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Key Notes 40: National's Economic Management Plan

09 October 2008

National's Economic Management Plan

On Monday, the New Zealand Treasury delivered its independent Pre-Election Fiscal Update (PREFU). This act of opening the books is required under the Public Finance Act.

The verdict was damning: Under current policies, under the current Minister, under the Labour Party administration, the Government of this country will run its accounts into the red for the next 10 years.

My colleagues and I have said on many occasions that the Labour Government was squandering the opportunity presented by the most favourable international economic conditions we have seen for decades.

We said that wealth consumption was being pursued at the expense of wealth creation.

We said that growth in the public sector was taking place at the expense of the opportunity for the private sector to invest, to expand, and to grow.

We said these missed opportunities would carry a future cost. This week's PREFU laid out that cost.

After a decade of the most favourable global economic conditions in our lifetimes, all New Zealand has to show for it is an ocean of red ink 10 years into the future.

The suddenness and severity of the international downturn has exposed our economy's weaknesses more quickly than anyone would have expected. But those weaknesses have been present for some time and they must be addressed now. This is a loud wake-up call.

Yesterday, against this backdrop, I announced National's Economic Management Plan.

The surest way out of the red ink is for the New Zealand economy to grow faster than is currently projected.

I am very conscious of the worsening international situation, which is evolving on a daily basis.

Together with my colleagues, I have been closely monitoring the build-up in problems in the financial markets over the past several months, and particularly in recent weeks, and the scale of intervention by other governments. Bill English and I received our latest briefing from the Reserve Bank on Sunday.

We are satisfied that its current plans are sufficient at this stage to maintain confidence in the New Zealand financial system over the coming months.

Should it become necessary, however, we are committed to working with the Reserve Bank on further steps to ensure financial stability.

Let me acknowledge the size of the task in front of the next Government.

Turning New Zealand's economy around will not be easy. In the past nine years, economic growth has been fed by easily available credit. Those days are over.

In today's changed world, New Zealand's economic recovery must be built on stronger fundamentals. It must be built on improved productivity and a better environment for investment in jobs and growth.

To ensure this happens, New Zealand needs a government with a strong economic management plan. That is what National will provide.

Our economic management plan will provide much-needed fiscal stimulus while strengthening New Zealand's position in the longer term by boosting economic growth.

National's economic management plan

Our plan has five essential components:

First, National will improve productivity across the public sector by ensuring a strong focus on the provision of frontline services.

For the past nine years, Labour has been indulging in record-beating spend-ups while failing to improve the productivity of the services they've been funding. I'm thinking, for example, of the health system. Billions more have gone in but surgery waiting times are longer.

There has been a huge increase in the number of reports, strategies, and initiatives across the public sector. The amount and cost of policy advice, communications, and administration has ballooned. It has to stop.

Kiwis confronting tougher economic times are scrutinising every dollar. It's time to instil the same kind of discipline across the public service.

Our message to public agencies will be clear: You must focus taxpayers' money on the frontline services that New Zealanders have a right to expect. And you must scrutinise every dollar and make sure it is money well spent.

Secondly, National will stop the massive rise in head office bureaucracy that Labour has encouraged, and we will deal with the regulatory and compliance issues that smother Kiwi businesses.

Within the first 100 days of our first term, National will introduce a bill to streamline and simplify the Resource Management Act.

We will amend the Emissions Trading Scheme to ensure it strikes a better balance between the need to reduce greenhouse gas emissions and the need to grow our economy.

We will undertake a regulatory review programme. This will identify and remove inefficient and superfluous regulation. It will ensure that regulations are used sparingly and effectively, and reviewed more often.

The hours that businesses spend complying with the demands of government come at a cost. That cost is investment that does not take place, jobs that are not created, and income that is not earned.

National will work hard to reduce the demands that government places on businesses so they can focus on getting through this downturn.

If I am elected Prime Minister of this country on November 8, I intend to bring the chief executives of government departments together and give them a clear and simple message: Their purpose in life is to facilitate the development of a more successful, prosperous nation - not to stand in the way of those who seek to create that prosperity.

