Pre-Budget Speech 2017 to the Wellington Chamber of Commerce
Hon Steven Joyce
Minister of Finance
27 April 2017
Pre-Budget Speech 2017 to the Wellington Chamber of Commerce
Thank you John and Peter and the Wellington Chamber of Commerce.
Special guests, Ladies and Gentlemen. It’s a pleasure to be here.
Budget 2017 is now just under one month away and preparations are continuing.
I have four key areas I am thinking about in getting ready for this year’s Budget.
First, delivering better public services for a growing country – providing all New Zealanders with the opportunity to lead successful independent lives.
Second, building the infrastructure we need in growing a modern economy.
Third, we need to keep reducing debt as a percentage of GDP.
And finally, we remain committed to reducing the tax burden and in particular the impact of marginal tax rates on lower and middle income earners, when we have the room to do so. We need to always remember that every dollar the Government spends comes from hard working Kiwi families.
That’s a lot of things to work on. And at the same time we need to make sure that we continue to build a strong economy. It’s only by having a strong economy that we get to consider these four priorities.
Today I intend to focus on two of these key budget areas, the importance of building infrastructure, and why it is important to reduce debt.
The good news in preparing the Budget is that our economy is performing well because of the Government’s strong economic plan. And that is a real tribute to my predecessor in this role, Prime Minister Bill English.
As a result of his economic leadership New
Zealand is now one of the strongest performing developed
economies since the Global Financial Crisis.
We have had positive growth in every quarter but one over the last six years.
That is a good performance in any one’s books. But it is even stronger when you compare it with our peers across the developed world. Over the last few years, New Zealand has on average grown faster than the US, the UK, Australia, the EU, Japan and Canada. Last year we were the 5th fastest growing economy across the whole of the OECD.
Consistent economic growth translates into jobs and higher incomes for Kiwis. We have one of the highest employment rates in the whole of the OECD, wages have been growing faster than inflation and as of December, for the first time, 2 ½ million people are employed in this country at any one time.
New Zealand’s Employment Rate stands at 66.9 per cent, while Australia’s is at 60.9 per cent. Furthermore, 74.6 per cent of the New Zealand labour force is in full time employment, compared to 64 per cent for Australia.
The Reserve Bank is forecasting solid economic growth at an average of 3 per cent over the four year period to 2020. If those predictions come to pass, New Zealand will have been growing almost continuously for a decade.
Of course, the next four years haven’t happened yet and predictions are just that – predictions. What is important is we understand what is driving this growth and that we take the right steps to ensure it continues rather than slipping back to our more traditional also-ran status.
This Government’s recipe for economic growth is pretty clear.
First, is trade. Much has been made of the massive growth of middle-income consumers across Asia. But it has been New Zealand companies, supported by a trade-friendly government that have been converting those opportunities to actual trade, making New Zealand steadily wealthier. And our exports have continued to grow despite the dairy downturn.
Second, our working-age population is growing, and becoming more highly skilled. That means our companies can hire the people they need to keep growing. Our education system is delivering more graduates with the right skills, our immigration system is providing the necessary skilled migrants, and our flexible labour market is encouraging businesses to add more jobs.
Third, New Zealand firms are becoming more innovative. We are building a strong innovation ecosystem of high-tech companies across the health sector, agri-tech, fintech, software as a service, edtech, govtech, and so on. Our programmes encouraging business research and development are achieving real success – Business R&D was $356 million higher last year than it was in 2014.
Fourth, we are actively encouraging more private sector investment in new businesses and in growing existing businesses especially in regional New Zealand. That includes attracting new international investors whose capital can provide more jobs for Kiwis. At the same time we are working hard to balance the economic needs of our regional communities with our all-important goal of improving environmental outcomes.
Finally, we are building the public infrastructure needed to support growth, including roads, rail, broadband, schools, houses and hospitals. In some parts of New Zealand, including Auckland – you can’t move for road cones at times – which is frustrating – but a strong sign of how we are building for further growth.
The Government’s plan is called the Business Growth Agenda. Blended with sensible, conservative fiscal policy, and successful orthodox monetary policy and you have a recipe for a steadily growing economy that provides more job opportunities and growing incomes.
One of the biggest risks in the New Zealand economy at the moment is the more insular economic policies being pushed overseas, and by our opponents domestically. Many politicians, even those in New Zealand, want to be more protective on trade, slash immigration, reduce foreign investment, institute radical new environmental regulation, centralise wage bargaining, blow up our R&D incentive system or stop much needed roading being built. And increase taxes. That’s the opposite of a recipe for growth – that’s a recipe for stalling growth.
