Cullen Speech: Pre-budget address to the CMA
15 May 2008 Speech Notes
Hon Dr Michael Cullen
Embargoed until 12:30pm
Pre-budget address to the Canterbury Manufacturers Association
Hello and thank you for that introduction.
It is a pleasure to be back here in Christchurch giving my annual pre-Budget speech to the Canterbury Manufacturers Association.
Next week I will deliver my ninth Budget – this will be the first time a single Finance Minister has delivered nine consecutive Budgets since Walter Nash did so through the Second World War.
Over these past nine years, workers, business, and the government have achieved the longest-period of growth since the end of that World War.
Together we have fundamentally changed expectations of the level of employment that can be achieved in our society.
We have lifted tens of thousands of children out of poverty.
We have created a more balanced industrial relations environment leading to fewer work stoppages.
We have seen a resurgence of regional economies.
And we have lifted wages for workers and profits for firms.
These are not the achievements of just – or even primarily – the Labour-led government. They are the achievements of the people in this room, of the firms who have invested in our economic success, and of our nation’s workforce, who have shown remarkable strength and resilience these past eight and a half years.
Together, we have emerged from two decades of great economic turbulence and social disharmony with an almost unprecedented platform for future prosperity.
We have moved past the reckless statism of the late 1970s and early 1980s that indebted us all.
We have moved past the late 1980s’ and early 1990s radicalism for radicalism’s sake that undermined our egalitarian tradition.
We have moved past the broken promises of the 1990s that saw an unprecedented attack on the social safety nets in our society.
We have moved past all of this. And we have used the dividends of eight years of growth to invest heavily in infrastructure and services, in tax cuts for families, business, and savers, and in support for older New Zealanders both today and for future generations.
We have restored the place of fairness in our economy, by proving that the work we undertake to build up public services, support low-income families, and reduce poverty will not come at the expense of growth, but will instead reinforce it.
We have shown that the New Zealand economy must be fair to be strong. And in so doing, we have all created a platform for future strength that would have been unimaginable eight and a half years ago.
In my comments today, I will outline what next week’s Budget will do to support the Labour-led government’s plan for the future of our economy.
But first, I must acknowledge that after eight and a half years of strong growth, we do today face very significant challenges in the economy.
Last December, I released the Half Year Economic and Fiscal Update along with my 2008 Budget Policy Statement. At the time, commentators focused almost exclusively on what the two documents meant for the size of the tax cuts that were under development.
Glossed over were the serious notes of caution, delivered both by the Treasury and myself around the considerable uncertainty facing the economy.
From October last year, it was becoming clear that the issues surrounding subprime mortgages in the United States were more serious than many had expected. There were concerns that the resulting credit crunch would have an international impact and that markets around the world would be hit in some way.
There were also signs that continual growth in commodity prices – especially food and oil – were starting to squeeze household budgets and put pressure on our headline inflation rate.
In short, even while we continued to enjoy a remarkable economic expansion and our unemployment rate continued to fall, there were major uncertainties in the months ahead.
By the time Parliament resumed in February, these global uncertainties started to look like serious challenges for the New Zealand economy. The US Federal Reserve’s aggressive action to stimulate markets made headlines here and shook confidence around the globe as people began to comprehend the scale of the problem. The bailout of Bear Stern only contributed to a growing mood of unease.
The global challenges manifested themselves in direct pressure on households as food and petrol prices started to bite hard on disposable income just as the credit crunch was making mortgage repayments more expensive.
To complicate things further, farmers in several important regions started the year battling drought, and the negative impact on GDP was expected to be significant. As manufacturers and exporters, you will know first hand that the collapse of the US Dollar was curbing our economic potential.
As Minister of Finance, the situation was not an easy one to confront. Here we were in New Zealand, confronted by not inconsiderable challenges, challenges that were not of our making, and challenges that accumulated very quickly.
There was clearly nothing the government could do lower to the cost of petrol or food – other than reach for a policy gimmick like cutting GST on essentials to make people think prices could come down. There was nothing I could do to reverse the high-debt policies that had driven down the value of the US Dollar.
We were certainly not able to bring rain to the regions that needed it.
And with mortgages being driven up not just by the Official Cash Rate, but by the continued fallout from the credit crunch, there was fear that even the considerable monetary policy headroom of the Reserve Bank would not be able to provide quick relief.
