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Mallard: A budget for our times, fairness to all

Hon Trevor Mallard
Associate Minister of Finance

17 June 2008 Speech Notes

Embargoed until:8am

Budget 2008 - A budget for our times, fairness to all
Speech by Associate Finance Minister Trevor Mallard to the Waikato Chamber of Commerce breakfast meeting, Novotel Tainui, Hamilton

Good morning and thank you. Apologies from Dr Cullen who could not be with you today.

It is a real pleasure to be here to talk in Michael's place about Budget 2008 and the measures the government is adopting to reduce businesses’ costs.

As you know on April 1 the corporate tax rate was reduced to 30 per cent in what was the first drop in New Zealand’s company tax rate since the late 1980s.

The governments that have a record of reducing the corporate tax rate in New Zealand in the past quarter century have been Labour governments and that is because one of our driving ambitions for being in politics is to create a full-employment society where people’s wages are rising.

The rationale behind reducing the company tax rate is that we anticipate the move will allow successful businesses to re-invest a greater share of their profits in new technologies and in further building up the skill-base of their employees – to the benefit of firms, working people and the greater public good.

The ten per cent reduction in the company tax rate at the start of the 2008/09 tax year is just one part of the government’s programme to facilitate New Zealand's transformation into a high-wage, export-led economy.

The package of reforms that took effect on April 1 included, of course, the introduction of tax credit for research and development as well as changes to the tax treatment of savings vehicles.

And later this month the government’s Tax Bill will reduce tax-related compliance costs and remove tax impediments to the offshore expansion of New Zealand-resident businesses as part of our on-going programme to simplify the tax burdens on small and medium-sized businesses.

Family businesses that are not incorporated concerns do not benefit directly from changes to company tax obligations, but they will most certainly benefit from the three-year programme of personal tax rate reductions detailed in Budget 2008 and which start to take effect from October 1.

A budget delivered in challenging international times

I am sure that you all recognise that Budget 2008 carried many of the hallmarks of Michael Cullen’s eight previous budgets:

• Strong investment in health services;
• Strong investment in primary, secondary and tertiary education;
• Strong investment in essential infrastructure;
• Strong promotion of research and science to the benefit of business and exports;
• A commitment to work with business to develop and expand opportunities in export markets;
• And finally a strong commitment to maintaining Labour’s low gross Crown debt target while at the same time building-up financial assets in the New Zealand Superannuation Fund that we established early in our administration.

This last commitment is fundamental to maintaining the overall health of doing business in New Zealand. The last thing this country needs is for the Crown to join the credit card bandwagon approach that was ruinous to this country’s interests in our not-too-distant past.

In recent budgets, the government has marshalled the precious resources available to the Crown to target tax relief to those most in need – particularly families with children – and in areas that offered the most opportunity to leverage economy-wide advantages – such as tax relief to encourage personal savings and, of course, the reductions in businesses’ tax obligations that I have already mentioned.

The value of the combined tax relief for businesses, for savers and for families with children unveiled in recent budgets has been significant – around $4.6 billion a year in foregone revenue to the Crown.

Budget 2008 was designed to build on these gains and to also protect all New Zealanders from the serious challenges posed to us from the offshore-generated price shocks.

Recent global increases in food and oil prices mean that households have been under considerable pressure at the supermarket checkout and at the petrol pump.
The sub-prime mortgage crisis in the United States has made credit more expensive in all nations, and has driven up mortgage interest rates here at home.

The prolonged and chronic weakness of the United States’ currency has produced quite punishing conditions for our exporters.

And on the domestic front, of course, we had a very dry summer and the drought that affected many of our farming regions.

In Budget 2008, Michael Cullen presented a plan for facing these challenges on three fronts:

• Delivering relief for working people and older New Zealanders as they work to make ends meet through this challenging period;

• Continued strong investment in public services and superannuation, as we reject calls to cut-back on those services just because the economy is going through a weak patch;

• And continued work to plan for the strong economic future New Zealanders deserve and expect.


Tax relief for all

In my view, one of the most important achievements since 2000 has been that we have stopped the widening gap in wages witnessed between New Zealand and Australia over the course of the 1990s.

New Zealand’s real, inflation-adjusted household incomes have risen 25 per cent since 2000.

Driven in large part by a huge wave of job creation, this is an achievement that is testament to the initiative of the New Zealand workforce, the determination of you in our business community – working in partnership with government.

While kiwi families are richer than they were eight and a half years ago, many feel poorer than they did this time last year because the global increases in the cost of credit, food, and oil have acted as a three-pronged attack on household wealth, and, for many, it has reduced disposable income.

As the early signs of these pressures began to emerge last year, the Prime Minister made a commitment that Budget 2008 would include a programme of personal tax cuts.

Because the government had maintained a strong fiscal position during the good times, we knew that we would be in the position to provide further tax relief, on top of what we have already delivered to families, to businesses, and to savers via KiwiSaver.

And as the extent of the pressure on household budgets became clear we knew that meaningful relief could not wait until 2009.

With softening economic data we had the confidence we needed to deliver a multi-year personal tax cut programme from 1 October this year without risking further pressure on inflation in our economy and without having to borrow overseas to fund them.

