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Hon Michael Cullen Address to Rotorua CTU Forum

12 July 2005 Speech Notes

5.15pm Tuesday 12 July 2005

Hon Michael Cullen Address to Rotorua CTU Forum: Overview of Budget

Arawa Park Function Centre, Rotorua

Budget 2005 has its highs and lows, although they are not what most people think they are:

High rates of employment;

High rates of economic growth and growth in household incomes; and

High levels of investment in public services like education, health and law and order.

Low government spending relative to GDP;

Low taxes relative to our trading partners; and

Low crime rates.

This year’s Budget completes the second cycle of budgets presented by the Labour-led government. It cements in some of the major initiatives we have made as a government, around economic growth and innovation and a return to quality public services.

And it also completes the task we began almost as soon as we took office in 1999: to place superannuation in New Zealand, public and private, on a sustainable track that will deliver real security for New Zealanders in retirement while maintaining strong public finances into the future.

This afternoon I want to go through the key elements of the Budget package, and look at the savings package in some detail. Savings is important not just because it is good for individuals, but because it will create a greater degree of local investment in the local economy.

Kiwis are fully engaged in the labour market, thanks to a set of economic policies that have seen unemployment plummet to near record levels. And they are also engaged in the residential property market, perhaps too heavily engaged.

Our vision as a government is for ordinary New Zealanders to have a stake in the future that goes wider than that, to have an investment in the new economy we have been creating.

It is an opportune time economically to be working towards increased savings. The New Zealand economy has grown strongly over the last five years and posted a growth rate of 4.8 per cent in the 2004 calendar year. This has flowed through to strong employment and income growth – 260,000 new jobs and an 11 per cent rise in real incomes since 2000.

Meanwhile, this government has earned a reputation as a prudent fiscal manager and is again this budget producing one of the strongest set of public accounts in the OECD. We are forecast to deliver this year a surplus of $7.4 billion and a cash surplus of $2.4 billion.

Those are both strong results. But as the slower economy starts to impact on tax revenues and possibly benefit spending, the numbers will weaken. The forecasts at 2009 are for an operating balance of $5.3 billion and for a cash deficit of $1.4 billion.

Having said that, the operating balance means that, with some careful management, we can meet the required capital spending on things such as roading, and make contributions to the New Zealand Superannuation Fund while maintaining debt at prudent levels.

Budget 2005 commits a further $2.3 billion in 2005-06 to the Super Fund which is projected to have a balance of $19.4 billion by June 2009. The Labour-Progressive Government can take significant pride in the Fund. Although it was only set up a few years ago in 2001, it has won wide public support.

On the basis of current fiscal policies, we will be able to reduce our level of gross debt to just above 20 per cent of GDP. That is a comfortable level of gross debt, and enables us to build up the Superannuation Fund. It reduces our annual debt servicing burden by about $2 billion, compared to what it would have been had we maintained the level of debt we inherited in 1999.

Alongside lower unemployment, debt reduction is an important contributor to the fact that we have managed to shrink public expenditure relative to GDP. In 1999, central government spending (that is, excluding state-owned enterprises and local government) was 33.3 per cent of GDP. It is now 30.1 per cent. That means there has been a three percentage point decline, or a ten per cent fall in the relative size of central government.

However, it does not give us any scope to indulge in large structural increases in expenditure or in wholesale tax cuts.

We know that there will be considerable pressure on the fiscal position from an aging population driving up health care and superannuation costs – and we are ensuring that New Zealand is well placed to deal with this.

What we have achieved with Budget 2005 is a balanced set of initiatives aimed at: growth; security; and opportunity.

Staying within the fiscal parameters we have set ourselves, we have been able to create a targeted set of tax cuts aimed at encouraging investment in business. This suite of tax cuts is estimated to cost $1.86 billion over four years, around $720 million of which will be recycled from the carbon charge.

Among other things, the business tax package will:

relax depreciation rules, and reduce compliance costs; streamline the fringe benefit tax regime and align GST and provisional tax payments; and assist international recruitment through a temporary tax exemption on foreign income of new migrants.

Other tax changes will reduce barriers to the development of a New Zealand securities lending market and improve the ability of growing companies to attract new equity investment for Research and Development.

Budget 2005 also puts new resources into tertiary education and skills, including:

$341.3 million over four years to strengthen quality and relevance in tertiary education and research; $57 million over four years in student support initiatives; and $44.6 million over four years for industry training and Modern Apprenticeships

The Budget also includes a range of initiatives in international trade, tourism promotion, research, science and technology and land transport.

Our focus is much wider than business and the economy. We recognise the need to maintain spending on high quality public services aimed at making New Zealanders more secure and delivering the quality health and education that makes New Zealand a great place to live.

