Achieving shared prosperity - outlining the Government's economic strategyFinance
ANZ Business Breakfast Speech – 1 December 2017.
Check against delivery.
Thank you to ANZ for the opportunity to speak today.
This morning I want to outline the goals and some of the key policy initiatives in the government’s economic strategy; update you on the steps we will take before Christmas including the release of the Half Year Economic and Fiscal Update and Budget Policy Statement, and the implementation of our 100 Day Plan.
It is only just over a month ago that the government was formed, built on a coalition agreement between Labour and New Zealand First, and with the support of our confidence and supply partners, the Green Party. While these are three parties with different traditions and histories, they are bound together by a shared desire to deliver a fairer and better New Zealand.
In both these agreements, there is a common mission statement that reads “Together, we will work to provide New Zealand with a transformational government, committed to resolving the greatest long-term challenges for the country, including sustainable economic development, increased exports and decent jobs paying higher wages, a healthy environment, a fair society and good government. We will reduce inequality and poverty and improve the well-being of all New Zealanders and the environment we live in.”
The parties that make up this government have a shared belief that the status quo and the tired out former government were failing too many New Zealanders.
While the fundamentals of our economy were, and are, strong, the purpose of it had become lost. While some enjoyed the fruits of growth, many did not.
This government will change that and build an economy with the purpose of delivering shared prosperity. We are committed to removing the social and infrastructure deficits that have emerged, and to shifting the focus to improving the wellbeing of all our people.
This will be an economy fit for purpose for the 21st Century. Resilient, Adaptable, Productive and Inclusive.
One of the things that struck me over the last few years as I have moved around the country was that the message I received from workers in smoko rooms was the same one I received from Executives in board rooms – the gaps in our country have grown too large. In this year’s Mood of the Boardroom survey 70% of the CEOs said they were concerned about the widening gap between the rich and the poor. Concerns about child poverty, homelessness, and inequality dominated the election.
It’s not the New Zealand way to see our fellow citizens left out and left behind. The clear message from voters was that we had to do better, to fulfil our country’s egalitarian mission.
And to do better, we have to do things differently. In crafting our plans and agreements we have had this at the forefront of our minds.
On a personal level I have had in my mind a man who last year sent me a copy of a letter he had sent to the then Prime Minister. He and his wife both worked, 60 hours a week in total, but they were not making ends meet. He was struggling to pay the bills and he said his children did not play sport because he could not afford the fees. He ended his letter saying “I am lucky. I have a house to live in and my wife and I both work. But we are poor.”
It is a not a successful economy where people in work feel poor or lucky, simply because they have a roof over their heads. A successful economy must be one where all our people can live a life of dignity, security and hope.
The goal of our economic strategy is to improve the well-being and living standards of New Zealanders through sustainable and inclusive growth. This means moving beyond narrow economic indicators and measures of success, and instead puts the well-being of our people and the environment at the centre.
Budget Responsibility Rules
Underpinning our strategy are our Budget Responsibility Rules.
We set these out earlier this year to ensure that everyone understood our commitment to responsible fiscal and economic management. In government we will abide by these rules.
To recap, this means that we will deliver a sustainable operating surplus each year unless there is a significant disaster or major economic shock or crisis. We will ensure that government spending as a proportion of the economy won’t rise above the recent historical average of 30% of GDP. We will reduce net core Crown debt to 20% of GDP within five years of taking office.
In order to meet these rules, it will require discipline. We have an ambitious programme and a plan to deliver on. We will grow the economy by making it more productive and we will have greater revenue from rejecting National’s tax cuts and cracking down on multinational tax evasion and speculators in the housing market.
But that will not be enough in itself. We also need to reprioritise and seek out programmes that are good value for money.
I have directed all Ministers to assess their Budgets against the new government’s priorities. If programmes are found that do not match these priorities then Ministers should consider whether this funding can be re-invested in new, higher priority areas which match our strategy. This work is already underway and will contribute to Budget 2018 planning.
The last Labour-led government showed that it is possible to be fiscally disciplined and deliver progressive policies. We will do the same.
I want to mention two other pieces of work that underpin our strategy. We have already begun the work to modernise our monetary policy. While in general our Reserve Bank Act has served New Zealanders well, after 28 years the legislation needs to be updated.
