Hon Bill English
Minister of Finance

Speech to Trans-Tasman Business Circle business luncheon

Thursday July 23, 2009
(embargoed until 12.45pm)

Good afternoon and thank you.

I’d like to especially thank the Trans-Tasman Business Circle for inviting me to join you today. I value engaging with business about how we can work together to solve what are pretty significant challenges facing New Zealand.

The Government has a very clear economic plan to increase our productivity, grow our exports and start narrowing the income gap with our trading partners.

We realise that no one has all the answers and we’re keen to hear about good ideas that will help New Zealand become a more productive and higher income country.

But we don’t want to waste our time talking in generalities. The time for that is over. We need to get down to the details and make things happen.

It’s just over eight months since the new John Key-led National Government was elected on a commitment to build a growing economy that values enterprise, rewards effort and encourages people to get ahead under their own steam.

In that time, the economy has understandably been the Government’s top priority.

We have faced the worst and most concerted global recession since the 1930s. We inherited a New Zealand economy that had already gone into recession in early 2008 and was under considerable stress from imbalances built up over the past decade.

There is no doubt in my mind that the impact of this recession will be felt in New Zealand for several years. It requires significant and permanent change in economic stewardship, which this Government is providing.

Today I’d like to walk through our economic plan and why we have taken a number of important decisions in our first few months in office – particularly in our first Budget.

And I’ll talk about the policy programme that will drive the next stage of our economic agenda over the next three to five years and beyond.

Let me start by looking at some of the Government’s immediate priorities when it took office.

It was apparent that the scale and speed of the recession had caught even the gloomiest forecasters by surprise. Every new set of data painted a bleaker picture of the economy than the previous forecasts.

This is what I mean:

The Budget in May 2008 forecast the New Zealand economy would grow by 2.3 per cent in the year to March 31, 2010. By Budget 2009, the forecasts predicted the economy would contract by 1.7 per cent.

In anyone’s language, that’s a dramatic turnaround.

Looking back at the data, it’s now clear that our economy started to get out of kilter around 2003/04 - and it has since got progressively worse.

• Bank credit and household debt started blowing out, growing at double digit annual rates.

• Non-tradeables inflation took off and remained stubbornly high at over 4 per cent. At the same time, inflation in parts of the economy exposed to international competition has been close to zero.

• Government spending ballooned, increasing by 50 per cent in the past five years –double the rate of economic growth and government revenue.

• Public sector wages increased well beyond what we’ve seen in the private sector.

• And, since 2003/04, our productivity has sunk to a 25-year low.

Our lopsided economy can be viewed through two worrying indicators:

First, the tradeables sector - that’s exporters or industries competing with imports – has actually been in recession for five years, contracting by about 10 per cent.

By contrast, the non-tradeables sector – domestic industries not competing with exports, including the Government, construction, finance and retailing – has grown by 15 per cent in the past five years.

And, even more staggering, there have been almost no net jobs created in the tradeables side of the economy for the past 10 years. This cannot continue.

The second symptom of our unbalanced growth is the deep red ink flowing through the Government’s accounts – the product of falling revenue and fast-rising spending.
On current forecasts, these deficits will persist at around 5 per cent of GDP for the next four years – and we will remain in deficit for 10 years.

Those cash deficits amount to $11.8 billion in 2010; $12.5 billion in 2011; $12.3 billion in 2012; and $10.9 billion in 2013.

These deficits are larger than we had foreseen – larger, in fact, than New Zealand faced in the early-1990s. They will require significant policy decisions – and ongoing restraint - to turn them around.

For all of that, a recession for ordinary New Zealanders is not about whether Gross Domestic Product is contracting or whether the Government is running budget deficits. It’s whether people have a job.

Unfortunately, unemployment is rising and will continue to rise over the next year or so – even when the economy starts to recover.

The Government is taking the sharpest edges off this unemployment through a rolling programme of targeted policies that give New Zealanders the best chance of keeping their job or finding a new one.

Over the next four years, the Government will borrow an extra $40 billion to support the economy and particularly to support many thousands of jobs.

There is no free lunch here. We have deliberately rejected calls for a reckless spend up that would have seen government debt skyrocket out of control and made the recession worse, costing thousands more jobs.

