ADDRESS BY THE RT HON W F BIRCH, TREASURER MINISTER OF FINANCE

  • Bill Birch
Finance

Slide 1 Economic & Public Sector Reform, 1990-1998

Slide 2 Situation of Government in 1990

When National was elected Government in 1990, an intensive period of reform during the second half of the 80s had made a lot of progress, but had not yet delivered significant increases in jobs or output.

Treasury was projecting a fall in terms of trade, an increase in unemployment and the current account deficit, a fiscal deficit rising to more than 4.5% of GDP, and only 0.8% growth in the coming year.

Domestic economic weakness, high world oil prices, and a weaker international situation compounded the problems facing us. Together, they posed a major challenge for the new Government.

Slide 3 Economic Package, December 1990

The Government tackled the key problems head-on in a December 1990 economic package designed to remove labour market rigidities and reduce excessive government expenditure.

Key measures included: · An Employment Contracts Act which replaced compulsory unionism and a national wage award system by a new decentralised enterprise-oriented system of wage agreements. · Lower basic social welfare benefits, tighter eligibility, greater targeting, and work and means testing for supplementary benefits · Removal of employers' obligations to pay accident compensation insurance for employees' non-work accidents, abolition of lump-sum compensation for injuries, and stricter work criteria · Proposals for more on user pays, particularly in tertiary education · A review of other social spending and the Guaranteed Retirement Income system.

Slide 4 Five Fundamentals of Policy

· Five fundamentals were established and maintained as the key drivers of economic policy throughout the decade of the 1990s: ·

An open economy, a floating exchange rate and deregulated financial markets, using the competitive discipline of international competition to improve the efficiency of New Zealand producers. · Price stability, enshrined in the Reserve Bank Act 1990 as the sole objective of central bank operations. · Responsible fiscal management · Flexible labour markets based on enterprise and individual contracting. · And a broad-base low-rate tax system to minimise distortion.

Slide 5 MACROECONOMIC REFORMS

Slide 6 Managing The Fiscal Balance

New Zealand Governments had been running fiscal deficits every year since 1978. Within three years, the new Government, by consistently prudent management of expenditure, turned that around and delivered a surplus.

We have already run five surpluses in a row, and project a sixth, by a narrow margin, in 1998-99, as a buffer against unforeseen economic shocks.

After that, the impact of a major El Nino drought, in combination with the Asian crisis, are expected to put us back into deficit for two years.

It is the Government's intention, however, to rebuild its fiscal buffer systematically, at the earliest reasonable opportunity as the world recovers.

Slide 7 Effect On Net Crown Debt

The surpluses of the 1990s enabled the Government to halve net Crown debt from a peak 52% at GDP in 1991-92 to 24.4% in 1997-98.

The present global turbulence following the Asian crisis will lift that only very modestly to around 26% in the short term, before the further reduction of net crown debt resumes.

Slide 8 Fiscal Responsibility Act 1994

In 1994, the Government reinforced its commitment to prudence by passing a new Fiscal Responsibility Act requiring:

· Annual surpluses until debt reaches prudent levels, improved net worth to provide a fiscal buffer, prudent management of risks, and predicability in setting tax rates · Legislated rules for fiscal responsibility require the publication of a Budget Policy statement well in advance of any Budget, setting out both short-term fiscal intentions and long-term fiscal objectives. · The Act moved Government on to accrual accounting. All financial information must be presented in a manner consistent with private sector accounting rules. · The full impact of fiscal decisions for the three years ahead has to be disclosed publicly in regular economic and fiscal updates. · A new regime of bank supervision, implemented by the Reserve Bank in 1996, requires detailed quarterly public disclosure by all banks, including disclosure of their risk exposure and credit ratings.

Slide 9 PUBLIC SECTOR REFORMS

Slide 10 Legislation for Public Sector reforms

A State Sector Act 1988 and a Public Finance Act set comprehensive accountability and reporting relationships for public sector agencies, to improve efficiency in meeting the strategic objectives of Government.

Departmental chief executives contract with Ministers to provide agreed outputs for agreed funding, and have the independence required to make optimal use of the funds provided for contracted purposes.

This focus on outputs has greatly improved both management and supervision of departments, and has been critical to improvements in resource allocation, targeting and the control of State expenditure.

Reform of the State sector is not a one-off action. It is an on-going process of adapting State agencies to an ever-changing environment.