We will continue to ensure that inflation is carefully managed within the target band. But we will expand the objectives of the Reserve Bank Act to provide monetary policy support to our goal of improving the wellbeing of New Zealanders, including focusing on maximising employment. As announced within our first two weeks in office we will review the work of the Bank in two phases, looking at the objectives and decision making first, and then other issues including the macroprudential framework in the second. The independence of the Bank remains paramount.
We have also established the terms of reference for a Tax Working Group to investigate possible changes which would make our tax system fairer and more balanced. At the moment, our system supports the speculative economy over the productive one.
The group, led by Sir Michael Cullen, has a mandate to propose changes that will make our tax system fit for a 21st Century economic plan, including the changing nature of work and commerce, and the enhancement of our environment.
Living Standards Framework
One of the things we will be doing differently is how we decide our priorities and how we measure the success of our economic strategy.
It is true to say that our GDP growth in New Zealand has been relatively impressive on a global scale. But that tells us only a fraction of the story. Firstly, it is a measure of activity, not the quality of that activity. And secondly, on a per capita basis, our performance has been significantly less impressive than many of our OECD counterparts.
Our supply and confidence agreement with the Green Party commits us to working on new sustainable development indicators. Alongside this work I have asked the Treasury to further develop and accelerate the world-leading work they have been doing on the Living Standards Framework. This focuses on measuring our success in developing four capitals – financial, physical, human and social. These give a rounded measure of success and of how government policy is improving our well-being.
This is a far better framework for judging our success. It is easy to say a policy is successful if it grows GDP, but what if that is at the expense of the physical environment? How can we be successful if the skill level of our workforce is not improving at the same time? If we do not have strong communities, any individual success can easily be undermined.
Success for us will mean more than just a strong balance sheet - as important as that is. It will be marked by how we improve the well-being of all our citizens.
This framework is still being developed, but I see this approach of focusing on well-being and lifting living standards as a core element of how we will create our future Budgets and measure the success of our work.
It is too late in the process to make significant changes in this regard for the 2018 Budget, but I will have more to say when I deliver that Budget about how this approach will drive our future work.
We will, however, take the first steps in this direction as part of our 100 Day Plan. We will introduce legislation to set measures of child poverty and a requirement to set reduction targets against them. This will include amending the Public Finance Act to ensure this work is part of our Budget process.
I want to say something about the way we must work if we are to achieve the goal of our economic strategy. This will only be possible when central government partners with local government, businesses, iwi, unions and communities. There are some big challenges in front of us, which I will now turn to, but I want to be clear that we will be coming to you to solve them together.
Delivering the Economic Strategy
To deliver this strategy we will have a number of areas of focus. We will develop detailed plans over the coming months but today I want to highlight several key issues.
Lifting Productivity and Wages
Fundamental to creating a more inclusive and prosperous economy is increasing productivity, so that New Zealanders achieve more with every hour they work and our businesses become more internationally competitive. For the last five years we have had almost no labour productivity growth. Low productivity has been a cloud over the New Zealand economy for decades and previous governments have failed to tackle this issue – this government will not.
Lifting the skills of our people is critical to solving the productivity challenge. We believe that learning for life is core to the further well-being of our people and to promoting our economy. The Future of Work Commission undertaken by the Labour Party in the last two years identified this as one of the most important transitional factors in the changing world of work.
Just as the first Labour Government moved to make a full secondary education the norm for people we need to update that vision for the 21st Century. We are sending a clear signal that post-school education and training will be for all.
Let me be absolutely clear – our first-year fees-free policy will come into force from the 1st of January 2018. This is for all quality post-school training. Only about one-third of school leavers go to University. They will benefit from this policy, but so will the other two thirds - those who will go to Polytechnics, other training programmes, apprenticeships and industry training. This policy is also for those who have not studied or trained before but are in work now.
Also critical for lifting productivity is increased investment in Research, Development and Innovation. The first step in this is the introduction of an R and D Tax Credit. Beyond that we will move to work smarter, adding value to change the mix of our exports and using and creating new technologies.
We also want to see wages rise. The government can and will take action to help this happen, including through lifting the minimum wage, paying core public sector staff the living wage and improving fairness in the workplace. But it is through improving productivity and developing new technologies and approaches to work that we will see long term sustainable improvements.
