Hon. Michael Cullen - Wellington Chamber Address
Hon. Michael Cullen
Friday 19 May 2006
Address to Wellington Chamber of Commerce
The Wellington Club, 88 The Terrace, Wellington
Budget 2006 is the Budget New Zealanders voted for, and the Budget the New Zealand economy needs.
I appreciate that some in the business community may dispute this; but I will argue that, on any reasoned analysis of the economic outlook and of the state of the economy, Budget 2006 is the best Budget for New Zealand businesses in the circumstances.
Those circumstances include a slowing rate of economic growth, driven by declining terms of trade (especially from the rising oil price), by lower net migration, and by lower profit growth following on from a dampening of demand in the latter half of 2005. After six years of steady heat our economy is now somewhat hard-boiled and leathery.
As a result of these factors, Treasury is forecasting that GDP growth will fall from 3.7 percent in the year to March 2005 to 2.1 per cent in the year to March 2006, and will bottom out at 1.0 per cent in the year to March 2007.
However, the context for this slowdown is an economy that has increased in size by over 20 per cent since 1999. The statisticians are telling us that New Zealanders have never had it so good.
We have enjoyed the longest period of sustained growth in the last thirty years, growing at an average of nearly four per cent over the last five years. This rate of growth was for the most part significantly ahead of the OECD average, and faster than our major trading partners.
The last six years have added some 313,000 full time equivalent jobs to the economy, and we now have one of the lowest rates of unemployment in the OECD. There are no expectations of a significant rise in unemployment during the period of the slowdown. What this indicates, of course, is that the forecasters believe New Zealand employers will by and large ride out the next couple of years.
The last six years have also brought strong growth in household incomes and rising real incomes, which in turn has maintained a strong platform of domestic demand. Too strong, indeed, if one is worried about the current account deficit or if one is focusing on maintaining price stability.
The Reserve Bank Governor has indicated that that there is still considerable inflationary pressure within the New Zealand economy over the medium term, added of course to off-shore pressures such as oil prices.
Finally, the last six years have brought a marked improvement in a variety of social indicators, including falling crime rates, a 30 per cent drop in the number of beneficiaries, fewer suicides, better participation in early childhood education, participation and so on.
These are as much indicators of a healthy outlook for business as are the positive economic trends. There is no better long term environment for business than a population that is healthy, secure, well educated and confident in their own national identity.
So, to draw upon the biblical story of Pharaoh’s dream, we have seen the seven fat cows come and go, and instead of seven thin ones following them we are forecasting only one or two lean years which will barely nibble at the gains we have made. The Treasury forecasts a return to growth of around 3.3 per cent in 2008, sustained for the following two years at least.
This is not to downplay the challenges that we face. How quickly we return to a growth rate of 3.5 or 4 per cent, and how sustained the next upswing will be, depends upon prudent management of the economy and upon our ability to maintain investments in the underlying drivers of economic productivity.
Budget 2006, like its predecessors, has been attacked for an excess of fiscal prudence. Even the far right Centre for Independent Studies acknowledged earlier this week that that the government’s fiscally conservative approach is “a commendable way to manage the accounts”, before proceeding to restate their mantra that a policy of lower and flatter taxes is a panacea for all ills, regardless of the circumstances.
I do not believe we should compromise on the underlying stability that a prudent fiscal policy brings. That is especially the case in a situation where there are imbalances in the economy that need to be unravelled carefully and capacity constraints that are inhibiting long term growth and investment.
Yesterday’s Budget shows a set of accounts that are impressive, but that do not yet give the economy the long-term stability that it needs. Let me remind you of the details:
- We remain on track to achieve our long term gross sovereign-issued debt target of 20 per cent of GDP, but we will not achieve that until towards the end of the forecast period;
- We have, for the first time in living memory, achieved a positive net financial asset position; but we know for certain that we need to move well beyond the break-even point and build up the assets in the New Zealand Super Fund if we are to weather the pressure of the coming demographic shift;
- In terms of expenditure, 2005/06 is expected to be the last year for some time in which we achieve a cash surplus. Indeed, we are forecasting cash deficits totalling some $7.4 billion over the forecast period. The deficit will be $1.5 billion for 2006/07, rising to a peak of $2.7 billion in 2008/09, before falling back to $1.1 billion in 2009/10;
Meanwhile the operating surplus has benefited from some unexpectedly positive results, first from the sale of Meridian’s Australian assets, on the strength of which the company paid the Government an $800 million dividend; and second from the very positive returns achieved by the Crown’s financial institutions. The latter contributed $2.5 billion towards the operating balance, notably the 19.5 per cent return on assets achieved by the New Zealand Superannuation Fund, which netted $1.1 billion for the Crown’s balance sheet during the nine months to March this year.
