THE MARLBOROUGH CHAMBER OF COMMERCEDeputy Prime Minister
THE MARLBOROUGH HOTEL
20 NELSON ST
Ladies and gentlemen,
in the last couple of months there has been much talk of business confidence. You have either noticed it directly through your businesses, or found out about it on the news.
Business confidence is down. No one will argue about that. The question is: What are we going to do about it?
Sector groups, including the Chambers of Commerce, have been telling the Government what it should do. There's no problem with that.
Representatives of businesses have a responsibility to speak up if they believe the interests of their members are being hurt by Government policies. That's life in a democracy... and if a government can't stand the heat, it should quit.
But similarly sector groups shouldn't expect politicians to roll over everytime they knock on their door. They must realise that the Government has a responsibility to look after the interests of all New Zealanders... not to turn its back on the will of the people expressed in last year's election.
The Coalition Agreement is a manifestation of that will. The agreement commits the Government to running a tight ship. It also commits us to spending more on health, education and making our streets safer.
This should not been seen as an expense. It should be seen as an investment... a social investment... an investment that has to be made.
What's the point in running a country with the sole aim of getting the financial markets cheering from the sidelines, while costs faced by communities threaten social harmony and political stability.
That would be a hollow victory.
The Coalition Agreement also commits us to prudent and conservative fiscal management, lower taxes, low inflation and lower public debt.
The June 26 Budget will show how far we have gone down that track... a three-year track clearly laid out in the agreement and March 4's Budget Policy Statement.
What we are doing is transparent.
Business interest groups have a clear preference for more tax cuts and more privatisation. Action along these lines, it appears will convince them that the Government has a sense of direction.
There has been talk of the deadweight loss of taxation... the cost to the economy of increased taxes. It is an argument for which the Government has some sympathy. We would like to lower taxes, to put more dollars in everyone's hands.
But the Government also has to ponder deadweight loss associated with social neglect... the cost to society of inadequate schools and hospitals, of not feeling safe on our streets, of parents not being able to afford to send their child to a doctor.
If these social costs are not dealt with now, we will all end up paying... one way or another.
Tax cuts alone won't deal with these problems. Putting more money in our pockets won't lead to a healthier, better educated, safer New Zealand.
Who could have confidence in a government which offered tax cuts while ignoring areas of desperate social need?
That's why this Government believes its policies to do away with the surtax, and increase spending in health and education, are the fairest way of dealing with crucial areas of need.
The total macro-economic impact of the forthcoming Budget will be about the same as the second round of tax cuts signalled by National last year.
It shouldn't be forgotten that whatever government came into power after the 1996 election would have had to spend more. Given critical social needs, it was unavoidable.
None of that means the Government should be accused of being oblivious to the concerns of the business community. We've understood the need for a balance between spending, tax reductions and debt repayment from healthy surpluses...
That's why we postponed the tax reductions for 12 months till July 1 next year, ensuring that additional government spending does not add to inflationary pressure.
That explains where we have come from.
All that means we are we now in a strong position for economic growth over the next year.
Short-term interest rates have fallen from around 10 percent in mid 1996 to around 7 percent;
the rapid rise in the exchange rate has stopped since the Christmas break. For the first four months of this year the Trade-Weighted Index fluctuated between around 68 and 69. During the last three weeks, the index has been running between 67 and 68;
the outlook for the world economy is favourable; and
the mix of additional Government spending and tax cuts will support domestic demand.
And while some of the economic news during 1997 has been patchy, we shouldn't forget that we've now had 17 consecutive quarters of positive growth - the longest period of expansion in a quarter of a century.
Confidence has not slipped anything like the extent it did in the recession of the early 1990s. Growth has bottomed out above 2 per cent, higher than New Zealand's average growth rate in the late 1970s and 1980s.
But the fall is a worry... particularly because this slip in confidence seems too much like driving by the rear-view mirror.
Confidence began falling in the run up to last year's election... and perhaps understandably. The first MMP election brought with it a lot of uncertainty, a clear risk of changes that could do great damage to the economy.
For example there was the prospect of higher tax rates.