Slide 11 Reform of Fiscal Management

Until 1992, New Zealand Budgets were put together by a "bid and review" process which led to grossly inflated bids. Departments could introduce initiatives and relitigate their bids at every stage.

From 1992, the Government adopted 3-year rolling baselines. Centrally controlled, they start from current policy. Out-year cost implications have to be identified and agreed before any bid is adopted.

No allowance is made for price increases. They have to be found out of baselines, except where Government policy, as with welfare benefits, requires a payment to be adjusted in line with inflation.

Where new bids can't be funded from savings or reprioritisation, they compete for a limited pool. Cabinet sets the size of the pool and priorities for its use, in line with the strategic objectives of the Government.

Requests for capital funding have to be supported by a business case including expected financial returns, and a strategic business plan demonstrating that relevant options have been fully considered.

Together these fiscal management tools have played a very significant part in allowing the Government to deliver consistent operating surpluses, eliminate net public foreign debt, and halve net Crown debt.

Slide 12 Performance Contracts, Reporting

From 1992, so that Ministers can hold departments accountable for delivery, written purchase agreements have been required of every supplier of outputs paid for by the Crown.

Those contracts describe the outputs; their cost, performance and reporting requirements, rewards, sanctions, and procedure for making amendments.

Negotiating these agreements, while it can be difficult, ensures effective dialogue between a Minister and the supplying agency. They are now accepted as an integral part of the accountability and reporting system.

Since 1992, all entities owned or controlled by the Crown have been required the Public Finance Act to table in Parliament an annual Statement of Intent in Parliament which it has agreed with the Minister.

That statement must define, for the 3 years ahead, the objectives, nature, scope and performance targets of the business, and its reporting commitments.

The entity must report against the Statement of Intent targets in its annual report. This allows Parliament to hold Ministers accountable for the performance of entities to which the Crown is financially exposed.

Slide 13 Public Sector Co-ordination

Since 1993, the Government has linked its own vision to departmental operations by defining Strategic Result Areas¾medium term public sector goals deemed critical to the Government's longer term goals. SRAs inform the strategic phase of the Budget process, and guide departments in formulating operational priorities and budgets.

Departments then develop Key Result Areas¾selected issues which Ministers want them to focus on in the period ahead. Measurable KRA milestones are built into each CE's performance agreement.

Consultation requirements are set down in the Cabinet Office Manual for departments developing policy proposals. Papers for Cabinet Committees have to certify that the required consultation has occurred. Ministers expect departmental differences to be resolved by this process as far as practicable, before the matter reaches Cabinet.

To enhance co-ordination, Ministerial teams and agency networks are now under development to help define measurable goals, set output priorities, and evaluate effectiveness in selected cross-portfolio areas.

Slide 14 MICROECONOMIC REFORMS

Slide 15 Employment Contracts Act 1991

The significant microeconomic reforms since 1990 were designed to remove regulations and interventions inhibiting economic performance. Deregulation aimed at increasing competition and improving productivity.

The Employment Contracts Act 1991, removed workplace conditions inhibiting productivity. Union membership became voluntary, employee representation contestable and bargaining structures negotiable.

Under the Act, a statutory minimum code protects employment rights relating to dispute resolution procedures, personal grievances, a minimum wage, holidays, sick leave and occupational safety and health.

An Employment Court and Employment Tribunal provides an accessible forum for dispute resolution and contract enforcement. Strike and lockout rights are recognised in pursuit of an employment contract unless the action takes place during the term of a collective contract.

The Act has, however, encouraged stronger links between productivity and wages, which better encourages skill development.

Slide 16 Tax Reform and Tax Reductions

Tax reform in the last dozen years has given us a broad-base low-rate tax system described by the OECD as one of the least distortionary tax systems in the world. Tax cuts have given our people more disposable income and more choice about how they spend their own earnings.

Tax cuts in 1996 reduced the effective tax rate on income between $9500 and $30,875 from 28% to 24%, and raised the threshold below which that rate applies to $34200.

Tax cuts this year lowered the effective rate on income between $9500 and $34,200 24% to 21%, and raised the threshold below which that rate applies to $38000.

The rate on income above $38000 is unchanged at 33%.

Simultaneously, New Zealand's international tax regime has been strengthened, and reoriented to facilitate capital flows.

Slide 17 Role of Asset Sales

Excessive Government involvement in owning businesses puts an unacceptable commercial risk on the taxpaying public. Government should get out of business unless there is a compelling social policy reason to stay there.

