AMP Budget LuncheonFinance
Thank you for inviting me to speak to you this afternoon.
By now you should have had time to digest not only your meals but several interpretations of the Government's 1998 Budget.
What I would not want you to lose sight of are some of the key numbers and policies.
1. Growth is forecast to be 2.7% in 1998/99, rising to 3.9% in 1999/2000 then 3.5% in 2000/01. Four strong factors are converging to boost growth this year - higher exports on the back of the lower dollar, the budget's full agenda of micro-economic reform, June's AMP demutualisation, and the July tax cuts.
2. The surplus for 1997/98 will come in at $2.8 billion. Next year this drops to $1.3 billion. Please note that is still a significant surplus after $3.3 billion of tax cuts, the $300m surcharge removal, and the $285 million reduction in tariffs.
3. We will achieve our net public debt target of 20% of GDP in the forecast period. This is a huge improvement from the debt at 52% of GDP we inherited at the start of this decade.
4. Inflation will remain low. CPI inflation is forecast at 1.5%, 1.7% and 1.5% over the next three years.
5. Unemployment is predicted to fall to 5.6% in the forecast period. Those are the type of figures on which any nation's progress is built.
Strong economic growth like this and low inflation is what creates jobs for New Zealanders. It also creates wealth.
The commentators are saying that this is a prudent Budget from a fiscal point of view.
And that, coupled with strong growth, will improve the quality and scale of priority spending.
It allows us to continue to pay off debt and save the amount of money we previously spent on interest.
That mix also provides the ingredients for more tax cuts in the future.
To you, that would be quite straightforward.
No doubt you try and live within your incomes, you pay off your mortgage, and work to improve your finances so that you are better able to cope in the future.
We should highly value that this Government has stuck to this simple winning formula.
Let me put this Budget in context.
"We had lost our way ? our budget, under Labour, was $10.3 billion in deficit. Government debts had grown nearly $80 billion over five years.
"Looking out to the next century there was just a haze of deficit upon deficit and climbing ranges of debt which hemmed us in and closed off our future opportunities."
That quote was not taken from the Budget speech of 1991.
It wasn't even from a New Zealand Budget.
Those were opening comments by Australian Treasurer Peter Costello when he presented that country's Budget two days ago.
The picture he evokes reminds us how far we have come since the years - the 17 consecutive years - of deficits and growing debt.
We now all expect that our Government will run a Budget surplus. But the strong positive reaction to Australia's promise of a surplus next financial year highlights our own achievement.
It takes on-going fiscal discipline to produce a surplus.
But they pay big dividends.
When governments run deficits, every extra dollar they spend adds to debt.
Surpluses give government the option of repaying that debt, or lowering taxes, or spending on new and better services.
With that realisation this week's Australian Budget has been well received.
Mr Costello said that the country's economic fundamentals are as good as they have been for 25 years. To quote him: "Australia will be the strong economy of this region."
So how do we compare?
Australia is forecasting economic growth of 3.0% in the 1998/99 year, against our 2.7%, and 3.5% against our 3.9% growth in 1999/2000. Our growth is slightly above theirs over the next two years.
Inflation in Australia is expected to sit about 2.5% in the next two years against 1.5% here in 1998/99 and 1.7% in 99/2000.
Australian unemployment is expected to remain around its new low level of 8% through 1998/99 with no projections further forward. Here, unemployment is forecast to drop from its peak of 7.1% to 6.7% in 1998/99 and to reach 5.6% within the forecast period.
As I mentioned, media have focussed on the Australian surplus forecast for the 1998/99 year of 0.5% of GDP. That compares to our forecast of a 1.3% of GDP surplus - and overlooks that while New Zealand will this year post a surplus of 2.8% of GDP, this Government's fifth in succession, Australia will be in deficit by 0.2% of GDP this year.
There are, of course, other indicators that can be contrasted, such as debt, where Australia is poised to make rapid progress on the back of asset sales. We have a policy of not forecasting for asset sale proceeds.
On four out of six important economic indicators we are ahead of Australia. Where has Malcolm Fraser been over the past six years?
What both the Australian and New Zealand Budgets reflect are the external risks the countries face.
The Asian financial shock has knocked the top off growth, and contributed to a large current account deficit.
Our prudent approach to fiscal policy is designed to mitigate against this type of external shock.
Keeping our own books in order is the most critical thing the government can do to provide the conditions within which individuals and firms are able to prosper.
And it is the best possible approach to the current risks facing New Zealand.
