Speech notes for address to Auckland Chamber of Commerce Post Budget Luncheon. Rendezvous Hotel, Auckland

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Thank you for the invitation to give this post-Budget address to the Chamber once again.

This year’s Budget has been written against the background of a slower global economy which has obvious ramifications for New Zealand.

The fall out of the sub-prime crisis in the United States has been felt around the world, and impacted here through banks lifting their lending rates.

So, while the Reserve Bank has stood still on the Official Cash Rate for the past ten months, home owners with mortgages and small and medium sized businesses with loans to service have faced increased costs.

At the same time pain at the petrol pump is also being experienced. Prices to the consumer have been on a steep upward trend, with average increases in the five years to March 2007 of 7.9 per cent.

But in the last March year, the rise well exceeded that with a price spike of 20.5 per cent.

These increases are already causing significant behaviour change, with more people buying smaller, more fuel efficient cars, and opting for public transport where they can.

The latest official forecasts now project a nil growth rate in petrol demand in New Zealand over our first Kyoto commitment period.

These trends, plus our government’s desire to ease the pressures of high fuel prices on businesses and households, plus the importance of minimising pressure on monetary policy, led to my announcement two weeks ago that entry of transport fuels into the Emissions Trading Scheme would be delayed for two years, and that the introduction of regional fuel levies to fund major transport projects would be carefully phased.

The third significant pressure on New Zealand families right now is the cost of key food items which are running well ahead of the Consumer Price Index.

While our dairy farmers have been enjoying record prices, leading to good returns even against the higher-for-longer Kiwi dollar, the family wanting to put milk and cheese on the table is feeling the pain.

The background to high food prices is a world food shortage. Around the world in recent weeks we’ve seen riots over food shortages and prices.

The world’s population is growing fast, and within that, so is the size of the middle class populations – which can afford to consume more and better food – in mega emerging economies like those of China and India.

As well there’s the impact of erratic climate on world agricultural production which has had a significant effect on supply. The prolonged drought in Australia for example has taken significant volumes of food production off world markets. And events like the massive cyclone and flooding in Burma three weeks ago impact severely on that country’s ability to feed itself.

As it’s a rare cloud which doesn’t have a silver lining, there is some upside in all this for New Zealand as a food exporting nation as I will outline later.

But for now, the trends in food costs are impacting on household budgets at home and that’s an issue very much in our minds as we’ve crafted the Budget.

Added to the factors beyond any government’s control is the serious drought through much of New Zealand during the past year. For many farmers, the effects will be longlasting and far reaching – on stock condition and supply, on pasture, and on balance sheets. Given the continuing high importance of the land based industries to our economy, this matters to us all.

Add it all up – slower global growth, the sub-prime crisis, high oil and food prices, and a drought at home, it’s not surprising that New Zealand’s growth forecast for the March 2009 year is down to 1.5 per cent. Treasury forecasts a pick up to 2.3 per cent in the year to March 2010, with further growth to 3.2 per cent in the year to March 2011.

So that’s the background to the Budget – now I come to its design.

Last time New Zealand ran into international head winds – in 1998 – the response of the government of the day was to cut New Zealand Superannuation, sell a major state asset – Contact Energy, and under-invest in the basics from health and education to infrastructure.

Obviously that’s not the way Budget 2008 is designed.

Over our previous eight Budgets, we have been addressing critical deficits in infrastructure, health, education - including in workforce skills -, policing and prisons, and much else besides.

The growth of investment in a number of essential areas has run well ahead of the rate of economic growth. There comes a point when capacity rebuilding has made significant progress and other priorities can also come to the fore.

That point is now. While some of the reaction from some social spending quarters suggests they disagree with that judgement, I stand by it.

Had it been possible to rebuild essential services, and infrastructure, invest in a more innovative economy, and make substantial changes to tax thresholds before now, it would have been done. But we couldn’t see how that could be responsibly budgeted for.

Prior to this Budget, we have given significant tax relief to families, businesses and savers. The total value of those measures will be running at $4.6 billion a year by 2012.

