Address to Westpac Trust in Association with Auckland Regional Chamber of Commerce and Industry

Business Leaders' Luncheon
Aotea Centre, Auckland

Drought, power cuts, the Asian financial crisis, lower business and consumer confidence, increasing unemployment, are the context in which the 1998 Budget has been delivered.

Growth in New Zealand in the first half of 1998 is expected to be flat and economic growth forecasts for our main trading partners has lowered from nearly 4% to under 2.5%.

Despite all this there are strong reasons for all New Zealanders to be positive and look to the future with confidence.

The 1998 Budget demonstrates this Coalition Government's determination to take a forward-looking course, building on the successes of the past and introducing innovative and progressive policies to cement in a better future.

We are an active Government, we are a working Government and we are a Government willing and able to take hard choices in the best interests of New Zealand.

There are a number of new and exciting initiatives in the 1998 Budget. The Budget renews our commitment to economic reform, with some key proposals which are not some knee-jerk reaction to recent events, but rather the next steps toward becoming a more open and competitive economy.

This Budget represents the culmination of many months constructive effort by National and New Zealand First Ministers. While there are differences in emphasis between us, we are united in our belief that the economic reform process must be continued and in our conviction that we can deliver.

The New Zealand economy is continuing to grow.

In fact, in the last five years, the economy has grown by over 22%. That ?s more growth in five years than the country managed in the previous 15. Reserve Bank and Treasury forecasts - and those of the private sector - expect growth to accelerate over the next three years.

The resilience of New Zealand?s economy in the face of the Asian crisis is evidence of the benefits of the micro-economic reform programme of last decade and a half.

We cannot isolate ourselves from international developments even if we wanted to. This means though that if New Zealand is to prosper, we must respond to rapidly changing circumstances. Individual firms and the Government must be able to adapt, to change plans where necessary.

With respect to the Asian crisis, we are not out of the woods yet. But all signs are that New Zealanders are rising to the challenge.

Exports to Asia constitute over a third of our total exports. Obviously this trade has been and will continue to be affected by the economic problems in that part of the world. But despite this, total exports in the 12 months to March 1998 were 4.3% higher than for the previous 12 months.

As the effects of the lower dollar flow through and our firms search out new markets for their products, we are confident that export volumes and receipts will continue to grow.

It is important that the private sector retains its confidence in the policy programme and the business environment.

Fiscal Policy
But it is not just the private sector that must respond. Government will and is doing its share.

As revealed in the Budget, the Government?s surplus for the current financial year is estimated to reach $2.8 billion dollars.

That?s a terrific result and well above our own and the market?s expectations earlier in the year. But we have to acknowledge that the out-turn has been influenced by a number of extraordinary items. We can?t guarantee that one-off technical adjustments in the Crown?s accounts will fall our way in the next 12 months.

Without allowing for proceeds from the sale of assets, we are forecasting a surplus of $1.3 billion in the coming year. That?s at the lower end of our comfort zone.

But rest assured, we will continue to guard our finances carefully.

While we have recognised and responded to the demands being placed on us in health, in education and in the justice sector, we will take all sensible precautions to ensure we do not spend more than we earn.

We have 'cut our cloth' in response to the economic conditions that face New Zealand.

Compared to earlier plans we have reduced our new spending on policy initiatives by $300 million over the next two years. This buffer will be used to protect our operating surpluses against the unexpected.

I have no doubt that some here will argue that the reductions in expenditure don?t go far enough.

But let?s be clear. Total Government spending next year is projected to be less than ½ of 1% higher in real terms than it was in 1989/1990.

More important, we have reduced spending as a percentage of GDP from 42% when the National Government took office to under 35% now. Not many governments can claim such gains. Not many political parties have a record of actual delivery. And we remain committed to our long-term target of reducing spending to below 30% of GDP.

And this has been achieved at the same time as we have increased real spending in health and education to unprecedented levels.

If we want more jobs we must keep making progress in this area.

As I have said before, we will not make significant further progress in reducing spending unless we take some hard choices about what goods and services we expect a modern government to provide.

This is a challenging debate, but it's one we need to have. But it?s not just a case of across-the-board cuts. One of the most fundamental changes we have seen in the past 20 years is that New Zealanders have come to expect, to demand, quality services.

This expectation is not limited to goods provided by the private sector. Nor should it be. Our public have a right to expect quality product from their government agencies. There is further reform that can be carried out in this area.

Personally, I intend to take the debate past the glib assertions about the right level of government spending so we engage in serious discussion of these issues. In any event, my Government will maintain its rigorous and disciplined approach to fiscal policy.