The same message will go out to the leaders of local and regional government.

The third part of our plan is the programme of ongoing tax reduction which I will detail further on.

If we are elected, one of our first steps will be legislating for this tax package. We will pass these tax changes into law before Christmas.

Fourthly, National will step-up infrastructure investment in vital national assets like roads and an ultra-fast broadband network.

New Zealand businesses and workers need confidence that the government is committed to growth, both today and in the years ahead. We must unblock the bottlenecks in New Zealand's economy if we are to ensure more productive growth in the years ahead.

So, a National-led Government will invest wisely to enhance New Zealand's growth potential.

Finally, we will have an unwavering focus on lifting education standards.

Our economic future depends on a more skilled workforce. Today's school children are that workforce. New Zealand simply cannot afford to tolerate the long tail of underachievement in our schools. I will have more to say about National's education policies in the coming weeks.

National's tax reduction programme

Now let me turn to tax.

The tax package I announced yesterday reflects National's willingness to set longer-term priorities to strengthen the economy and to make choices to achieve them.

The goals of this package are to stimulate the economy while creating the drivers for long-term economic growth.

One of our first priorities is reductions in personal tax.

In the short term, personal tax reductions will provide much-needed flexibility to taxpayers confronted with difficult economic conditions.

In the medium term, our tax package will help make New Zealanders' after-tax wages more competitive. It will improve incentives in our economy and it will drive growth.

In delivering personal tax reductions, I have also been determined to protect the vulnerable from the sharp edge of a recession.

To that end, we have designed our tax package so it does not require any cuts to public services. As I said earlier, our focus in government expenditure will be increasing productivity, reducing bureaucracy, and improving frontline services.

We have included in our package specific measures to cater for lower and middle income New Zealanders.

Highlights of the package

Let me highlight the principal measures in our package before going in to them in more detail.

The highlights are:

• By 1 April 2011 National's tax-cut programme will deliver a worker on the average wage a tax reduction equal to $47 a week, as compared to the taxes New Zealanders have been paying for the past nine years. As I have previously indicated, this $47 total includes the 1 October 2008 tax cuts.

• The bulk of our tax package will be delivered on 1 April next year, when it will deliver an additional $18 a week to someone on the average wage.

• We will create an Independent Earner Rebate for people earning between $24,000 and $50,000 who aren't receiving Working for Families, NZ Super or a benefit. This rebate will be $10 per week in the first year and $15 per week in subsequent years.

• Our tax reductions will result in higher rates of New Zealand Superannuation than under Labour.

• We will retain all Working for Families entitlements.

Details of the plan

I will now turn to National's tax plans in more detail.

Following on from the tax cuts of 1 October 2008, National will be making further tax reductions on 1 April 2009, 1 April 2010 and 1 April 2011.

We will deliver the bulk of our tax cuts five months from now, on 1 April 2009. As of that date National will apply the following new income tax rates and thresholds.

• A tax rate of 12.5% for income up to $14,000.

• 21% for income between $14,000 and $48,000.

• 33% for income between $48,000 and $70,000.

• And 38% for income over $70,000.

On 1 April 2010 we will shift the threshold at which the 33% rate applies out to $50,000 and lower the top rate to 37%

On 1 April 2011 we will lower the 21% rate to 20%.

This programme of tax reduction will provide welcome relief for households who are feeling the pressure of a down-turning economy.

That means that under National's tax plans around 80% of taxpayers will be paying no more than 20c in tax for every additional dollar that they earn.

This will ensure that everyday Kiwis can look forward to earning more and getting ahead under their own steam.

As a result of our changes to the tax structure, most workers with second jobs will pay a secondary tax rate of no more than 20%.

National has taken steps to ensure there is substantial relief for those taxpayers who earn less than $50,000 and who are not getting financial assistance from the government.

Those who earn between $24,000 and $50,000, and who aren't getting a benefit, Working for Families, or NZ Super, will qualify for the new Independent Earner Rebate.

