Cullen: Freedom from debt, freedom to prosper
7 March 2008 Speech Notes
Freedom from debt, freedom to prosper
Speech to Tax Agents Institute of New Zealand Annual Conference, Napier
Hello and thank you for that introduction.
The people in this room are more aware than most of the success the New Zealand economy has enjoyed over the last eight years. You know that our economy is in much better heart than it was at the turn of the century, because it is the businesses you serve, and the increasingly strong and vibrant workforce those businesses rely on that have driven our growth.
It is the strength and ingenuity of our small business community, of which you are all a part of, that has continued to be the face of a dynamic and innovative Kiwi economy.
The Labour-led government is proud of the role we have played in responsibly managing our economy and investing in the drivers of growth. But we know that New Zealand’s economic growth this decade – the longest period of growth since World War II – is an achievement of intelligent partnerships.
Today I will talk about that growth and what it means about the state of our country. And yes, in addressing a group of tax agents, I will talk about tax cuts – both the business tax cuts that come into force on 1 April and the programme of personal tax cuts I will announce in the Budget.
But while I think we all deserve to celebrate the success of recent years, I also know that we have a responsibility to honestly address the challenges we face today.
The news on the global economy is cloudy at best. New Zealand cannot expect to be immune from a global slowdown. And in fact, New Zealand families are already feeling the effects of global problems, especially from high food and energy costs. These costs are biting at a time when families are spending more of their disposable income on mortgage repayments than they have in the past.
Our dollar is hovering around record highs against the greenback, putting significant pressure on exporters. To complicate matters further, drought conditions through much of the country are taking a toll not just on farmers, but on some of our provincial economies.
In other words, we cannot allow the fact that we are all much better off in real terms than we were eight years ago to be cause for complacency today. We have real challenges. We have serious issues to tackle. And we have a genuine obligation to be honest about what we can deliver.
It is against this backdrop of success and of fresh challenge that I want to focus on one of the central policies of Labour’s economic platform. I have often been criticised for running what are perceived to be large surpluses and for focusing too much on lowering crown debt. When our economy has been on a roll, it has been politically difficult to encourage restraint and a focus on the long-term.
But what I want to stress today is that while lowering debt and investing in Crown assets has not been headline grabbing work, it has been among our most important achievements.
It has always been my belief that those who advocated increasing our debt levels at a time when we were making huge investments in infrastructure and services without borrowing, were at best misguided.
But today, when we find ourselves confronting a slowdown from a position of strength, I think the true recklessness of those who called for high debt – and who continue to do so today – has been exposed.
It is the Labour-led government’s commitment to keeping our debt levels low and our refusal to borrow for today’s consumption that best demonstrate our belief in what New Zealand is truly capable of.
We have real ambition for New Zealand and our economy. And we know that by refusing to burden our children and grandchildren with a legacy of debt, we are removing one of the biggest obstacles to realising that ambition.
An economy rebuilt
Eight years ago, Labour was elected to government at a time when our economy was struggling to emerge from a period of recession and stagnation.
Unemployment remained stubbornly high, regional economies were in serious decline, backward labour laws led to a caustic industrial relations environment. Those are evidence of an economy in failure.
But it was not just the economy that was struggling – middle and low income families were increasingly being left behind.
Child poverty rates peaked at 1 in 3. Disease and overcrowding became a reality in our community as 13,000 state houses were sold off and market rents were introduced, public services crumbled, and superannuation rates were cut.
Our job as the newly elected government was to prove that we could work with business, with workers, with community leaders, and with families to turn this around.
The task was not easy, there was scepticism from some, and we did not always get it right.
But there can be no question that together, we have rebuilt this economy.
New Zealand enters this period of global weakness still enjoying its longest period of economic expansion since World War II.
Our unemployment rate stands at a record-low of 3.4 per cent compared with 4.1 per cent in Australia.
Over 370,000 new jobs have been created since 1999 and workforce participation is at an all time high at 68.8 per cent compared with Australia’s 65.2 per cent.
Profits for firms are up 13 per cent in real terms, while real, inflation-adjusted wages are up 15 per cent.
Work stoppages have fallen year after year.
Household incomes are up 25 per cent in real terms and our regional economies are thriving.
The growth in the wage gap between Australia in New Zealand has fallen from over 50 per cent during the 1990s, to 0.4 per cent since 1999 – yes we still need to catch up, but we have stopped the rot.