Yesterday’s tax package stands at $10.6 billion over the next four years – investing $1.5 billion this year, $2.27 billion the next, and $3.06 and $3.76 billion in the two following years.

That is a substantial package by any measure.

It means that the increases in spending in a number of other areas are not on the scale that people are accustomed to.

But in a year of slowing economic growth with pressure on households, we have worked to give every taxpayer a hand up in a way which does not have any significant effect on inflation and interest rates.

As you know the tax cuts start on 1 October with a cut for every taxpayer.

The cuts are fair – the biggest percentage cuts go to the lowest paid, the extra pressures on families are acknowledged by bringing forward the Working for Families adjustment, and superannuitants benefit as taxpayers.

The lowest tax rate falls to 12.5 per cent – up to the first $14,000, and by 1 April 2011 – that 12.5 per cent rate will apply to the first $20,000 of earnings.

Income thresholds are changed at every level.

So from 1 October – the 39c rate shifts from the $60,000 threshold to $70,000; on 1 April 2010 to $75,000, on 1 April 2011 to $80,000.

The tax package does have particular benefits for families because of the cost pressures I referred to earlier.

A Kiwi family on the average household income of $72,000 – split two thirds/one third between two parents – with two children at primary school is almost $43 a week better off on 1 October – that’s equivalent to a 3.6 per cent increase in take home pay.

By full implementation of the tax package on 1 April 2011, that Kiwi family is almost $85 a week better off – the equivalent to a 7.5 per cent increase in their take home pay.

A one earner family on $45,000 a year – close to the average wage – with two primary school aged children will be $30.83 better off a week from 1 October – and $62.82 better off by 1 April 2011 – equivalent to 3.7 and 7.6 percentage increases respectively in their take home pay.

A worker on the average wage without children gets over $16 on 1 October – and a total tax break of over $32 a week by 1 April 2011.

Married superannuitants will see their fortnightly payments rise by $45.88 – or 5.2 per cent. With next April’s annual adjustment expected to be $29.44 on their fortnightly payment, their fortnightly rise in payment by then will be $75.32 (or plus 8.6 per cent).

The tax relief in this Budget is important.

So is the fact that we are maintaining investment in the critical areas of health, education, housing and infrastructure.

While people want tax relief – many say they don’t want it at the expense of the basics.

So we have to balance these things.

And we have to keep up investment in areas which contribute to economic and business growth in the future.

Last year’s business tax package which included substantial incentives for R & D was important.

Our 21st century economy has to be knowledge based.

This year’s increase in the annual Government science, research and technology spend is close to 6 per cent.

That’s important.

So is New Zealand Fast Forward, the $700 million capital fund we are setting up to back science and innovation in the pastoral and food industries – we need smarter, more innovative products out of our major export sector.

Then there’s a major new investment announcement in the Budget for broadband – in the form of contestable funding aimed at leveraging the maximum possible private sector investment.

The aim is to step up the roll out of faster, cheaper broadband – to our homes and businesses, schools and hospitals, and keep us up with the latest ICT trends in advanced societies – where we want to be.

On top of the contestable fund we’re planning significant investment in connectivity in health and education, and we will be aggregating government demand to speed up the deployment and improve the efficient use of broadband.

We believe our half billion dollar investment in broadband over five years represents significantly better value for the taxpayer and is more pro-competition than the $1.5 billion package announced by our opponents a few weeks ago.

Then there’s the government’s investment in skills which gets another big lift this year.

For the 9th Budget in a row, we’ve prioritised apprenticeships and on-the-job training – and that includes literacy and numeracy teaching for workers.

Our economy is still crying out for skilled workers.

We have to grow our own talent.

That’s why another $168 million in this year’s Budget, spread over four years, goes to upskilling the workforce.

The transport infrastructure has been a major feature of previous budgets, providing a big wave of investment going forward, not least into Auckland’s transport.

Wherever you look across our metropolis, road building, rail track improvements, and public passenger transport are going ahead at a rapid rate.

Transport also features in this year’s new Budget investments with particular funding for Canterbury and the Northland, and Gisborne regions; along with more investments in the rail track and the capital sum to buy the rail operating business.

