Pre-Budget Speech to Business New Zealand

  • John Key
Prime Minister Budget 2012

Ladies and Gentlemen.

Good afternoon and thank you for coming to this pre-Budget speech.

I want to thank Business New Zealand for hosting this event today. And I want to thank them for the very constructive role they play in representing New Zealand businesses and employers.

Budget 2012 will show the Government is on track and sticking to its plan.

As Bill English said in a speech a few days ago, we are set to post an operating surplus in 2014/15.

We don’t have the final forecasts through from Treasury yet, but we have enough headroom now to be sure that there will be a surplus in that year.

It might not be the world’s biggest surplus, on current forecasts. But in 2014/15, for the first time since the global financial crisis and the worldwide recession, the Government’s books will be back in the black.

That’s a testament to disciplined fiscal policy and a willingness to make trade-offs.

As you know, this year will see our second zero Budget.

A zero Budget is not a straightjacket. The Government will continue to spend money in priority areas.

But it means that over the next four years – what the Treasury calls the ‘forecast period’ – our new spending will be balanced out by a combination of savings and revenue initiatives.

That means we’ll get back to surplus in 2014/15 and we can start reducing government debt rather than racking it up.

This marks a huge turn-around in the public accounts.

You’ll recall that when we came into office in 2008 the financial crisis was at its peak and the New Zealand economy had already shrunk two-and-a-half per cent in a year.

The Treasury was forecasting that if nothing changed the Government would be caught in a spiral that would see soaring debt, rising interest costs and no surpluses – ever.

Since then, the Government’s finances have also been buffeted by the Canterbury earthquakes and a global recovery that has been much slower than almost anyone predicted.

But we have had a plan to rebuild and strengthen the country, we have stuck to it, and we are continuing to stick to it. And it’s working.

The central thread in that plan is good, responsible economic management.

I think sometimes New Zealanders take that for granted, but they shouldn’t.

You only have to look at some of the countries in Europe to see how badly things can go wrong.

And meanwhile our political opponents are still dreaming up ways to spend money that doesn’t exist.

In terms of the upcoming Budget, I want to leave you with two messages today.

The first is that while getting back to surplus by 2014/15 is a challenge, it’s an achievable target and it’s achievable without any great dramas.

We’ve shown over the last three years that we can run a very tight ship while retaining the trust and support of New Zealanders.

So anyone predicting a slash and burn Budget is, for the fourth year in a row, sadly mistaken.

Some things do need to change. We’ll be doing things a little differently in a number of areas to maintain our focus on results and to save money.

But in keeping with the way we have done all of our Budgets, these changes will be moderate and considered.

Change is necessary. If you don’t want to change anything, you end up in the position that Labour is in right now, arguing that the military still needs 10 brass bands around the country and that any reduction in this number would be disastrous.

So that’s the first thing.

The second message I have for you is that while getting back to surplus is hugely important, it is not a single-minded, isolated goal.

Getting back to surplus is part of a wider programme to build a more competitive and productive economy and deliver better public services.

The Budget will protect and grow areas of public spending that are important in delivering real results for New Zealanders.

These include health, education, science and innovation, and supporting people off welfare and into work.

So while staying firmly on the path to surplus, we are also cracking on and getting things done.

A whole range of initiatives will be announced as part of the Budget.

Again, this approach fits with the way we have put together our previous three Budgets.

I want to say some more about these two messages this afternoon.

Before I do, though, I want to talk about why the Budget is so significant and why it’s such a focal point for the year.

It’s significant because the most important thing we as the Government can do for the economy, and therefore boost jobs and incomes in New Zealand, is to be responsible managers of the public purse.

We have set out to achieve our economic and social goals without hugely ramping up spending.

That helps to keep the pressure off interest rates and exchange rates, and helps rebalance the economy.

Exactly the opposite, of course, happened in the mid-2000s.

A massive increase in government spending led to high interest rates and a high exchange rate. Resources were sucked into domestically-focused sectors, leaving the internationally-competitive parts of the economy in recession.

Growth in the economy was fuelled by debt, consumption and government spending.

The task of my Government has been to turn that situation around, so that future growth is built on a far more stable platform of exports, savings and productive investment.

That starts with getting the public purse under control.

A lot of cost increases in recent years have been outside our control, such as increased spending on the Unemployment Benefit and the costs of the Canterbury earthquakes.

But the Government has been very restrained in its deliberate spending decisions over the last three years. I’ll come back to that shortly.

We have set a path back to surplus and – despite weakening forecasts of world growth – have stuck to that path.

Getting back to surplus is important because every year we are not in surplus we have to borrow to cover the difference between what we spend and what we raise in revenue.

All that adds up – and it has to be paid back with interest. So the more debt we rack up the more it matters down the track.

New Zealand is particularly vulnerable to an increase in government debt because we are one of the most indebted countries in the world, when you add together both public and private debt.

In these circumstances, it’s crucially important to have a strong government balance sheet with relatively low levels of public debt, as a counterweight to high levels of private debt.

International lenders put a lot of store on that counterweight.

And when other political parties talk about spending $500 million a year on a combination of extending paid parental leave and introducing an R&D tax credit, that’s the context you have to consider it in.

I want to go back now and talk a bit more about my two key messages for today.

The first, as I said, is that while getting back to surplus by 2014/15 is a challenge, it’s an achievable target.

What’s more, it’s achievable without doing anything too radical and without creating any great dramas.

That will no doubt come as a surprise to some people. I think that’s because they still consider the fiscal situation in the mid-2000s to be normality.