And don?t forget, it is this discipline that has put us in the enviable position of being able to both pay off debt and lighten the tax burden.

Tax Cuts
The Government is committed to increasing the amount of each dollar New Zealanders have earned for their own use. There are very good reasons for doing so.

While there are some who seem to believe that the combination of a growing economy and tax reductions has done little for ordinary working families, the reality is that real incomes have never been higher than they are today. In fact, over the past five years, real disposable incomes have grown on average by over 3% a year.

After the next round of tax reductions, the average New Zealand family with three children will have an after tax income of just under $40,000 a year. This is over $5,000 a year - about $100 a week - more than an average family with the same family structure received before the 1996 tax cuts.

Lower taxes don?t just help those initially affected. Because they increase the returns from work and training, they act as a strong incentive for people to up skill and to work harder. They reward people for effort.

Overseas estimates suggest that a 1% decrease in tax rates translates into a 1% increase in education and training levels. Having a smarter and better qualified workforce will see increases in productivity and higher living standards across the board.

This is why we will look to further tax reductions in the future as economic circumstances permit. And this is why my Government will continue to promote policies that will maximise economic growth. Those who work and put in the effort will get the greatest rewards.

Social Policy
For it is a truism that the people who benefit most from tax cuts are those who are in work and paying tax.

As we approach the new millennium, the tragedy is that not all New Zealanders are in a position to share fully in the growth of our economy. No government, whatever its hue, can alter the stark reality that people who are reliant on income support for extended periods so often finish up the poor relative to those in work.

We have a responsibility to those New Zealanders who need help. My Government will not shy away from that responsibility. We currently spend about $36 million a day on social security and welfare payments, around 38% of total Government expenditure.

We must satisfy ourselves that welfare is improving New Zealanders' lives and prospects. In some instances I am not convinced that this is so.

Many New Zealanders agree we need to look at this issue in a new way.

The 1998 Budget marks a major change in the way we work with people on benefits.

While we ensure those on a benefit are not forgotten, we will do everything we can to help people back into the workforce so they can contribute to New Zealand?s growth and enjoy the improvements in living standards that growth creates.

We will focus on their capacity to work and contribute rather than on the category of benefit they fit into. Those who have a capacity to work, even for 15 hours a week, will in future receive a community wage.

>From 1 July Sickness Benefit no longer exists for future applicants. They will receive the Community Wage, which is the current Unemployment Benefit, and their direct costs of any illness will be met by the Disability Allowance.

By focusing on a person's capacity to contribute to their own support, it is changing the way we look at welfare. It recognises that people do, and can be expected to, contribute to the wider community.

To help realise this vision we are transforming our social services departments. We want to achieve a shift from an automatic teller machine culture to one of modern, responsive and innovative agencies charged with finding specific solutions for the individual or family concerned.

This will take into account their circumstances and needs. To help out, there is more child care, more after school care, but also more expectation of a contribution as well.

The reforms we have announced as part of the Budget are not motivated by short term fiscal considerations. In fact, as we move to improve the service provided to those in need of assistance it is likely that costs in many areas will actually increase.

But it will be worth it if we can invoke the change in attitudes that this country so desperately needs.

Education
In education Government is also trying to sharpen up our goals for young people's learning and for our economy as a whole.

The Government is making a further substantial investment in all levels of education provision.

The $1.7 billion new spending on education we have committed for the Coalition period speaks for itself. But the money must translate into a better education for students and better value for taxpayers.

This year we are taking another huge step forward with two major initiatives. We are giving schools the option of full control over their budgets, including wages.

A key consequence of these reforms is that funding will be more responsive to the needs of students and communities through their boards of trustees, and not just directed to teachers and education providers on their behalf.

We want these groups to work together to find local appropriate solutions.

To those of you in business, this change is not new or revolutionary. Government firmly believes that those who are most directly involved in the educational process are best placed to decide on how and where the resources should be used.

I have no doubt there will be some in the teaching unions who will attempt to portray these changes as the end of the world as we know it.

They must put the interests of students first before taking a position on this new fully funded option.

The New Zealand education system is for children's learning.

If these reforms put a few union officials out of a job, I make no apology. The needs of students and local communities must be paramount and I hope parents, teachers and their communities grab this new opportunity with both hands and give education a real lift in this country.

There is change in the tertiary sector also, through our commitment to ensure our education system produces the best possible results for our children and for the economy overall.

To do this we are removing the limit on how many students the Government will assist. Equally as important, we are allowing all qualified providers to receive this assistance, not just state institutions. Real competition in this sector can now occur.

These changes will give students more choice and encourage improvements in price and quality throughout the tertiary sector.