Just Transition to a Low Carbon Economy
Climate change is the greatest challenge facing the world and has the potential to undermine our primary industries. But our response to it is also an opportunity to develop new high wage jobs. The government’s commitment is to sustainable development that makes the transition to a low carbon economy. Work is already underway, under James Shaw’s leadership as Minister for Climate Change Issues, to develop a Zero Carbon Act and an Independent Climate Commission. Through our $100 million Green Investment Fund we aim to stimulate $1 billion of new investment in low carbon industries by 2020. This will contribute both to New Zealand’s climate targets and to the sustainability of our economy going forward.
Supporting Regions To Thrive
It is essential that the regions of New Zealand thrive again, for the sake of the people who live there and to take the pressure off Auckland. Long-term under-investment and inter-generational poverty are undermining areas of the country that have enormous economic potential.
The cornerstone of this government’s response to this is the $1 billion Regional Development (Provincial Growth) Fund agreed with New Zealand First as part of the coalition agreement.
This fund will (among other things) invest in regional rail, supporting the planting of a billion trees over the next ten years, an investigation of the future of the upper North Island Ports, and investment in other large-scale capital projects.
The criteria for the fund are currently being finalised. But I can say that successful bids will have to have robust business cases that show long-term development potential.
There is also a strong commitment to forestry with the development of a NZ Forest Service to be located in regional New Zealand and the regionalisation of some other government services.
Infrastructure To Support Sustainable Growth
One of the biggest challenges facing the incoming government is the need to update and build the infrastructure for sustainable and inclusive growth.
We will make the necessary investments in our health and education assets to ensure that we do not have hospitals that make people sick, or schools where students cannot learn. This is the core role of any responsible government.
Beyond that, we know that at a local government level, a significant amount of infrastructure is inadequate, aging and vulnerable. Many of our local authorities are either at the limits of what they can borrow, or do not have the revenue to service more debt.
At a central government level, we have an urgent and pressing need to fund the infrastructure that will support the unlocking of growth opportunities.
The fiscal plan that we have used as the starting point for our Budget has room for significantly more capital investment than the previous government. This is as a result of a slightly slower debt repayment track that will allow us to make investments such as the capital injection to kick off KiwiBuild.
But to create the 21st Century infrastructure, New Zealand needs to be innovative. We need to unlock capital and capture the value of investments through the work of urban development agencies and innovative instruments such as infrastructure bonds.
We want to work with those who can be partners in taking forward developments that build and modernise our infrastructure. Ministers have come together to identify and co-ordinate this work.
Growing exports through a Progressive Trade and Investment Agenda
New Zealand will and must remain open to business and the global economy. We welcome foreign investment that adds value to our economy, improves productivity and grows jobs.
This does not mean, however, that anything goes. Where we have drawn the line, is to say that we will not accept that there is value in having offshore speculators buying existing residential property and keeping first home buyers out of the property market. We continue to welcome offshore investment that adds to our housing stock.
We have heard the concerns of New Zealanders that they do not want to be tenants in their own land. To this end, we have already issued a new directive to the Overseas Investment Office and legislative changes will follow, to be introduced as part of the 100 Day Plan. We recognise the importance of an efficient and effective overseas investment regime and will be working to improve the operations of the Office.
When it comes to immigration, we must have people with the right balance of skills coming to New Zealand, with a particular emphasis on closing regional skills gaps. We must ensure that those who come to study are in quality courses and are not exploited or are simply here to gain residence.
Where there are genuine skill gaps that need to be filled to drive sustainable economic growth, we will continue to support entry of the people with those skills.
Labour-led governments have a proud record of delivering high-quality trade agreements that open opportunities for our exporters. The government will build on this record.
We have made progress with the Comprehensive and Progressive Trans Pacific Partnership. This agreement now balances improved market access with preserving our right to regulate in the public interest and also builds a progressive agenda in areas such as sustainable development, labour rights and gender equality.
We will continue to pursue this style of high-quality, progressive free trade agreement, with the European Union, UK and other nations.
Supporting Maori and Pasifika Aspiration
As we move towards the end of the major Treaty settlements it is timely to reset the dial on how the Crown and Maori work together, and how to focus on maximising the strength of Iwi. Through the work of both Minister Kelvin Davis and Nanaia Mahuta the government will support Maori in this process. At the same time, our economic goals will not be met if we do not improve the outcomes of Maori in employment, education and housing where there is still a significant and ingrained disadvantage.
Next Steps: HYEFU/BPS/100 Day Plan
The first steps in delivering on this government’s new economic strategy are included in our 100-Day Plan.
