Bill English: Speech to Annual Conference 2008
Bill English MP
National Party Deputy Leader & Finance Spokesman
2 August 2008
Speech to National Party Annual Conference Wellington
In recent years New Zealand has had a taste of the fruits of economic growth. We have enjoyed rising incomes, increasing asset values, a bit of spare cash to save, and enough tax revenue to markedly increase public spending.
These eight years of economic growth presented a great opportunity to prepare this economy for a step up.
But Labour missed the step.
They had the right idea: to lift our economy into the top half of the OECD and keep skilled New Zealanders here. They just didn't do anything to make it happen.
Despite the growth we have enjoyed, our economy has dropped in the OECD rankings and New Zealanders are leaving in record numbers to live permanently overseas. The gap between what you can earn in Australia and what you can earn in New Zealand has grown.
Labour's time in office has coincided with a period of reasonable growth. But that's not what you get judged on as a government.
You don't get judged on the conditions you inherit. In an open economy like ours, a government is judged on what it makes of the opportunities it has, on its preparedness for the next challenges, and on what it leaves for the years and decades that follow.
By that yardstick Labour's record is a poor one.
Our productivity is one of the lowest of all developed countries.
A build-up of regulation and poor incentives has made us less competitive.
Enterprise and profit are regarded as problems rather than the engines of investment, jobs, and growth.
The accumulated mismanagement of growth makes it harder for New Zealand to absorb the shocks that a destabilised world economy has sent our way - in particular, higher oil prices and a deepening credit crunch.
Households are squeezed hard. They have record debt, interest rates that are the second-highest in the developed world, and they face job insecurity and the prospect of job losses.
The time for Labour has well and truly passed. They are a party-time government, but the party is over and the guests have all gone home.
Their main skill was designing schemes to give money away and curry favour with particular groups of voters. So much tax flowed through their greedy fingers that they had plenty of opportunity to do it.
But it will take a different kind of economic management to get through this downturn and earn our way back to a growing economy and higher incomes. So let's talk about that, rather than worry about what Michael Cullen might or might not be up to.
What state will the economy be in over the next year or two?
It's a mixed picture.
On the negative side: * The economy will continue to struggle. * Inflation is high. * Interest rates are high. * The business outlook is grimmer than it has been since 1988. * There is considerable uncertainty about some parts of the investment market, given the collapse of many finance companies. * Oil prices are much higher than they were a year ago and, despite some short term relief, are likely to remain high.
It's fair to say that the people who enjoyed the best of the boom are now being hit hardest by the bust.
On the positive side: * Commodity prices are at an all-time high. * Provincial areas are doing reasonably well, and the further south, the better. * The dollar is dropping, pushing up export incomes. * The economy is tilting more towards the export sector.
Unfortunately, the negatives will outweigh the positives quite heavily over the next 12 months. That's a surprise for those who have known only expansion in the past 10 years.
So where does National stand, given the gloomy short-term outlook?
Our goals are unchanged. We remain ambitious for New Zealand. We are committed to a growing economy with rising incomes, closing the wage gap with Australia, making this country dynamic and attractive to our young people, and rewarding those who commit their skills to their work.
National is confident that with the right economic stewardship New Zealand can get through this downturn.
The economy is resilient and the kinds of things the world wants to buy are those things we are good at producing.
Families, workers, and businesses have learned resilience through 20 years of a fast-changing economy. They are used to making changes - both big and small - learning how to deal with uncertainty, and making it through periods of growth and recession.
We have the people, the skills, and the attitudes to be a successful small open economy if we have the right kind of leadership and the right kind of policies.
On the other side of this downturn, opportunity is heading our way.
For the first time in two generations the world is willing to pay more for our food, and fast growth in China and India means it could stay that way for some time. Much of the world is short of food and water and we have a natural advantage in both. We also have a deep culture of skills and expertise related to food production and the management of natural resources that the world needs.
We cannot afford to miss the opportunity of the next decade in the same way we missed the opportunity of the past decade. We must cast aside that complacency and get to grips with a new set of requirements for economic growth.
I'll give you one example. The prosperity of the past decade was partly driven by cheap credit and borrowing, and, as a consequence, our private debt doubled.
Now, the world market is telling us they won't lend cheaply any more, and they won't take the same sort of risks again. So, in the next decade, New Zealand will have to earn rather than borrow its way to prosperity.
