PM Pre-Budget Speech: Fujitsu – Business NZ Luncheon
Rt Hon John Key
11 May 2011
Fujitsu – Business NZ Luncheon
Ladies and Gentlemen
I want to start by thanking Business New Zealand for co-hosting this lunch.
More importantly, I want to thank them for the constructive role they play in representing New Zealand businesses and employers.
I’d also like to thank Fujitsu for their part in sponsoring this event as well.
In a week’s time Bill English will deliver his third Budget.
Looking back, it’s hard to imagine a Finance Minister having a more challenging time.
When we came into office in 2008 the financial crisis was at its peak and the New Zealand economy had already shrunk three per cent in a year.
Since then we’ve had to deal with two major earthquakes in our second-biggest city; the impact of the deposit guarantee scheme, especially with South Canterbury Finance; adverse weather events from blizzards to droughts; the cost of leaky homes; and the support package for AMI.
In difficult times like these the country needs good, responsible economic management. You only have to look at many of the countries in Europe to see how badly things can go wrong
The events I mentioned have already happened and we are already dealing with them.
Our biggest challenge going into the future remains the task of lifting real, sustainable growth in an economy that got seriously unbalanced and out of kilter in the early-to-mid 2000s.
Government spending increased markedly in the mid-2000s, as Labour poured money into expensive new schemes and rapidly pumped up the public service.
They are astonishing facts, but government spending rose 50 per cent in just five years and, since 2004, almost 60 per cent of new jobs have been in heavily government-dominated sectors.
Not surprisingly, that increase in government spending provided a very substantial stimulus to domestic demand.
Interest rates, and therefore the exchange rate, soared.
The domestically-focused side of the economy – fuelled by debt, consumption and government spending – grew strongly.
But on the back of a high exchange rate, and competing for resources, the internationally-competitive sectors of the economy went into recession in 2004, and experienced a 10 per cent drop in output over the following five years.
Not surprisingly, export volumes grew only one per cent in total between 2004 and 2008.
And since the end of 2004, GDP per person has fallen by an average of 0.1 per cent a year – the weakest period since the late 1980s and early 1990s.
These indicators highlight very clearly the impact of a shift of resources, throughout the 2000s, away from the sectors of the economy through which we earn our way in the world, like agriculture and manufacturing, and towards domestically-focused sectors like retail, construction and government services.
Our job as a Government is to reverse that shift.
That is the only way we can support the new jobs and higher incomes New Zealanders deserve.
The 2000s are actually a lesson in how not to manage economic policy.
They stand in sharp contrast to New Zealand’s experiences only a decade before.
Between 1990 and the mid-2000s, on average, the New Zealand economy grew by over 3 per cent a year, export volumes grew by over 5 per cent a year, and the number of jobs increased by 35,000 a year.
That happened because the economy was internationally competitive and government spending and regulation were well focused.
So our plan is simple, and always has been.
It’s about creating conditions which allow New Zealand to focus on what it is good at – and where it can create sustainable jobs and higher incomes.
It’s about making sure we have a tax system that encourages work and savings, rather than providing incentives to shelter income.
It’s about having an efficient public sector that doesn’t crowd out the internationally-competitive parts of the economy.
It’s about limiting government debt, to reduce our reliance on foreign lenders and to give us a buffer against future economic shocks.
It’s about regulation that encourages enterprise and flexibility.
It’s about an education system that is producing skilled workers, and those workers knowing they have a successful future here in New Zealand.
It seems simple, but it’s very easy to get off track, as we have seen.
However, it is the only way to create permanent, worthwhile jobs for Kiwis and their families.
It’s a proven formula. It works. And this Budget is another step towards putting us back on track.
Despite very difficult circumstances, this Government has actually made significant changes since coming into office, but we have done so steadily, progressively, and by taking people with us.
That is in contrast to the point of view that says economic reform should happen all at once, involve a lot of noise and conflict, and follow a strict adherence to ideology rather than what works.
Needless to say, I don’t agree with that view.
I believe sustainable change happens over time, building on itself year after year, with the general support of the public.
Probably the most significant reforms we have undertaken have been in the area of tax.
These have been the biggest changes to the tax system in a generation.
Three-quarters of New Zealand taxpayers now face a top marginal tax rate of 17.5 per cent or less. Tax rates have been changed to favour saving, rather than consumption. And the fairness of the tax system has been improved by reducing the opportunities to avoid tax
Importantly, we designed these tax changes so they pay for themselves over time and therefore don’t require extra government borrowing.
We have also put the squeeze on government spending.
We have reduced the size of the bureaucracy, hauled back new budget spending allowances, reprioritised billions of dollars of spending, forced efficiencies on government departments, and improved the way the government manages its capital spending.
We have continued to protect the most vulnerable in society, and support the economy through recession, but we have also kept government debt under control and avoided a downgrade from the international ratings agencies.
