English: Finance 2012
Hon Bill English
Minister of Finance
Speech to the Auckland Chamber of Commerce and Massey University
Embargoed until 1pm
Thursday February 23 2012
Good afternoon. It’s a pleasure to join you here today.
My thanks to Michael and the Auckland Chamber of Commerce, and Steve and Massey University, for inviting me back to this annual event.
It’s now almost three months since John Key’s National-led Government was returned for a second term.
So today I want to outline the cornerstones of the policy programme you can expect from the Government over the next three years.
In its first term, the Government showed it can deliver strong and stable government in difficult times.
We worked constructively with a number of other parties in Parliament for the benefit of New Zealand and New Zealanders. We’ll continue to do that.
As the Prime Minister said last month, the next three years will be about rebuilding and strengthening the economy. We have set out a clear and comprehensive economic programme to achieve that.
In particular, we want a more competitive economy that sells more to the rest of the world. We want an economy that supports more jobs and higher incomes.
Compared to a lot of other countries, we’re in pretty good shape.
The New Zealand economy will continue to expand in 2012.
It has now grown in nine of the past 10 quarters, despite a number of headwinds – including the European debt crisis, the Canterbury earthquakes and a high exchange rate.
Looking ahead, New Zealand has a number of opportunities that will provide impetus for solid growth over the next three years.
The rebuilding of Christchurch will help drive domestic activity. Some $20 billion will be spent in Canterbury over the next few years, and we’re only in the early stages of this huge and complex project.
The rebuild is expected to add 1.25 percentage points to annual growth every year between 2012 and 2016.
In addition, our two largest trading partners, Australia and China, are forecast to maintain relatively high growth rates.
And our terms of trade will remain elevated on the back of demand for our major export commodities from emerging markets.
So we have a sound longer-term outlook. We’re making progress, despite the headwinds.
But we shouldn’t get too tied up with year to year fluctuations in forecasts and official data. What’s important is building a solid platform for sustainable longterm growth and competitiveness.
And it’s important to keep New Zealand’s outlook in context.
Despite the slightly weaker near-term forecasts, New Zealand is still expected to grow more strongly over the next two years than the Euro area, the United Kingdom, Japan, the United States and Canada.
There are some risks. Global growth could be weaker than the Treasury and others are forecasting, depending on how European policymakers manage their debt and economic challenges.
The Government is closely watching these global developments and we’ll provide a full economic and fiscal update with Budget 2012 later this year.
The Government’s economic programme
To ensure that New Zealand is well placed to grasp its opportunities – and withstand the global challenges that will continue to come our way - the Government has set out a clear economic plan for this term.
Our main priorities are:
Responsibly managing the Government’s finances.
Building a more productive and competitive economy.
Delivering better public services within tight financial constraints.
So there will be no big surprises from this Government – and I make no apologies for that.
If I had to sum it up, Budget 2012 will focus on implementing that plan.
I’ll now expand on each of our four priorities and give you some examples of how they’re delivering results.
Responsibly managing the Government’s finances
First, let me explain why the Government is focused on responsibly managing its finances – and in particular getting back to budget surplus in 2014/15.
Every household and business knows how important it is to live within their means by budgeting carefully and deciding on priorities.
It’s no different for the Government.
Between 2000 and 2009, total core Crown expenditure jumped by about 85 per cent – from $35 billion to $64 billion.
When the Global Financial Crisis struck three years ago, we said it was entirely appropriate for the Government to continue spending to absorb some of the shock on its own balance sheet.
If we exclude earthquake costs, core Crown expenses will increase by another $7.4 billion to a forecast $71.4 billion in the three years to June this year.
But we also made it clear that this could not continue forever. At some point, the Government would have to tighten up its spending and stop the increase in public debt.
We told public sector chief executives to look at their own operations and tell us how they could be improved to deliver better services with little or no new money. We gave them time to do that.
We’re now at that point. That means we’ll see quite a change in how public services are delivered.
This will also help general productivity in the economy. The public sector represents about a quarter of the real economy and it has been a drag on overall productivity.
In the election campaign, we made a commitment to return to surplus by 2014/15. This was always going to be a challenge, requiring tight control over spending for the foreseeable future.
The Budget Policy Statement last week confirmed we’re on track to achieve that.
