The economic environment

Speech notes for opening of the Budget Business Summit, Parliament

Can I first thank Nick for those opening comments and add also my warm welcome to all of you.

It is always rewarding to engage with business. It is especially so today as it is not often I host so many of you here in Parliament. I don't intend to assault you with my views or even with a manilla folder or two! I am unarmed and keen to listen.

Your session topics cover some of the big issues that responsible, responsive governments must regularly ask themselves: How can changes to tax policy make investment more attractive? What are the requirements for improving productivity and efficiency through economic transformation?

I believe that most people these days appreciate that raising the country’s economic and social performance is a long-term process of incremental policy adjustments.

Economic transformation is not a finite event.

It is not something we “do” and then it is over.

It is an ongoing set of programmes designed to continually equip us better to compete in an increasingly competitive international environment and in a world where barriers to investment, trade and migration will continue to diminish.

We must always strive to improve our productivity, increase the quality of our work and constantly adapt to changing international market demands and opportunities.

Over the past seven years the government has been working hard toward improving our performance across a broad range of indicators against which we still have room to make further improvements: in savings, in infrastructure investment, in skills and training investment, in research and development, and in lifting our export performance.

I think it is important today while you are in this arena that you reflect on the pressures facing decision-makers next door in the Beehive where the daily clamour for new spending or tax cuts can be quite deafening. Fiscal policy does not exist in isolation from the wider macroeconomic environment.

A responsible government must be sensitive to ensure its fiscal stance does not complicate the job of the Reserve Bank.

Slide 1: Growth

As we all know the economy has enjoyed a golden run which has allowed this government to make significant strategic decisions.

The economy is now taking a bit of a breather, though Treasury expects it to rebound to annual growth of around 3 per cent in 2008 which is above average growth rates in the past and about the latest estimates of sustainable growth in the U.S. However, the pressures from this growth surge are starting to tell.

Slide 2: Inflation, current account, dollar

The economy is close to a number of constraints. Inflation remains at uncomfortably high levels largely as a consequence of bottlenecks in the domestic economy. The consumption boom has fuelled an unhealthy current account deficit and the dollar remains stubbornly high as our relatively high interest rates attract persisting offshore short-term investor interest.

Slide 3: Gross and net debt

However, the strength of the public finances has been a key factor reassuring the Reserve Bank not to increase interest rates further, and reassuring ratings agencies not to downgrade NZ.

We have run large surpluses during the good years, which have allowed us to get gross debt tracking down to around 20 per cent of GDP, and as a result, we are a net saver for the first time in our history.

Slide 4: Fiscal stimulus

Maintaining a prudent fiscal policy is critical to prevent further stimulus being injected into the economy. As this slide shows, there is already significant fiscal stimulus forecast. Additional injections at this point would only further increase pressure on the economy from higher inflation and higher interest rates.

Moreover, it is important to recognise the large, inbuilt growth in government spending from price and wage pressures. In the phrase made popular in the 90s, a freeze is a cut.

Slide 5: Revenue track

We will need to wait for the economic and fiscal forecasts due in December to get a better idea of the likely future path for revenue. As you can see IRD and Treasury have divergent forecasts of future tax revenue. How this pans out will be an important influence on future tax and spending decisions.

It is important to note that our fiscal strategy has paid significant dividends.

With the New Zealand Superannuation Fund, we are through our collective efforts building national savings for the future.

Next year, KiwiSaver kicks in.

It is worth remembering that this is the first significant attempt in our country in more than a generation to improve our domestic savings record and also a step toward diversifying our household savings efforts away from the traditional narrow base which is of course our stock of housing.

In addition to the up-front and housing incentives in KiwiSaver,
the government is cutting the taxes on savings by around $200 million a year and that is before any further decisions are taken.

The discussion document released three months ago underscores our strong desire to further improve the capability of business to grow and to compete in an increasingly borderless international economy.

We want to ensure that our business tax rules best encourage innovation, better support business investment and further encourage New Zealand-based firms to either enter or to expand their engagement in offshore market opportunities

This government is also engaged in major changes in our tertiary education system. My big challenge right now is to ensure the current reforms to the tertiary funding system deliver a high quality network of providers, more focused on producing the right mix of skilled graduates needed to drive economic transformation. You will see more on our thinking on this over the next few months.

What connects all the issues I have briefly touched on this morning are two things: The first is that all involve a strategic role from a central government as an organiser, part-funder or as a facilitator of change.

And most, if not all, also demand a commitment to significant amounts of current taxpayers’ dollars to be invested in the enablers of productivity growth down the track - either by way of direct expenditure or via foregone revenue.

I believe our experience tells us strongly that New Zealand’s ultimate success in moving ahead economically requires that we take our people with us every step of the way. Economic and social progress will advance hand-in-hand and any economic transformation process will falter in a society divided against itself.

Even as we sit down together to discuss how best to make further steps to strengthen our economy ahead of the inevitable challenges in the medium- and longer-term, I do not think it does us any harm also to remind ourselves every once in a while how much progress we have made as an economy, and as a society, in the past 20 or so years - a short period of time in historic terms.

We have so much going for us as a place to live, as a place to bring up a family, as a place to invest in and as a place to do business with. We should never lose sight of that, even as we strive to be better and stronger still.

Thank you again for coming to Parliament for this event. I trust all of us will have a rewarding day.