ADDRESS BY THE RT HON W F BIRCH, MINISTER OF FINANCEFinance
I am delighted to be able to speak to you this morning about the outlook for the economy and business in New Zealand. The Coalition Government's second Budget will be presented in three weeks time. I can't give away any Budget secrets, but it means we have a very up-to-date picture of New Zealand's economy right through to 2001.
It is of solid growth, low inflation, continuing surpluses, falling debt and increasing employment. As well, the Government will be delivering $1.1 billion of tax cuts this July. We are also following through with a programme of other reforms designed to further improve New Zealand's international competitiveness.
There should be no surprises in this. New Zealand Government's now operate in an environment where overall targets and policies are set down well in advance.
What is encouraging, however, is that at this specific time of world economic uncertainty, New Zealand's prospects are still so positive.
In the last 12 days the OECD and IMF have released their latest forecasts, which are not out of line with what the Government is now thinking. The OECD is the more optimistic, predicting growth of 3.1% for the1998 calendar year and 3.4% for 1999.
The IMF is slightly more conservatively picking growth of 2.7% this year with 3.5% in 1999.
This is consistent with what private and public forecasters in New Zealand are saying - the economy will continue to expand this year at around two and a half percent, and then this growth will accelerate.
There are a number of positive factors for growth:
the lower dollar assisting exports and strong economies in traditional markets like the UK, Australia and US the July tax cuts the one-off AMP demutualisation worth $1.2 billion, and major events such as APEC, the America's Cup and millennium celebrations providing a tourism boost.
We are currently in our sixth year of solid economic growth with 20 quarters of consecutive growth apart from an aberration in the March quarter last year.
We are on track to reach a $100 billion economy this calendar year. Our nominal economy has grown by 36% in 6 years in a very low inflation environment.
A foundation of policy fundamentals recognising growth as the key to our country's well-being is the reason for our country's rapid expansion. Up until the 1990s there had been a long period of low improvement in our living standards compared to the rest of the developed world. The trend is now for our nation's income and hence individuals' worth to improve.
We have moved on to a different plane when our economy has growth over 2 percent at the bottom of the business cycle. Our official growth figures for the December quarter showed the economy grew by 0.5% in the quarter, and we had 2.3% annual growth. That is well above the average 1.5% we achieved in the period from 1975 to 1991.
Our policy fundamentals are straightforward.
1.An open competitive economy which allows our businesses to make decisions based on proper market signals. That means we have free capital markets, no subsidies or import controls, and we have removed most tariffs - so we are ready and willing to enter into free trade agreements.
2.Price stability has been delivered through the Reserve Bank Act and an independent central bank. March quarter inflation, announced last Friday, was 0.2%, giving annual inflation of 1.3%. From 1991 to 1997 our underlying inflation averaged 2%.
3.Flexible labour markets were introduced with the Employment Contracts Act. From the time this legislation took effect in the June quarter of 1991, we had very strong consistent job growth. Unemployment was cut from a peak of 10.9% to 6% in December 1996 in which period 228,000 jobs were created. Unemployment is expected to move under 6% in the forecast period.
4.Our low rate broad based tax system recognises that lower taxes are critical to economic growth. From July 1996 to July this year, income tax cuts worth $3.3 billion will have been introduced to increase the return from paid work and encourage growth. We have also moved to systematically address distortions and loopholes in business taxes.
5.We have legislated for sound fiscal management with the Fiscal Responsibility Act. Through this decade government has concentrated on controlled quality spending, running surpluses and repaying debt. The Budget will confirm our fifth successive surplus, with a further three to come.
The framework represents the broad principles of an orthodox, high quality programme designed to foster growth and make the economy more competitive.
We have demonstrated that comprehensive, high quality structural reforms do work. That you don't have to have a boom and bust business cycle.
A stark example of how far we've come is the international rating of our economic competitiveness.
In 1985 the Canadian Fraser Institute ranked New Zealand 60th in the world. Last year they ranked us third.
The US-based Heritage Foundation in its 1998 index of economic freedom has rated New Zealand fourth in the world - once again behind Hong Kong 1st Singapore 2nd and another city-state, Bahrain 3rd. In both surveys New Zealand is ahead of the United States and Switzerland.
These ratings reflect the worth of our focus on economic fundamentals. And it is this focus on sound economic principles which means New Zealand is well placed to weather the effects of the Asian storm.
With our economy built on a sound framework, and with far lower debt and unemployment, New Zealand is much better equipped to ride out such external shocks now.
The financial problems of South East Asia and Korea and Japan are affecting New Zealand, as they are the rest of the world. They have hit our export markets, tourism and business confidence.
In January and February the number of visitors from some Asian countries halved, and tourism from Korea was down 91%. Exports in the three months to February were up 4.2% overall, but there were large falls in several Asian markets. Business confidence, which was rising steadily at the end of last year, is now negative.
While there are tangible effects from the fall-out in the ASEAN 4 and Korea, we should not over-state the threat to New Zealand business from the downturn in these countries. In Hong Kong you understand our position - we are affected, but we are not part of the problem.