The New Zealand Government has pressed ahead with the sale of Government-owned businesses, including for example:

· New Zealand Rail Limited · Bank of New Zealand · Maori Development Corporation Limited · Forestry Corporation of New Zealand Limited · Works Corporation · Mangahao power station · Coleridge power station · Auckland International Airport

A Coalition Agreement signed in 1996 defined some assets as strategic, and precluded their sale. But scoping studies were undertaken on several non-strategic assets such as Government Property Services and Vehicle Testing. Since the dissolution of that Coalition, that Agreement has terminated. The sale of Contact Energy is now under consideration.

Slide 18 International Linkages

International linkages are critical for New Zealand. In 1991 the Government announced a new regulatory regime for foreign direct investment to streamline approvals and promote New Zealand as an investment destination.

APEC has been a key regional development. APEC leaders are committed by the 1994 Bogor Agreement to free trade and investment in Asia/Pacific region by between 2010 and 2020.

Our Closer Economic Relations agreement with Australia is another important trade arrangement, extended in 1997 by a Trans-Tasman Mutual Recognition Agreement allowing goods produced in one country to be sold in the other without further restriction.

New Zealand concluded "Open Skies" air service agreements with the United States and Singapore in 1997, an important step in stimulating broader air service deregulation in the Asia-Pacific.

We have systematically exposed our own producers to competition as a means to improved international competitiveness by removing agricultural subsidies and eliminating quantitative controls on imports.

Tariff reductions were announced in 1994 for carpets, apparel, footwear, motor vehicles and other manufactured goods. This year's Budget announced an immediate end to tariffs on vehicles. Legislation since then has timetabled further reductions to eliminate all tariff protection by 2006.

Slide 19 Other Microeconomic Reforms

Significant changes in company law in 1994 changes have simplified procedures for forming, administering and terminating companies.

A 1992 Electricity Act introduced the potential for competition between energy retailers. Transmission and generation were split in 1994. In April this year a decision in principle was announced to split ECNZ, our dominant electricity generating company, into three competing State-owned generators. Electricity supply companies are being divided into separate line and energy businesses.

The Resource Management Act (1991) was designed to co-ordinate policies controlling pollution and to ensure that natural and physical are used in a sustainable manner. Concerns about compliance costs are now leading the Government to review aspects of the Act's practise and performance.

Transport reforms have shifted more responsibility for safety on to transport sector participants. The Government ensures that safety rules and mechanisms are in place and monitors compliance. Civil Aviation Authority and Maritime Safety Authorities have, for example, been established to carry the regulatory responsibility in their respective areas.

Other steps announced in the 1998 Budget to advance the process of micro economic reform include:

· The introduction from April next year of market competition in areas such as accident compensation insurance · The removal of past prohibitions on parallel importing · Further tax simplification, reviews of local body rating powers and systems, water and wastewater systems, occupational licensing and other regulations imposing avoidable costs on business.

Slide 20

Improving the Quality of Social Assistance

Health reforms launched in 1991 aim at better and more cost effective health care. They split funding from provision, allowing greater competition among health service providers.

A National Health Authority established this year purchases public health services. Crown health providers compete to deliver those services on a business-like, although not-for-profit basis, alongside other providers. Extending integrated care contracting will further improve service delivery.

Reforms to the public provision of retirement incomes have included higher abatement rates, a freeze on rates for two years (until April 1993), and a progressive increase in the age of eligibility from 60 to 65 over 10 years.

In November 1991 the Government replaced the steep abatement rate with a tightening in the tax surcharge. An inter-party accord on retirement income was established in 1993 to look for sustainable superannuation solutions.

The surcharge was removed in April this year, but additional reforms introduced in a September 1998 policy package should help to alleviate the growing fiscal pressures which will be created by an ageing population.

Reforms of State housing assistance in 1992 introduced a new accommodation assistance scheme (the Accommodation Supplement). Tenants of the Government's Housing Corporation faced a progressive increase to market-level rentals effective from July 1993, as the Housing Corporation was moved closer to an enterprise basis.

The functions of Housing Corporation New Zealand were split. A Ministry of Housing now provides policy advice and administers tenants' bond money. Housing New Zealand owns the stock of houses and provides accommodation at market rents. The Corporation handles mortgages and surplus land, and the Social Welfare funds the Accommodation Supplement.

