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Budget 2007: Saving and investing

Hon Dr Michael Cullen
Minister of Finance

Saving and investing to secure our future

Saving and investing are the centrepieces of Budget 2007, helping drive the Labour-led government's strategy of putting the economy on a sustainable footing to meet the challenges of today and tomorrow, Finance Minister Michael Cullen said today.

"We must save and invest more if we are to continue transforming New Zealand into a more dynamic and innovative economy equipped to deal with our economic, environmental and social challenges," said Dr Cullen.

"That is why Budget 2007 enhances KiwiSaver, the landmark work-based saving scheme and introduces the most significant package of business tax measures in twenty years.

"My eighth budget is the right budget for these times and one only a Labour-led government could deliver. It deals with our economic priorities without compromising our fiscal objectives and continues our progress in delivering social investments to allow all families, young and old, to enjoy a better quality of life.

"New Zealand has experienced the longest period of economic growth for three decades, with record low unemployment and strong income growth. But our economic success has caused imbalances to build up.

"Budget 2007 has been prepared against the backdrop of persisting inflation, high interest rates and an over-valued exchange rate, which are putting pressure on our productive sector. We have a high current account deficit symptomatic of our poor saving record.

"There is much this government can do and is doing. We can be supportive of monetary policy by restraining the fiscal stimulus. We can help correct structural imbalances by addressing our poor saving record. And we can raise the speed limit of the economy by encouraging a shift in the mix of growth away from domestic demand and towards saving and investment.

"That is why we are enhancing KiwiSaver, the work-based saving scheme, through tax credits. These will help Kiwis save more, far earlier in their working lives so they can secure their retirement dreams.

"If we save more, we consume less, easing inflation and so pressure on interest rates and the dollar. Greater saving deepens capital markets so allowing our business better access to the capital they need to expand and at a lower cost.

"We must also grow more globally competitive firms if we are to build a higher wage economy. That's why the government is investing $3.4 billion over four years in a package of measures designed to encourage greater business investment and improved competitiveness.

"A lower company tax rate, tax credits for research and development, changes to international tax rules and greater export market development assistance will drive investment in innovation and expansion. The measures will improve productivity and encourage more exporters to produce the kinds of products that can demand a premium in overseas markets.

"These tax changes continue the targeted measures the Labour-led government has introduced to ensure tax policies are structured to ensure the best economic and social outcomes.

"Investing in world-class infrastructure is also critical to achieve higher sustainable economic growth. Budget 2007 invests further capital to support the construction of state highways. Regional fuel taxes will also improve the ability of regions to fund priority investments. Further state funding is guaranteed with all revenue from fuel excise taxes to be dedicated to transport improvements.

"The $600 million investment in rail in Auckland and Wellington (over six years) and the additional $50 million for track improvements to the national rail network, will help develop a more sustainable transport network and underscores the government's commitment to ensure New Zealand deals with the challenge of climate change.

"This government is sensitive to the challenges we face and we must continually reassess our priorities against the pressures we face. We have therefore decided to not to proceed with indexation of income tax thresholds at this time. This would only further stimulate the economy, when what the economy needs is further investment and saving.

"It is testament to our prudent fiscal management since 1999 that this significant set of policies can be accommodated within our medium-term fiscal strategy. Gross sovereign issued debt is now only 23 per cent of GDP, compared with 35 per cent of GDP in 1999, and is forecast to remain around 20 per cent over the next 10 years.

"The NZ Superannuation Fund is now $12.5 billion, building up assets to smooth the demographic transition due to an ageing population. Net core Crown debt is forecast to be only 3 per cent of GDP, and including the NZ Superannuation Fund; the core Crown will have net assets close to 5 per cent of GDP.

"In the short term, the government continues to support monetary policy by leaning against domestic demand. The fiscal stimulus in 2006/07 is substantially smaller than forecast in the Half-Year Economic and Fiscal Update. The average stimulus over the next two years is roughly what was forecast.

"I can proudly say that Budget 2007 both supports the short-term macroeconomic environment and builds on the foundations we have built over the last eight years so all families, young and old, can enjoy a sustainable and prosperous future," Dr Cullen concluded.

ENDS

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