New Zealand now has a widely diversified export base. The ASEAN countries account for 7% of our export market, Korea a further 5%. Those are the countries where we can expect to see a short-term fall off in trade - though in the longer term I am sure the trend this decade of strong export growth to these nations will continue.
We also export to countries which are performing strongly at this time - Australia takes 20% of our exports, the US 10%, and the EU 16%.
This means our export risks are reasonably well spread. And our exporters are already showing they are capable of shifting sales to offset difficulties in some markets. February saw a huge boost in sales to non-traditional markets in Mexico and Venezuela, and exports to the US were up 37% for the month. Similarly, in January and February tourism numbers from Australia were up 12%, from the US 16%, and from Europe 4%. Together these countries account for over half the tourists to New Zealand.
For all this, the problems in Asia have caused us to refocus on what is important to drive a modern economy. Clearly, we cannot be content with saying we are coping better than we would have in the past.
Further, the financial problems in the region have also served to draw attention to New Zealand's increasing balance of payments deficit.
It is important to understand the components of this.
I should point out that New Zealand's trade has been in surplus for 10 years, despite a very high real exchange rate over the last few years. The high current account deficit is mainly due to the investment income balance, reflecting the returns to foreign investment in New Zealand.
What it also reflects is New Zealand's inability to fund high levels of investment from our own savings.
Clearly we want sustained economic growth, and we need investment to drive this. But low domestic savings rates means this money has to come from offshore, and the trade-off between the necessary investment and low domestic savings is the growing current account deficit.
While balance of payments deficits have been a feature of New Zealand's economy for many years, it is important to note that the Government is not contributing to this deficit.
The Government is a net saver, and is paying back debt.
What the deficit reflects are transactions in the private sector, much of which relates to the servicing of private sector financing offshore.
It is also crucial to remember that New Zealand has a floating exchange rate. Ultimately, in an open economy, this means there will be a private sector response.
This response has already occurred in the form of a weaker currency. Both the Trade Weighted Exchange rate and the cross-rate against the US dollar have come back considerably from their highs of late 1996 and early 1997.
At that stage the NZ$/US$ crossrate was over 0.70. It is now around 0.55.
This is a key reason forecasters are expecting the balance of payments position to improve.
The Government is not comfortable with this balance, however, and will continue to look at ways of addressing the country's poor savings rate. We are also particularly aware that at this time the best thing government can do from a fiscal viewpoint is to ensure surpluses and debt repayment.
That is exactly what we are doing in this year's Budget.
We recognise the importance of the Government's economic credibility to New Zealand's economic performance. Such credibility is very hard to gain, and very easy to lose.
It simply depends on results. That is why we have worked to protect surpluses right through the forecast period because of the risks in international markets.
This year's surplus will be ahead of its forecast 1.6% of GDP, but that is already in the bank and we cannot afford to return to deficit.
We also know we cannot expect to get further growth and competitiveness and better economic results by sitting on our hands. That's why the Government is committed to further reform.
In the last few weeks we have:
introduced full competition to the postal industry; announced the split of the states' largest electricity generator, ECNZ, into three competing companies, and moves to create greater competition among retailing energy companies; brought in improvements to the Accident Compensation scheme; negotiated to have a performance based pay system for primary school teachers; announced the creation of a single agency to combine employment and welfare services; and today unveiled a scheme to introduce community work in return for the unemployment benefit - the community wage.
The Government is also involved in an extensive range of work around its ownership of non-strategic assets. We have sales advisers working on the float of Government Property Services, and on the sale of the Crown's shares in Auckland Airport. Sales advisers have also been appointed for Solid Energy and Wellington Airport.
In addition a scoping study has been completed for Vehicle Testing New Zealand and a study is being undertaken on the Crown's options as shareholder in Television New Zealand. This is in the context of the Coalition Agreement commitment that TV1 will not be sold.
You should note that Government does not include in its forecasts the proceeds from asset sales. This is designed to ensure that sales are not driven by fiscal timetables.
Along with ensuring Government businesses make the best possible contribution to the economy, our micro reform programme includes:
helping move producer boards into a more effective shape extensive reform of roading so that costs reflect use cutting down regulations that stifle business further moves in employment and welfare lifting education standards ensuring immigration levels remain positive and contribute to economic growth reducing tariffs to meet APEC obligations and lower costs for exporters introducing competition to ACC.
All of these moves are designed to sharpen the Government's focus on strong economic performance, to lower costs on the productive sector, and create further opportunity for individual New Zealanders.
It is the reforms to date that have already lifted our game - that have the Reserve Bank and OECD now saying our sustainable growth rate is 3%, twice what it was in the 1980s. But like business, the Government is fully aware that it must continuously seek to lift its performance.
We will. The problems in Asia only serve to reinforce that we have to do everything we can to strengthen our economy and make it less vulnerable to external shocks.
This cannot mean raising barriers. The reality - as shown here in Hong Kong as well as in NZ - is that small trading nations must be open and outward looking if we are going to be successful.