Key: Trans Tasman Business Circle post-Budget
Hon John Key
29 May 2009 Speech
Budget 2009 – The Road To Recovery
Address to the Trans Tasman Business Circle post-Budget lunch
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It’s a pleasure to be speaking to people who are such keen observers of trans-Tasman events.
I’m sure you all know that the Australian and New Zealand budgets both typically come out in May, and that they don’t always take the same approach to fiscal management.
So at this time of the year there are often a lot of people comparing and contrasting the two budgets.
This year I haven’t noticed much interest in that.
I suspect that is because the global recession is so deep, and so synchronised, that all developed countries are facing the same sorts of fiscal challenges and are addressing them in broadly the same sorts of ways.
In Australia, in New Zealand, and in almost every developed country, the government will run a budget deficit this year, next year, and for a number of years to come.
The fiscal stimulus this creates will be added to by increased government investment in infrastructure.
Across the world, government debt will grow significantly to fund those deficits and to fund that infrastructure investment.
Projections show that over the new few years gross debt in both the United Kingdom and the United States will head towards 100% of GDP. In Japan, gross debt is already more than 200% of GDP and heading higher.
Prudent governments will be starting to think now about how they are going to limit the growth of their debt and begin to pay it back.
That was the approach taken in the Australian Budget earlier this month and it is also the approach that we have taken in our Budget.
I agree with John Whitehead, the Treasury Secretary, that this is the most important Budget in 25 years.
It starts New Zealand on the road to recovery.
It puts in place policies to ensure that the New Zealand economy emerges strongly from this recession and provides the strong growth, high incomes and quality public services this Government wants into the future.
In preparing this Budget we have focused on three main objectives.
The first is helping New Zealanders through the recession and supporting jobs.
The Government’s approach here is pretty simple, and it is shared by most other developed countries.
We are using the strength of the Government’s balance sheet to absorb much of the shock of the recession.
We are therefore able, as much as we can, to cushion the effects of the recession on everyday New Zealanders.
What that means, in plain language, is that we are keeping up spending on public services, and on entitlements to income support, despite the fact that the Government’s revenue is dropping significantly.
We have to borrow money to do that. However, we are in a good position to do so, at least in the short-term.
This is because successive governments – both National and Labour – have brought Government debt down to relatively low levels.
They brought debt down because of the risk of an economic shock sometime down the line – a risk which has now turned out to be a reality.
Our approach of keeping up spending will provide a considerable stimulus to the economy and stop it falling further into recession.
In yesterday’s Budget we maintained all entitlements to income support, including Superannuation, benefits and the Working for Families scheme.
This Government is not prepared to turn its back on our most vulnerable citizens when they most need our help.
We also increased spending on front-line public services, particularly in health, education, and justice, and in doing so we fulfilled many of our election commitments.
I want to talk about one of these initiatives in particular, and that is our investment of $323 million over the next four years in a campaign to make New Zealand homes warmer, drier and healthier.
New Zealand Insulation Fund will allow more than 180,000 New
Zealanders to receive kick-start grants of $1,800 to
insulate their houses and install clean heating devices.
If your house was built before 2000 and it's inadequately insulated, or lacks efficient heating devices, then you will be eligible for this assistance.
A number of electricity companies, city councils and banks have indicated they will do their bit by offering loans to cover any extra expenses incurred.
This policy will have a range of benefits.
It will stimulate the building and construction industry and create jobs for the men and women who will do the retro-fitting.
It will improve energy efficiency
And, in the longer term, New Zealand families and children will experience warmer, drier, and much healthier living conditions.
The Budget also includes funding for measures we announced earlier in the year to help take the sharpest edges off the recession, including the ReStart package for people made redundant, the small business relief package, and the 1 April tax cuts.
It includes funding for initiatives that came out of the Job Summit in February. These include $50 million for the New Zealand Cycleway project, the nine-day fortnight scheme, a boost to the Workplace Literacy Fund, the introduction of summer research scholarships for university students, and increased investment in international education promotion.
In total we will deliver a net increase in new operating spending of $5.8 billion over the forecast period, out to 2012/13.
That amount of new spending is quite restrained, at least by the standards of recent budgets. The 2004 Budget, for example, included new spending of $11.8 billion over its forecast period.