Just last night the first two significant pieces of legislation were passed - twenty six weeks Paid Parental Leave (at a cost of $325m over the forecast period) and the Healthy Homes Guarantee Bill that significantly increases minimum standards for rental housing.
Progress is being made on all the measures in the Plan. These include the introduction of a minimum wage of $16.50 an hour from 1 April 2018, in line with the coalition agreement with New Zealand First to lift that to $20 an hour, with effect in April 2021. Contributions to the New Zealand Super Fund will re-commence within the 100 Days. Student allowances and the living costs component of the student loan scheme will both increase by $50 per week from the 1st of January next year.
I want to highlight one part of the 100 Day Plan that will be one of the most significant policies this government will pass this term. Our Families Package. This is an ambitious programme to give low and middle-income workers a much-needed boost in incomes and address inequality and child poverty.
It is paid for by repealing the previous government’s tax cuts, which gave $400m per annum to the top ten percent of earners. Again, in the election the message on this was clear. New Zealanders knew that now was not the time for tax cuts. And that included more than half the CEOs in the Mood of the Boardroom.
This package will deliver increased targeted assistance to families through Working for Families changes, greater support for children in early years of life through Best Start, support for increased cost of living for our seniors and those on low incomes through a Winter Energy Payment and support to deal with soaring cost of rents through the Accommodation Supplement.
It is a major shift to improve families’ well-being, along with other initiatives such as the minimum wage, reducing cost of doctors’ visits and improving the quality of rental accommodation.
In less than a month of being in office, we have worked to develop the details and assess the costs of the plan. All the fiscal costs of the 100 Day Plan, which are currently being finalised, will be incorporated into the Half Yearly Economic and Fiscal Update. This will be released, along with the Budget Policy Statement, on Thursday December the 14th.
You will see when the Half Yearly Update is released that we are meeting our Budget Responsibility Rules, in particular the commitment to reduce net core crown debt as a percentage of GDP to 20% within five years of taking office.
One of the core elements of the 100 Day Plan is the reversal of National’s tax cuts. This provides $8 billion of fiscal headroom over the forecast period. This will more-than meet the costs of the 100 Day Plan and provide further resources to invest in Budget 2018 and beyond.
The Budget Policy Statement will outline our priorities for Budget 2018 and show the level of operating and capital allowances for the next four Budgets. These allowances provide the expenditure necessary to deliver our policy plans, including the coalition and confidence and supply agreements.
All these commitments – outside the 100 Day Plan, which will already be in HYEFU – are now subject to the normal Budget process to finalise details and costings. We will, however be providing the current estimates of the costs of the policies in the coalition and confidence and supply agreements at the time of the release of the Budget Policy Statement.
The HYEFU on 14 December will also include Treasury’s latest forecasts for the economy.
There have been a range of forecasts for economic growth since the new government was formed. Some are more pessimistic than others, with both the Reserve Bank and the OECD Economic Outlook more optimistic than some of the bank economists.
In general these economists agree that over the next year there will be some softening of growth as the housing market remains flat and as net migration tapers off slightly. Then, there is a consensus of a stronger growth track through 2019 and 2020 which is expected to be supported by government policies such as increasing R&D tax credits, increased wages and export growth.
In other words, we’ll be swapping out population growth and the buying and selling houses to each other as our two main growth drivers for much more sustainable ones. That sounds like a good description of our plan.
If that means slightly lower growth for a year while the transition to a productive economy occurs, then that will be a price worth paying.
As one economist put it, we will be passing on the baton of growth.
While I understand a new government and the change that comes with it will inevitability cause some uncertainty I think there is a clear understanding that the government’s policies will ultimately be good for sustainable growth.
Relatedly it is good to note that in the Reserve Bank’s Financial Stability Report released this week the Government’s Housing Plan was highlighted as a reason the Governor felt confident to ease LVRs.
It is sometimes easy to forget that it is little over a month since the government was sworn in. We are making good progress to building the better and fairer New Zealand we have been charged with doing by the public.
The foundations on which we are building our economic strategy are disciplined and careful fiscal and economic management, and a clear goal to see the well-being of all New Zealanders improve. We are moving at speed to implement a 100 Day Plan that will lift incomes and well-being. We are putting New Zealand back on a course of fairness, compassion and shared prosperity. It is early days, but the journey is an exciting one. I look forward to working with you all over the coming months and years.