Wellington City RotaryJustice
Thank you for the opportunity to talk to you today, as we begin to emerge from a period of both economic and political adjustment.
The question I've been asked since taking over as Treasurer 10 days ago is: what now? I'll answer that as best I can.
The principle change for government is that the way ahead will be clearer. We now have less constraints in dealing with changing circumstances. That will gives us more tools and better flexibility.
Commentators are trying to cast the direction of the Government in terms of left or right. They're looking at the wrong axis. This isn't about a change of direction, just a return to what good government should do - focus ahead instead of backwards.
Government over the last 20 months has been constrained by a coalition agreement which in a sense made it backward-looking. It was framed with the best intentions, but increasingly became an anchor on the ship of state. Without it we can look ahead and produce policies that are important in driving growth and jobs.
We can also send out far clearer signals now than when the Government consisted of two parties, both compromising and sometimes sending conflicting messages. That made it difficult to clearly explain what policies were about, why we were seeking change, and what was to gain.
Those problems became very evident with the Wellington Airport sale. It was clear that it made sense to move the company into private ownership, removing risk from the Crown, and using sale proceeds to pay back debt.
I'm sure your experience would support the view that under city council and government ownership during the last 30 years the airport hadn't been the positive asset for Wellington or the commuters passing through it that it was capable of. The airport company management has done a good job, but government and council shareholders aren't willing to invest public money in areas like runway or terminal development.
For any government, investing in education or health or other core areas will always take priority over putting money into state businesses.
With the sale, the risks of running and developing the airport will pass to New Zealand Airports, the largest shareholder of which is the Wellington-based company Infratil, which specialises in infrastructure investments. That removal of risk is an important gain for the Crown.
On top of that, the $96.4m paid for the Government's 66% shareholding will be used to retire debt. The resulting debt servicing savings of $5 million a year become available for other, higher priorities. And the sale, $25 million more than book value, increases the surplus by that amount.
This is a deal which is good for taxpayers, the people of Wellington, and everyone who uses the airport.
Unfortunately, reinterpreting the coalition agreement with an eye to politics became the focus for the former Treasurer.
This Government isn't embarrassed by common-sense policies which work for New Zealand. We need the public to know that. We need the international market to know that we will make decisions based on the merit of the action.
We need a Government that knows how to take the right decisions promptly, without putting a party-political spin on everything it does. I believe we do have that now.
New Zealanders might enjoy criticising the government. They might even get upset by it. But they also know that government has to govern, it has to take the hard decisions, so they want the Government to keep its eye on the ball.
The impact of the Asian crisis means now, more than ever, it is vital to ensure the quality of our economic and other policies.
We have to engage the world and continually work to improve our competitiveness so we don't get left behind. That means retiring debt whenever possible, and removing barriers and lowering costs so New Zealand businesses can grow and create jobs.
Since the 1980s, we have come to recognise that no country can stand against the trends and pressures of world markets. Instead of putting our heads in the sand, we now aim to adapt rapidly and efficiently so that we not only survive but seek to increase our market shares intentionally..
We don't agree with the Alliance/Labour approach of merely trying to protect what we've got.
There will always be a role for welfare. But it should be a safety net to assist those in need and not a suffocating blanket that suppresses our ability to grow.
Obviously our economy has been seriously affected by events in Asia, and to a lesser extent by the drought. Exports make up 30% of GDP in this country, and 40% of our exports go to Asia.
Aggregate output in Asia has plunged in Korea, Malaysia, Thailand, Hong Kong and Indonesia. It has softened in Singapore, and turned negative in Japan, which is a crucial engine of Asian economic growth. Only in Taiwan and China do growth forecasts remain positive.
The problem facing these Asian countries is a great deal more serious than anything facing us. But New Zealand and Australia both have strong trade links with Asia.
With several of our key markets experiencing severe economic downturns, it is hardly surprising that this should effect exports, tourism, confidence and growth.
Most private sector forecasters are predicting flat or even negative economic growth in the year to March 1999. The Reserve Bank in its projections last Thursday picked only 0.1% growth in the 1999 year.
But this Government's economic policy framework has allowed New Zealand's economy to adjust to the Asian crisis without the type of dislocation we have seen in Asia, or would have seen in New Zealand in the past.
We have not had the shocks of sudden currency devaluation, sharemarket and business collapse, rapidly escalating unemployment, and high inflation.
Instead, our open economy has seen an orderly adjustment in the value of the dollar, which makes our exports far more competitive, and we are now also seeing a steady fall in interest rates.
Even more importantly, under this Government's framework, our businesses are far better placed to react to challenges and opportunities and to grow jobs.
Our economy is in fundamentally good shape with public debt more than halved as a percentage of GDP since 1991, inflation well strapped down, flexible labour markets, a low rate broad based tax environment, and with open and competitive markets. And the government is continually working to improve our competitiveness by lowering costs to business and job creation.
That is why three major banks, National, WestPac Trust and BNZ, have all published forecasts recently showing growth of 3%, 3.5% or better can be expected to resume in 1999. The Reserve Bank is forecasting a more spectacular take-off with 4% growth in 2000 and 4.7% in 2001.
It is also important to recall that, up until the Asian crisis, we had 20 out of 21 quarters of economic expansion under National's economic framework.
We must not lose sight of the gains New Zealand has already made through sticking to an orthodox economic framework designed to improve international competitiveness and growth.
