Key: Jobs and Growth
Hon John Key
4 February 2009 Speech
Jobs and Growth:
Speech to the Waitakere Enterprise Business Club
We live in challenging times.
It’s been more than a year since the first tales of financial ruin started to trickle out of Wall Street.
What started as a trickle has gathered momentum. Each week we are being met with more bad news about the state of the global financial and economic system.
There can be no doubt that these waves of bad news have darkened New Zealand’s economic outlook.
We are a small open economy and our fortunes rise and fall with those of the wider global economy.
The IMF predicts that global growth this year could be the weakest we have seen since World War II. And, even worse from New Zealand’s perspective, it predicts that the advanced economies, which make up most of our trading partners, will shrink by 2 per cent.
The resulting forecasts for our economy are sobering. Falling growth rates. Lower commodity prices. Falling demand for our exports. Rising unemployment.
I know that some in this room are already feeling the effects of these global events, while others will be worried for their prospects in the months ahead.
I share your concerns. We are certainly facing a tough couple of years ahead.
But let me be clear from the outset. I am confident that we will get through these tough times together. The New Zealand economy will recover strongly.
As Prime Minister, I have made that recovery the number one priority of my Government, and all my Ministers are working towards that goal.
Later on in this speech I will announce a series of initiatives designed to provide some relief to the small and medium-sized Kiwi businesses that will play such an important role in that recovery.
Before I do so, let me outline how this package fits in with our wider Jobs and Growth Plan for the economy.
Jobs and Growth Plan
The Government’s Jobs and Growth Plan is about keeping the economy running as strongly as possible, easing the sharpest impacts of the recession and preparing our economy for future growth.
In support of this plan, and in light of the deteriorating global economic situation, we have already taken several steps aimed at protecting Kiwis’ jobs and financial security.
We have overseen the introduction of retail deposit and wholesale funding guarantees.
These are designed to maintain the liquidity of the financial system, and to ensure our economy can continue to function.
We are carefully watching the operation of these schemes to ensure they are working. We are also keeping a close eye on the banks to ensure that large cuts in official interest rates are passed onto everyday Kiwis.
Secondly, we have moved to lessen the impact of unexpected job losses through the introduction of our ReStart package.
This package, introduced before Christmas, will provide extra support to those hit hard by redundancy, and it will lessen the shock of sudden job losses.
Thirdly, we have passed legislation to introduce extensive personal tax reductions on 1 April this year.
These tax reductions will help New Zealanders make ends meet and reward their hard work even as international conditions worsen. They will inject considerable stimulus into the economy.
Fourthly, we will add to that stimulus with a series of fast-tracked Government building projects. These will keep more New Zealanders working as the international crisis hits home.
I will announce details of these projects next week. They are specific projects that were chosen because they are worthwhile and can be geared-up quickly.
They will employ Kiwis with diggers, hammers and spades in regions throughout New Zealand. And in turn they will help keep suppliers and sub-contractors, shopkeepers and sales staff in business.
Larger, longer-term infrastructure projects will also be announced in the coming months.
The combined effect of this infrastructure spending, together with tax reductions, will mean that New Zealand will experience a fiscal stimulus amongst the top five in the developed world, when compared on a relative basis.
That stimulus package will help keep our economy ticking over even as global demand falls, and it will help many businesses and families keep their heads above water.
In addition to these measures, three weeks from now I will be hosting a Jobs Summit.
This will bring together industry, business and other employment experts, including training providers, iwi and unions, and will be designed to harvest practical ideas for keeping people in jobs and helping them to find new jobs.
I will ask the participants at the summit to leave their ideology at the door, and to instead focus on what will work for everyday Kiwis.
I will ask them to think about what actions they can take to keep their fellow New Zealanders employed.
And I will ask them to come to the table in a positive and collaborative spirit with the intent of agreeing on concrete, achievable measures.
The resulting ideas will feed into the Government’s next steps in what I like to call our rolling maul of Jobs and Growth initiatives.
A Balanced Approach
The Government will remain open-minded on future steps that may be required as economic conditions worsen over the next few months.
I am very conscious however that steps taken today to stave off the international crisis should not be devised in such a way as to undermine the economy in the years ahead.
There is a balance to be struck.
We simply must ensure that decisions taken now neither undermine the future prosperity of our country nor diminish the opportunities available to this and future generations of New Zealanders.