So, our plan is about a nation ready for another step up, a self-reliant enterprising nation that can compete in the global economy and do well.
I make no apology for the simplicity of National's plan. In recent years, strategies and committees have been a crutch for a government that didn't really come to grips with the economy.
If National is the next government there won't be vacuous economic transformation agendas, there won't be endless committees, and there won't be job machines. There will just be solid, competent policy and a lot of hard work for our Cabinet in ensuring government expenditure is controlled and effective.
One important aspect of that policy is how we handle the government's finances.
Michael Cullen's Budget earlier this year pushed the operating balance in future years to very low levels, especially in the period between 2011 and 2013.
Given the marked slowdown in the economy this year, which is more severe than was anticipated in that Budget, the pre-election opening of the books is going to be a bit of a shock to some people.
The books will almost certainly show that operating balances are lower than forecast in the Budget. There are a number of ways of measuring the government's operating balance, and under some of these measures, and for some years, the Treasury is likely to be forecasting small operating deficits.
I want to reassure people that National will not worsen this situation. We will be careful stewards of the economy and of taxpayers' money. We will focus on effective government spending, not the sort of profligate spending that would increase deficits even further.
On the other hand, we need to keep things in perspective. Small operating deficits, for a limited time, are not the end of the world.
Over the past 18 years, governments have run a kind of golden rule which recognises that the economy goes in cycles. When times are good, governments aim to deliver reasonable surpluses, but when the economy slows, there might be small surpluses or deficits for a short period. What is important is that, on average over the economic cycle, we maintain a surplus and we keep debt under control.
When times are tough, as they are now and will be in the near future, people, particularly older people, the sick, and the vulnerable, and those who rely on the government for their incomes, look to government for a sense of security. The New Zealand government is in a sound fiscal position and we can afford to protect the vulnerable and maintain vital social services.
Another important part of economic policy is the government's investment in infrastructure and the means by which it finances that infrastructure.
Our policy focus is on lifting our prospects over the next three to five years. The current downturn doesn't change our plans to invest in New Zealand's infrastructure, and nor should it.
We want to build more infrastructure, sooner. Right now, the Labour Government builds what it can from the cash it has. That's like a business trying to grow bigger but only spending money from its petty cash.
In contrast to Labour's approach, National plans to use more long-term debt to build long-term infrastructure, just as any sound business would do.
Our Leader, John Key, is going to flesh this point out some more tomorrow. But let me say for now that New Zealand does not have a debt problem, we have a growth problem and we have productivity problem.
Our debt levels are among the lowest in the OECD, but our productivity is among the worst.
It wasn't always that way. When National came to power in 1990, government debt was 61% of GDP. It really was a problem and it was a priority to get that debt down. I should know, I was a part of that government. With a lot of hard work, we brought debt down to 32% of GDP by the end of the decade.
Government debt is now down to around 17%, and Labour's target is to keep this at an average of around 20% over the next 10 years.
At the same time, the government holds significant financial assets. In fact, as a country, we hold more financial assets than we have debts. So, in theory, the government could sell the financial assets it owns and clear all the public debt.
So it's clear we don't have a debt problem. Ratings agencies and market commentators say the same.
However, everyone agrees we have a growth problem. And, despite the current downturn, we want to continue to lay the foundations for the next round of economic growth.
Prudent debt financing is one tool we can use to get on with the job now to build infrastructure that will endure for decades and provide long-term benefits for the economy.
In summary, National will continue with a conservative fiscal policy through the downturn and a prudent use of additional borrowing for infrastructure to lift our long-term growth prospects.
The other cornerstone of sound economic policy is the Reserve Bank Act and a clear set of rules for controlling inflation.
Labour has a very poor record on inflation and interest rates. Interest rates have doubled in the nine years they have been in office. External factors have made it worse, but a big part of the rise in interest rates has been the low quality of Labour's big build-up in government spending.
Now, rather than dealing with the Michael Cullen spending elephant sitting in the corner of the room, Labour is talking about making significant changes to the monetary policy framework just when inflationary pressure and interest rates are at their worst. This would only lead to higher inflation and interest rates in the long term.
Our Reserve Bank rules are right up there with international best practice - in fact, we largely developed international best practice - and National has seen no compelling evidence to indicate we should change them. No household and no small business owner will thank us for keeping interest rates higher for longer.
Our approach is to carefully manage government policy.