Running surpluses, reducing debt, and strengthening the balance sheet are constructive approaches at any time.
In the current climate, however, it is essential that the Government reiterates its commitment to these fundamentals.
This year, in light of the extra risks the economy faces, we have made the decision to defer $300 million worth of spending over the next two years to reinforce surpluses.
And we have reinforced our commitment to debt repayment by moving the Government's net debt objective from the current 20% target to a goal of less than 15% of GDP.
To strengthen the economy long-term, however, we have to pay continuing attention to improving New Zealand's economic growth.
Obviously, government fiscal policy again plays an important role in this. The burden's of a too-large state sector are now well quantified.
Remember, job growth comes from economic growth, and economic growth comes from the private sector - from family businesses, local firms, and the large companies.
Improving the efficiency of the economy, and lowering the cost of doing business in New Zealand is a key to allowing these businesses to do better and create jobs.
That is why we are continually looking at reforms to improve our competitiveness.
We understand that micro-economic reform can cause pain in the sector involved, particularly where there are any job losses.
We cannot and will not, however, sacrifice the large gains of job growth and higher incomes because vested interests stand out against desirable change.
And that is why this Budget delivers on a number of micro-economic reforms announced by the Prime Minister earlier this year.
Reforming electricity generation and distribution to reduce the costs of power to consumers and business Introducing competition into the ACC employers account from 1 July 1999. Workers entitlements will not be eroded but there will be choice of providers and better incentives to improve costs. Removing motor vehicle tariffs immediately. Look at what that's done to prices overnight. Taking away the restriction on parallel importing which has worked as a form of import licensing. This will mean cheaper goods for businesses and consumers. Asking Producer Boards with statutory monopolies to report to government by 15 November this year on how they would work in a deregulated environment. We want to ensure the marketing of New Zealand products overseas is handled in the best possible way. Working to improve provisions of the Employment Contracts Act relating to personal grievances. Selling the Crown's interest in Auckland International Airport by way of a public float, allowing New Zealanders to have the first opportunity to buy shares, and continuing to examine our ownership of Wellington Airport. In the process of divesting our coal mining and marketing SOE, Solid energy Providing for $1.1 billion dollars worth of tax cuts. And last but not least, mounting the most ambitious effort so far in this country to transform the lifetime prospects of our large beneficiary population, by treating them as full human beings, and focussing on what they can, rather than what they can't do to help them re-engage in the work force.
Notwithstanding opposition from vested interests who benefit at the expense of the wider community from no change, these are all moves which will help competitiveness and growth. They need to be made, and they need to be made now, to help keep New Zealand moving ahead.
And don't forget the moves to come in areas such as roading, occupational licensing, and the reviews of the Commerce Act, Securities Act and Resource Management Act.
I will speak, in a little more detail, about just one area of reform.
Another, third round of tax cuts, comes into effect from 1 July this year - improving the take home pay of the person on an average wage of $35,000 by $835 a year. That is equivalent to a permanent pay rise of over 3 percent.
In the 2 years to 1 July 1998, the Government will have cut the effective middle income tax rate by a quarter, from 28% to 21%. Indeed, on incomes from $30,875 to $38,000, the rate falls from 33% to 21%.
Simultaneously, we have boosted family assistance by up to $20 a week a child for low and middle income working families and introduced a tax credit for working families. On July 1, the three year tax package will mean a single income family with three children on $35,000 a year will be $98 a week in the hand better off.
That substantially improves incentives to enter and remain in the workforce?a classic example of tax cuts improving attitudes and growth.
Raising disposable incomes is the best possible way to improve living standards for families.
And consider the economic benefits of the government taking $1.1 billion less revenue out of workers' pockets.
Tax systems impose deadweight costs that increase with rising tax rates. An extra $1 in tax always costs the community more than a dollar.
Well-designed tax reductions improve decisions about work, savings and investment.
What this Budget demonstrates is that big gains are being made in lifting our long term sustainable output growth.
It also shows that a Coalition government, despite the different approaches of its component parties, can make excellent progress on behalf of the country.
The Budget is a strong positive for confidence and confirms the importance of our economic framework for growth.
It is this base which provides our individual opportunities, and it is also economic growth which has provided the revenue stream that sees, health spending up to over $6 billion this year and education spending up to $7 billion.
The country could not have afforded this level of expenditure before. Nor in the past could a government guarantee that such spending could be directed at, for example, elective surgery.
That is why I make no apologies for saying that this Budget continues to build on sound economic fundamentals.
Such an approach is required if we are to continue to approach the new Century with confidence.