Because despite the wishes of some commentators and despite the gloom on the horizon, my Government won’t lose sight of our determination to make a lasting difference to the lives of New Zealanders, now and in years to come.
That means rejecting some of the alarmist suggestions that will be made to us.
It means being careful, and making decisions in a disciplined way.
And it means avoiding the temptation to spend any amount whatsoever, without regard to the trade-offs that expenditure may have for the future of New Zealand.
We simply must weigh up the fiscal costs of initiatives we take now against what those costs will mean for the Government books in the longer-term.
Because I know, and you know, that if we borrow excessively to look after the taxpayers of today, we will end up saddling our children with a mountain of government debt.
In the more immediate future the prospect of an excessive level of debt would swiftly bring a downgrade from credit agencies, leading to higher interest rates and lower growth rates into the future.
So we need to be sure that the decisions we make now really hit the mark.
You can be confident then that over the next two years, as times get tougher, my Government will continue to act responsibly, because we know that a short-term sugar- fix today could lead to a diet of debt later.
Future Growth Opportunities
While we must be careful we can also take heart that the economic situation presents some real opportunities.
When it comes to the recession we need a dose of reality but we also need a dollop of confidence.
During this global downturn, we can work to improve the performance of our economy relative to other countries, and we can emerge better off.
That’s the second, longer-term goal of the Government’s Jobs and Growth Plan.
It’s about improving the fundamentals of our economy. A tax structure that rewards hard work. Reform of the Resource Management Act to allow people to do more things. Reducing the red-tape that saps initiative and good ideas.
It’s about policies that will future-proof our economy and set us up for a strong recovery.
These include our “Build New Zealand” proposals to future-proof our country with investments in roads, public transport, schools, housing and broadband.
When our economy starts to recover we don’t want New Zealand to be constrained by inadequate transport networks and essential facilities. We want to be ready to grab opportunities for growth.
It also includes our “Frontline Services” policies to improve public services by getting more out of existing resources.
Because just as the days of cheap and easy credit are gone, so too are the days of Governments being able to spend ever more without being accountable for results.
Getting better value for taxpayer dollars is part of the day-to-day business of my Government. We will run a value-for-money ruler over everything we do.
We will also pursue “Education for Success” policies to tackle the long tail of underachievement in our schools. Because the future prospects of our economy depend on each and every Kiwi being able to make a skilled contribution.
These are the policies I campaigned on and they are policies I am committed to implementing.
Furthermore, they are policies that will play a critical role in supporting jobs and growth in the long-term. They are about ensuring that steps taken to improve our economy today can endure in the decades ahead.
Small-Business Relief Package
Let me turn now to the Government’s small-business relief package.
This is a package of measures designed to lighten the load on small and medium-sized businesses in New Zealand.
Improving the environment for business, and therefore jobs and growth, is a long-term undertaking for this Government.
This task has become even more pressing in light of New Zealand’s current economic predicament.
Many of our firms, some of whom may be represented in this room today, are finding their cash-flows shrinking as demand for their products and services erodes.
Some exporting firms are finding it harder to get short-term trade credit insurance.
And, even more than in the past, all firms are finding they need to focus their resources where they can most help the bottom line. As such, they are becoming increasingly intolerant of form-filling and time-wasting compliance.
The package I am announcing today is aimed at urgently improving the business environment by reducing the impact of taxes on firms’ cash flows, by improving firms’ access to credit, and by reducing business compliance costs.
It has five parts:
• A suite of tax changes,
• An expansion to the Export Credit Scheme,
• An extended jurisdiction for the Disputes Tribunal,
• The expansion of business advice services, and
• A prompt-payment requirement for Government agencies.
Let me deal with each of these in turn.
1. Tax Initiatives
A major part of today’s package is a suite of 11 new tax initiatives, designed to help businesses, particularly smaller businesses, with their cash flow and to reduce the compliance costs they face.
The Government is also going to fast-track five initiatives which are in an existing tax bill, to ensure that they apply from 1 April 2009.
In total these initiatives will cost the government almost half a billion dollars over the next four-and-a-quarter-years.
That means half a billion dollars of benefit to New Zealand businesses.
In addition, and equally as important, these tax measures will reduce the compliance and form-filling that smaller business owners have to do themselves, or pay an accountant to do for them.
These changes are good news for small businesses, but I’m afraid they’re bad news for tax accountants.
That’s as it should be.
In these tough times, I want small businesses to be focusing on the road to jobs and growth, not on the taxman’s forms.