At the time of the election there was mixed economic news. Exports were holding up, in particular dairy exports, corporate balance sheets were strong, the Auckland housing market had not run out of steam.
On the other hand, the dollar and interest rates were high.
It's hard to believe that the economy is in worse shape now than it was then, but confidence is still down.
We've got to snap out of it.
A look forward would, I suggest, justify a more positive view of the business environment.
The Government has fixed its mind on what it must do:
maintain a conservative fiscal policy and predictable monetary policy so that businesses don't have to second guess the Government before making any decisions;
create a welfare system that encourages more people to work;
ensure high quality education for all New Zealanders;
improve the efficiency of markets by reforms of regulations and taxes; and
encourage New Zealanders to save so that they will benefit more from growth.
None of this should come as a surprise to anyone. This programme was spelt out in the Coalition Agreement last December, again in the Budget Policy Statement and we will start delivering on it in the June 26 Budget.
Our expenditure of up to an extra $5 billion over three years will be the most scrutinised Government commitment ever. We've made sure of that by being completely upfront about our plans.
Despite the increased spending, expenditure as a percentage of GDP will fall over the next three years.
Our long-term goal is to reduce gross Crown debt to below 30 per cent of GDP and net Crown debt to 20 per cent of GDP.
Surpluses will be maintained. However, markets and commentators shouldn't expect the same track of surpluses as described in the Budget Policy Statement. We're sticking faithfully to our expenditure policy targets, but it is clear that tax flows won't be as strong.
The lower business confidence means that Treasury's forecasts for the coming year will be revised down and that has a significant effect on taxes. That's a timely reminder why we budget conservatively and plan for surpluses.
Even after taking into account lower business confidence we will continue running surpluses.
Our commitment to an acceptance of social obligations that go with being part of the welfare state has brought predictable complaints of beneficiary bashing.
Our position is clear. We want to see a greater level of self-reliance among some New Zealanders. Work is perhaps the most basic way of achieving this.
It's up to the individual to get motivated to find work, but the Government can help. The Budget will begin to outline how that can be done.
It does not mean beneficiary bashing... hurting the people we want to help.
The same has been said about the proposed Retirement Savings Scheme... critics say it will hurt Maori and the young who will have to pay twice for their retirement.
Their argument has not been helped by an opinion poll released yesterday showing strong support for the proposed scheme among the young and Maori. They know what's in their own interests unlike some sideline critics.
Though the poll showed most respondents opposed the scheme... a scheme they have not yet seen... details of the result give every reason for optimism.
When they learn that the long-term cost of the current compulsory tax-for-retirement regime is twice that of the proposed scheme... when they see the details of the Retirement Savings Scheme... they will have every reason to vote for change.
Most New Zealanders realise the importance of this issue confronting them and have an interest in it.
They realise the September referendum on superannuation is a chance... and perhaps their only chance... to put the issue of superannuation on a sure, permanent footing.
Critics of the proposed scheme claim New Zealand Superannuation is sustainable. Then they add a pile of ifs and the buts... if the age of entitlement increases, if taxes increase, if the size of the payout decreases.
That is an abuse of the word sustainability. When those of us who support the Retirement Savings Scheme talk of sustainability, we mean:
the same age of entitlement - and not rising every five years or so
no drop in payments, not decreasing every time a politician gets worried about the accounts, nor
the threat of continual tax increases.
Sustainability means putting superannuation as we know it today, but delivered by a different means, finally beyond the short-term tamperings of the politicians.
In summary then this Government will deliver on the commitments we made last December. But we have got to be realistic.
No government can deliver on all its commitments in its first year of office. No government in the past has been expected to.
This is not playing the Budget up or down. It is being realistic.
How business groups up and down New Zealand, such as the Marlborough Chamber of Commerce, see the world is a crucial aspect of how the New Zealand economy performs.
We have set up the environment for you to have the confidence to make positive decisions. Short-term interest rates today are trading below 7 percent, down from around 10 per cent in the middle of last year... the rise in the exchange rate has stopped... inflation is falling and is expected to fall further.
Despite all the doubters, we are running a sound economy.
But at the end of the day it's your decisions, on whether or not to take on staff, or whether or not to go ahead with a new investment, that make the difference.