Labour conditioned many people to think that a government wasn’t actually doing anything unless it was spending at least $3 billion extra every year. And that anything less than about $2 billion in new spending each year constituted some sort of cut.

Under that logic, a zero Budget looks almost impossible. But that is quite wrong.

In fact, spending the sort of money Labour did each year represented extremely poor discipline and an unwillingness to make the sort of trade-offs that most businesses and households in New Zealand make as a matter of routine.

As a piece of research, I asked my staff to look at Labour’s last four Budgets and the deliberate decisions they made to increase spending and cut taxes.

That’s clearly set out in the Executive Summary of each Budget, with a new spending track set out across the forecast period.

If you take the final years of each of those spending tracks, and add them together, they come to a total of $15 billion.

That represents a permanent and deliberate increase in government spending of $15 billion in just four years.

If you do the same exercise for the National-led Government, over four Budgets including the one coming up, the total comes to only $750 million.

That’s less than $200 million of extra discretionary spending each Budget. And it’s only one-twentieth of what Labour chose to spend over a similar period of time.

Yet we have been a very busy government with a big work programme. And we have retained the trust and support of New Zealanders.

How is that possible?

It’s possible because we haven’t been a government of extremes.

We have been making modest and sensible changes across a whole range of different areas, and we have had much greater discipline over government spending.

We’ve also had a focus on results rather than just inputs.

We aren’t a government that thinks spending more money on something is an end in itself. Far from it. We are a government that thinks getting results is what’s really important.

If a programme can get results, we are much more likely to spend money on it. And if it doesn’t contribute to better results, we are much more likely to reduce spending on it.

So, for example, we have constantly been reprioritising our spending from lower-value to higher-value activities.

We have been reining back on policies that had big cost escalations built into them, so they didn’t keep growing out of hand.

We have been introducing a lot more efficiency into the public sector.

We have been better targeting government financial assistance, for example through tax credits.

We have been broadening the tax base and clamping down on tax avoidance.

We raised tobacco excise, which of course has a huge benefit in reducing smoking rates while also raising revenue.

All of this adds up.

We’ve shown over the last three years that we can run a very tight ship while taking New Zealanders with us.

That’s the approach we are bringing to this year’s Budget as well.

So as I said before, anyone predicting a slash and burn Budget is, for the fourth year in a row, sadly mistaken.

My second message today is that while getting back to surplus is hugely important, for all the reasons I’ve just mentioned, it’s by no means the Government’s only goal.

Getting back to surplus is part of a wider programme to build a more competitive and productive economy and deliver better public services.

We are sticking to our path to surplus, and showing a great deal of discipline around government spending, but we are also getting on and doing things.

I’ve already made it clear this year that the Government is committed to delivering results.

That means getting traction on difficult issues like reducing crime, reducing long-term welfare dependency and improving educational achievement.

That approach will be reflected in the Budget.

The Budget will protect and grow areas of public spending that are important in delivering real results for New Zealanders.

And it will be focused on results, not just on inputs.

It might help if I give you a brief summary of the Budget, so you can see how the focus on getting things done marries with our objective of getting back to surplus.

The health sector will be the biggest recipient of new spending in the Budget and we will be following through on our election promises. We will be making some savings in health, but these savings will be reinvested back into funding more frontline services.

Education will also get a sizeable increase in the Budget. There will be carefully targeted savings proposals from within the overall vote, but again, these savings will be reinvested in the education sector to help improve student achievement.

There will be an upfront investment in welfare reform. We are going to spend money on supporting beneficiaries into work, but we expect that this will be more than recouped over the forecast period through a lower welfare roll.

We will spend some more on science and innovation, as we promised at the election, to help build the research and innovation base of the economy.

We will be rebalancing our overall spend on tertiary education, and this is an area that I want to mention in a little more detail.

The Government remains committed to keeping student loans interest free but we are also determined to reduce the cost of the overall loan scheme to taxpayers.

The scheme is very large, and not so long ago the Government was effectively writing off 49 cents of every dollar that was lent.

With previous changes we’ve made, we’ve so far managed to bring that down to 45 cents.

And we intend to get it closer to 40 cents in the future by continuing to chase overseas borrowers and through the faster repayment of loans once people have finished their study.

As in previous Budgets, some of the savings we make will be reinvested in improving teaching and research within our universities and other tertiary institutions for the next generation of students.

We’ll have more to say on this as we lead into the Budget.

The Budget will also continue to prioritise investment in much-needed infrastructure, including by reinvesting the proceeds of the mixed ownership model.

And we’ll continue our strong commitment to rebuilding Christchurch.

We will be better targeting financial assistance in a couple of areas, including through the tax system. There will be no changes, however, to Working for Families and KiwiSaver tax credits.

There will be some more base-broadening in the tax system, which has been well-signalled, and more investment in protecting and improving the integrity of the tax system.

And we are taking back a number of under-spends across government, and reducing some contingencies.

So with that in mind I can tell you that nothing in our approach should be hugely surprising.

There will be some more detailed announcements over the next three weeks and, of course, the full picture will be set out on 24 May.

But the approach I have indicated is simply a continuation of our approach over the last three and a half years.

Ladies and Gentlemen.

Bill English’s fourth Budget will be a very measured and responsible Budget.

It will reflect the Government’s four priorities for this term. These are:

  • to responsibly manage the Government’s finances
  • to build a more productive and competitive economy
  • to deliver better public services, within tight financial constraints
  • and to support the rebuilding of Christchurch.

It’s the balance between those four priorities that is critically important.

So the Budget will contain both spending and saving initiatives.

We are on track to post a surplus in 2014/15.

And we are building a stronger platform for jobs and growth into the future.

Thank you.