This will start at $10 a week and rise to $15 a week, which they will receive as part of their normal pay cycle.

This rebate rewards those lower and middle income workers who have not received any benefit from large government surpluses over the last few years. It ensures that National's tax cuts are fair across all income levels and that all workers, no matter their family situation or income level, face incentives to work hard and get ahead.

National will drop the top tax rate to 38 cents in the dollar in 2009 and to 37 cents in the dollar in 2010.

The top tax rate applies to many of the skilled workers our communities rely on - including school principals, GPs, police officers, and many teachers. By reducing the top rate we will show these people that they have a real future in New Zealand where their effort and aspiration will be rewarded.

As I said earlier in the week, we have made some changes to our tax package in light of the news dished up in Monday's PREFU. We had planned to move more aggressively to reduce the top personal tax rate over the next three years.

Our longer-term plan for the income tax system is a simple three-tier structure with the highest rate at no more than 33% for income above $50,000. This is what we will work towards as future economic conditions allow.

But we are being realistic about what is affordable in light of the mess Labour will be leaving behind it. We will continue to target a top tax rate of 36 cents and then lower towards 33 cents over time, subject to economic conditions.

I make no apologies for sending a clear message that National values enterprise, hard work, and people getting ahead under their own steam. I think it's time we all moved on from the politics of envy and embraced a tax system which assists us in retaining our skilled workforce in this country.

Funding of the tax package

I would like to now address the question of how we will fund our programme of personal tax reduction.

Several months ago I made it clear that our tax plans would be hermetically sealed from other government spending tracks. That continues to be the case.

Paying for this package will not require additional borrowing. It will not require any cuts to public services.

Instead, National proposes a rebalancing of the tax system.

We have made two clear choices that have given us the headroom to fund our tax-reduction programme and that will make our overall tax policy self-funding.

The cost of National's personal tax cuts will be balanced by:
• Changes to KiwiSaver, and
• Stopping the Research and Development (R&D) tax credit.

Let me deal with each of these in turn.

First, changes to KiwiSaver.

The expanded KiwiSaver scheme Michael Cullen announced in 2007 is not suited to the difficult economic conditions New Zealanders are facing.

National's KiwiSaver policy is designed to strike the right balance between increased investment in savings and the need to support ongoing economic activity in today's environment. We do not believe that Labour has achieved that balance.

Before I outline the changes to KiwiSaver let me first offer this assurance:

New Zealanders who are in KiwiSaver, and who join KiwiSaver in the future, will continue to receive significant contributions from the government and from their employers.

National is proposing three changes to KiwiSaver. These changes will make KiwiSaver fairer, more affordable for current and future members, and more enduring in the long-term.

The three changes National is planning are:

• First, a reduction in the minimum contributions demanded of employees.

At the moment, most KiwiSaver members are required to contribute 4% of their income to KiwiSaver. In return, they receive a contribution from their employer equal to 1% of their income. As an interim measure, Labour has allowed some KiwiSaver members to make a more affordable contribution, of 2%. In return they receive an equal contribution from their employer.

National thinks this 2 +2 arrangement is fair and affordable. We disagree with Labour's plans to ramp-up KiwiSaver over the next three years.

National will make KiwiSaver a 2+2 scheme. Once this is bedded down, however, we will consider offering an alternative 3+3 scheme option, as and when economic conditions permit.

Let me stress that those who want to contribute more than 2% of their wages to KiwiSaver will still have that option. And employers who want to match contributions beyond 2% will still have that option, too.

• Second, National will remove the tax credit that is currently paid to employers whose staff are enrolled in KiwiSaver. This will have no effect on the amount of money that goes into New Zealanders' KiwiSaver accounts.

This subsidy was a transitional tool but it creates a complex money-go-round. It simply doesn't meet National's test for effective, disciplined government spending.

I note that the net effect for employers will be small, once they take into account the lower minimum contribution rate.

• Finally, National will repeal recent legislation which effectively discriminates against some employees who can't afford to join KiwiSaver.