Let me now talk briefly about the Budget, within the context of the Government’s wider economic plan.

Budget 2009 took significant steps toward managing the immediate impacts of the recession.

First, it got the Government’s finances in order and brought debt under control. We went into the Budget faced with gross government debt rising to 70 per cent of GDP by 2023 and continuing to increase, year after year.

Budget measures will now see gross government debt peaking at a forecast 43 per cent of GDP in 2017 and then falling.

Second, the Budget protected the most vulnerable by maintaining welfare entitlements and increasing spending by $2.9 billion in the 2009/10 year - targeted at better frontline services in health, education and law and order.

As I said in the Budget, this increase in spending is entirely appropriate to help cushion the impact of the recession. But it cannot continue indefinitely and we are entering a permanent period of restraint to reel in that decade of forecast deficits.

Third, the Budget paved the way for creating a government sector that provides better services and delivers better value for taxpayers.

The public sector represents about one third of the economy. So it must contribute to the recovery and not stifle the business investment that will create new jobs.

Budget 2009 struck the right balance in dealing with the immediate challenges.

The Government is now focused on a bigger task – a three to five-year programme that will set New Zealand on the road to recovery.

New Zealand’s economic challenges are threefold – the Prime Minister spoke about them last week:

• Increasing our productivity growth

• Maintaining high levels of employment

• Reducing our vulnerability to adverse events.

Improving productivity is important because, over the past 20 years, New Zealand has failed to keep pace with the incomes of Australia and other countries.

Maintaining high levels of employment –basically creating sustainable new jobs – is critical because this has important social, as well as economic, benefits.

Finally, it’s essential that we reduce New Zealand’s vulnerability to future shocks because, as we’ve seen with the current recession, economic conditions can change extremely quickly.

These three challenges – increasing growth and productivity, maintaining high employment and reducing our vulnerability – need to be addressed urgently.
New Zealand must move away from borrowing and spending and towards exporting and productive investment. That means reversing the trends of recent years.

There is no single silver bullet here. Much of what we are doing is unglamorous - and I make no apologies for that.

The Government’s programme will permanently boost productivity and competitiveness. Our policies will give businesses the confidence to invest and create sustainable jobs.

Let me pick up on the six policy drivers the Prime Minister outlined last week. They will form the core of our economic programme for the next three to five years.

1. Regulatory reform:
The first area is reforming the regulatory environment and cutting away red tape getting in the way of business and productive investment.

Regulatory Reform Minister Rodney Hide has been extremely busy working with the Government to get this significant two-year review programme underway.

It includes the Overseas Investment Act, the Resource Management Act, the Building Act, the Holidays Act, electricity and telecommunications rules, and the emissions trading legislation.

Today, I’d like to particularly focus on the overseas investment rules.

Overseas investment is important because New Zealand relies on it to provide businesses with capital to grow, create jobs and bring new technology and skills from overseas.

We are competing more than ever for overseas capital. So it’s particularly important that our investment screening regime does not deter valuable overseas investment.

However, while we recognise the benefits of overseas investment, the Government is determined to safeguard our most sensitive assets.

Our overseas investment rules should achieve three objectives:

• They should address public concerns – requiring overseas investors to meet additional requirements to those of domestic investors.

• They should be simple – simple to understand and to implement.

• And they should be predictable – providing certainty for investors.

On that basis, the case for reviewing our overseas investment rules is compelling.

Since 2002, 98 per cent of all overseas investment applications have been approved.

But they are tied up in a complex process that takes far too long and therefore risks putting off investors who can take their valuable capital to another country.

Most overseas investment applications are for sensitive land – some of which is tied to business transactions.

Yet some types of land we currently screen are not obviously sensitive. For example, it’s not clear that an investment in a retirement home next to a sports field should face the same scrutiny as a high country station or land that provides access to our national parks.

New Zealand’s international reputation as a place to invest has also been undermined by previous policy changes at short notice. We need to restore our credibility and show that New Zealand will deal with investors fairly and with certainty.

Today, I can report that we’ve made good progress with our overseas investment review.

• First, we have decided the Overseas Investment Office – rather than Ministers - will decide on a greater number of applications. This is expected to reduce the number of applications considered by Ministers by around 40 per cent and cut the assessment time for these applications by one or two weeks.

