Cullen: Tackling New Zealand’s national debt
Hon Dr Michael Cullen
Deputy Prime Minister, Attorney-General, Minister of Finance, Minister in Charge of Treaty of Waitangi Negotiations, Leader of the House
28 August 2008 Speech Notes
Tackling New Zealand’s national debt
Finance Minister Michael Cullen’s address to the Association of Superannuation Funds of New Zealand conference, Auckland
Good morning and thank you for that introduction.
It is a pleasure to be able to speak with major players in the savings industry in what has been a major year for savings in New Zealand.
I will open my brief comments today with a reflection on how far we have come in transforming the savings landscape in New Zealand since I spoke to the Association last year. We have made huge progress and I believe strongly that the enthusiasm shown by New Zealanders for KiwiSaver means that we are building a new sustainable work-based savings culture in New Zealand.
But before leaving plenty of time for your questions, I also want to place our collective work to expand workplace savings in the wider effort to address New Zealand’s very significant debt problem.
Yes, New Zealand does have a very big debt problem. And that debt problem is a drag on our economic growth and a major and ongoing risk for our economic security.
Our work to improve personal savings – through KiwiSaver and through tax reform – sits right alongside the government’s work to lower crown debt, build up financial assets in the New Zealand Superannuation Fund, and to protect state assets in a major effort to lower our national debt. And this work to lower our national debt is inseparable from our plans to lift New Zealand’s long-term economic performance and to continue to raise living standards for New Zealanders.
A tough year for the economy
But first, I do need to acknowledge that after the longest period of economic expansion in several generations, we have now recorded a negative quarter of economic growth. Treasury expects that the second quarter of 2008 will also have turned out to be negative, in line with a significant slowdown in the global economy.
New Zealanders have certainly felt pressure this year, both at the petrol pump and the supermarket checkout. And those with mortgages have found that the global credit crunch has kept interest rates high, even after a cut to the Official Cash Rate.
While relief is in sight – both through lower interest rates and personal tax cuts on 1 October – the seriousness of our economic challenges must be addressed and discussed with the seriousness they warrant. I know that with election season soon to be upon us, the temptation to reach for slogans and platitudes will be growing by the day.
But for our part, the Labour-led government is going to continue to discuss our economic plans in a way that shows both respect for the pressures New Zealanders are facing, and that demonstrates that we understand the challenges we face as a nation.
A new savings culture
In that spirit, we must recognise that New Zealanders themselves are showing just how seriously they are taking one of our major economic challenges – our disappointing record on household savings.
As we approach the end of August 2008, it is remarkable to recall that New Zealand’s adoption of active government promotion of work-based retirement savings only came into force less than fourteen months ago.
In my address to this association in Wellington last year, I was proud to announce that the Inland Revenue Department had received 92,000 KiwiSaver enrolments in the five weeks following the scheme’s launch.
I dared to say at the time that the Treasury’s initial take-up forecasts looked likely to be too conservative.
But I never imagined that a year later I would be able to come back to this association and say that as at 9 August 2008, the number of New Zealanders in KiwiSaver schemes had reached 770,000.
And I certainly never thought I would be able to announce to you today that Treasury is now budgeting for KiwiSaver numbers to reach 1 million in the first half of 2009. This compares to our original forecast of reaching 855,000 KiwiSavers by 30 June 2017.
What we are seeing through KiwiSaver is nothing short of a savings revolution in this country.
All those who doubted KiwiSaver would take off were proven wrong within months of the scheme’s launch. And all of those who are still trying to argue that KiwiSaver is not leading to a new net savings really need to let go.
The headline numbers alone suggest a major shift – we will have the equivalent of half the New Zealand workforce in KiwiSaver schemes by this time next year. Are those who are trying to argue that KiwiSaver is not leading to net new savings really trying to argue that half of New Zealand workers were already actively saving for their retirement before the scheme’s launch?
And when you reflect on the demographics behind the headline KiwiSaver numbers, the emergence of a new savings culture becomes even clearer. The evidence of this is highlighted by the reality that about 120,000 KiwiSavers are in the 18-to-24 age group, and a similar number are in the 25-to-34 age group. The majority of these young savers will be new savers.
The new reality in New Zealand is that participation in workplace savings is now the norm – that is excellent news for the people in this room. And it is excellent news for the New Zealand economy.
Our household savings rate is among the worst in the world. Indeed by the World Economic Forum’s estimates New Zealand ranks 108th out of 131 nations for strength of private savings.
This obviously means that our living standards in retirement are not as strong as they could be. While New Zealand superannuation provides for a basic standard of living, many older New Zealanders have to work hard to make ends meet once they retire.