However, we will keep a safeguard in place, by amending the KiwiSaver Act to make it explicit that no employee can have their gross taxable pay reduced as a consequence of joining KiwiSaver.

National believes that these three changes to KiwiSaver will make it a fairer, more affordable and more enduring savings scheme.

Second, we will stop the R&D tax credit.

When we released our Research, Science & Technology policy we noted our concerns with the effectiveness of this credit and we announced our plan to reduce it in size.

It's clear that the tax credit has created a lot of business for tax accountants and tax advisers, but evidence of real increases in R&D is harder to find.

The PREFU has reinforced how important it is that the government be a careful steward of the public purse over the next few years. National will therefore now discontinue the R&D tax credits altogether.

I am confident that businesses will continue to invest in the research and development they need to innovate and grow.

National has a clear sense of priorities. We think personal tax reductions are the priority in the current environment.

Taken together, the removal of the R&D tax credits and the changes to KiwiSaver mean National will not have to borrow or cut public services to fund our personal tax cuts.

We will, in fact, be booking a small saving from the changes we are proposing - $283 million over three years.

So, no matter what smears my opponents may try to spread, you can be confident. This is a prudent and responsible tax package. National will not undertake additional borrowing for tax cuts. We will not cut public services for tax cuts.

The fiscal picture

In putting together our tax package, National has been mindful of recent global events.

Earlier I made my clear determination to see value for money in the state sector. In that respect we have made a firm decision in relation to Labour's plans to inject significant amounts of new funding into the Ministry of Foreign Affairs and Trade.

National will not commit to this increased funding, apart from expenditure which has already been incurred. This will save around $265 million over the next few years, which we will use to reduce the operating deficit. These savings will not be used to fund our programme of tax reduction.

As I said, we will be working diligently to drive further efficiencies in the public system should we become the Government, but we have taken a conservative approach to our fiscal projections and not factored in any additional savings at this point. Our priority will be improving the productivity of existing spending and delivering better frontline services.

Earlier this year I announced our intention to borrow up to an additional $750 million per year for six years to build more infrastructure sooner. National remains committed to an enhanced infrastructure programme because it will strengthen our economy.

However, in recognition of the uncertain economic outlook, we have decided to phase in the increased infrastructure investment more slowly over the next three years. The total investment over the next six years will be $3.7 billion.

This, together with the savings from our rebalancing of the tax package and our cancellation of the Ministry of Foreign Affairs expansion plans, means National is able to project lower operating deficits and an almost identical debt track to that which Labour is projecting.

A brighter economic future

The events that have unfolded in international markets over recent weeks are testing the framework that has served the international finance sector over many decades. The world is not certain about precisely what lies ahead.

On the issues that are vital to the national interest, my colleagues and I have been careful to keep close to the relevant authorities, especially the Reserve Bank, and to signal our readiness to support initiatives that might be required to support the stability of our financial system.

The decline in the fiscal forecasts has made it necessary for us to re-visit our earlier plans, and we have done so responsibly and been straight-up about it.

If volatile world events pose any further challenges over the coming weeks, I will be equally clear in spelling out the nature of that challenge and the way in which any Government led by me would confront it.

When I entered the New Zealand Parliament, and later when I became the Leader of the National Party, I was motivated by an unshakeable confidence in our country's ability to do better.

I have always believed that given the opportunity to choose a path to a more successful, enterprising, and prosperous nation, New Zealanders would sign up to policies that would bring a brighter future.

But with the current world economic situation, the choices have become starker.

The Treasury forecasts released earlier this week paint a bleak picture of the future, for a long way ahead, if we remain on our current course, if we keep our current policies, if we keep our current government.

My colleagues and I are offering a very different way forward. It involves some clear choices. It requires us, as a nation, to be prepared to back ourselves.

That is what the package that National has put forward is all about.

John Key MP

For background and policy statements, follow these links:

Fiscal Policy Paper
Kiwisaver Policy PaperÂ
Tax Policy Paper


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