Given the events overseas, especially in Europe, the updated forecast $370 million surplus in 2014/15 is understandably smaller than the $1.45 billion forecast in the Pre-Election Update.
I’ve been asked how bad things would need to get in Europe to throw New Zealand’s recovery off track and force the Government to rethink its path back to surplus.
It’s worth remembering three things:
First, we need to keep this in perspective. New Zealand’s exports to Europe, the UK and the US amount to just over 20 per cent of our total exports. The other 80 per cent of our exports go to faster-growing economies – the bulk of them to Asia and Australia.
Second, the track record of European politicians so far is that, in the end, they generally take the measures needed to stabilise their immediate problems – once they realise that doing nothing will make things much worse.
And finally, I think New Zealand is in better shape, and our banks are better placed now than they were in 2008, to withstand a crisis in world financial markets.
Should a meltdown in Europe get so bad that it sends the world into recession, the Government would need to look carefully at what that would mean for New Zealand and our public finances – and take the appropriate steps. Other countries would have to do the same.
But I don’t expect things will get that bad. We’re firmly committed to returning to surplus in 2014/15 and focused on what we can influence to make the economy more competitive.
We’re also improving how we manage the Government’s large and growing balance sheet. Taxpayers own $245 billion of assets, and this is forecast to grow to $267 billion over the next four years.
So we are not reducing taxpayers’ assets. Our challenge is how we pay for their growth, while getting on top of our debt.
Instead of borrowing all the money we need, we will free up some capital from within our existing asset base.
Merits of the mixed ownership programme
That’s why we’re proceeding with the mixed ownership programme. As we promised, we’re selling minority stakes in four energy companies and Air New Zealand, with New Zealanders at the front of the queue for shares.
The rationale is quite simple.
First, the Government gets to free up $5 billion to $7 billion – less than 3 per cent of its total assets – to invest in other public assets like modern schools and hospitals, without having to borrow in volatile overseas markets.
Our political opponents need to honestly explain to New Zealanders why it would be better to borrow this $5 to $7 billion from overseas lenders at a time when the world is awash with debt and consequent risks.
We would rather pay dividends to New Zealanders on shares they own in the energy companies than pay interest to overseas lenders on more borrowing.
The fact is, the Government is spending and borrowing more than it can afford into the future. So it makes sense to reorganise the Government’s assets and redeploy capital to priority areas without having to borrow more.
Most nights on television, we see the consequences of countries in Europe and elsewhere borrowing too much. We don’t want that for New Zealand.
Secondly, under the mixed ownership programme New Zealanders will get an opportunity to invest in big Kiwi companies at a time when they are telling us they want to diversify their growing savings away from property and finance companies.
Counting the Government’s controlling shareholding, we’re confident 85-90 per cent of these companies will be owned by New Zealanders.
And thirdly, it’s good for the companies themselves. Greater transparency and oversight from being listed on the stock exchange will improve their performance and the companies won’t have to depend entirely on a cashstrapped government for new capital to grow.
We already have a living, breathing and successful example of mixed ownership in Air New Zealand, which is 75 per cent owned by the Government and 25 per cent by private shareholders.
So that’s why we’re offering New Zealanders minority stakes in these companies and putting them at the front of the queue for shares – as we said we would before the election.
Building a more competitive and productive economy
Our second economic priority is building a more competitive and productive economy.
It’s important to understand the Government’s role here. Our role is not to worry about fluctuations in economic indicators from month to month or quarter to quarter.
The Government’s main role is to look out over the next five years or more and set a policy framework that helps the economy become more competitive and productive in the longer term.
That’s precisely what we’re doing through our economic programme.
Our tax package in the 2010 Budget which increased taxes on consumption and property speculation, and reduced taxes on work and saving.
Our requirement for government agencies to deliver better public services at less cost.
Our changes to regulations, including a six-month time limit for consenting medium-sized projects under the Resource Management Act.
Our multi-billion dollar infrastructure programme.
Our focus on changing the incentives around welfare and work.
And reducing costs on business – for example, ACC levies on employers and the self-employed will fall by 22 per cent this year, reducing total costs to business each year by about $250 million.
All of these long-term policies are aimed squarely at building a more competitive economy based on more savings, exports and productive investment, and less borrowing, consumption and property speculation.
