JB Were Budget LuncheonFinance
[Slide 1: Title Slide]
Thank you for this opportunity to talk to you today about the key decisions in the Budget and why they were made.
It was interesting to have Peter Costello present the Australian Budget so close to ours. Australia is our biggest market. Competitiveness there is critical for our manufacturers.
Beyond that, our two countries compete worldwide. Competition in the delivery of quality government policy plays a key role in our worldwide success.
Comparison shows Australia remains significantly better than us on public debt, for example, assisted by massive returns from the sale of Telstra.
[Slide 2: Trans-Tasman Comparison]
But on four out of six of the most important indicators of government quality, New Zealand had a clear lead last week. Looking at the two years ahead, 1998-99 and 1999-2000:
Average annual growth, Australia 3.25%, New Zealand 3.3%. Average annual inflation, Australia 2.5%, New Zealand 1.7%. Unemployment, Australia 8% in 1998-99, and no prediction beyond that date. We forecast 7.1% falling steadily to 5.6% by 2000-01. Fiscal balance, they have a 0.2% of GDP deficit this year, expect a 0.5% surplus next year, and regard that as a triumph. We have a 2.8% surplus this year, our fifth in succession. We?re forecasting another surplus, 1.3%, next year, and with Kiwi modesty regard that as disappointing.
[Slide 3: Revenue and Expenses]
Business has resented the expenditure of the Coalition Government as an impediment to growth. I sympathise.
But we have delivered major health and education gains for the money, and a radically new work-focused approach to welfare.
You see it in the slight spending bulge in this chart, rising from 34.3% of GDP in 1996-97 to 34.7% and 34.5% this year and next year, before the decline resumes.
Government expenses during this decade are falling from 41.6% of GDP in 1992-93 to a projected 33.1% in 2000-01, a hugely important achievement.
[Slide 4: Operating Surplus]
You will see that the surplus is down from 3.3% of GDP in 1996 to 1.3% next year.
That's the fiscal downside of the last 18 months. The upside is that we achieve that 1.3% after:
Delivering well over $3 billion in tax cuts since July 1996 An end to motor vehicle tariffs costing $250m a year Navigating our way through the Asian crisis And preserving growth at the trough of the business cycle at about twice the level New Zealand used to average in the 1980s.
[Slide 5: Net Crown Debt]
Net Crown debt has been slashed already from 52% of GDP in the early 1990s to 24.7% currently. A lot of analysts laughed when we first set a net debt target of 20% of GDP. We are now set to achieve that by 2000-01.
So in this budget, we've raised our sights to a new target - 15% of GDP.
[Slide 6: Economic Growth]
The Budget covers the most credible range of possible outcomes for growth in three scenarios, labelled as central, rapid rebound and gradual recovery.
Forecast annual economic growth under the central scenario at 2.7%, 3.9% and 3.5% in the three years to 2000-01?an average of 3.4%, fully up to the rate most analysts regard as sustainable for the New Zealand economy.
Even the worst of Treasury's scenarios forecasts average growth at 2.9% a year, better than twice the 1.4% we averaged from 1980 to 1992.
[Slide 7: Interest and Exchange Rates]
What makes that rising growth credible? In the last 12 months, the New Zealand dollar dropped nearly half its gains of the previous three years, significantly increasing the competitive edge of New Zealand exporters.
[Slide 8: Monetary Conditions Index]
The Reserve Bank's monetary conditions index is falling from around 1000 in 1996 to a forecast not much above 200 by the end of this year. As the exchange rate stabilises, interest rates will come down too.
[Slide 9: Micro-economic Reform]
We know that there are no easy ways of delivering wealth to New Zealand. Get rich quick schemes are not part of this Government's repertoire.
Likewise, at the end of the 20th century, the Labour and Alliance approach of re-fighting the lost battles of yesteryear are irrelevant.
New Zealanders know that in the modern world, there are a vast number of opportunities available - but they have to be earned. That is why the left is continually losing ground.
The left still refuses to believe that more growth that leads to more jobs and better incomes, and the way to achieve that is through a well-performing private sector.
New Zealanders understand this. This Government knows it.
And that is why we are focussing on micro-economic reforms to reduce costs to consumers and businesses, to improve efficiency, and to keep the economy growing.
As this list shows, we will leave nothing to chance in moving New Zealand constructively into the 21st century.
[Slide 10: Employment]
It is only to be expected that micro-reforms will not be universally applauded by those in the affected sectors. We can expect people to have public meetings and jump up and down to oppose change.
But the reforms are about growth, jobs and incomes.
The huge pay-off is in employment. Growth through the 90s has already created a quarter of a million new jobs and slashed unemployment from its peak of 10.9%.
Over the next three years, unemployment is forecast to fall to 5.6% with an extra 118,000 jobs created in the economy.
[Slide 11: Household Gains]
This growth in employment explains the very rapid growth in household incomes over the last few years. Disposable household incomes rose by 5% in the years to March 1994 and 1995, 6.9% in 96, 5.4% in 1997 and are forecast to have increased a further 5% to March this year.
Over that short time, the average household income has risen from $50,000 in 1994 to over $62,000 this year.