The lack of household savings is also a major driver of income inequality in retirement. Workers who do not save during their working life – or those who rely solely on their investment in the home they live in – will see a substantial drop in their income when they retire. And they will watch their colleagues who did save maintain a lifestyle in retirement that is comparable to the one they enjoyed during their working years. Thus the expansion in private savings we are seeing through KiwiSaver is the biggest assault on income inequality in retirement that we have seen in generations.
But from a wider economic perspective, our deficit of household savings is both a weight around our collective economic neck, and a risk for our national economic security.
Our poor savings record can be directly linked to the weakness and shallowness of our capital markets. This weakness deprives firms of capital for investments in productivity and innovation. Over the last eight years we enjoyed our longest period of economic expansion since World War II. But it is clear that our lack of domestic capital held us back from even stronger growth.
And our poor savings record can be directly linked to our huge debt to the rest of the world that is a significant risk to our position as a safe place for investment from offshore.
At 31 March 2008, New Zealand's national debt, as measured by a negative net international investment position, stood equivalent to 86 percent of gross domestic product.
Among rich, developed nations, only Iceland has a higher level of national debt on such a measure.
As I have said, New Zealand's high national debt in part reflects a prolonged period of weak household savings in our country. The work of the people in this room, who have long promoted the benefit of greater savings, have always been a part of the effort to move our nation out of debt and to expand our economic potential. And now, the New Zealand Labour-led government has joined this effort by making saving easier than ever before.
But for many, many years, the Crown itself was part of the problem.
After some tragic policy choices in our country in our not-too-distant past – from the cancelling of the Kirk government’s superannuation scheme to the Think Big project to the sale of state assets – New Zealanders only recently have had a realistic hope that our country is again on the road to building-up its private and public capital reserves and securing a stronger place in the global economy in which we must compete.
It was only in financial year ended June 2006 that the Crown moved, for the first time in this country’s history, into a net positive financial asset position.
The Crown’s net financial asset position, inclusive of the financial assets of the New Zealand Superannuation Fund established by this government early in its administration, stood at a net positive 1.2 per cent of GDP at 30 June 2006.
In its May economic and fiscal report, the Treasury forecast the Crown’s positive net financial asset position would remain stable and positive at just over a six per cent of GDP in each of the next four financial years.
The Labour-led government does not apologise for implementing its investment programme, implementing its education, health and other social policies, designing its personal tax and company tax cut reduction programmes, all within this fiscal framework. It is a framework that includes paying-down gross Crown debt and maintaining a stable and positive net financial asset position.
And we certainly do not apologise for fervent promotion of the policies that will rebalance our economy and improve our economic security, from debt reduction to KiwiSaver and from the New Zealand Superannuation Fund to the protection of state assets. These policies are as central to New Zealand’s economic success as the major investments in infrastructure, research, and tax relief that this government will continue to make in the years to come.
And we know that these policies to provide balance in our economy are more crucial now than ever before.
Today New Zealand is facing a serious economic challenge generated by the global credit crunch and steep rises in global commodity prices. These are the most complex and challenging set of economic forces we have confronted in at least two decades.
In this environment, the Labour-led government does not agree with those who would propose that the Crown purposefully and actively engineer a weakening of the Crown’s net financial asset position.
The reality is that our national debt challenge means that irrespective of the stage of the economic and monetary policy cycle, we in our nation have structurally higher relative interest rates than our competitors. Deliberately weakening the Crown’s fiscal position would not assist, but would weaken our relative competitive position in that regard.
In this environment, we do not agree with those who would propose weakening the incentives for people to join KiwiSaver. It is exactly during difficult times like these that we need people to keep investing in their future if our new culture of workplace-based savings is going to prove sustainable. It is during these times that we must prove to KiwiSavers that their trust in the scheme will be rewarded by a government that does not back away from its responsibilities.
In this environment, we do not agree with those who would propose lowering government contributions to the New Zealand Superannuation Fund. It is exactly during these tough moments that we must prove we are serious about future-proofing our universal superannuation system. In these times we must show that we will not allow economic challenge to be used as cover to back away from our commitments to future generations.
In this environment, when the very fact that the government and the New Zealand public are taking debt reduction and savings seriously is our saving grace with international credit agencies, we cannot see how anyone can seriously propose taking their eye off efforts to reduce our national debt.
In the months ahead, the government will lay out a renewed vision for a strong, growing, and fair New Zealand economy. We will argue that our success this decade can and should be followed by even stronger growth in the years to come.
But we will also reaffirm our commitment to lowering our national debt; to keeping crown debt low; to helping all New Zealanders save for their future; and to protecting New Zealand assets. We know that this work is crucial to realising New Zealand’s true economic potential.
Thank you and I look forward to your questions.