The $10.6 billion personal tax cut programme will from 1 October deliver real relief and is aimed at being as fair as possible to all.

At full implementation the package will deliver:

• A new low tax rate of 12.5 per cent
• A lifting of the 21 per cent threshold by $10,500 to $20,000
• A lifting of the 33 per cent threshold by $4,500 to $42,500
• A lifting of the 39 per cent threshold by $20,000 to $80,000
• A boost to the Family Tax Credit and an increase to the Working for Families Tax Credit income threshold from 1 October
• A further expected increase to the Working for Families Tax Credit and income threshold from 1 April 2011.

The package will see a couple on the current average household income of $72,000 (split two thirds/one third) with two children aged 11 and 8 better off by $2223 a year ($43 a week) from 1 October rising to $4397 a year ($85 a week) from 1 April 2011.

At full implementation, the programme will cut personal tax by roughly one quarter at the current level of the full-time minimum wage, one sixth at the current level of the full-time average wage, and one eighth at $80,000 a year.

Under Michael Cullen's financial stewardship, we are proud to be part of a government that is delivering relief to workers at a time when relief is needed and delivering complementary and ongoing social and economic programmes that are strengthening the productive capacity of our economy. This all means higher wages and higher living standards over time.

We should all be thankful that Dr Cullen managed the Crown’s books responsibly and prudently over the last eight years - so that now - as stormy clouds from offshore gather on our borders, we do not have to cut back on support when that support is most needed.


Continued strong investments

The government’s political opponents imply that if they were in government today then they would significantly reduce government spending. But they can not say or will not say which public services and social support programmes they would slash to fund their own promises.

Certainly, a former government in New Zealand responded to an Asian economic downturn a decade ago by cutting the floor of New Zealand Superannuation to just 60 per cent of the net average ordinary time wage.

The call to cut spending on social services during tough economic times is in my view based on the false and cowardly belief that the only way to manage through the downturns of an economic cycle is to fully surrender to its effects by abandoning social support and public investment.

Our government of course makes no apology that Budget 2008 rejected that approach.

We will boost superannuation considerably, not cut it.

We will invest an extra $750 million a year in health, delivering more elective surgery, keeping doctor’s fees low and helping our hospitals cope with the rising cost of delivering services.

We will invest hundreds of millions in education, delivering over 700 extra teachers, a substantial investment in information and communications technology for schools, and more funding for our vital early childhood sector.

And remember, the benefits from programmes that strengthen our families and communities – through education, health and skills training - do flow through to businesses, large and small, across the country.

Other important initiatives in Budget 2008 will strengthen regional economies - through the development of a modern rail system and faster, cheaper broadband.

The $690 million appropriation for the buy-back of New Zealand’s rail operating business and the funding of transitional arrangements will enable us to make our wider transport sector more efficient and sustainable.

Our $500 million investment in broadband includes the new contestable Broadband Investment Fund. It will be used to accelerate broadband investment and high speed rollouts to businesses, local authorities, universities, schools and hospitals in urban centres, and is also aimed at extending broadband into under-served regions.

I would like to conclude with a few comments about the future.

While the Treasury and the Reserve Bank have revised down New Zealand’s short-term growth prospects over the next 18 months or so, the expectation is that New Zealand will bounce back to recording strong annual growth of 3 per cent or more in the 2010-2011 year.

The Labour-led government believes that it would be a mistake to wait this cycle out before taking our next steps in planning for a prosperous future.

We want the New Zealand economy to emerge from this slowdown on its feet ready to grasp the opportunities in front of it.

In some developing countries, the global commodity price shocks pose a very serious threat to literally millions of people, while many governments in developed economies have found their own accounts thrust deep into debt as they move to protect their citizens from the rough edges of these difficult international economic conditions.

We in New Zealand are in a stronger position because we managed the economy properly, when international trading conditions were more favourable.

Our government is not up to its neck in debt and we have been able to positively respond to the need for personal tax cuts without having to borrow money to fund them.

There were plenty who in recent years called on the government to irresponsibly "spend" the accrual surpluses many times over – surpluses that were in fact fully utilised already investing in infrastructure, in the New Zealand Superannuation Fund or in paying-down inherited Crown debt.

Crown debt in 2008 is now below 20 per cent of GDP – down from above 35 per cent when we came into government. In fact, we are the first government in New Zealand history to run a net positive financial asset position.

Running a strong fiscal position has meant we have a buffer to protect us from the externally-driven shocks we are now experiencing.

I believe that every business person, like every citizen, has the right to expect their representatives in parliament to be up-front about the challenges before us.
It is disappointing that some politicians have implied, for example, that a weaker growth profile over the coming year or so would in fact mean that there would be greater scope, for example, for bigger tax cuts – in the face of lower government revenue.

It is a nonsense and highly reckless and naïve - to make claims that unfairly raise public expectations and that cannot be delivered without significantly cutting social services or superannuation entitlements, or without taking the questionable approach of going deeper into hock, and borrowing to fund tax cuts.

All of our interests are best served by a steady and experienced hand in government and a high degree of honesty about the issues before us as a society.

I am happy to take any questions that you may have of me.


ENDS

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