Micro-economic Reform
The expenditure priorities and social policy initiatives announced in the Budget are far reaching and significant.

But equally, if not more importantly, is the range of micro-economic reforms that we have introduced.

The five key areas of change are:

Competition policy
ACC
Producer boards
Tariffs
Asset sales
As Prime Minister I am determined to take every opportunity to implement sensible regulatory and micro-economic reform.

Only if we reduce the cost of doing business can we generate more jobs, higher incomes and greater well-being for all New Zealanders.

Recent improvements in the performance of the New Zealand economy are in large part a reflection of our preparedness to open industries up to domestic and international competition.

And one of most striking lessons from our recent history has been the unexpected ability of many of our firms and industries to improve their performance when exposed to competition.

This is true both within and outside Government.

One need only look at the huge improvements in price and service that competition has delivered to postal services, to telecommunications and transport and, more recently, in the petroleum industry.

The Coalition Government is looking to replicate these successes in other areas of the economy. That?s why we are reviewing legislation governing occupational regulation. It is why we are moving ahead to expose electricity generation and retail businesses to greater competition. It is why we have decided to remove the prohibition on parallel importing of goods protected by copyright. And it is the desire for better service and lower costs that is at the heart of our reforms of accident compensation.

ACC
Yesterday we announced that full competition for the employers account and for the self employed will be introduced from 1 July next year. This reform will not affect existing rights to cover. Rather, we are looking for the types of gains already being achieved with the accredited employer scheme.

Over time we hope to open up all of ACC?s current businesses to competition from private sector insurers. However this is a complex area and the Government is conscious of the need for the issue to be handled carefully and well. We intend to deliver this reform in manageable pieces.

Producer Boards
The general economic benefits from competition apply as well to those activities traditionally undertaken by statutory producer boards. Around 40% of our total exports are controlled by producer boards. This is a major slice of our economy and even small improvements can have a major impact on New Zealand?s overall economic performance.

There is now a shared understanding that traditional agricultural industries must focus on future opportunities.

I have spoken to the leadership of the primary sector and am excited by the possibilities that exist for New Zealand. But to maximise our opportunities, industries must be innovative and move from the agricultural commodity market to the international consumer driven food and fibre markets.

I am pleased that many of the leaders of the producer boards are lifting their sights and investigating the best commercial approaches to achieve these objectives. Most of them have come to the realisation that the existing statutory structures are no longer as relevant as they used to be and are actively addressing how best to manage the transition to life without statutory intervention.

As announced in the Budget, the Government has invited all the producer boards to provide by 15 November their plans on how this transition may take place.

We have made clear that the reform process must not be allowed to stall. At the same time it is important that the industries themselves lead the change. I am very conscious of the need for careful management of the risks, including allocation to quota markets.

Government will do nothing to disrupt commercial arrangements without careful planning and full consideration.

Tariffs
Of course while competition can improve the performance of industries and individual firms, it also hastens the closure of those businesses that relied on protection and subsidies to survive.

One of the most significant announcements in yesterday?s Budget is that all remaining tariffs on motor vehicle imports have been removed as from today.

The decision was made at the request of the assembly industry itself following individual companies? decisions to close down their operations over the course of this year.

The decision to remove tariffs from cars was not taken lightly. I know full well that the end of the road for vehicle assembly in New Zealand will mean a period of heartache and hardship for the families and communities affected.

But while in the short-term closure of the assembly industry imposes costs both in human terms and in terms of the Government?s fiscal position, the longer term benefits from zero tariffs, to consumers and to the productive sector, - will be substantial.

The simple reality is that keeping uncompetitive industries afloat drives up prices and requires us to impose potentially crippling taxes on more productive sectors of the economy.

That doesn?t make sense in terms of long-term job creation. It doesn?t make sense in terms of economic growth and it?s not good for consumers either.

The staging of further tariff reductions in other sectors of the economy will be considered later in the month.

Asset Sales
Significant progress has been made in recent years to improve the performance of those businesses that remain in Crown ownership.

But where there is no strong public interest served in retaining ownership of State owned enterprises or other Government businesses, the Coalition Government is pledged to investigate alternative options, including sale.

In any asset sales that are undertaken, the Government is committed to maximising returns to the taxpayer while maximising the potential for New Zealanders to invest in the businesses they helped create.

We announced yesterday that we have decided to float all of our shares in Auckland International Airport. The float will ensure as a first priority that ordinary New Zealanders have an opportunity to participate in this process. Planning is also now in its final stages for the float of Government Property Services.

Coinciding as they do with July?s tax reductions and increasing concerns about the level of householders? savings and investment, these floats are well timed.