We see the investments in rail as strategic investments in a more sustainable transport system for the future. Buying the rail services business gives government greater scope to plan for and deliver that than does paying steeply escalating subsidies to a monopoly private provider.

Michael Cullen has also outlined changes in legislation to be introduced next month to reduce tax-related compliance costs and remove tax impediments to the offshore expansion of New Zealand resident businesses.

For exporters, this Budget delivers more support for those operating offshore, including through the expansion of New Zealand Trade and Enterprise’s Beachheads programme into China, India, and South East Asia.

The Budget also provides for the sizeable government investment in New Zealand’s participation in the 2010 Shanghai Expo, which is one of many parts of our comprehensive programme to boost our country’s profile in China.

This last point leads me to make a few points about New Zealand’s trade strategy for East Asia.

There has been a very positive business response to the signing of the FTA with China – and a number present in this room today were part of the significant business delegation which came with me to Beijing in early April.

The China FTA is an important part, but not the only part, of our ambition to achieve better market access for New Zealand exporters in East Asia.

The end game for the ASEAN-CER FTA negotiations is now in sight, after many years of study and talks.

Now both Japan and Korea are perceiving greater benefits from developing FTAs with New Zealand than has ever been the case before.

This became apparent last week when I visited both countries supported by senior and substantial business delegations.

No doubt part of the reasons lie in geopolitical factors. China’s greater openness to our exporters may have stimulated some reconsideration by others.

Throw into the equation as well the fact that both Japan and Korea are significant food importers and need to secure reliable and quality supplies.

Perhaps for the first time, a clear coincidence of interest can be perceived between our export interests and their import interests.

With Japan, we’ve agreed to begin a joint study on the potential of an FTA for both our countries. Senior Japanese commentators say that when Japan agrees to a study, it does carry through to negotiation of an FTA.

With Korea, the study agreed to eighteen months ago is complete, and we have agreed to preparatory talks about negotiations in the second half of this year.

We believe that once negotiations with Korea begin, they will move quickly because we are two of the most complementary economies in the Asia Pacific, and we have compatible negotiating approaches.

It’s worth noting also that we are engaged in a study on an FTA with India; we are in negotiations for an FTA with the Gulf states of the Middle East; and in the past 8½ years we have negotiated FTAs with Thailand, Singapore, and – in a four way deal – with Chile Brunei and Singapore.

And under the latter FTA, the United States is now getting involved in its next stage – the financial services and investment negotiations.

Of course the biggest game in town for agricultural market access and trade policy is still the WTO’s Doha Round. But after 6½ years, it’s struggling. Our government has made the judgement that we need to get on with direct negotiations for market access with others, while also driving hard at the WTO Round.

There had been hopes of progress in the Round this month – to the point where a ministerial meeting could have been held to crunch a deal.

I am now told that that is unlikely.

A ministerial meeting is still possible by mid-late July, but if one is not held by then, the general view would be that it will not be possible to finish negotiations this year. By the time a new Administration of either party gets settled in the United States in the course of next year, the Round would have a lot of catch up to do.

I come back to the Budget and its context.

It’s written against external factors which are not what any of us would want, but which we have to work around.

Our approach has been to give tax relief to relieve pressures on households and to continue to invest for the future.

That means smaller surpluses and it means cash deficits over the forecast horizon.

But the strong fiscal position our government has sustained through debt reduction and accumulating financial assets has made this possible.

Our intention going forward is to maintain that strong fiscal position; to keep Gross Sovereign Issued Debt at around twenty per cent of GDP, and continue to build up the Crown’s financial assets in, for example, the New Zealand Superannuation Fund.

Our plan for the future is laid out in detail with full costings. We are utterly transparent.

It’s now the time for others to put their plans on the table.

Those with radically different tax plans will have to say how they would pay for them.

Would it be by borrowing for tax cuts?

Or would it be by major – and it would have to be major – cuts to government investments in the essential areas?

The answers to these questions will of course be of interest in the forthcoming election campaign.

Thank you once again for the invitation to address you today.