• Second, certain types of transactions will be exempt from requiring consent under the Overseas Investment Act. This will reduce the number of minor and technical applications that result in little or no change to the overseas ownership or control of our sensitive assets.

The previous government had agreed to a number of these exemptions and it’s now important that we move on them.

• Finally, officials are completing work on how the Overseas Investment Act itself can be improved, with advice from a Technical Reference Group of senior partners in five major law firms.

There are three main areas of the Act we’re looking to improve.

1. We’re looking at whether the thresholds determining which land and business investments are screened are set at the right level – so only genuinely sensitive assets are captured.

2. Second, we want to provide more certainty for investors by removing the ability to substantially change overseas investment rules during applications –avoiding the situation we saw last year with Auckland Airport.

3. Third, we’re looking to considerably simplify the screening of investments in sensitive land. We will make sure that overseas investors are subject to a higher standard than domestic investors, but that they are not required to meet further arbitrary requirements of government departments. We want to ensure that all relevant domestic legislation is used to address New Zealand interests.

We’re looking at removing the strategic asset test from the overseas investment regime. No one was ever sure what a strategic asset was and it created considerable confusion and uncertainty.

Our own stock take show that unique assets, when overseas ownership might pose a risk to New Zealand consumers, are in public ownership or protected by other restrictions.

As a final reserve power, we will consider a new national interest test - similar to those in other countries. This would balance providing certainty for investors with safeguarding the interests of New Zealand.

Many other countries have these tests, but they are rarely used. They allow governments, on the basis of credible evidence, to decline an investment application where this is necessary to protect vital economic interests and where these concerns cannot be addressed under existing laws. That's a pretty high hurdle.

In the rare times this test is used, the Government would be required to lay out to the public and Parliament its reasons for declining an investment. This will be clear and transparent.

The Government will consider the recommendations for any legislative changes in the next few weeks. We plan to introduce any legislative changes in September and hope to pass them by the end of this year.

The public will be consulted through the select committee process – and I encourage interested groups to put forward their views.

The changes we are making strike the right balance between making overseas investment simpler and more attractive, while still protecting New Zealand’s most sensitive land and assets.

2. Better, smarter public services:

Moving along, the Government’s second policy driver is significantly lifting the performance of the public sector, while reducing the rate of spending increases.

As I’ve said, the public sector represents about 30 per cent of the economy, so it’s essential that it plays its part, particularly with the Government’s finances under pressure.

We have made it clear that we will improve both the efficiency and effectiveness of spending, while limiting the negative impacts of public policies on private enterprise.

We made a good start in the Budget, freeing up $2 billion over the next four years to put back into Government priorities such as boosting frontline services in health, education and law and order.

But we need to make enduring and significant change in the public sector. Restraint is now permanent when Budget deficits exceed $10 billion and surpluses are 10 years away.

Public sector CEOs and Crown entity boards are working with Ministers to drive performance and achieve further fiscal consolidation as we look ahead to Budget 2010.

I look forward to reporting on our progress in more detail in coming months.

3. Investing in productive infrastructure:

Infrastructure is one area not currently constrained by weak demand. The problem, actually, is that much of our infrastructure is not commercialised, it has limited access to capital, it has suffered from regulatory constraints, or fallen prey to a combination of all these issues.

The challenge is quite simple. It is to ensure that the right level of investment is made in the right places by organisations with the knowledge and incentives to invest. I sometimes wonder how we ever let things get so complicated.

One of our first steps was setting up the machinery to handle the Government’s part of the sector.

Earlier this year, we established the National Infrastructure Unit. One of its roles is producing the first National Infrastructure Plan – a stock take of current demands and investment programmes which will become the focal point for industry co-operation.

The unit is backed by a recently-appointed advisory board of private sector experts and the Government has a strong desire to see as much private sector expertise and discipline used as possible.

The impact of the Government’s programme on infrastructure investment is already evident. We are investing $7.5 billion over the next five years to build and upgrade schools, roads, housing, hospitals and telecommunications.

We announced in February we were fast-tracking almost $500 million of this investment and much of this is already underway.

There is also substantial investment elsewhere, including Transpower’s expansion of the national grid and several local government projects.