Child poverty rates are down, the cost of seeing the doctor has been halved, superannuation rates have risen, and public services are thriving.
Together we have made this economy stronger and we have made this economy fairer.
And in 2008 we will continue our work.
In a few weeks time, we will implement major policies for business, workers, and families.
On 1 April, we will cut the company tax rate.
We will introduce research and development tax credits for business.
We will increase the minimum wage to $12 an hour.
We will facilitate employer contributions for KiwiSaver with the tax credits to support them – on this point I want to acknowledge the work businesses, especially small businesses, are putting in to make this happen. And we are rapidly approaching 500,000 people in KiwiSaver.
In May we will deliver a budget that will demonstrate that we have fresh ideas for our economy, and for supporting our families and communities. And while the Budget will be forward looking, it will also be a budget for these times. It will take the challenges we face seriously and will be mindful of the inflationary pressures on our economy.
We have worked hard to be credible managers of the New Zealand economy and we have never surrendered our commitment to our long-term responsibilities. We govern not just for today’s New Zealanders, but for tomorrow’s.
A test for tax cuts: borrowing and debt
It is that commitment to long-term, sustainable prosperity that sits behind Labour’s four tests for personal tax cuts. They are not tests about ruling tax cuts in or out. I will announce personal tax cuts in the Budget.
The tests are about how to design responsibly a programme for personal tax cuts.
Labour will deliver personal tax cuts because it is fair – money that we do not need to meet our obligations to New Zealanders should not be held indefinitely in crown accounts.
But we will not allow our economic platform to be eroded in the process.
We will design and introduce a personal tax cut package that does not require cuts to services to pay for it.
We will design a programme that does not put extra pressure on inflation.
We will design a programme that does not lead to growing inequality in our society.
It is the fourth and final test that I want to pay special attention to today, that is that the Labour-led government will design and deliver a personal tax cut package that does not require borrowing to fund it.
When Labour entered office in 1999, gross government debt stood around 35 per cent of New Zealand’s Gross Domestic Product.
At $2.3 billion per annum, the finance costs to service that debt every year were nearly 7 per cent of the government’s annual budget.
The high levels of government debt meant that access to capital was more expensive for firms than it would have been had the Crown been carrying less debt.
The high levels of debt also made us as a society more vulnerable to offshore economic shocks. A decade ago the Asian financial market weakness was used as an excuse to cut the rate of superannuation.
But the high levels of debt were worrying most of all for what they said about New Zealand’s future. With a looming demographic shift towards a much older population, we knew that our high level of debt was potentially only the beginning. The ongoing challenge of extra health services and providing superannuation to a growing population of older New Zealanders meant the pressure to borrow – or to cut services or significantly raise taxes – would only grow year after year from around 2020.
We were determined to turn this around. And we have been successful.
We have reduced our national debt to a prudent level of less than 20 per cent of Gross Domestic Product.
We have reduced the proportion of our GDP spent just on servicing debt by over 30 per cent.
We have invested heavily in the New Zealand Superannuation Fund to secure the future of the universal pension from age 65 and we have reversed the cuts in the value of New Zealand Super made by National.
And the Fifth Labour Government has become the first government in New Zealand history to secure a net positive financial asset position.
All of this was achieved at a time when we invested heavily in health and education, in roading and public transportation, and in providing over $4 billion per annum in tax relief for families, business, and savers.
We have invested in success – success for today and success for tomorrow. But we have seized an opportunity to prepare for the inevitable rainy days.
I know better than anyone that the significance of these changes is not one that always excites the media or the public.
But today, I hope that they can at least be appreciated for what they mean about our ability to respond to any deterioration in our economic position.
We are not a government that will have to cut the floor of superannuation in a downturn, like the previous government did on 1 April 1999. We are not a government that has significantly weakened its ability to prevent a downturn by throwing itself into massive debt, partly to pay for ill-timed personal tax cuts, like the United States Government has in recent years.
We are a government that today can allow automatic stabilisers to work in the nation’s interest – Crown debt that has fallen further than we could have imagined in 1999 can rise in a downturn without approaching the risky levels of years past.
And we are a government that will have options if and when we need them to better protect New Zealanders from the harsh edges of a slowdown – not punish them further to protect the Crown financial position as our predecessors were forced to because they cut personal taxes too far while carrying too much debt.