The details of these tax changes are contained in the background material accompanying this speech, and can be found on the Beehive website.
Let me touch on some of the highlights.
First, the Government is going to help businesses with their cash flow during this recession by temporarily reducing the amount of provisional tax they are required to pay.
As you are no doubt aware, the standard method of calculating provisional tax payments is to assume that they will total 105% of last year’s income tax, or 110% of the year before that.
The Government is going to lower that formula to 100% of last year’s income tax, or 105% the year before that, for provisional tax payments relating to the 2008 and 2009 tax years.
This will give all firms a positive cash flow boost in the short term, allowing them to delay some of their tax payments into future years.
And for those firms who are struggling through this recession, and making reduced profits, it will reduce the chance that they overpay provisional tax.
Ultimately, firms will still have to pay the correct amount of income tax, but this initiative will allow them to manage the timing of their payments better. It will give them a bit of breathing space in what will be a challenging couple of years.
This initiative will come into effect on 1 April this year. The immediate impact for firms will be an estimated cash flow boost of $245 million between 1 April and 30 June.
The second major tax change the Government is making is a reduction in ‘Use of Money Interest Rates’.
This will ease the penalty on small businesses that, for whatever reason don’t get their tax payments quite right.
We’ve listened to businesses who’ve pointed out that the taxman’s interest rate is out of whack with market interest rates.
We agree that these rates must come down. This is not a time for excessive penalties from the taxman.
We will drop the underpayment penalty rate from 14.24%, to 9.73%.
This change will be effective from the end of this month.
Bringing down this rate will significantly reduce the interest cost to taxpayers for underpaid or late tax, freeing up more funds for productive uses.
It will be of particular benefit to provisional taxpayers in industries like farming that can experience significant fluctuations in their earnings.
It will also reduce the tax burden on those who cannot meet their tax obligations for a short period because of cash flow problems.
The third change is that the Government is going to cut back on the number of times many businesses have to file PAYE and Fringe Benefit Tax (FBT) returns.
We are going to set a new threshold in legislation which means that around 15,000 businesses will be able to move from paying PAYE twice a month to paying it only once a month.
Those 15,000 businesses will also be able to move from paying FBT four times a year to paying it only once a year.
As a result, those firms will benefit from increased cash flows and significantly reduced compliance costs.
These changes will apply from 1 April this year.
From that date onwards, around 98% of businesses will only have to file PAYE returns once a month, and will only have to file FBT returns once a year.
We’ll also ease up the rules so that employers can provide employees with a greater range of smaller benefits before FBT kicks in. And we’ll lower the FBT interest rate that applies to businesses providing low-interest loans to their employees.
The fourth set of changes is around GST.
We will free up to 47,000 Kiwi businesses from the cost and burden of GST compliance by changing the rules around GST registration.
We will do this by increasing the amount that a small business can turnover before it has to GST register, up from $40,000 to $60,000.
We will also allow more firms to account for GST when they actually get paid, rather than when they issue an invoice. We will do this by increasing the GST payments basis threshold from $1.3 million to $2 million, which will affect up to 14,000 firms.
Finally, we’ll simplify the rules around two tax-deductibility bug-bears.
The rules around tax deductibility for legal expenditure are confusing to even very experienced business people, leading to high compliance costs.
We’ll cut out the confusion by allowing all types of business-related legal expenses, up to $10,000 a year, to be deducted.
In addition, the thresholds under which businesses can deduct expenditure in the course of one tax year, instead of having to spread that deduction over several years, are being lifted. This will be for common items of expenditure such as building leases and advertising.
Those are some of the key tax changes in this package.
I now want to talk about the other measures in our small business relief package.
2. Expansion of the Export Credit Scheme
We have become aware in recent weeks that some good exporting businesses are finding it particularly difficult to get short-term trade credit.
This has made it very difficult for them to continue trading in some countries.
The result is that some Kiwi exporters, particularly small-to-medium exporters, have had to turn down export orders.
That is unacceptable.
We will plug the gap by expanding the powers of the Export Credit Office so it can provide short-term trade credit insurance on export contracts with payment terms of less than 360 days.
This guarantee will be provided on a temporary basis, for a period of up to two-and-a-half years.
This step will expand the lines of credit available to exporters and will help ensure trade opportunities won’t be missed.
