ADDRESS BY THE RT HON W F BIRCH, MINISTER OF FINANCEFinance
Thank you for the opportunity to talk to you this morning, to celebrate the implementation today of income tax cuts that put $1.2 billion a year back into the pockets of taxpayers, to improve their reward for work and initiative.
In the last two years, the Government has slashed the middle effective personal tax rate by a quarter, from 28% to 21%. On income between $30,875 and $38,000, the rate has dropped from 33% to 21% in that time.
Family assistance has been boosted, since 1 July 1996, by as much as $20 a week per child in total, for low and middle income working people.
A single income family earning $35,000 a year with three children is better off, from today, by $98 a week in the hand than they were on 30 June 1996.
That's a massive contribution to family well-being and family security.
Through the same programme, beneficiaries can earn $80 a week without loss of benefit. People on the DPB, widow and invalid benefits can earn $180 instead of $80 a week before the benefit abates more than 30c in the dollar.
Some Opposition politicians argue that all those changes are money wasted.
The Government, they say, should have hung on to every cent, and kept every decision on spending it in the hands of Cabinet Ministers.
On the contrary. These decisions are designed specifically to improve work, savings and investment decisions; to help lift productivity, boost personal and family incomes, and improve the support available for needy people.
Those are important priorities for Government and the community. They are particularly critical in the international situation currently facing us, where mobilising productive effort must continue to be the focus for economic policy.
Let me come now directly to the drought, the Asian crisis, the 0.9% decline in GDP which we experienced in the March quarter, Monday's Cabinet meeting, what Ministers learned there, and what they decided.
The Cabinet review followed immediately on the release last week of March quarter balance of payments and growth figures, and new statistics updating our picture of exports and imports to the end of May.
A week earlier, you will recall, the US and Japan had jointly announced a two-fold plan for central bank intervention in support of the Yen, in return for a pledge by the Japanese Government to reform and revive their economy.
White House spokesman Mike Curry, speaking the same day, said while he would not speculate on speculate on specific future actions, again I quote, "the US and Japan are prepared to continue to cooperate in currency markets."
That White House statement in a very short space simultaneously illustrates official confidence in, and official anxiety, about prospects in the period ahead-the uncertainty and ambiguity of the global economic situation.
For some time now, the outlook for 1998 industrial growth in Asia has been deteriorating month by month. The cumulative change in outlook is demonstrated in Consensus Forecasts estimates for industrial growth in 1998:
Japan, estimate last November, +1.6%; revised estimate now, -4% Korea, November estimate, +8.2%; revised down in June to -7.8% Indonesia, estimate in November, +6.9%; current estimate, -13.3%.
Nobody last November was in a position to predict a decline on that scale in the six months ahead, and nobody in the world today has the least ability to predict reliably how the latest figures may to evolve in the next 6 months.
The Treasury doesn't have a crystal ball. But they do have a responsibility to the Government and the people of New Zealand as best they can to predict the unpredictable, and clarify what managing it may require in terms of policy.
Here, in a nutshell, is what the Secretary to the Treasury, Dr Allan Bollard, and the Governor of the Reserve Bank, Dr Donald Brash, told Cabinet on Monday about their current perception of the future outlook for New Zealand.
The Asian crisis has deepened. The outlook is significantly worse now than it was in April when Budget forecasts were finalised. Significant risks exist it may deteriorate still further in the months ahead.
Asia normally takes one-third of total New Zealand exports, but markets there are, for the moment, shrinking instead of growing. And that has serious implications for short-term growth in New Zealand.
The drought has also bitten a lot deeper than expected. Nearly half the 0.9% decline of GDP in the March quarter arose from drought losses, and even with good weather, stock numbers will take time to recover.
The Government must therefore expect that GDP growth, originally expected to remain positive, may now prove to be negative, not just for the first quarter, but for the first half, of the 1998 year.
Based on current data about the evolution of the Asian crisis, Treasury continues to expect that positive growth will resume in the second half of the 1998 year, and cites good reasons for holding that view.
Pick-up will be stimulated in the short term by tax cuts, easier monetary conditions, AMP demutualisation, and the quite major on-going expenditure programmes of the Coalition Government.
Subsequently, in the medium-term, Treasury says recovery will be further reinforced as exporters seize new opportunities created by a lower dollar, and shift more of their focus to non-Asian markets.
Given expected developments in the first half of the year, however, pickup will be slower than forecast at the time of the Budget, and it will be taking off from a significantly lower baseline.
That combination suggests, said the Treasury-and let me highlight this telling phrase, because this is a key conclusion in the material presented on Monday-"significantly subdued growth in 1998-99."
Not all of the news in the Treasury assessment was bad. Our greatly improved economic framework is, for example, already working to deliver much faster, smoother adjustment than we had to the 1970s oil shock.