Budget spending on security includes:

$173 million over four years for increased police resources;

$157 million over four years to ease pressures on the courts and justice services; and

$59 million in 2005-06 to increase New Zealand’s overseas aid.

$4.6 billion over 10 years for defence, taking to 51 per cent the amount by which operational baseline defence funding has increased since 1999; and

$18.5 million over five years plus a $564,000 capital injection in 2005-06 to improve civil defence capability and public awareness.

Health, education and housing remain at the core of our social policy. Budget 2005 includes an additional $4.09 billion over the next four years for Vote Health, covering initiatives in primary care, the nurses’ pay settlement, home based care and the phasing out of asset testing for the elderly in geriatric care.

Education spending is boosted by close to $400 million over four years, with major initiatives in early childhood education, ICT based learning, and getting better quality and relevance in tertiary education.

We are spending $134 million over four years to provide a further 1300 new state houses, bringing to 3,288 the stock acquisition programme over the four year period. In social development we are continuing to invest in programmes that help people into work, support ethnic communities, and provide early intervention and crisis assistance for children and families at risk.

The major new set of initiatives in the Budget are around making it easier for people to develop a long-term savings habit and helping New Zealanders buy their first home.

The package has three components:

KiwiSaver, a government sponsored work-based savings scheme;

A substantial extension to the Mortgage Insurance Scheme, introduced in 2003; and

Education programmes for financial literacy and for first home buyers.

KiwiSaver has been designed at every step to make saving easy and to minimise compliance costs to the employer.

KiwiSaver is a voluntary scheme, and is available also to the self-employed and beneficiaries. Nevertheless, we are trying to tilt the playing field towards participation with several important features of the scheme:

New employees aged 18 to 65 are enrolled automatically by their employer as they take up their job. They can choose to opt out if they wish. Conversely, existing employees can choose to opt in.

The government makes an upfront contribution to the employee’s account of $1000.

To make payments ‘painless’, employers make deductions from wages and forward them to the IRD along with PAYE. They can also choose to make contributions on their employees’ behalf.

The scheme imposes minimum administration costs on employers. IRD forwards the payments to the private fund providers, oversees the automatic enrolment and contribution holidays, provides information and maintains records of scheme members.

Those already paying into a scheme can enjoy the benefits of KiwiSaver. Existing registered superannuation schemes can choose to convert OR be exempt from automatic enrolment, so long as:

The scheme is portable, It is open to all permanent employees, Has a total contribution rate [employer and employee] of at least 4 per cent of earnings.

Members of exempt schemes are eligible for the home deposit subsidy, but not the kick-start payment for obvious reasons.

KiwiSaver avoids the pitfalls of the failed Roger Douglas scheme of the 1970s, by spreading the funds around a number of registered funds managers and providing maximum flexibility for members.

Choice is the watchword of the scheme. For example, individuals can:

choose to opt in to KiwiSaver if they are already in a job, under 18 or self-employed; choose their own provider or be allocated to a default, conservative scheme if no choice made; choose to change provider; and choose their own risk profile (e.g. conservative, balanced, growth).

There are definitely opportunities here for unions to add value for their members, by providing advice on options and assisting in the task of increasing the financial literacy of New Zealand workers.

There is a quid pro quo for all this, of course. This is a scheme that aims to increase the overall level of domestic savings, not just shift around the current savings. In return for the benefits of the scheme:

Funds are locked-in until age of eligibility for NZS (age 65); and Funds can be accessed prior to retirement only for: first home ownership; financial hardship; or permanent emigration

However, members can take a contribution holiday for up to five years, to accommodate situations such as withdrawal from the workforce to care for children.

We have long recognised that the foundation for security for most New Zealanders is a freehold home. That is why we have designed an option within KiwiSaver to deliver a first home deposit subsidy of up to $5,000 per person.

It is available to those who have contributed at least $1,000 per year to the scheme and can be accessed after 3 years of contributions. It is subject to an income test.

We are also expanding the mortgage insurance scheme so that it will assist up to 5,000 households a year.

The savings package, Securing Your Future, is the centrepiece of Budget 2005. It has the same long-term focus as the Working for Families package in last year’s budget and in many ways complements it.

Working for Families looks to the future by raising the living standards and life opportunities available to New Zealand children.

Securing Your Future looks to the future by assisting individual New Zealanders to save for their retirement and to buy their first home.

It also completes the superannuation double by complementing the New Zealand Superannuation Fund. Within the space of two terms of office we have put an end to decades of turmoil during which New Zealanders struggled to prepare for retirement while politicians kicked superannuation around like a football.

We have now stabilised the long term funding of the basic state pension so that it will remain a secure bedrock for all New Zealanders. And this year we have introduced a savings scheme that will place an achievable programme of retirement savings within the grasp of every working New Zealander.

We are giving New Zealanders a tangible stake in their future, and ensuring that that future is a solid one.

Thank you.


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