Despite the global nature of our challenges, my Cabinet colleagues and I have over the past months analysed the situation thoroughly. And in so doing, the Labour-led government has rejected the notion that as a nation New Zealand is powerless in the current climate.
The truth is that we always have choices on how to respond, both when times are good and when we are faced with challenge.
The truth is that for Labour, we are not in government just because of our ambition for sunny days, but because we know that we are not immune to global shocks, and that we have firm views about how to navigate our way through downturns.
So in next week’s Budget, what you will see from this government is a real response to the situation we are facing. It will not involve gimmicks that I have already alluded to and it will certainly not be sold as a silver bullet economic rescue package, because it is not possible to create one.
It will be an honest reflection of our economy’s needs and a reflection of the values that Labour brought to government eight and a half years ago. It will be grounded in the New Zealand tradition of economic fairness and responsibility.
The Labour-led government’s plan for the economy that I will announce in next week’s Budget consists of three broad elements:
It will provide relief for the workers who are finding it
difficult to make ends meet
It will reaffirm the government’s commitment to strong investment in infrastructure and public services and support – a firm rejection of the failed boom and bust, pro-cyclical policies preferred by the opposition
And it will outline a genuine plan for the future of our economy, looking through this cycle towards greater sustainability and greater prosperity for all our families
Tax relief for workers
In my comments today, I will not dwell for too long on the tax relief that the government will announce for workers. In previous speeches, I have made it clear that while we understand that relief is necessary, we know that the last thing workers want is an irresponsible tax cut programme that leads to cuts in services or higher interest rates.
I have re-affirmed that the tax cuts will be delivered without seeing the government abandon our goal of keeping debt at around 20 per cent of GDP. I have said that they will be fair and will not lead to rising inequality.
It is true that tax cuts cannot be huge, not only because a large tax cut programme would be irresponsible fiscally, but also because the Budget will make it clear that revenue is down on forecast.
So I will leave my comments on tax cuts to that, reaffirming that they will be responsible and that they will be as fair as they can be to all workers.
Fighting cycles, not encouraging them
The second element to our plan for the economy that will be clear in the Budget is a rejection of the cyclical – and often cynical – boom and bust policies that have hurt too many New Zealanders in past slowdowns for no economic gain.
Too often in New Zealand the conventional wisdom has been that when times are hard, the government should retreat from the economy as quickly as possible and wait for the upturn before climbing back into the provision of services and support.
I believe that the logic behind this is fundamentally flawed. While we must be mindful of inflationary pressures, we must also be mindful that when growth is slowing a slashing of government services and support can lead to a genuine contraction of the economy while hurting the most vulnerable.
Let me be clear here that I am not drawing a direct comparison with the cuts the new Labor government in Australia has unveiled in their Budget. What we are seeing across the Tasman is the consequence of year after year of tax cuts and year after year of spending increases leading to inflation rates considerably higher than here at home.
What I am rejecting is the policy of our current Opposition, and the policies that caused so much pain for so little benefit in the late 1990s.
When New Zealand was hit by the Asian economic downturn, the first response of the government of the day was slash and burn. The centrepiece of their “Policies for Progress” plan was a cut in the floor of New Zealand Superannuation. Investment in health, education, and infrastructure were all allowed to stall.
Today we are seeing those same calls yet again. When the first jitters appeared on the NZX, there were immediate calls for spending cuts. Commentators have repeatedly called for me to hold all new investments.
Despite the spin these calls are not genuinely related to a desire to fund bigger tax cuts. Most reasonable people realise that the size of our programme is not just limited by available revenue, but also by inflationary pressures.
Instead, I believe what we really see behind these calls is opportunism. Despite New Zealanders being overwhelmingly supportive of social provision and public services, there is still a core of economic fundamentalists who feel that the project of the late 1980s and 1990s is incomplete. For them the role of the state is still too large and the march of the market has not gone far enough. They have created a narrative suggesting that some sort of immutable law of economic management means that in a downturn you cut first and ask questions later.
I reject that.
I reject the notion that a government should ever cut support for people when support is most needed.
I reject the idea that at a time when the Reserve Bank is trying to encourage firms to keep investing that the government should send the opposite signal and halt its investments.
I reject the premise that the policies that have supported growth since 1999 are somehow now the policies that will keep us from picking up the pace in the months and years to come.