Two important points about the operating surplus. First, it too is forecast to head south over the next few years, and if we look at the Operating Balance Exclusive of Revaluations and Accounting Changes it is already in decline, falling from 5.9 per cent of GDP in 2004/05 to 4.5 per cent of GDP this year.
The second important point about the operating surplus is that it is a grave error to assume that it is immediately available for redeployment elsewhere, either as new expenditure or to reduce revenue. This is a point that many people refuse to see; but the absurdity of the proposition is clear if one were to suggest that Crown Financial Institutions should immediately sell down assets which have performed better than what had been anticipated.
While we hope for continued good performance from the Crown Financial Institutions, the reality is that good years in terms of unrealised gains will inevitably be offset by years when such gains are sub-normal or even negative. While we should have great confidence in the skills of those managing these funds, we cannot expect returns in excess of 10 per cent to be repeated year on year. Besides, these institutions are not moneymaking ventures, but rather are dedicated to particular purposes and should be reserved for those.
One might argue that the gains that Meridian Energy returned to the Crown should have been returned to New Zealanders by way of tax cuts. But again I am confident that most New Zealanders would prefer that they be returned to them by way of maintaining the programme of enhancing our roading infrastructure.
Indeed, the current economic and fiscal outlook provides ample evidence of the flaws of the tax cut ideology which seems to drive our opponents on the right. We have an economy which has absolutely no need of further stimulation, and no need for additional public debt. Our tax system is by no means onerous compared to other developed nations. Indeed, New Zealand’s tax wedge – that is, the cost of labour to employers versus the net pay received by the employee – is third lowest in the OECD at 20.5 percent, compared to an unweighted average of 37.3 percent.
And I should like to remind all those clamouring for tax cuts that we are already giving substantial tax relief by way of our Working for Families programme. The difference, of course, is that we have targeted tax relief to families who are caring for the next generation. By next year, when it is fully underway, 350,000 families who need help the most will be getting $1.6 billion in tax relief every year. That's a total of $6.1 billion over the next four years, and it means an extra $88 a week for each family on average.
What Budget 2006 could not reflect is the outcome of the business tax review that Peter Dunne and I are engaged in. A discussion document will be issued a little later this year and implementation will occur on 1 April 2008.
Ours is an economy which urgently needs investment in infrastructure, and which relies upon a population with no tolerance for cuts in spending on core public services.
The result, as the saying goes, is a no brainer on all accounts. Under current conditions and within the forecast period, large scale tax cuts are simply a recipe for economic instability, driving up debt, choking off investment in infrastructure, and fostering bitterness and anger amongst the electorate.
So to sum up, Budget 2006 continues an approach to managing the government’s finances that is building a platform for future economic stability almost without parallel. The only countries in a stronger financial situation are those whose prosperity is based upon non-renewable resources; in other words, those countries which are literally mining their own balance sheets.
That strength will increasingly become a source of competitive advantage for New Zealand in the decades ahead, particularly as other developed nations face the cost of ageing populations and struggle with hard fiscal and political tradeoffs which we in New Zealand have largely under control.
To throw away this advantage would be foolhardy.
Fiscal stability is only one part of what Budget 2006 offers. I believe history will remember it as a Budget firmly focused on economic transformation, and in particular the task of giving New Zealand a world class infrastructure.
Transport is a major element of that. Government has nearly doubled spending on land transport already and yesterday’s Budget added further funding commitments to New Zealand's largest ever road building programme. The Government will spend $13.4 billion on land transport between 2006/07 and 2010/11. This is around $300 million more than the revenue we will collect from petrol excise duties, road user charges and motor vehicle registration.
You will recall that Transit recently announced a shortfall in funding for the projects on its draft ten year programme. That shortfall was eventually assessed to be $862 million for the entire National Land Transport Programme over the next five years. The Government is not prepared to see important roading developments, and other initiatives such as public transport, put on ice. As a result we announced yesterday that we are injecting an extra $1.3 billion over the next five years to guarantee the State Highway Programme and speed up major projects around the country.
The funding package announced yesterday covers the first five years of the programme. It includes the $800 million dividend from Meridian Energy following their sale of Australia Southern Hydro assets, and envisages that up to $1.0 billion of infrastructure bonds may be issued.
This will allow a list of high priority projects to go ahead, and will enable the government to maintain its commitment to a variety of other projects that are subject to the local share of funding being made available. These include Transmission Gully, which can now proceed to the investigation and preliminary design stage, and, once local funding is confirmed, construction could begin around 2011/12.