In the next three months the public will get a taste of the alternative to this approach. No one doubts that Helen Clark will focus ruthlessly on short-term politics to try to win a fourth term in government. That would come at a long-term cost to taxpayers.
During the upcoming election campaign you will see all the tricks. You will see more meaningless, aspirational slogans which sound sexy on the surface but are unachievable, just like Helen Clark's goal to be carbon neutral.
You will see spending promises added up over four, five, or even 10 years to make the numbers look big.
You will see the Labour re-labelling operating expenditure as capital to make it look cheaper.
And you will see Labour using the authority of government to deliberately underestimate the cost of policies in the hope they can clean up the mess afterwards. Dr Cullen did this in 2005 with his student loan policy which turned out to be far more expensive than was promised.
In a growing economy, expensive promises can be absorbed. In a slowing economy they can't. There is no room for large-scale bribes this election
New Zealanders who care about this economy, who want families to get ahead under their own steam, and who care about incomes in this country, cannot afford to put Labour back in charge.
What's more, it's the people on lower incomes who will be hurt most by the downturn, and they stand to gain the most from an economy that gets back on its feet as quickly as possible. Labour's antics will come at the expense of its own supporters.
National has committed to policies that get New Zealand through the downturn and back on to a path to higher incomes.
So here is our plan to get this economy back on track.
First, we are going to have tax cuts. New Zealanders have been taxed too high for too long.
Even the Labour party has grudgingly conceded the argument. But it has come awfully late to the party. Australia is in its sixth year of significant personal income tax cuts and has signalled further cuts to come. It's time we got started.
Tax cuts will put some cash in people's pockets and that's good. But the longer-term reason for cutting taxes is to improve the incentives to work, save, and invest - and that's what National is committed to doing.
Secondly, New Zealanders are not getting value for money - their hard-earned money - from government services. Too much is caught up in a burgeoning Wellington bureaucracy designed to make the government feel big and ministers to feel powerful.
We will put more of that expenditure to the frontline and improve its efficiency. It's only fair that government carries its share of the burden of adjustment in a downturn.
When Kiwi households are running up overdrafts to pay the bills, and facing high interest rates, they will welcome a government that spends their money as carefully as they do. The government should be contributing to better productivity because New Zealand cannot afford a government that does less and less with more and more.
Thirdly, we will cut red tape.
This is easy to say and hard to do. People wonder how we can be in favour of small workplaces, soundly build houses, and yet achieve it with fewer rules.
We will do it in two principled ways.
We will use bureaucracy against the bureaucrats. Let officials and ministers jump the hurdles, fill out the forms and incur the cost of compliance before they can have a new regulation. We will also attack specific costs, like complexity in the tax system, the time and costs of the RMA, and the extensive new rules and bureaucracy under the new Building Act.
At the heart of the machine that produces regulation is an aversion to every imagined risk, the urge to "do something", and a naïve belief that new rules are always the answer. It will be a challenge to roll the nanny-state approach of Labour, but we will meet that challenge.
Fourthly, we will introduce national standards in education.
Almost 10,000 young New Zealanders leave school every year without the basic competence to learn more skills.
As the baby boom generation begins retiring in significantly larger numbers over the next few years, we will have, for the first time, more people leaving the workforce than entering it. Our young people will be particularly valuable.
National will do more to realise the promise of free, state-funded education and the competencies of citizenship.
We will introduce national standards in literacy and numeracy. This will be a spur to taking the best teaching practise from schools that are succeeding and spread this across the whole system. If every child is assessed and taught appropriately, we can help the thousands who now miss out.
Finally, we will lift the quality and quantity of New Zealand's infrastructure investment, to remove the blockages that are currently holding our economy back.
New Zealand under Labour is virtually the only country in the developed world that refuses to use private sector financing and risk management techniques to help spend taxpayers' money effectively and make it go further.
Over the next 10 years, central and local government will spend between $60 billion and $70 billion on infrastructure. We can do it badly or we can do it well. Let's do it well.
In conclusion, can I relay what someone told me last week about the economy. They said New Zealand has two gears - fifth and reverse.
The economy is currently in reverse.
But we are confident that New Zealand will come through this phase.
We are confident we can move up through the gears again to full speed.
And we are confident that New Zealanders will respond to government policy which backs them, which gives them confidence, and which provides the right settings for them to get ahead.