3. Expanding use of Disputes Tribunal
We will also take action on another trouble-spot for smaller firms, by reducing the number of small claims that result in District Court battles.
We will encourage use of the lower-cost Disputes Tribunal by raising the financial threshold at which cases can be heard there.
Currently the maximum claim level of the Disputes Tribunal is $7,500 or $12,000 with the consent of both parties. We will lift those levels to $15,000 and $20,000 respectively.
This change will reduce costs in up to 3600 cases a year which will now be able to be held in the Disputes Tribunal.
4. Business Advice
I am conscious that in spite of the measures I have just outlined, these will continue to be uncertain and troubling times for many small and medium-sized businesses.
Many small businesses don’t have the resources to call in expensive financial management advice when things get hard.
I want to ensure that when firms want help they can get it.
So from today the Government will expand an 0800 helpline to assist businesses who may want help.
As part of this service, businesses will be able to ask for a standard ‘health check’ to identify any major problems and to solicit solutions to them. Businesses will also have the option of being put in touch with a suitable mentor at no cost.
In addition to these expanded 0800 line services, from today the nationwide network of Biz Centres will begin promoting seminars offering tips on how to manage businesses through an economic downturn.
5. Prompt Payment Requirement
Finally, the Government intends to show leadership by ensuring we are good payers to firms which supply us with goods and services.
All businesses who supply goods and services to government agencies should receive payments promptly. At the moment that does not always happen.
That needs to change.
At a time when the Government is doing all it can to get Kiwis through this downturn, it is not acceptable that some government agencies could undermine that effort by being tardy in paying their bills.
Therefore I have asked the State Services Commissioner to write today to the chief executive of each government department, directing them to urgently review their processes for approving and paying invoices to their suppliers and to bring forward payment dates where possible.
At the very minimum, I expect departments to pay their invoices in accordance with their posted terms and conditions and in any event no later than the 20th of the month following the receipt of the invoice.
Departments will also convey to the Crown agencies they monitor, these expectations for prompt processing and payment of invoices to suppliers.
In short, that means paying Kiwi firms without unnecessary delay.
I want to stress that the package I have announced today is just one aspect of the Government’s long-term programme for improving the business environment in New Zealand.
You will remember that before Christmas we moved swiftly to introduce our 90 days probationary employment law for small businesses.
That policy is an important tool for improving the job prospects of many New Zealanders who small firms may have otherwise been reluctant to take on.
Yesterday we announced our package of reforms to simplify and streamline the Resource Management Act.
These reforms will significantly reduce the compliance burden created for small and medium-sized businesses wanting to expand, develop and innovate.
There is more to come.
In particular I have given Rodney Hide, as the Minister for Regulatory Reform, the mission of finding and cutting additional red tape that is holding back business development, reducing investment and depriving New Zealanders of jobs.
He is hard at work on that mission and will have announcements to make in the coming weeks.
I have also asked that my Minister of Finance, Bill English, continues to monitor the economic situation facing all firms, particularly small and medium businesses.
He will report back to Cabinet at the end of March.
Some of the changes I have announced today are small, others are large.
Taken together they demonstrate the kind of practical, results-focused approach my Government will take to leading New Zealand through these tough times.
I don’t pretend to have laid out all the answers today or allayed all your fears.
After all, the fortunes of the New Zealand economy are not just controlled by the good judgment of the Ministers sitting around the Cabinet table.
Nor is the New Zealand economy able to be completely immunised from the impact of world events.
Rather, the New Zealand economy is the sum of the work of many.
It is the result of the hard-work of Kiwi Mums and Dads, the smart ideas of small businesses, the output of our farmers, global demand for our products, the foresight and competitiveness of our industry and the individual leadership of business people and employers like those in this room today.
Together all of these factors play a role in the performance of our country’s economic engine.
The task of Government then is not to claim to be that engine, but instead to do all that we sensibly can to keep that engine humming, tuned and free to go up a gear.
My Government is resolutely focused on this task.
That is why in the years ahead you can expect us to implement policies that aim to encourage the resilient Kiwis whose hard work, tenacity and initiative will get New Zealand through this downturn.
Because, in the end, it is the extra efforts, the good ideas and the good will of all of us that will get our country back onto a strong growth path.
And my sense is that overwhelmingly New Zealanders have confidence that through their own efforts, and with the support of their community and country, they will get through the challenges ahead.
My Government intends to back those Kiwis, and place our confidence in them and their future prospects. I urge you to do the same.