New Zealand’s stronger economic performance continues to flow through to the Government's books.
first eight months of the year, tax revenue was nearly 4 per
cent ahead of Budget 2016 predictions and 7.7 per cent ahead
of the same period last year. Our surplus in the eight
months to February was $1.4 billion. That’s more than $900
million more than was predicted at the Half Year
A growing and more resilient economy allows us to meet some of the pressing needs that the Government is faced with from time to time.
The most recent opportunity was the pay equity settlement in the Terranova case. I’ve yet to meet anybody who doesn’t feel that that was a fair settlement for a group of 55,000 hard-working mostly female New Zealanders who have been trapped in an outdated view of the value of their work for a very long time.
One of the distinctive elements of the case of the residential care-givers is that the majority of the sector’s funding comes from Government. It is also one of the positives of this government’s economic stewardship that this year and at this time we have the resources to address this longstanding issue.
The settlement of the Terranova case will cost the Government around $2 billion over five years. We took a decision to put aside funds that will meet 90 per cent of those costs in the fiscal track at the half-yearly update. While the settlement will cost taxpayers in real terms, we have decided to treat it as outside the operating allowance for Budget 2017 – given the unique size of the settlement.
Some unions and other commentators are already talking up the potential for the Terranova settlement to lead to a number of other large settlements across both the public and private sectors. However the barrier is rightly set high, because a flow-on to other sectors would mean going back to the old relativities that these workers have just won the right to get away from.
The Government is proud to be able to solve a long standing issue and lift the wages for this group of New Zealanders as part of our quest to ensure that everyone benefits of steady economic growth.
Another pressing need has been the response to the Kaikoura earthquake.
When the quake happened, the Government immediately moved to provide support to the affected towns, with the earthquake job subsidy, primary sector and tourism support packages, extra housing assistance through MSD, additional health sector support, and grants to help with the restoration of important local infrastructure, including the Kaikoura Harbour.
The biggest challenge created by the earthquake is the reinstatement of State Highway One and the rail line both north and south of Kaikoura. It’s a massive job – but I can report today that the entire project is not expected to cost as much was originally estimated.
The current expected range for re-instating the road and rail corridors is now $1.1 to $1.3 billion dollars, down from the previous estimate of $1.4 to $2 billion.
Both the road and rail corridors will be able to be largely re-instated where they were previously – except for 2.5 kilometres of new alignment north of Kaikoura.
The Kiwirail share of the corridor rebuild is estimated to be up to $400 million, the largest part of which will be covered by insurance. The Government has put aside a capital contingency for the balance of the rail costs.
The rebuild of the state highway is now expected to cost between $800 and $900 million dollars. So today Transport Minister Simon Bridges is announcing the Government will commit $812 million to the State Highway One rebuild as part of the capital budget in Budget 2017.
The New Zealand Transport Agency and Kiwirail both continue to expect their respective parts of this crucial transport corridor to open before the end of this calendar year.
The reinstatement of the transport corridor around Kaikoura is the biggest but by no means the only large cost that will be paid by the Government and taxpayers for the Kaikoura earthquake.
The Government will be assisting the local Kaikoura, Hurunui and Malborough District Councils with the reinstatement of their lifeline utilities. That cost is expected to run to $60 million and will be included in government baselines in Budget 2017.
We have also made an additional $2 million contribution to the Kaikoura District by forgiving their loan for the new medical centre, and today Minister Brownlee is announcing an extra $1.8 million of new operating funding to the town’s water infrastructure costs as part of Budget 2017.
The costs to EQC of the Kaikoura earthquake sequence are now expected to be $550 million. This will be met from EQC’s current cash position, but EQC will have very few funds available of its own after this event and the Edgecumbe floods.
The Government of course stands behind EQC, and the organisation carries billions of dollars of reinsurance to cover a major event, but the Kaikoura earthquake hastens the need to finalise decisions in relations to EQC’s future operations. Minister Brownlee and I intend to announce decisions on the EQC review in the next two to three months.
The total cost to government of the Kaikoura earthquakes continues to evolve – but currently is still expected to be in the order of $2 to $3 billion.
Infrastructure for a Growing Country
Yesterday I had my first drive along the 22km Kapiti Expressway. That is an impressive piece of infrastructure which is reducing journey times and connecting communities on the coast and across the lower North Island. It’s the first stage of a multi-billion dollar development which includes Transmission Gully and the Otaki expressway. And nine years ago it wasn’t even on the drawing boards.
Earlier in the day I travelled down the newly widened North-Western motorway in Auckland, and through the widening of SH20 in Mt Roskill, and through the new Kirkbride Road link to Auckland airport. I’ve also recently visited and travelled over the new motorways and expressways in the Bay of Plenty, Waikato, Christchurch and Dunedin.
This Government is New Zealand’s infrastructure government. Our investment in roads, rail, broadband, schools, electricity transmission and hospitals has been unprecedented. And we are increasing it further.