We have invested in much-needed infrastructure, to start unblocking the arteries of the economy.
We have introduced 90-day trial periods for all businesses, streamlined the Resource Management Act, and introduced a number of regulatory changes to make it easier to do business.
We have introduced National Standards in primary and intermediate schools to identify students who are falling behind and intervene early to help them.
And we are pursuing an ambitious free trade agenda.
All that is a good start.
But real change in the economy does not happen overnight. It is a bit like turning around a super-tanker.
New Zealand’s economic imbalances have built up over several decades, so it will take more than a year or two to fix them.
It will take a number of years and considerable effort.
But I am very optimistic about the future.
The outlook for New Zealand is hugely positive.
Households and businesses have been saving more and shifting away from an excessive reliance on borrowing to fund their consumption and investment.
That is an important sign that the economy is moving onto a more sustainable footing.
Interest rates are at historical lows, which will stimulate business investment. Floating mortgage rates, for example, have halved over the past three years, and are at 45 year lows.
The Rugby World Cup will provide a boost to the economy at the end of this year, and rebuilding in Christchurch will significantly increase activity in 2012 and beyond.
The Budget next week will show the economy growing faster and supporting a significant increase in the number of new jobs over the next three or four years. Unemployment is coming down and we want to bring it down further – especially among young New Zealanders.
Export prices are at record levels, up 25 per cent over the past year according to the ANZ’s Commodity Price Index.
The terms of trade – a measure of export prices compared to import prices – are up 19 per cent since late 2009 and are expected to remain at high levels.
Growth among our trading partners has remained strong, which means they will continue to want what we produce.
We have been well served by our strong ties with Australia and our growing links with Asia.
The Government has been increasing its efforts to foster trade with Asia. In 2010, for example, the Government took six trade missions to China. Exports to that country have increased 40 per cent in the past year alone.
Our competitiveness with Australia is near an all-time high. A very favourable exchange rate is helping our exporters compete across the Tasman, and our 28 per cent company tax rate is below Australia’s.
And let’s not forget that despite all of our significant global and domestic challenges, the economy has grown, albeit modestly, in six of the past seven quarters.
So there is much to look forward to.
But as the economy picks up, it is crucially important that our growth is not based, as it was in the 2000s, on debt, consumption and government spending, but instead is built on the solid foundation of savings, exports and productive investment.
As I said in my speech at the beginning of the year, a key part of that rebalancing is an increase in national savings.
Businesses and households are currently doing their bit, by lifting private savings.
The key sector which is not saving right now is the government.
Labour’s spending and lax fiscal management have meant the government is fundamentally over-committed compared to how much revenue it can raise.
While we have been steadily improving this situation there is still a lot more to do to reduce deficits and rein in our expanding debt.
It is very telling that one of the key recommendations of the Savings Working Group is for the Government to return the budget to surplus as soon as possible.
But there is, as always, a balance to be struck here. We want to return to surplus as soon as we can, and limit government debt.
But at the same time we also want to fund our share of the reconstruction of Christchurch, New Zealand’s second-largest city.
We want to continue to protect the most vulnerable New Zealanders, who depend on the government for support.
We want to boost frontline health and education services.
We want to give businesses the confidence to grow, invest and create new jobs.
And we want to continue to invest in important capital projects, to build up the productive assets of New Zealand.
All these are extremely important roles for the Government.
So while Bill English will be announcing some significant savings next week, it won’t be a slash and burn Budget.
It will be a responsible Budget that balances a number of the Government’s aims.
That will disappoint some people, who like the drama of severe cuts.
It will also disappoint the Labour Party, which is clinging tight to policies of borrow, spend and hope.
In actual fact, the changes we will make to programmes like KiwiSaver, Working for Families, and student loans, are to ensure their survival.
As I said earlier this week, we recognise that New Zealanders value these programmes and therefore we want to make sure they are around for the long haul in a form that is affordable. That means that they have to be affordable when it’s sunny and affordable when it’s raining.
When you look back, these schemes were in fact designed on the hottest day of summer.
They were introduced when Labour thought the debt and consumption-driven economic bubble of the 2000s, and therefore the booming tax take they were getting, would go on forever.
That idea ended quite abruptly in 2008.
Post-recession, it is clear that the high costs of KiwiSaver, Working for Families and interest-free student loans are unaffordable in the longer term.
The changes we will make in the Budget will ensure they are more enduring and sustainable.
We don’t want Kiwis to be thinking from year to year that these programmes could end up being axed.
We want to give them confidence that future governments can afford to run and maintain them.
That is not the case at the moment.
Put together, these three programmes are costing taxpayers the best part of $5 billion a year, and rising.
Since the Government has a large structural budget deficit, this is $5 billion of money that has to be borrowed from foreign lenders.
That has a particular resonance for KiwiSaver, which was created as a way to increase national savings.
People might not realise this, but currently over $1 billion a year of what goes into people’s KiwiSaver accounts comes from the government, through subsidies and tax breaks.