I reject the notion that the failed policies of the past are those that can be trusted to take us through these uncertain times and into the future.
And today, as I reject the calls for spending cuts and I can also deliver relief when we need it. I can do this because for the past eight and a half years I have rejected the calls of these same cyclical champions to run big deficits, to borrow more, and to not put money aside for a rainy day.
It has not been politically easy during the good times to talk about the need for saving for the future, to talk about the automatic stabilisers in our economy, and to prioritise tax relief for families, business and savers.
But today, when other nations are forced to make cuts, and when the battle against inflation has been surrendered in other economies by heavily indebted governments, I hope that the rationale of the Labour-led government’s eight and a half years of fiscal responsibility can be seen more clearly.
Because this year as we face difficulties that are not of New Zealand’s making we will do what we can to fight against the impact of the current economic cycle. We will not surrender to it.
We will deliver tax relief for workers. And we will also invest strongly in the services and support New Zealanders need.
This year we have boosted superannuation, not cut it.
This year the Budget will include $750 million in new health investments and more funding for education and social services, not a roll-back on previous commitments.
This year we will see a large injection in capital spending, to keep building the public infrastructure our communities need.
As with our tax relief programme, our plans for strong investments this year will be responsible. We are not going to play a game of chicken with inflationary pressures.
But the point I want to stress is that our ability to pursue this programme of relief and investment today is not accidental. It is by design.
Plan for the future
And today as we fight against the harsh edges of this economic cycle while maintaining our investments, we can and must continue to plan for the future.
As we see economic pessimism on the rise, real indicators start to turn the wrong way – not least of all last week’s disappointing job figures – and households under pressure, the last thing we can afford is to take our eye off the long-term.
The truth is the global situation will improve. And when it does, New Zealand needs to be standing on its feet and ready to start grasping the opportunities in front of us.
This focus on the future of our economy is very much at the centre of my ninth Budget.
It is a focus on improving what every worker is able to get out of the economy and about what they are able to contribute.
It is a focus on what our firms can expect from the government and what New Zealand must expect from our businesses.
It is a focus on sustainability, about what we can and must do to fight climate change and compete in a global economy where a premium is placed on environmental credentials.
I will leave most of the detail for my Budget next week, but there are several aspects of our plan for the future of the economy that I can share with you today.
The first is something you will have heard a lot about over the past 10 days; the government’s buy back of New Zealand’s rail system. The Budget will reflect the $665 million capital investment we will make on handover of the rail system back to New Zealanders on 30 June.
We bought back the rail for two main reasons. The first is that it was clear that for years to come running the rail system was going to require government subsidies. These subsidies were not inconsiderable. What some of the critics seem to have missed was that in addition to having to make up Toll’s shortfall on the track access agreement, they were planning to seek $100 million in government investment for capital spending on new rolling stock just in the year ahead.
We were simply not willing to indefinitely subsidise the profits of an Australian firm to the tune of hundreds of millions of dollars with no end in sight. Yes, they made a profit last week, but the profit made pales in comparison to the long-term profit they would have extracted from New Zealanders for generations by way of taxpayer subsidies.
The second reason we bought back the rail is that it is central to the more sustainable economy we must build. Rail is an efficient mode of transport with great potential to reduce pressure on our roads, make our highway network safer, and reduce the carbon footprint of our wider transport sector. Many nations are turning to rail as a central element of 21st century economic infrastructure. And while Toll must be applauded for increasing volumes on rail, the government and many in the freight and transport industries know that there is much more than can and must be done.
In the weeks ahead, I will announce more detail of how we plan to operate the rail business through the transition period with Toll and into an SOE structure. As we are still in negotiations there is not much I can say at present, but there is one final point on rail I would like to stress.
Over the past week and a half there has been a huge outpouring from New Zealanders and businesses supporting the buy back of our rail system. I have been concerned though that some political leaders have criticised these New Zealanders for suffering from some nostalgic longing for a golden era of rail travel in years gone bye.
Not only is this patronising and elitist – it is totally out of touch with the economic realities of what the government is doing.
Behind the criticism of our plan for rail has been the constant refrain that the private sector is better at running large enterprises than the public sector. That view is the truly nostalgic one in this debate.