Looking ahead, we have real opportunities to use private sector capital and expertise in new investment and in managing the Government’s extensive assets.

The private sector already constructs infrastructure; the challenge is to extend these skills to designing, financing and operating parts of the system, with the Government retaining ownership.

I was in Queensland last week talking to both private and public sector organisations about how they have gone about building and managing their infrastructure stocks. We want to learn what works and what doesn’t work.

Overseas experience is that, done right, we can make significant productivity gains.

4. Education and skills:
The fourth policy driver is education and skills. There are several parts to the Government’s focus in this important area.
The first is literacy and numeracy at primary schools, driven by National Standards, which will set clear expectations, measure children’s progress against those expectations and report their progress to parents in plain English.
The second area is providing options for secondary-age students outside the traditional school system.
The Ministry of Education has received several proposals for Trades Academies, and is looking to get these underway as soon as they can.
Trades Academies, based in schools, will give young people wider choices in education and the ability to gain practical, hands-on vocational skills while still at school.
Our Youth Guarantee will focus on 16 and 17 year olds and will allow them to study towards school level qualifications at a polytechnic, institute of technology, wananga, or private training establishment.
We will soon announce details of a staged roll-out of the Youth Guarantee, beginning from next year.

5. Innovation and business assistance:
The Government’s fifth policy driver is government and business investment in research and development, in innovation, and in developing new markets and products.
Our considerable investment in this area will help firms connect with overseas markets and consumers; as well as help them develop new ideas to create new and higher value products and services.
Those goals will help drive productivity growth and investment in the tradeables sector, and improve our export performance.
We are working on ways to best deliver a seamless network of government agencies operating offshore. This will support our trade and economic interests overseas, with the Government working alongside New Zealand exporters.
More generally, we are pushing ahead with efforts to secure free trade agreements, particularly in Asia, alongside our commitment to a multilateral trade agenda.
With innovation, we will promote a stronger relationship between the business sector and our publicly-funded research institutions.
One of our first initiatives in this area is the Primary Growth Partnership, announced in the Budget. This will invest $190 million over the next four years in significant research and innovation programmes across the primary and food sectors.
Because it is a partnership between the sector and publicly-funded research institutions, the research will be more relevant, take-up will be greater, and it will be more effective.

6. A world class tax system:

Finally, let me turn to taxation - the sixth focus of the Government’s economic policy agenda for the next three to five years.

Our starting point is that we want a tax system that rewards effort, provides better incentives to get ahead and allows our businesses to thrive both at home and on the world stage.

We also need a tax system that helps New Zealand become more competitive, but at the same time preserves the necessary revenue flows.

Striking this balance is especially important when we are facing a decade of fiscal deficits.

We he have an open mind about how that might be achieved and we welcome and encourage public debate about the tax issues we face.

The Government’s medium-term goal remains aligning the top personal, company and trustee tax rates at a maximum 30 per cent. That will be challenging in the current environment.
You will be aware that a Tax Working Group, chaired by Victoria University Dean of Commerce and Administration Professor Bob Buckle, is currently considering the tax policy challenges facing New Zealand.

It is looking at the Government’s medium-term fiscal position and the pros and cons of possible reform options. I look forward to the group’s report late this year.

In considering options for our tax system, the Government will be closely watching international developments –particularly the comprehensive Henry Review in Australia.

The Henry Review is due to report back at the end of this year and it will certainly influence our tax thinking in New Zealand. We cannot consider options for tax reform in isolation, if our overriding aim is to be competitive with other countries.

Conclusion

These six policy areas will drive the Government’s economic direction over the next three to five years.

You can see we are clear about what needs to be done. We have a balanced, targeted and effective plan to turn the economy around.

Despite the considerable challenges we face, I’m confident about New Zealand’s prospects because of the resilience demonstrated by many New Zealanders.

By backing ourselves as a country, we have a real opportunity to emerge from the recession stronger and more competitive than other countries.

Before the election last year, John Key set out a clear and compelling economic vision for New Zealand under a National Government.

He said that given the opportunity, New Zealanders would choose a path to become a more successful, enterprising, and prosperous nation. They would warmly sign up to policies that would bring a brighter future.

New Zealanders chose that path at the election.

The economic programme I have outlined today will deliver the success they are demanding.

Thank you.

ENDS

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