The economy has grown by 37% since 1991. At the end of 1991 our GDP was $71.8 billion. In March this year it had reached $98.5 billion. Even with the recent drop in employment, there are now 267,000 more jobs than at the end of 1991. That is an increase of 18%. After 17 years of consecutive Budget deficits, this Government has now delivered five surpluses in a row. Net Government debt has been more than halved from 51.5% of GDP in 1992, to under 25% this year. National put the Government's balance sheet into the black in 1995 - net worth is now $9.1 billion after years of virtual insolvency. Marginal tax rates for most working people have reduced from 28 cents to 21 cents in the dollar. In June 1990, net foreign currency debt was $15.2 billion - $4,470 for every man, woman and child. Net foreign currency debt became $0 after the sale of FCNZ in 1996. $2.5 billion more is being spent on health than in 1990. 50% more people a year are getting elective surgery than 10 years ago - 123,801 compared with 82,283. There are $2.7 billion more education dollars than in 1990, and 73,000 more students in tertiary education. Last Thursday, Reserve Bank Governor Don Brash said that the Asian shock was the largest external impact on this country since the oil shocks of the seventies.
He also said that the economy is in considerably better shape than in the early 1990s, the last time growth slowed abruptly.
"Business balance sheets and the banking sector are in better stead, unemployment is lower, tax cuts and government spending are supporting domestic demand, and inflation is low and stable, providing scope for monetary policy to ease.
"These features indicate that a broadly-based recovery can readily be anticipated."
Obviously the Reserve Bank's easing of monetary policy is a factor supporting recovery.
Monetary conditions have already eased by more than 900 basis points since early last year. The latest Reserve Bank statement projects continued easing down to an MCI of ?225 in mid-1999.
Most floating interest rates have now dropped to 8.5% or less with some even below 8%. For someone with a $100,000 mortgage, that 8.5% rate represents a saving of $229 a month from when interest rates were at 11.35% in May. Fixed rates, which have been accounting for a high percentage of new borrowing, are now under 8% for one-year terms.
Coupled with the lower exchange rate - the dollar has fallen 17% on a trade-weighted basis, and 30% against the US dollar since its peaks early last year - that is stimulating export production, and changing the focus of our trade effort.
All of these changes are creating opportunities for people to take constructive action on their own account which, increasingly over time, offsets the loss of export sales to Asia.
The mix of lower interest rates, as well as a much lower dollar, is also behind a jump in business confidence. The latest National Bank Survey, for example, indicated that a net 42% of respondents expect, notwithstanding the Asian crisis, to increase their exports during the next 12 months. For the second month in a row, optimists outnumbered pessimists in responses to that Survey.
The Government intends to support this change in mood and intentions.
In May this year, the Government brought down a Budget which set out one of the biggest programmes of sectoral reform ever seen in any previous Budget in this country.
Some of the gains from those reforms have already been seen. The removal of car tariffs saw the price for family cars down $6,000 overnight, which is also a major cost saving for businesses and industries such as tourism. Price savings are now being also being seen through parallel importing, and the electricity reforms.
These micro-economic reforms are designed to improve competitiveness by lowering costs. The lower input costs are for businesses, and the lower their product prices, the better it is for New Zealand consumers - and the better it is for our exporters.
That programme is not only good for New Zealand on a long-term basis. It is also ideally suited to help the nation to manage its way on an sound basis through any difficulties created for us by the present crisis in Asia.
The urgent priority now is to implement that Budget programme without delay. I believe the changes of the past two weeks will permit us to achieve that with less friction than might otherwise have been the case, and with less waste of time.
Further, a week or so into September, the special economic outlook which Cabinet on 29 June instructed the Treasury to prepare, will become available, to update our present information on the impact of the Asian crisis. That economic forecasting will also be used to update the fiscal outlook.
Based on that data, the Government will, to the extent that the information itself makes it desirable, review the present economic and fiscal policy mix, not to slash or burn, but to help the country through any difficulties that lie ahead.
Quite clearly, the Asian crisis is not over. There are more downside than upside risks in the global growth and trade situation.
It's often said that Government's are not a lot of use. But the fact is, it is the development of a strong economic framework by successive governments that distinguish the response to the Asian crisis from New Zealand's response to previous external shocks.
A floating exchange rate, open capital markets, more flexible labour markets, light-handed regulation based on transparency, low tariffs, an open flexible economy, and emphasis on competition as a means to efficiency are all helping firms to adjust much more quickly to changes in international demand.
But we need to continue with the programme of further reforms designed to help firms to adjust even more smoothly and flexibly by reducing regulatory barriers to competition, and lowering the costs we impose on them.
In the shorter term, that means, further work on ACC, some sensible privatisations, the Resource Management Act, producer boards and the tariff review.
Medium-term, you have to be looking at the labour market flexibility, sensible readjustments of immigration policy, the Meat Act, roading, and tax changes just as soon as the fiscal outlook permits it.
Longer term, you can add to that reviews of the Commerce Act, occupational licensing, the Rating Powers Act and the management of water and waste-water.
Equally clearly, if the international scene should change in unexpected directions, then New Zealand will need to change with it.
Far and away the most important contribution the Government has to make now is to ensure that it behaves in a way that maintains and reinforces public and business confidence in the quality of its economic management.
This is a time when MPs very clearly need to put the needs of the nation ahead of personal or party political priorities. If they do that, they will make a huge contribution to the quality of the future available to all New Zealanders.
The evidence last week was that a majority of the MPs in the House understand that priority, and are committed to give it their best possible shot. As Treasurer, I welcome and respect them for taking that position.