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Cullen: Address to Meeting in Palmerston North

Thursday 8 June 2006

Hon Michael Cullen: Address to Public Meeting in Palmerston North

Te Manawa Science Centre, 396 Main St, Palmerston North

Today I want to talk about the Budget and what it means for regional economies and regional communities.

Unfortunately, a number of the key messages in the Budget were blurred somewhat due to the fact that some in the media have a very one-eyed view of what Budgets should be about.

Budgets are in fact about how the government is managing the economy, investing in the future and maintaining quality public services, like health, education and policing. But listening to some media coverage, one could be mistaken for thinking that they are a kind of extended soap opera in which the reluctant male lead must overcome his obsession with prudence and restraint, and eventually come to embrace tax cuts.

What makes good journalistic copy does not necessarily make good economic management.

I want to talk about tax relief later on, but it is important to see the bigger picture, and understand the challenges we face, both economic and social, over the next few years. The Budget is about much larger issues than whether or not to drop the top tax rate.

The New Zealand economy today is around 20 percent larger than it was in 1999, when the Labour-led government took office. We have enjoyed one of the longest periods of sustained economic growth in living memory, and it has enabled us to do two things:

- It has enabled us to improve the living standards of ordinary households, through creating over 300,000 new jobs, delivering better incomes and improvements to public services like free doctors visits and more accessible childcare.

- And it has enabled us to start investing in the things that will secure our future. Those investments include building up our essential infrastructures, supporting our exporters, focusing our scientific research on key areas of competitive advantage, and placing our public finances on a more stable long term footing.

I say ‘start’ investing, because many of these investments require sustained attention over a long period of time. For example, in the 1990s we fell seriously behind in maintaining infrastructures like roading. The Labour-led government has increased annual roading expenditure by almost double; and yet it takes many years to regain the lost ground and to bring our road network up to the expectations of a growing population and a growing economy.

We cannot leave the job half done.

Those good economic times are ending. We are seeing a slowing rate of economic growth, due to declining terms of trade (especially from the rising oil price), lower net migration, and a dampening of demand in the latter half of 2005. GDP growth is expected to 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.

It is perhaps unfortunate that government’s revenues show a lagged effect, so that, despite the weakness in the economy, the Crown accounts showed another healthy operating surplus in the year to June 2006. If this is the only figure we look at, we get an unrealistic view of the fiscal situation, and we might be tempted to think that the government’s finances are more robust than is actually the case.

The fact is this is the last time we will see a significant surplus for quite some time. We are moving into several years when our expenditure will exceed our revenues. 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.

It is obvious that any tax cuts now would simply make this situation worse. For a start, they would require severe cuts on expenditure on public services and infrastructure.

And secondly, with the economy running near full capacity, with skills shortages in many industries and with our large current account deficit, any tax cut worth having would likely fuel inflation and worsen the existing imbalances from which our economy is suffering.

In fact, what is remarkable about the Budget is not the absence of tax cuts, but the fact that despite the economic downturn we are able to sustain quality public services, and even put additional resources into some key areas, such as combating obesity, and reducing student loan debt. We are putting an additional $9.6 billion into the services that New Zealanders value over the next four years, and spending an additional $2.7 billion in capital.

A major component is the extra $1.3 billion over the next five years to guarantee the State Highway programme and accelerate some critical roading projects. While the major metropolitan areas get a large share of this expenditure, including improvements to Wellington’s Western Corridor, a number of important regional projects will also be fast-tracked.

We are also continuing to invest in initiatives that propel us towards a high value knowledge-based economy. For example, there will be a $100 million increase in research and science funding over the next four years, including $81 million to support research in key industries and $16 million to accelerate the commercialisation of research. All told we are spending $630 million a year on research, science and technology, which is a 65 per cent increase since 1999.

The Manawatu is of course home to some very successful bio-industries, many of whom have research links to Massey University. Our aim is to strengthen these kinds of clusters, so that we produce more globally competitive firms.

In the same vein, Budget 2006 puts $64.2 million more into market development assistance, assisting New Zealand firms crack key overseas markets.

Education and skills training are also important areas for investment. 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.

So Budget 2006 makes major commitments to strengthen the key drivers of our economy, so that when we begin to move out of the current downturn we will be in a better position to sustain another period of high growth.

Alongside of strengthening our economy, the Budget also addresses issues that were put before the electorate in last year’s election and raised by our support parties during the negotiations to form a government. These include eliminating interest on student loans, extending the Working for Families programme, and additional police.

Coming back finally to the question of tax, I hope it is clear that one should not see this in the abstract. Tax issues and spending issues are all about what our priorities are, and what New Zealanders want their government to deliver.

As I have explained, the conditions are not propitious for large scale tax cuts at the moment. However, one should not forget that the Working for Families programme is providing significant tax relief to over 300,000 New Zealand families to the value of around $88 per week, once it is fully implemented. The only difference between this and the kind of tax cut our opponents are advocating is that Working for Families targets tax relief to families with dependent children.

National’s tax cuts, on the other hand, would deliver large gains to those on high incomes, and relatively little to ordinary working families. At the end of the day, it is a question of values; and I am confident that New Zealanders value support for families, value easier access to health care, and value investment in education and roading. This, ironically, was the most significant finding of a Colmar Brunton poll released last week, which was trumpeted as proving that New Zealanders wanted tax cuts.

What the poll found was that, when voters were told that the government had an $8.2 billion operating surplus, they tended to believe that the government has scope for cutting taxes. Had it been made clear to them that this surplus is due to evaporate over the next few years, I suspect many would have taken a different view.

What was more interesting was that, when asked whether they favoured tax cuts over spending on core public services, only 25 per cent opted for tax cuts as their first priority. Three-quarters of those polled said that, even if tax cuts are possible, their preference is for the government to spend the money on roads, health, and so on.

In other words, there is a largely silent majority out there who recognise that this government has presided over five years of solid economic growth, that has brought widespread benefits to the community. This year’s Budget is a continuation of that programme, and I firmly believe it has the strong support of a majority of New Zealanders.

Thank you.


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