Over time, the government has put in nearly half the money that has built up in KiwiSaver accounts.
But that does not constitute real savings.
That’s because the government has to borrow to raise it, and the debt on one hand simply cancels out the saving on the other.
It’s a bit like someone going to Westpac to borrow some money then taking it to ANZ to put in their savings account. It’s easy to see that this is not real savings.
So at the moment, the government contributions to KiwiSaver make no difference to the level of national savings.
They do, however, increase our reliance on overseas lenders, who can at any time decide that our debt has grown too large and that we are just too much of a risk.
We recognise there is an important place for government contributions to give an incentive for people to save And we certainly support the elements of KiwiSaver which are successfully encouraging long-term savings habits.
KiwiSaver is a very well-established savings scheme, with nearly 1.7 million members, and is gaining about 20,000 new members a month. There is no question about it continuing.
But national savings are only increased when the savings are genuine, that is, when they come from people or businesses or government actually reducing their spending.
Otherwise we are all just kidding ourselves.
So the Government wants to put KiwiSaver on a sustainable platform for the longer term, as well as increasing national savings.
In the Budget the Government will change the mix of contributions to KiwiSaver accounts, with less coming from the Member Tax Credit and more coming from both individuals and employers. The $1,000 kick-start for new KiwiSaver members will remain as it is now.
The changes to KiwiSaver won’t happen immediately, and this will give people and businesses time to adjust.
Increased contributions from people and businesses will happen at a time when the economy will have well and truly recovered, and both wages and employment will be increasing.
The changes will maintain total contributions into KiwiSaver funds, which are expected to accumulate rapidly.
After the Budget changes, total KiwiSaver funds are projected to rise from around $8 billion currently, to about $25 billion by 2015, and to almost $60 billion in 10 years.
The advice we have had from officials, who have modelled the effect of the Budget changes, is that they will result in a modest improvement in the rate of national savings.
As a result of the KiwiSaver changes alone, New Zealand’s net international liabilities – the amount the country owes to foreign lenders – will reduce by an estimated two per cent of GDP over the next decade.
I am not going into any more specifics today – people will have to wait for details to be released in the Budget.
But what I can say is that none of these changes will affect people before the election. So New Zealanders will be voting with all the information they need to make their own choices.
In terms of Working for Families, we have previously indicated that the scheme will be better targeted at lower-income families, which have a much greater need for assistance, and will be a little less generous to families higher up the Working for Families scale.
That is bearing in mind, of course, that when it comes to Working for Families, being ‘higher up the scale’ depends on how many children a family has. For example, Working for Families payments currently tail off at an income of around $75,000 when a family has only one child, but around $130,000 when a family has four children.
Working for Families, under various names, has existed since 1986, and again there is no question about it continuing.
What happened over the course of the 2005 election campaign, however, is that, for the sake of politics, the scheme was boosted overnight to a level far beyond what even Michael Cullen had originally planned for it.
This year Working for Families tax credits will cost almost $2.8 billion – roughly twice what they cost in 2005/06.
Nonetheless, families have now come to rely on Working for Families, in no small part because growth in after-tax wages only marginally exceeded the rate of inflation under nine years of the Labour Government.
Over time we intend to slightly reduce the amount spent on Working for Families each year, but at the same time target a greater proportion of the total spend at the most vulnerable families.
We will do this gradually, in a way that minimises the impact on families.
The changes will be phased in over the best part of a decade and in fact most families will see increases in their Working for Families payments over this time.
The changes will make Working for Families simpler and more sustainable into the future.
But again, none of the changes will affect people before the election.
Finally, in terms of student loans, Steven Joyce has already signalled that the Government is looking to get costs down, within the parameters of an interest-free scheme.
New Zealanders have indicated they are prepared to subsidise student loans by having them free of interest.
But their generosity is currently being stretched. For every hundred dollars lent to students, taxpayers can expect to get only $55 back (in 2011 dollars).
In particular, there is a big issue with students who subsequently go overseas. These people have over half of all the overdue debt under the student loan scheme.
That is not good value for taxpayers.
We need to ensure borrowers understand that when they choose to access the loan scheme they are also taking on all the responsibilities that come with it.
We made some changes in last year’s Budget and we will be making some more in the Budget next week.
And at the risk of repeating myself endlessly, none of these changes will affect people before the election.
Again, that means people will have the opportunity to decide whether a responsible approach to balancing the books and building growth is one they want to support.
Ladies and Gentlemen
Bill English’s third Budget will be a very measured and responsible Budget.
It will contain both spending and saving initiatives.
It will provide certainty of funding for the reconstruction of Christchurch and the surrounding area.
And it will build a stronger platform for jobs and growth into the future.
Here in New Zealand we have a chance, now the economy is gathering steam again, to build a solid platform for future growth.
If we get this right the opportunities are endless.
That is what Budget 2011 is all about.