Back in January, amid growing public attention on the weakening United States economy, journalists naturally wanted to know how the New Zealand government would respond to the financial market developments unfolding across the Pacific.

In an article I wrote at the time, I stressed that the overarching commitment of the government would remain to protect New Zealanders, all New Zealanders, from the rough edges of any potential slowdown which might be before us in the challenging months ahead.

On the positive side, I noted that the Crown had utilised part of its surpluses over the last eight years to invest heavily in the productive capacity of the economy, while simultaneously building-up financial assets in the New Zealand Superannuation Fund.

The government’s “tight” fiscal policy during the good times meant, I said, that we would be in a much stronger position as a society to cope with any undue weakening in the global economic environment than we would have been had we run “looser” fiscal policy in recent years.

The New Zealand government, for example, has been running significantly higher underlying budget surpluses than Australia, while opposition parties in the U.S. and in the United Kingdom have criticised their governments for entering this period of global slowdown running weak fiscal positions. These weak positions have arguably left those governments with less room to manoeuvre now that they find themselves facing more challenging times.

I also stressed that we head into this period of global economic uncertainty from a position of strength still enjoying the longest sustained period of employment and economic growth since World War II.

Many economists expect, for example, that reports on our economy (such as Gross Domestic Product for the year ended December 31 due from Statistics New Zealand next week) will still reflect solid growth in our economy at the end of last year.

But we also know that as we fast approach the end of the first quarter of the year, the roll-out of disturbing news about both the United States’ economy and its financial markets continue apace and many economists now believe that America is either in, or about to enter, recession.

With the world’s largest economy in trouble, that will inevitably have an impact on us.

The Reserve Bank and the Treasury are now anticipating that the annual economic growth rate in New Zealand will ease back over the next year or two – the central bank’s most recent forecasts for annual average GDP growth are that it will ease to around 2 per cent a year over the next couple of years.
Given the international situation, the slowdown in the housing market and the drought, it would be foolish to rule out any possibility that there could be two successive quarters of very small negative growth, which technically is a recession.

However, I do not think that is likely.

The fact that we have had such very strong employment growth in recent years, with the unemployment rate at an historic low and well-below Australia’s, is one of the factors that will stand us in good stead in the challenging months ahead.

Other developments that will support our economy are due to take effect from April 1.

On 1 April the company tax rate is being cut for the first time since Labour was last in office in the 1980s.

Another factor that will strengthen the productive capacity of our economy, and further improve employment opportunities, is the government’s Research and Development Tax Credits which will kick into force.

We are also increasing the minimum wage from the start of April, which will be the ninth time in eight years that we have raised it – this will put money in people’s pockets so helping them to cope with the very high food and petrol prices that New Zealanders, like everyone else in the world, is having to adjust to due to skyrocketing international energy and commodity prices.

Budget 2008, due in late May, will, moreover, include further investment in strengthening the productive capacity of our economy, building on the heavy investment in infrastructure and skills rolled out in previous budgets.

Budget 2008 will also build on the $4.5 billion a year of tax cuts already delivered by the Labour-led government.

Whereas previous rounds of tax cuts were directed particularly at working families, personal savings and businesses, Budget 2008’s programme of personal taxation reductions will, I hope, offer some relief from those high international oil and food prices that are hurting families’ weekly budgets.

The government is committed to delivering a budget that does not exacerbate inflationary pressures, does not make us more vulnerable to global financial market and economic shocks, and that takes our challenges as a society seriously.
Our economy has been rebuilt over the last eight years.

We have an unprecedented opportunity to become the world’s first truly sustainable nation and in the process become more prosperous than ever before.

While we openly and fully acknowledge today’s challenges, we must not take our eyes off that prize before us as a nation.