The Government detailed its economic programme before the election in our 120-point economic action plan. There are not one or two magic things that will transform the economy – literally, we need to do more than 100 things well.
Steven Joyce and I are working on the next steps in the action plan, and we’ll provide an update on progress in the next few months. That will clearly show the progress we’re making on existing initiatives and we’ll add new ones as we move forward.
The Prime Minister has reorganised a number of ministerial portfolios to ensure we focus strongly on creating conditions that encourage businesses to grow.
No policy works unless or until a business decides to invest or employ.
Taxpayers invest large amounts of money supporting inputs to business – such as skills and training – as well as regulating their activities.
We need to ensure these activities support growth.
And we need to ensure this is coordinated and delivers results.
For example, in the science and innovation area, we have a tertiary sector with a role; economic development with a role through New Zealand Trade and Enterprise grants; and we’ve also got the Ministry of Science and Innovation.
By putting them all together under one minister in Steven Joyce, we get more cohesive and effective policy.
Better public services with little or no new money
Our third priority is delivering better public services within tight budgets.
New Zealanders are rightly demanding better services delivered in innovative and more effective ways.
They expect world-class health services for their families. They want every child to be educated so they can fulfil their potential and contribute to society.
And they want the most vulnerable New Zealanders protected through the justice and welfare systems.
As the Government has made clear, in the current tight fiscal environment those services need to be delivered with little or no extra money.
As we’ve seen in the past, simply throwing money at problems doesn’t work.
The Government’s approach is based firmly on improving results – and providing the resources for that to happen in priority areas.
In education, for example, we’re improving performance measurement and accountability in schools, and we’ll invest $1 billion of mixed ownership model proceeds in modernising New Zealand schools.
In welfare, we’ll move quickly in the next few months to get our reform programme underway.
It’s staggering that around one in eight New Zealanders aged 18 to 64 is on a benefit, and about half of them have spent at least five of the past 10 years on a benefit.
That’s not only bad for the beneficiaries and their children, it’s a waste for society and taxpayers.
So we need to provide beneficiaries - particularly long-term beneficiaries - with support and better incentives from public agencies to help them move off welfare.
Finally, the Government’s other priority is rebuilding Christchurch.
One year on from the devastating earthquake on 22 February last year, the Government is absolutely committed to rebuilding our second largest city.
We set aside $5.5 billion in Budget 2011 for the Canterbury Earthquake Recovery Fund; we set up the Canterbury Earthquake Recovery Authority; and we passed special legislation so the Government can step in where required to remove barriers to reconstruction.
My colleague Gerry Brownlee is doing an outstanding job in difficult circumstances.
We need to remember the scale of the Canterbury earthquakes. It’s not only unprecedented in New Zealand, but we can’t find a natural disaster in the world that has had such a large impact on a developed economy.
The cost of damage is estimated at more than $20 billion, so it’s without doubt the biggest economic project we’ve seen in this country.
Unfortunately, ongoing earthquakes have delayed the rebuild. This is understandably frustrating for the people of Christchurch.
As the Prime Minister has said, the Government will continue to stand with the people of Canterbury and we’re determined to see that momentum is maintained.
Progress is being made – although not as quickly as many Christchurch people would like.
Construction is underway on about 20 significant commercial buildings within the four avenues of the central city.
Work on around 80 per cent of the 1,400 buildings required to be partially or fully demolished in greater Christchurch has been completed.
And around 200 infrastructure repair projects, worth more than $420 million, are underway across the city.
The residential red zone settlements are progressing well. Almost half of the 6,800 property owners in the residential red zone have formally accepted the Government’s offer to purchase their properties.
More than one third have already settled on their properties, allowing them to move on and restart their lives.
As the rebuild gathers pace, this will provide a significant boost to the Canterbury and New Zealand economies.
In closing, I’d like to reiterate that New Zealand is in a good position to take advantage of the opportunities we have as a country.
I have no doubt the coming 12 months will be extremely busy and, at times, quite challenging for the Government as it controls spending and reduces deficits.
We will stick to the very clear plan I’ve talked about today. Budget 2012 will be about implementing that plan.
New Zealanders have shown remarkable resilience in the face of some significant challenges over the past three years.
That’s why I’m confident that we will overcome whatever challenges come our way in the next three years.
That’s also why I’m confident that we’ll build the brighter future New Zealanders deserve.