But by continuing to spend, and not locking our chequebook away, we are improving public services in New Zealand, helping to keep up economic activity, and providing much-needed support for New Zealand jobs.
In addition to this new spending there has been a considerable amount of reprioritisation within existing levels of government spending.
When we came into office we found there were a number of programmes that weren’t very effective, that departments themselves weren’t keen to continue with, but that the previous Government wouldn’t let them touch.
We’ve started to address these in the line-by-line reviews we undertook in the lead-up to the Budget.
We identified a total of more than $2 billion in spending over the forecast period that either did not accord with our priorities, or that had a relatively low value.
We have used that money to fund other, more valuable, initiatives.
It is important to recognise, however, that the Budget is not just about the short-term, and in particular is not just about the recession.
This year’s Budget looks beyond the current recession, and is the first step towards positioning New Zealand to take advantage of the eventual global recovery.
So our second objective in this Budget is lifting productivity and raising New Zealand’s international competitiveness.
Over the last decade, New Zealand has suffered from poor productivity growth and a relative decline in the internationally competitive sectors of the economy.
Export growth has been patchy in recent years and our current account deficit has grown unsustainably large.
These weaknesses were largely papered over when the economy was growing, but they are very evident now that a slowdown has occurred.
This recession will pass. But unless we do something about the fundamental problems in our economy they will be a handbrake on future growth.
In particular, we have to increase our productivity, because in the longer term only increases in productivity will permanently raise New Zealanders’ living standards and create well-paid jobs.
Over the past decade, this country’s productivity has suffered the equivalent of death by a thousand cuts.
This Government’s job is to revive New Zealand’s productivity so that this country can grow strongly out of the recession and into the future.
Our initiatives to lift productivity fall into four broad areas.
We are increasing the Government’s investment in infrastructure, by spending $7.5 billion on new capital initiatives over the next five Budgets, including investments in new roads, rail and ultra-fast broadband.
We are removing roadblocks to growth by improving the regulatory environment under which businesses operate. That includes reviewing the Resource Management Act, the Building Act, and the electricity sector, amongst other reviews.
We are putting in place a range of initiatives to lift knowledge and skills, including:
* a funding boost of just over half a billion dollars for the 21st Century School Building Programme
* additional frontline funding for raising achievement in our schools including targeted funding to assist students who are not meeting our new National Standards in literacy and numeracy
* a significant and enduring investment in primary sector innovation through the Primary Growth Partnership, which will be matched dollar-for-dollar by industry.
Finally, we are improving the productivity of the public sector by, for example, shifting resources from the back office to the front line. One of the key things the Government can do to improve overall productivity in New Zealand is to get its own house in order, and the public sector makes up around a quarter of the economy.
The third objective in the Budget is taking steps to keep Government debt under control.
During this recession the Government will be spending more than it raises in revenue, and will be borrowing to make up the difference.
That is the right response to the economic conditions we face. However it is not remotely sustainable in the longer term.
The current downturn is of such a magnitude that we won’t get our growing debt under control simply by waiting for the next up-cycle.
Without any policy response, the Government’s gross debt was forecast to reach 70% of GDP by 2023.
That translates to around $45,000 for every New Zealander.
For a family of four, it would be like having a second mortgage.
That kind of outlook is completely unacceptable.
So, as part of the Budget, we have put in place policies that will enable us to get our budget balance back in surplus, to keep the increase in Government debt to a manageable level, and to eventually lower that debt.
As a result of these measures, the Treasury projects gross debt to reach a peak of only 43 percent of GDP in 2016/17 before beginning to decline. The operating balance returns to surplus in 2018/19.
Those are the current Treasury projections, but the Government is intent on working towards an even better fiscal position as conditions permit.
Our measures to keep debt under control and return the budget to surplus have been recognised by the ratings agencies.
Yesterday Standard & Poor’s took us off negative outlook. Moody’s confirmed our Aaa rating, with a stable outlook.
That’s great. It is external confirmation that this Government has a credible, medium-term fiscal plan to help New Zealand out of this recession.
This recognition from ratings agencies will help keep down borrowing costs for businesses, households and the Government in the years that follow.
More than that though, high levels of debt in the future would be a millstone around the country’s neck, with effects for generations to come.
Achieving the results we have in this Budget has involved making a number of difficult choices.
Anyone who has picked up a paper this morning, or watched the news last night, will know what these are.