At the half-year update the Government decided to increase the new capital spend for Budget 2017 from $900 million to $3 billion. We have reviewed that figure again as we prepare for Budget 2017 and our total new capital spend for each year over the forecast period.
Today I can announce that the Government has decided to invest $11 billion in new capital infrastructure over the next four years including $4 Billion in this year’s budget alone.
To put that into context, the net new capital allocated in the last four Budgets was $4.8 billion, of which $4.1 billion was funded through the proceeds of the mixed ownership model programme.
In Budget 2016 we were forecasting just $3.6 billion in new capital spend between Budget 17 and Budget 20 compared to $11 billion now.
The $11 billion is additional spend on top of investments already planned by the Government.
If you add the Government’s budgeted new capital investment together with the investment made through baselines and through the National Land Transport Fund – the total is around $23 billion over the next four years, or an average nearly $6 billion per year.
Details of how the first tranche of that money will be invested will be laid out in the Budget on May 25th. But in anyone’s language, this is a very big capital spend over the next four years.
And we want to extend that further, with greater use of public-private partnerships, and joint ventures between central and local government, and private investors.
This is the level of investment we need to make in a country that is growing strongly and one that we want to have grow further, and with it grow more and higher paying jobs, in the years ahead.
Another of the Government’s key fiscal goals is its net debt target. We have set a target of reducing net debt as a proportion of GDP to about 20 per cent by 2020.
And that’s all about resilience.
Resilience has become a bit of a buzzword in this country in recent times. Recent earthquakes and flood events have placed emphasised the importance of resilient buildings, resilient infrastructure, and resilient communities.
But the most important resilience we need to have is to be a resilient country. A country that has the ability and capacity to respond to the needs of the most vulnerable people and communities in the face of a natural disaster.
We have direct experience over the last eight years of how important this capacity is.
When the Global Financial Crisis hit, the world economy plunged and New Zealand with it. The combination of Labour’s spending, a 50 per cent increase in five years, and the impact of the GFC meant that our new Government was faced with Treasury’s prognosis of a ‘decade of deficits’ with net debt expected to climb to more than 60 per cent of GDP.
We took the decision to protect the support for more vulnerable New Zealanders through the GFC and immediately started to rein in some of the previous Government’s more wild spending plans.
Then New Zealand had the second big shock – the Canterbury earthquakes.
These two major events meant we had to borrow significant sums of money. Firstly to cushion vulnerable New Zealanders from the worst effects of the GFC, and secondly to rebuild Christchurch.
Net debt grew rapidly. We expected it to peak at 30 per cent of GDP. It actually peaked at 26 per cent.
The deficit grew – reaching $18 billion.
The important point is that to manage New Zealand through those two shocks meant borrowing the equivalent of about 20 per cent of our GDP.
That was the right thing to do. It allowed us to spread the cost of both events and allow the economy to recover without extra taxes and without slashing entitlements – which critics on the left and right were calling for at the time.
But now it is the time to get that debt down – to make sure we have the capacity to absorb and respond to the next challenges New Zealand will face.
There will always be future shocks. We are a geologically young country, and we are also a small country in an often turbulent world – so there are plenty of bumps in the road ahead of us, whether they are natural disasters or from international events.
The Kaikoura earthquake was tough for Kaikoura, for Waiau, and Seddon in particular. But it would have been much tougher for New Zealand if it had been centred a bit further north in Wellington.
It’s important we start to save now for our next rainy day. The most important protection against future shocks to run a strong and vibrant economy. Lowering debt levels gives us the capacity to do this.
That’s why the Government has set the target to reduce debt to around 20 per cent of GDP by 2020 – and we are determined to maintain the progress to that target in this budget, both by growing the economy and reducing debt. And 20 per cent is just a staging post.
In Budget 2017 the Government will set a new medium-term fiscal target of getting net debt to between 10 and 15 per cent of GDP in another five years – by the middle of next decade.
At 10 to 15 per cent, New Zealand will have the capacity to absorb not just one but a couple of big shocks at once if we need to, as we had to last time.
That’s what resilience is all about. And we owe it to our future to take that decision. And we’ll be able to do it while making the level of capital investment I talked about earlier.
The Government’s budget is about balancing competing concerns, and that is always the challenge.
Whether in deficit or in surplus there are many alternative uses for the available resources.
The Government has set four priorities for Budget 2017 – boosting public services, building new infrastructure for a growing country, reducing debt, and seeking to lift family incomes.
However the biggest priority is the one that pays for the other four. It is only through having a strong economy that we can tackle the others, and provide for the income and security of New Zealanders.
Building and sustaining a strong economy therefore remains the Government’s most important goal.
It is only through having a strong and prosperous economy, that we can deliver a prosperous and successful New Zealand.