I hope that when considering how best to use their tax cuts, New Zealanders will think about investment in real assets in our future. New Zealanders do need to fall in love with saving. This is a good chance to do so.

But the Government remains focused on the need to ensure that in conducting asset sales we do our best by the taxpayer. We won?t sell by way of a public float where it is not appropriate to do so.

Consistent with this approach, our current intention is that our interests in Solid Energy and in Wellington International Airport will be sold by competitive tender. That?s because the value to be realised from sale of these assets is likely to be higher with a trade sale and there are no other governance or ownership complications.

As a matter of policy, Government forecasts do not include proceeds from expected asset sales.

We will only sell when the time is right. Asset sales will not be used to ?balance the books?. As in past years, all proceeds from asset sales will be used to retire debt.

Our success in reducing the Crown?s indebtedness is one of the real achievements of Government since 1990. In 1991 when net public debt stood at 52% of GDP, the Government was subjected to derision over plans to reduce it below 20%. We are now on track to achieve this landmark by the turn of the century. It is a great success that all New Zealanders can be proud of.

Yet we are still behind Australia, which is forecast to reduce its net debt to 11.2% in the coming year.

We must continue to pay off debt. As announced yesterday, the Government has now set a new long-term target of reducing debt to below 15% of GDP. And based on current forecasts, we can achieve this while still having room for further tax reductions or increased spending on priority areas.

Which brings me to the two largest challenges New Zealand still has ahead of it.

Current Account
There is now general agreement that the biggest cloud on our economic horizon is New Zealand?s current account deficit.

It is true that financial problems in east Asia, industrial disputes in Australia or drought here in New Zealand, all have the potential to delay the upswing in economic activity. But these are things about which we can do very little. There are many things we can do something about, some of which I've already mentioned.

The current account deficit is one such issue where both the responsibility and the solution lies on our own door step.

But I want to be very clear. New Zealand?s situation is very, very different from that in some other countries which have experienced high current account deficits.

It is important that business and other opinion leaders take the time to acquaint themselves with the facts underlying our current account.

And key amongst these is that today?s deficit is entirely the consequence of private rather than Government investment decisions.

Because the Government is a net saver, it is making a positive contribution to reduce the deficit.

All commentators expect that with the recent depreciation in the currency we will see trade surplus grow strongly over the short/medium term.

In time this will feed through into the current account.

However if a correction is reflected in a sudden shift in the currency and/or in interest rates, the ?cure? can itself cause pain for our businesses and families.

So what, you may ask, is the Government doing about it?

Firstly, we must continue to restrain our spending and we must continue to pay off debt.

And we must move with confidence and energy to implement micro-economic policies which will lower the costs facing business in New Zealand and improve our international competitiveness.

That's why over the next few months we will make bold decisions on:

Roading reform
Reviewing the Resource Management Act
Occupational regulation
General review of tariffs
Labour law reform
But as a Government and as a society, there is one further policy issue which we need to address and that is the issue of private savings.

New Zealanders must not continue to defer facing up individually and collectively to the savings issue. While New Zealanders have rejected a compulsory savings scheme approach to this problem, the relationship between private savings and superannuation policy is unavoidable and must be addressed in time for the baby boomers as they retire. To achieve this policy decisions will need to be made around the turn of the century.

Superannuation
It is not enough for the Government alone to ensure that we earn more than we spend.

New Zealand?s saving deficit is a direct consequence of the aversion ordinary New Zealand families have towards saving. Perhaps the major reason is New Zealanders' belief that the Government will always be there.

I don?t want to engage in scaremongering.

But at a cost of almost $5.2 billion in the coming year, New Zealand superannuation already consumes about 5% of GDP and the cost is forecast to more than double by the middle of next century.

That?s why the Minister of Social Welfare last month initiated discussions with Accord parties over the future of retirement income policy.

I hope the Accord parties and the Parliament put politics aside and make progress. If that's not possible we will have to look at an alternative approach.

New Zealanders can't rely on others' savings to support our growth and development. We must become enamoured with savings in the interests of ourselves and our country.

Conclusion
As we look ahead it is going to take the best of what makes New Zealand unique to guide us through the next 18 months.

The performance of Government and the private sector alike must be sure-footed, but confident, and clear about its goals and the disciplines required to achieve.

We are a different country to the New Zealand of the early 80s. We've made stunning progress through the hard work of New Zealanders. Progress is still required and I'm personally committed to seeing that progress continue.

Our prospects are bright because we are an open outward-looking and competitive nation. We must not let this advantage be eroded.

And the politics are manageable. I firmly believe the policies and values of the centre right will deliver the best possible future for all New Zealanders.