The first is to reduce the Government’s operating allowance for new spending in future budgets to a maximum of $1.1 billion.
Let me put that in perspective.
The average new operating allowance over the last five Budgets was $2.8 billion.
The operating allowance we allowed ourselves in the Budget Policy Statement last December was considerably smaller, at only $1.75 billion.
By finding savings within government departments we have been able to limit our new spending to $1.45 billion a year.
Now we are planning to spend only $1.1 billion a year in the 2010 Budget, with future allowances rising by 2% in each Budget.
That is going to be an ongoing challenge and is going to make our focus on value for money in the public sector even more important than it already is.
On the revenue side, we have reluctantly decided to delay the personal income tax cuts that were scheduled for 2010 and 2011.
We have long said that lower personal income taxes benefit the economy, by providing incentives to work hard and get ahead. Lower taxes also make New Zealand more attractive for skilled people and graduates.
Already we have put in place over half the value of our total tax cut package, but to carry on with the 2010 and 2011 tax cuts would have required us to borrow heavily.
This is because the recession has come on so strongly and so quickly that, even with the measures we are taking in the Budget, the Government will still be in deficit to the tune of $7.7 billion next financial year and $9.3 billion the year after.
We will already be borrowing to fund this deficit, and implementing tax cuts would mean borrowing even more. That would be reckless.
It would also be reckless to borrow money to continue making full contributions to the New Zealand Superannuation Fund.
It is important to remember that the Super Fund was set up to invest budget surpluses, putting that money aside to help with Superannuation expenses in the future.
The most obvious parallel is a household investing money that it saves, so it can be used to pay for things in the future.
As a result of the recession, however, budget surpluses no longer exist, and will not re-emerge for a number of years.
To make full contributions to the Super Fund would therefore require borrowing around $30 million a week, or around $1.5 billion a year – a figure which will rise in future years.
Committing the Government to an even bigger debt-raising programme, in a world where the United States, the United Kingdom and other governments will be hoovering up available funds in their own debt programmes, does put the New Zealand economy at some risk.
That is like a household borrowing money to invest in the share market, on top of having a big mortgage, a car loan and a whopping credit card bill.
Or, perhaps more relevantly, it is like saving for your retirement using your credit card.
The Government has therefore decided to take the sensible step, and hold off making full contributions to the Super Fund until the Government runs an operating surplus sufficient to fund those contributions.
I cannot stress enough that this move does not have any detrimental impact on New Zealand Superannuation entitlements, either in the short-term or in the longer term.
The bottom line for this Government is preserving current Superannuation entitlements.
We will maintain payments at a minimum of 66 per cent of the average wage, and people will continue to be eligible for Super when they reach the age of 65.
Future funding at this level is locked into the Government’s long-term spending path and is reflected in all of the Budget projections.
In fact it is quite correct to say that, far from putting anything at risk, the combination of measures we have taken in this Budget actually secures Superannuation entitlements in the future.
In the mid 2020s, when demographic pressures begin to push up the total cost of NZS, it is important that the Government is in surplus, has a moderate level of debt, and is not burdened with high borrowing costs.
That is a situation we are now forecasting, thanks to the measures we have taken in this Budget - including temporarily suspending Super Fund contributions.
In conclusion, let me reiterate that this
Budget focuses on three main
helping New Zealanders through the recession and supporting jobs
lifting productivity and raising New Zealand’s international competitiveness
taking steps to keep Government debt under control.
The policies we have put in place start New Zealand on the road to recovery.
Ladies and Gentlemen, this Budget has been delivered against a backdrop of dark economic clouds.
However I believe that every cloud has a silver lining.
This is a truly global recession – every country will be affected by it. In fact we are in better shape than most countries.
As we work our own way through the recession, we have the opportunity to outperform other countries, on a relative basis.
The fact that we are taking steps now to improve New Zealand’s productivity and international competitiveness, and to limit the growth in Government debt, means that we have a strategic advantage over other countries.
We already produce things the world wants, and will continue to demand in the future
We have a clean and green country.
We have a skilled workforce and a can-do, entrepreneurial attitude.
The challenge now is to focus on an economic agenda that can fulfil the aspirations of everyday New Zealanders.
This Budget is part of that ongoing agenda.
We have a plan, we know what we are going to do, and we are getting out there and doing it.