Yesterday’s release of the latest Crown financial statements showed that the global slowdown is having a significant effect on the headline operating balance. This figure has become somewhat infamous in recent years, especially when it reached $11.5 billion in surplus.
Commentators and my political opponents looked upon my constant call for caution when discussing the headline surplus with some derision. At one point, my opponents called for me to deliver a tax cut package equal to the total headline operating surplus – indeed Mr Key repeated this call in Parliament on Wednesday. I always maintained that we should not fund current consumption out of the temporary gains being made by our long-term assets like the New Zealand Superannuation Fund.
Today, when those losses on international markets have sent the headline balance into deficit – along with a decline in tax revenue – I believe that the wisdom of that caution can be seen with greater clarity. In May, I will be able to deliver a solid Budget. I will not have to cut superannuation like my predecessor Bill English did. I will be able to maintain investments in New Zealand’s future success. And yes, I will be able to announce a programme of personal tax cuts.
None of that is accidental. In the face of a global slowdown, this is a government that can still meet its obligations to New Zealanders and invest in the success of our country. Every day in government is about making choices – we have made choices for the future and kept our eye on the long-term.
What is worrying is that despite all this evidence, the champions of borrow and hope economics have not yet been satisfied.
It has been suggested by some that the government should raise Crown debt to 25 per cent of GDP. This proposal is not genuinely linked to a desire to provide more services or invest in infrastructure – indeed on both counts most reasonable people agree it would be difficult to invest more than the government currently is.
Instead, the idea of extra borrowing is usually linked – in reality, if not explicitly – to a desire to provide larger personal tax cuts than would otherwise be possible for electoral gain.
If such a move is wrong for the short term it would be disastrous for the long-term. It is very risky.
In the short-term, the immediate effect of increasing borrowing to 25 per cent of GDP would be to significantly raise all of our debt servicing costs, including for businesses and homeowners. The proposal would cost $700 million a year in finance costs for the Crown alone.
Let’s put that into perspective. That is roughly the amount of new money the government has invested in the health system for each of the past two years.
In the short and medium term, the effect of such a plan would be to make our current account position weaker at a time when we desperately need to make it stronger.
In the medium to long term, the effect would be to make us more vulnerable to global shocks, when this year we are all learning the benefits of developing a fiscal cushion.
But it is the long-term effect of such a choice – a political choice – that makes it most baffling.
Today, at a time when we are investing in the Superannuation Fund and when we have moved to free ourselves from the burden of debt, the Treasury is still projecting a massive increase in government indebtedness over time.
In its report on New Zealand’s long-term fiscal position, the Treasury looked at a scenario that assumed government spending would rise by 7.5 per cent per annum, a not unreasonable assumption. Under this scenario, by 2050, the Treasury projects that our demographic challenges and the increasing cost of health services will see Crown debt rise to 100 per cent of GDP. I am somewhat sceptical of this projection as I do not believe any responsible government would sit by and let this happen, but I do understand how hard it will be to lower the rate of growth in social spending.
If it occurs, that would mean the government would be so burdened by debt servicing, that meeting our obligations to New Zealanders would be nearly impossible.
It would mean that the cost of borrowing for private firms could be significantly higher.
It would mean that homeowners would face additional pressure as they sought to repay their mortgage.
It would mean we would be significantly more vulnerable to global downturns and would have very little room to manoeuvre to protect our vulnerable citizens.
The Labour-led government will deliver personal tax cuts to New Zealanders. These will be a dividend from our success as a society. They will build on the $4.5 billion a year in tax relief we will deliver from 1 April to families, to businesses and to savers. They will, I hope, provide some comfort to families struggling to deal with global rises in food, transport, and electricity prices.
But our personal tax cuts will be paid for by today’s taxpayers, not tomorrow’s.
We will not allow our tax cuts to start us down a road where our grandchildren are burdened with debt that enabled the consumption of their grandparents.
Because the truth is that we are proud that we seized the opportunity provided by the longest expansion since World War II to lower our level of debt.
We are proud that if our economy takes a hit from the global slowdown, we are in a position to protect New Zealanders from it, and that we will not have to cut benefits and superannuation as a result.
The truth is that freedom from debt is the freedom to prosper.
And in this year where we have a significant choice to make about our future direction, the Labour-led government will argue strongly that our economy deserves a chance to succeed not just today, but sustainably into the future.