I am not saying for a moment that the Crown is a superior business operator all the time – I do not believe that is true. But anyone who has seen the resurgence of Air New Zealand, the profits turned by Kiwibank and the efficient operations of our state energy companies will know that we have come a long way since the days of the old New Zealand Railways under Sir Robert Muldoon when it was used as an unemployment sink.
We will run a highly efficient rail business and it will deliver serious dividends for our economy.
But it is not just a modern rail system that the Budget will invest in for the future. We will also take the next steps in our plans to bring faster, cheaper broadband to New Zealanders.
We all know that the real impediment to the roll out of broadband in New Zealand was for years the anti-competitive behaviour of the incumbent telco. It took time, but the government has acted to break the anti-competitive cycle and has now reached agreement with Telecom on a separation plan.
We can now take the next steps and the Budget will include serious investments in improving broadband, lifting our focus on priority areas in the economy, and in improving our international connectivity.
But we will not get caught in a bidding war with the opposition on this issue. And we are not about to go back and prop up a monopoly once again to roll out more broadband just as we are emerging from an anti-competitive period that has cost us so much.
The broadband package that David Cunliffe will announce will promote competition, not undermine it.
The focus on the strong future our economy must have will also be apparent in next week’s funding announcements on innovation.
This will include the largest ever investment in science and research including the New Zealand Fast Forward Fund.
The Budget will also announce final decisions on the international tax regime and an ongoing programme of tax simplification measures that will benefit the small business community.
The Budget will see the government make a further contribution to the economy-wide efforts to boost productivity. Last year we saw the strongest productivity growth we have enjoyed this decade. But we know that we have more work to do lift productivity if we are going to give New Zealanders the incomes they deserve, make our firms more successful, and grow our economy while fending off inflation.
The government can only do so much to help the economy lift productivity rates.
One thing we have already started is a revitalisation of skills training. Through Modern Apprenticeships and a huge surge in the numbers of people involved in industry training, we have already seen more skilled workers entering the workforce.
This year we will build on these efforts through the integrated Skills Strategy we have developed with Business New Zealand and the Council of Trade Unions. Our focus will be on doing our part to invest substantially in lifting the basic skills of the existing workforce. My colleague Pete Hodgson will announce the details of this plan next week.
In last year’s Budget we did our part to invest in productivity through our cut in the company tax rate and the introduction of research and development tax credits. We dramatically enhanced the KiwiSaver scheme which will lead to a huge pool of domestic capital for firms to draw from for many decades to come. We took those steps because we know that in the long-term, firms must start investing more capital per worker if we are going to ever make talk about closing the wage gap with Australia more than just empty rhetoric on tax cuts.
But having made these cuts and these investments in skills, I believe it is now time for business to rise to the productivity challenge as they have called for the government to do in years past. We have listened, we are acting, and we now need to work in partnership with you to take the next steps.
I can also announce today that the Budget will include a specific investment in transport infrastructure here in Canterbury.
As many of you will know, the Labour-led government has been working with the Chair and Mayors from the Canterbury region to fund the Canterbury Transport Project.
Canterbury has been able to produce a package of regional and transport development initiatives which have been developed by and have the support of the whole region.
The government is confident that this package provides a sound basis for future transport investment in the region.
I am therefore pleased to announce that the government will provide funding assistance to Canterbury through a partnership approach to enable additional investment in transport infrastructure to be made over a 10-year period.
The government’s share contained in Budget 2008, will be $33.5 million over the next four years (2008 – 2012) with the indicative Government contribution totalling $244 million over 10 years.
Canterbury will still need to fund its share from local resources or, perhaps, from a modest Regional Fuel Tax. If a Regional Fuel Tax does form part of the funding then it is likely to be phased in from 2010/11.
So my message today is that next week’s Budget will be a budget for these times, but it will be more than just a Budget for today.
We know New Zealanders are feeling pain at the pump and at the supermarket checkout. We know that for many families’ mortgage repayments or rentals are wiping out disposable income. We know that some regional economies are still struggling with the economic effects of drought.
We will deliver relief.
But we also know that now is not the time to say that public services are as good as they can be. They are not.
Now is not the time to say that we are being ‘too generous’ with retirement support. We are not.
It is not the time to say that our huge investments in infrastructure including roads and public transport will be sufficient for our future needs. They will not.
And it is certainly not time to stop planning for the strong future we all deserve. We must not.