Social Welfare policy changes have increasingly targeted assistance to those most in need, and encouraged self-reliance by ensuring that paid work is the default option for New Zealanders. After the changes to social welfare introduced in the Government's 1991 package, the 1993 Budget introduced targeted increases in Family Support and new initiatives funded by Social Welfare and Education to provide extra support for families at risk.

In February 1996, a Tax Reduction and Social Policy Programme announced, a two-stage programme to cut taxes, and increase in family assistance and work incentives through changes to benefit abatement rates and introduction of an independent family tax credit.

The 1998 Budget replaced the unemployment benefit with a new "Community Wage" and established an integrated employment and income service. The Sickness Benefit was merged into the Community Wage early this month. Work requirements for domestic purposes and widows beneficiaries have been introduced, with a childcare subsidy for low-income working parents.

Direct labour market policies have been expanded since 1990, providing valuable work experience for beneficiaries. Interventions comprise a mix of wage subsidies and direct training and employment schemes, which focus on improving the employment outcomes for disadvantaged members of the labour force, particularly the long-term unemployed.

A new Department of Work and Income integrates financial and employment assistance to improve the delivery of labour market policies.

Education reforms in education have aimed to give parents and students more opportunities to influence the performance of educational providers, and to permit greater autonomy for providers in responding to that pressure. Decentralisation is most advanced in the pre-school sector, where parents can choose from a large variety of providers.

In the school sector, parents now have greater choice over where their children receive their education. Funding for schools has steadily increased, including subsidies for private schools. The growth of 'direct resourcing' has given schools more autonomy over their operational performance. There have been a number of measures aimed specifically at improving the educational outcomes of Maori and Pacific Island students.

In tertiary education, reforms are aimed at bringing overall subsidy levels closer in line with the net public benefits of education. They also aim to encourage students to take a more considered view of the cost of their tertiary education choices and so put greater pressure on tertiary institutions to be more responsive to student needs. Institutions have responded, with new vocational and degree programmes opening up. The 1998 Budget announced a move to fully demand-driven funding for tertiary students.

Major achievements have been made in the settlement of long-standing Maori grievances, continuing the work of the previous Government. They include the settlement of two major Treaty claims. In May 1995 the Government settled the Tainui claim, and in 1998 the Ngai Tahu claim was settled.

Slide 21 The Past Year

The New Zealand economy had already begun a normal cyclical slow down before the Asian crisis affected our international trade. Simultaneously with the onset of the Asian crisis, the El Nino brought a drought said to be the severest experienced in some areas during the past 150 years.

The automatic stabilisers provided by an open economy, floating exchange rate, a statutory priority for transparency, an independent Reserve Bank dedicated to price stability, and deregulated finance markets now continuously assist the economy to adjust to the changing conditions of the global trade.

The Government, in explicit response to deteriorating economic conditions, has taken a medium term focus. Although we will probably slip into deficit short term, we aim to re-establish our surplus and resume repayment of debt.

To help achieve this, we have increased the fiscal buffer since May in two tranches of $300 million. The Government has since September been releasing a package of additional policies addressing medium term expenditure pressures, with continued targeting of assistance to those in most need. The key elements of the policy package aimed to:

· Strengthen medium-term economic and fiscal management via decisions to scope the sale of Contact Energy, eliminate tariffs by 2006, and reduce the wage floor for New Zealand Superannuation from 65% to 60% of the average wage. · Promote New Zealand in the world by funding new initiatives to raise New Zealand's profile. · Use targeted assistance to break cycles of disadvantage via new initiatives to improve the housing of low-income families, reduce educational failure, and provide extra employment assistance for the long-term unemployed. · Ensure low income people are not taxed to pay benefits to the better off, for example by deferring a proposal to remove income and asset testing of elderly people in long stay hospital care. · The Government will continue with its wide-ranging medium-term micro-reform agenda addressing ACC, roads, producer boards, asset sales, compliance costs for business and occupational deregulation.

Slide 22 Objectives for the Future

Our work will continue to be guided by the following principles: ·

To increase New Zealand's competitiveness, and the disposable incomes of New Zealanders ·

To protect high quality government social spending ·

To ensure that low income people are not taxed to fund benefits for the better-off in society ·

To reduce disparities and break cycles of disadvantage with targeted assistance ·

And in achieving those goals, to adopt sound policies that protect and enhance the fiscal position of the Government.

I am in no doubt that, with the Government providing the right framework and environment for growth, New Zealanders can look forward to a bright future.