with children. The costs are tremendously high and the gains are meagre. There are much smarter ways of managing the benefit-tax interface, and of improving the rewards that ordinary New Zealanders receive from acquiring and applying their skills.

Working for Families is not simply about redistributing income. It is first and foremost an investment in the workforce of the future. We need to invest in the skills of our children and young people, and also in the skills of those already in the workforce. Given the aging of our population, we need to take this longer term perspective.

So the Working For Families package sits alongside our ongoing investment in education and industry training and our immigration policies as instruments for building a higher skilled workforce.

We are working to make tertiary education more affordable. From next year the government will spend another $110 million on student support, benefiting more than 36,000 students.

We are also encouraging better quality and focus in the tertiary education system to ensure that the qualifications that students gain bear a close relationship to the competencies that employers are looking for. We do not have the luxury of maintaining ivory towers. Instead, we are encouraging excellence in research and teaching, and ensuring that tertiary providers have strong links with employers, researchers and local communities.

We are also well on track to achieving our target of getting 150,000 New Zealanders learning on the job through industry training and modern apprenticeships by the end of 2005. This will go some way towards addressing the severe skills shortages that many New Zealand industries are experiencing, shortages in the mid-level skills that are the backbone of many of our manufacturing industries and exporters. Budget 2004 also includes major new expenditure on strengthening our economy. Indeed, over the next four years close to half a billion dollars will be spent on a range of investments including developing our export markets, increasing our R & D spend, and attracting quality offshore investment.

There will be $500 million of additional spending over four years for economic development initiatives. The new measures are strongly focused on boosting exports, and include:

$26 million over four years to enable New Zealand Trade and Enterprise to boost its offshore efforts;

$35 million over four years to market specialised business sectors offshore;

$42.6 million to deepen Investment New Zealand’s offshore representation and funding, increasing their capacity to find offshore companies to partner growing New Zealand companies; and

$40 million over four years for the education sector to develop stronger offshore relationships to protect and promote export education.

We are also putting additional spending into the Ministry of Foreign Affairs and Trade - $19 million initially, rising to $28 million in out years – to assist that organisation with the very significant work load they will carry in securing trade access with some of our key trading partners.

As many of you will be aware, we have very real prospects of a free trade agreement with China in the medium term. New Zealand’s small size, and the fact that we have relatively few areas where tariffs currently operate, offers China an opportunity to take its first steps on a free trade agreement with an OECD economy that would involve a less complex negotiation than it would face with larger developed economy trading partners. The Chinese also recall that New Zealand was the first developed country to sign off on terms for China’s accession to the WTO.

We are also actively pursuing a free trade agreement with the ASEAN nations after their economic ministers recommended initiating discussions with Australia and New Zealand on free trade. ASEAN is a region of some half a billion people with increasingly sophisticated economies and very fast growing middle classes.

The budget initiatives are only part of our work agenda on behalf of New Zealand businesses.

We are working on a number of important issues that affect businesses. For example, over the past year-and-a-half we have been talking with business, local government, environmental organisations and the broader community about how the Resource Management Act is working. Some key problem areas emerged, and our focus is on finding practical solutions to them.

It is important that we do not fall into the trap of laying all of our woes at the door of this Act. It is easy to make it the scapegoat for other barriers to investment, whether technical or cost-related.

Nevertheless, there are some aspects of the RMA that are clearly unhelpful. Some of the key processes have become onerous, both in terms of cost and time. And while the Act was originally conceived to prevent the denial of natural justice in major resource decisions, it was not its intention to provide opponents of developments with opportunities for ‘greenmail’ and protracted filibustering. An average period of five to six years to secure resource consent is, I would argue, not conscionable and certainly not necessary for the preservation of democratic rights and processes.

So we are not revisiting the ideas and principles that underpin the RMA, because they are fundamentally sound. Rather, our aim is to get greater certainty and efficiency in the way the RMA operates. The review will focus on some areas where we believe there is room for improvement.

We are also making major investments in the country’s infrastructure.

Without good quality infrastructure it is hard for a country to sustain economic activity and growth. It is one of the key factors that investors – both domestic and overseas – consider when they are contemplating long-term investment. Any uncertainty about the quality and stability of key infrastructures can quickly undermine confidence.

Price Waterhouse Coopers recently carried out an audit of New Zealand infrastructure. It showed that the major problem areas have been identified and work is under way towards resolving them. The main concerns were:

Security of electricity supply, both in the short term (due to the threat of water shortages in the major storage lakes), and in the long term (due to issues around the supply of gas in particular, but also the environmental issues around alternative fuels);

A lack of investment in electricity transmission, brought about by a combination of land access issues and uncertainties over pricing and who should pay for investments;

Road congestion, primarily in the Auckland region;

Water allocation problems; and

Water quality problems in some areas.

The government’s response, first of all, has been to increase the overall level of expenditure on infrastructure, both by direct government expenditure and by encouraging others to invest. The 1990s was not a great decade for infrastructure investment in New Zealand. For example, in the years from 1994 to 2000 net purchase of physical assets by government amounted to only $5.8 billion or an average of $800 million per annum. In the period 2001 to 2008 we have increased that commitment to $8.6 billion or $1.1 billion per annum.

If we include planned investments by state owned enterprises and Crown entities, that figure rises to around $29 billion.

We have also addressed the problems with short-term supply of electricity by a new regime to ensure that sufficient reserve generating capacity is in place to cope with extreme events such as high country droughts.

We are addressing the long-term situation in a number of ways. Most recently I announced a set of measures to encourage exploration for new gas reserves through a set of proposed changes to taxation.

On the question of roading, we announced a $1.62 billion investment package in December last year. This is the most important development in several decades, and is aimed largely at solving Auckland’s traffic woes.

The commitment of resources is only one part of the package. For too long, confused and inefficient lines of responsibility have inhibited Auckland's transport development and the establishment of a single 'business-like' transport organisation for the Auckland region. The package provides a clear and fair solution to that conundrum.

So long as regional and territorial authorities in Auckland continue to meet their responsibilities for transport funding, Aucklanders will finally see the steady development of a world class, well integrated transport system, and we will start to see the economic costs that Auckland’s traffic congestion impose – estimated at around $1 billion annually – start to come down.

So to sum up, Budget 2004 combines a far-reaching plan of investment in improving the living conditions of ordinary working families, with continued financial strength and stability, and investments in the economy in the areas of skills, international trade linkages and infrastructure.

So far the opposition parties have been curiously silent on an alternative plan, beyond the now familiar mantra from National and Act about tax cuts. I believe most New Zealanders see through that message, as both fundamentally wrong in terms of how economies grow and as something which appeals only to a narrow band of the population who would see significant benefit from tax cuts.

What I believe we have proved in the last five years is that there is no clash between prudent financial management, proactive social policy and an active role for government in supporting business and investing in economic capacity. If we are prepared to be patient and prudent, we can and will have our cake and eat it too.

Thank you.

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