Cullen - Independent Financial Review Relaunch
Hon. Michael Cullen
24 May 2006 Speech Notes
Address to the Independent Financial Review Relaunch Breakfast
Shed 5, Queens Wharf, Wellington
First of all let me congratulate Fairfax New Zealand on the relaunch of the Independent Financial Review. A healthy economy runs on fast and accurate business information. It is very heartening to see something of a renaissance in business journalism in New Zealand after a rather sad period characterised by a limited range of views and some woeful analysis.
I look forward to the Independent Financial Review providing the New Zealand business community with the kind of trenchant, undogmatic analysis that we need. We certainly need more of that and less of the pseudo-scandals in politics and business that we often have had.
Today I want to talk about last week’s Budget and pick up on a few of the themes that have dominated the media coverage, and a few that are beginning to receive more attention.
Budget 2006 confirmed, for those who ever doubted it, that it is very hard to make wise fiscal management appear sexy. I had considered changing my habit of delivering the Budget in new suit. Instead I could have given it stark naked. But that would simply have encouraged the DominionPost to repeat last year's headline: "Is that it?"
No one, it seems, gets a shiver up their spine at the news that we are in a net positive financial position, or that we will achieve our long term gross debt target of 20 per cent of GDP by the end of the decade.
It seems that to earn the label “bold” or “visionary” from some of our media a Budget must be either profligate or cruel or both. This is something of a hangover from the 1980s and 1990s when Budgets were all about giving some form of shock treatment to the economy, a sort of economic ECT to overcome depression.
The irony is that finance ministers in that era would have given their eye teeth to have been able to deliver a Budget like last week’s one, which cements into place a stable fiscal platform for decades to come, alongside some strategic investments in infrastructure and human capital.
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.
However, the context for this slowdown is an economy that has increased in size by over 20 per cent since 1999. 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 – well ahead of most in the OECD.
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, 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.
Budget 2006 shows that we have within our grasp the long-term stability that the economy needs:
• We remain on track to achieve our long term gross sovereign-issued debt target of 20 per cent of GDP by the end of the forecast period; and
• 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.
On the expenditure and revenue side, however, we are facing some difficult years, despite the last flush of golden weather in the current year. 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.
Meanwhile the operating surplus this year 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.
Of course, it is a grave error to assume that an operating surplus is immediately available for redeployment elsewhere, either as new expenditure or to reduce revenue. This is a point that many people refuse to see.
It is somewhat bizarre that the media have not prodded the proponents of the tax cut ideology harder, and forced them to divulge exactly how they would make the difficult tradeoffs involved in fiscal management. The fact is that fiscal policy is an engine with a fairly small number of moving parts.
In a slowing economy, tax cuts of the magnitude my opponents talk about require one of three things:
• Cutting back capital expenditure on things like roading; or
• Cutting into core government services such as health or education, or reducing funding for things like scientific research; or
• Taking on more debt.
Instead, they are asking New Zealanders to follow the example of the Queen of Hearts in Alice and Wonderland, and believe six impossible things before breakfast. It is hypocritical to say ‘me too’ to the government’s initiatives on roading, on the Superannuation Fund and on additional police, and yet call for tax cuts sufficiently large to bring the take home pay of Kiwis into line with that of Australians. We can’t have our cake and eat it too, and those who deliver that kind of message deserve to be shot, figuratively speaking.
The fact is we have an economy which has no need of further stimulation, and no need for additional public debt, both of which would result from large scale tax cuts. Some chose to ignore this, but I am much heartened that Standard & Poor's in a post-budget endorsement said we had got that the balance right and that any relaxing of fiscal discipline would be unwise.
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. 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. Currently Inland Revenue's tax forecasts are quite a lot more optimistic than Treasury's. Obviously we have to base our decisions on Treasury's numbers. However, I am hopeful we will have the fiscal headroom to make some meaningful changes to the business tax regime.
Dr Brash seems to suggest we should cut taxes just because Australia did. Well, if the recent Australian budget was so good why then did the Australian Labour Party rise three points in the latest opinion poll while the government fell three points? My Labour colleagues there are now eight points ahead. The same AC Nielsen poll showed that 68 per cent of respondents wanted spending on services and not tax cuts.
Consumer sentiment has also dropped in Australia after the budget thanks to rising petrol prices and a pre-budget hike in interest rates. Tax cuts could add further pressure on interest rates there, very quickly extinguishing any gains in income for most low to middle income earners with mortgages and other debts.
As I said, we think we have got the balance right. But fiscal stability is only one part of what Budget 2006 offers. Restoring a growth rate faster than our trading partners means being firmly focused on economic transformation, and in particular ensuring New Zealand has world class infrastructure and a highly skilled workforce.
Transport is a key element. We have more than doubled spending on land transport and Budget 2006 adds further funding commitments to New Zealand's largest ever road building programme. The government will spend $13.4 billion on land transport over the next four years - around $300 million more than the revenue we will collect from petrol excise duties, road user charges and motor vehicle registration.
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.
We are also taking action on the information superhighway with our decision to unbundle the local loop. We want more investment, more competition and cheaper, faster broadband. We cannot be satisfied with being a middling player in terms of uptake and competitive pricing.
Budget 2006 also 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 continue the transformation of our economy.
This includes a $64.2 million increase in programmes for assisting New Zealand companies develop their overseas markets, a $60 million injection of capital into the VIF venture capital fund, 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 – an expansion of Modern Apprenticeships, industry training and a new campaign to improve literacy, numeracy and language skills.
In short, 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. And, to mark this event, all we ask for is fair facts from Fairfax.