The fall in Kiwi dollar has significantly improved the international competitiveness of New Zealand exports over most of our trading rivals.
Many exporters and tourist operators are using the flexibility acquired during the reform process to switch emphasis as fast as practicable to non-Asian markets where growth still remains strong and healthy.
Awareness of the framework, the 1998 Budget programme, tax cuts, AMP demutualisation and a better mix of monetary conditions lifted the National Bank business confidence survey from -36% in April to +12 in June.
Major adjustments are already occurring on an open, orderly basis, through exchange and interest rates, without any dependence whatsoever on the vagaries of politicians or the inadequacies of civil servants.
The depreciation of the dollar is moving resources into areas supportive of improved export-led growth and a better trade balance. Higher interest rates are reducing residential investment and consumption.
At Mystery Creek this month, a big exhibitor told me, far from talking gloom, that right now, he is revising his provisional tax upward, in the light of the improved profitability of his exports into the United States.
These are all essential steps forward in the process of achieving sustained growth and sustained improvement in the current account
But here in New Zealand, we have to take any uncertainty more seriously than most. A significant and growing proportion of this country's GDP has been exported, in recent years, to emerging markets throughout Asia.
Exports to Asia accounted for 8% of GDP last year, lower than Australia's 10%, but a great deal higher than the 2-3% level which is typical of other OECD countries like the United States, UK, Germany or Canada.
Reduced economic growth will lower our profits and tax revenue in the short-term, and that poses a threat to the fiscal surplus forecast in the 1998 Budget, and to the ongoing credibility of Government fiscal policy.
The surplus plays a critical role in guarding us from the risk of disruptive shifts in interest and exchange rates on a scale capable of causing serious damage to New Zealand incomes and New Zealand jobs.
Reinforcing the surplus will play a key role in sustaining confidence at home and abroad in the both government management and the economy.
That was, in a nutshell, the message Cabinet and the nation got from Treasury in the paper presented to Ministers by Dr Allan Bollard on Monday.
Let me summarise now for you the decisions we made, based on that information.
1.In the short term, growth will be inescapably subdued because of the drought and the shrinkage currently occurring in our major Asian markets.
2.No short-term measure can alter that, but medium-term, the Government can take new steps to improve the rate and extent of our exports pickup.
3.Cabinet has agreed in principle to find additional savings which at least double the $300m buffer created in the 1998 Budget.
4.What that involves is not slash and burn. We are talking about a sensible, modest reservation at the margin of an ambitious and wide-ranging expenditure programme, to protect the credibility of the surplus.
5.Gatekeeping Ministers will report back to cabinet as soon as possible with detailed recommendations delivering on this objective.
6.A rapid increase has occurred in the level of uncertainty facing not just New Zealand, but Governments throughout the world. In the face of that uncertainty, Treasury's Budget forecasts now look significantly dated.
7.To minimise that problem, Cabinet on Monday endorsed measures to update the Government's economic and fiscal data a lot earlier than the next normal economic and fiscal update, scheduled for December.
8.Treasury Ministers have directed the Treasury to prepare an additional full economic forecast, with fiscal implications, for Cabinet in August, to give future policy formulation the soundest available information foundations.
9.Medium-term, the Government's focus will be on improved growth as the best available guarantee of rising living standards and job opportunities.
10.With that in mind, Cabinet on Monday invited the Prime Minister, Treasurer and Minister of Finance to work with portfolio Ministers to:
a) Complete the Budget programme of micro-economic reforms so that firms get the full benefit as soon as possible, as an aid to achieving further fundamental gains in international competitiveness
That includes, for example, lower electricity prices, competition in the provision of accident compensation, and tariff reform to focus more resources in areas of improved competitive advantage
Roading reform, a review of the Resource Management Act, Employment Contracts Act, announced privatisations and Producer Board reform are all part of that Budget reform programme.
b) Identify new measures which, added to Budget programmes, will further improve the competitiveness of firms and their growth prospects.
That includes, for example:
i) Additional means of improving micro-economic efficiency, and positive measures to improve the contribution of immigration.
ii) Improved incentives for people to save for their own retirement
iii) Improved efficiency and focus in the public sector
iv) And reductions in medium-term fiscal pressure as a means to an expenditure to GDP ratio of 30%, in line with the stated long-term expenditure objective of the present Coalition Government.
Those decisions provide a framework for sensible short-term action to reinforce the surplus, and further enhancement of a dynamic medium-term micro-economic reform programme, in support of competitive export growth.
They permit Cabinet to make immediate advances of value to the business community and the nation in the immediate future, with provision for further action based on improved data, in the period from August onwards.
In an uncertain global environment, New Zealand stands out as a country with the best possible framework to facilitate adjustment, and a Government actively seeking to further enhance the quality of that framework.