The other major announcement on infrastructure was the changes to the telecommunications regulatory framework, which unfortunately had to be released prior to the Budget for reasons you are all aware of. Stolen thunder is thunder nevertheless. The Government announced a set of measures aimed at boosting overall investment in telecommunications and bringing consumers the benefits of real competition.
The measures include unbundling of the local loop, provision for naked DSL, removing the upstream limit on bitstream unbundling and increasing the powers of the Commerce Commission to deal with anti-competitive behaviour in the telecommunications industry. As for how regulation might affect Telecom itself, that will depend upon the details to be worked through in Select Committee; however, it will mean at least an accounting separation of Telecom’s lines business from its other activities.
These decisions were not taken lightly; and they were driven by a careful analysis of the options, rather than merely a sense of pique at Telecom’s apparent commitment to a long defensive game based on confusing the market. The fact is that a small, isolated trading nation needs to be ahead of the game on telecommunications. In the new global economy it is rapidly emerging as the most important business infrastructure. We cannot be satisfied with being a middling player in terms of uptake and competitive pricing.
Economic transformation goes wider than infrastructure, however, and Budget 2006 continues a broad strategy of investment in increasing New Zealand’s productivity.
The Budget commits $2.1 billion of new operating funding and $1.5 billion of new capital funding over the next four years to a set of strategies to enable us to produce more value for less cost.
This includes a $64.2 million increase in programmes for assisting New Zealand companies develop their overseas markets. It includes a further injection of capital into the VIF venture capital fund of $60 million, following promising early results from the Fund’s initial rounds of investment. And it includes a substantial additional investment of $23.7 million in the Performance Based Research Fund for tertiary institutions, and $47 million into research capability and linkages between tertiary institutions and industry partners.
All of this supports the development of a research-led culture of entrepreneurialism in which more New Zealand businesses can become globally competitive.
The Budget also continues the government’s programme of human capital investment, much of it aimed at programmes with fairly immediate benefits in terms of productivity. So, for example, the Budget includes:
- Funding of $34.4 million to expand the number of Modern Apprentices to 14,000 by the end of 2008;
- A further boost to industry training of $15.6 million, now that we have surpassed our initial goal of getting 150,000 people into work-based training by the end of 2005;
- New initiatives costing $33.5 million in improving the literacy, numeracy and language skills or the workforce, aimed at making many of our lower skilled workers more productive; and
- A major investment of $8.1 million in the Gateway programme, which assists school leavers make a successful transition into the workforce.
The Budget also provides additional funding for tertiary students, in line with the government’s commitment at the last election to abolish interest on student loans for those resident in New Zealand. While that remains a substantial commitment of new funds, I am happy to say that the initial estimates have been revised downwards to the tune of $600 million, largely due to the fact that students have not flocked to increase loans in order to engage in arbitrage on the financial markets, as some of our opponents so confidently predicted.
In short, Budget 2006 adds to an already impressive set of investments in the last six years aimed at boosting the skill levels of the New Zealand workforce, and increasing our ability to thrive in the global, knowledge-based economy.
The Budget also announced an important review of regulatory frameworks to be led by the Minister of Commerce and Small Business. Regulation is an essential part of any modern economy. It is important to remember that regulation provides important protections to businesses as well as to individuals and to the national interest. Those businesses that complain about compliance issues one day can just as easily benefit from regulatory action the next.
Nevertheless, the government is committed to a regulatory system which imposes the least amount of unnecessary cost on the economy. We are not interested in the kind of slash and burn exercise that our opponents seem to favour. That just leads to unhelpful swings of the regulatory pendulum.
In our review of the RMA and a variety of other areas of regulation, we have shown a commitment to carefully extracting the bathwater, but leaving the baby intact. The review of regulatory frameworks continues that, and I trust that the business community through its peak organisations will get involved in the consultation process.
As well as being the Budget that the economy needs, Budget 2006 is also the one New Zealand voted for. The electorate gave a clear message last year that it wanted continued investment in core areas of public service, such as health, education and policing.
Hence, the Budget contains a number of important new initiatives including: improvements in child health; measures to fight the obesity epidemic; improved services to victims of crime; and the first tranche of an additional 1000 sworn police.
Budget 2006 delivers on all fronts. It is fiscally responsible at a time when the economy is heading into a brief period of downturn. It invests in the infrastructure and human capital that are needed to underpin the next period of prolonged growth. And it continues to give New Zealanders what they value in terms of public services, personal security and the means to build a strong national identity.