And look at the additional gains to households of the reforms:
the end to parallel importing means that goods that are imported can be brought in cheaper. the electricity reforms will save households an estimated $90 to $180 a year. the tariff cut saw new car prices drop by $6,000 overnight; and tax cuts on 1 July will mean a total increase in take home pay of $98 a week for a three-child family on the average wage. That is the total gain since 1996 - more than $5,000 a year.
These gains are important not just because we want higher living standards for New Zealanders. Reducing costs to families, and increasing discretionary incomes is crucial if we are to increase our savings.
[Slide 12: Main Export Markets, 1997]
Micro-economic reform is also important in further strengthening the economy against the uncertainty of the Asian financial crisis.
Just before the Budget I came back from two weeks of extensive talks in Hong Kong, Japan, UK, the US, the OECD Council of Ministers in Paris, and the Asian Development Bank's Geneva annual general meeting.
Those talks confirmed that while the situation varies from country to country, they will all have lower growth for a few years, than in the recent past. Indonesia, Thailand and Korea, are expected during 1998 to contract by 9%, 3.5% and 0.7% respectively.
Their first focus of affected countries has been on attracting investors back, and improving their domestic banking sector.
Medium-term, most East Asian countries hope currency depreciation will improve competitiveness and solve their problem by export-led growth. Investment houses and the OECD think recovery will take 2-5 years in East Asia.
New Zealand's exposure to East Asia is limited. The four ASEAN countries took 6-7% of our exports, and Korea 4-5%. Our main risk is any serious down-turn in Japan, our third biggest export market after the EU.
Looking at the big picture, most politicians and investment houses remain cautiously optimistic. If East Asian countries learn the lessons of the crisis, they may emerge at the end of the day stronger than ever.
Meantime, however, downside risk is endemic in the situation. It makes sense for New Zealand to go on exercising fiscal prudence. Government and business should take every practicable step to improve our competitiveness.
[Slide 13: Current Account]
Those considerations are reinforced by the deterioration in our current account. Our economic framework has already begun the process of adjustment necessary to bring that deficit down over time.
The decline of the New Zealand dollar and the opportunities for faster export growth are forecast to reduce the current account deficit from 8% to 5.9% by the year 2000-01.
Until that happens, however, the OECD, IMF and the rating agencies all emphasise the importance of maintaining international confidence by running visibly responsible policies, such as on-going surpluses and debt reduction, and continuing micro-reform, to go on improving our competitiveness.
[Slide 14: Trade-weighted Partner Growth Forecast]
How far can we plumb the uncertainties of the Asian crisis?
Last December, Consensus Forecasts Incorporated put the 1998 tradeweighted growth of our top 10 trading partners at 3.7%. By April, they had revised that down to 2.3%. What will that mean for New Zealand?
[Slide 15: Export Volumes, World Prices, 1998-99]
Major variations are predicted by product category.
Non-commodity manufacturers, for example, gain by a 2.2% increase in world prices and a 12% increase in volume. Tourism, despite the Asian crisis, emerges 1.9% ahead on world prices, and 0.6% ahead on volume.
Agriculture, by contrast, makes minor losses on both price and volume. A 3% volume gain for forestry is outweighed by an 11.6% decline in world price.
Across total New Zealand exports, however, the balance is positive. An average 1.2% decline in world price is offset by a 3.4% gain in volume.
Looking further ahead, across the three years to 2000/01, Treasury predicts export growth averaging no less than 4.5% annually.
[Slide16: Composition of Investment to 2000-01]
Investment growth recovers from negative figures this year to average 8¾% a year across the next three years for plant and machinery, 13% a year for non-residential building, and 8.3% a year for transport equipment.
[Slide 17: Key Export Volumes to 2000-01]
Export volumes are equally positive. Treasury forecasts show average growth at 10.2% a year to 2000-01 for non-commodity manufacturing, 5.3% a year for tourism and 5.2% for commodity manufacturing. Agriculture, limited to natural increase, gains on average 1.5% per year.
Nothing is more important than getting our long-term objectives right. The Budget looks not just one year or three years, but 10 years ahead.
Those findings are important.
I want everyone who runs a business in this country continuously aware of what good government can do for New Zealand in the next decade, if politicians go on getting it right, because we need you working to make it happen.
I mentioned this Budget has set a new net debt target of 15% of GDP.
Long-term analysis show's 15%, given additional spending and additional tax cuts, is challenging but achievable by 2002-03.
The same analysis shows that by 2008-09, ten years from now, if we manage this country well, we can have net Crown debt at 5% of GDP.
That opens up a new era. While Crown debt is high, we depend on our fiscal surplus for security against economic shocks. As debt falls, that cushion is instead increasingly provided by the rising net worth of the Crown.
The strength of the Crown's balance sheet depends on the composition of its assets and liabilities, so we need a continual focus on the role of the Crown.
Case by case review, ownership grounded in sound public policy, and divestment of non-strategic assets will remain essential to economic strategy.
The stated goal of this Government is to get expenditure below 30% of GDP. With the surplus reducing gradually, what that clearly implies is that tax too will fall below 30% of GDP.
New Zealand will need to use the best available mix of public and private provision, if we want to achieve the ambitious economic and social targets we have set for ourselves in the future.