NBR Budget BreakfastFinance
Yesterday's Budget is pivotal in the evolution of Government policy:
1. As a basis for on-going business confidence 2. In the management of the Asian crisis and the current account
And also, thirdly, in positioning New Zealand to use its widening opportunities more effectively, as we enter the 21st century.
It would waste your time this morning to cover Budget detail you have already heard on radio, seen on TV and read in the press. Instead, let me concentrate on broader themes of fiscal strategy and fiscal security.
Business confidence is, for the moment, subdued. Last December Consensus Forecasts Incorporated put the tradeweighted growth of our top 10 trading partners for 1998 at 3.7%. By April, they had, as a result of the Asian crisis, revised that down to 2.3%. What will that mean for New Zealand? The Budget covers the most credible range of possible outcomes in three different scenarios, labelled as central, rapid rebound and gradual recovery.
Forecast annual economic growth under the central scenario averages 3.4% for the three years to 2000-01. That figure is fully up to the level which most analysts regard as sustainable, for the New Zealand economy.
Even the worst of Treasury's three scenarios forecasts growth at an average 2.9% a year. That's better than the 2.7% which the US has been projecting for 1998. We do need, therefore, to keep our sense of perspective.
I am also aware that, because of past fiscal history in this country and the political complications of coalition government, quite a lot of business people feel uncertain on the fiscal front. So let me deal next with the framework of fiscal policy, both short and long-term.
In New Zealand today, we have a very robust fiscal framework.
The Fiscal Responsibility Act requires the Government to run surpluses every year until we reduce debt to prudent levels. The Budget Policy Statement commits the Government, if economic conditions threaten the surplus before that time, to consider deferring or reducing expenditure.
They are two sound reasons for confidence, and this Government has responded impeccably on both counts.
First, as you know, since last year's Budget, the Asian crisis, lower growth projections and a high current account deficit have led the IMF, the OECD and the rating agencies to underline the critical importance of fiscal credibility, as a contribution to domestic and international confidence in the New Zealand economy.
Both parties to the Coalition have signed up endorsing that view.
Yesterday's Budget has scaled back the Coalition's $5 billion 3-year limit on new policy initiatives to $4.7 billion, a reduction of $150m in each of the next two years, and a very significant 6% down from the level previously proposed.
The Budget shows us delivering, under all three Treasury scenarios, significant fiscal surpluses, in every year of the forecast period.
If, instead of improving as expected, the economic outlook should worsen, then be very clearly assured that the Government, under this Budget, will continue to react appropriately.
Nothing is ever more important in government or business than getting your long-term objectives set right, not just for one year or three years, but at least 10 years ahead.
I want everyone who runs a business in New Zealand continuously aware of what good government can do in the next decade, if politicians go on getting it right-because I want all of you fighting alongside us, to make it happen.
Net Crown debt peaked at 52% of GDP in 1992. At that level, it was a serious threat to economic security. And we were quite literally laughed at, by a lot of professional analysts, when we set our long-term target for net Crown debt at 20% of GDP.
We are due to reach that target, on present showing, in 2000-01. So yesterday, as Jenny said, we raised our sights. We moved our net debt target down to 15% instead of 20% of GDP.
Long-term analysis in the Budget makes it quite clear that 15% is challenging but attainable, in five years-but more than that. By the year 2008-09, with good management, we can slash net Crown debt, after providing for both expenditure growth and additional tax cuts, to 5% of GDP.
That's the gain available if we manage expenditure well, target it to the areas of greatest benefit, monitor and protect the tax base, and, by ensuring that expenditure does not grow faster than nominal GDP, make further growth-creating tax cuts sustainable.
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.
While Crown debt is high, we depend on a robust fiscal surplus for security against adverse economic shocks. As debt falls, that cushion will instead be provided increasingly by rising net Crown worth.
The strength of the Crown's balance sheet depends on the composition of its assets and liabilities. 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 overall economic strategy.
New Zealand will need to use the best available mix of public and private provision, if we want to achieve ambitious economic and social goals in New Zealand in the future. And we need that in place well ahead of the demographic pressures which will arise later from our aging population.
It's probably fair comment to say that some key areas in the Budget, such as roading, occupational licensing, and the proposed reviews of the Commerce Act, Securities Act and Resource Management Act, all critical to efficiency, seem to be, for the moment, more in the realm of talk than action.
If you want to remain sceptical about them until we deliver firm action plans, feel free to do so. The onus is on us to produce convincing evidence of serious progress. We know their importance, and we will make that progress.
By Australian standards, the micro-economic package in this Budget is spectacular, as a contribution to cost reduction and economic efficiency:
Electricity generation and distribution Accident compensation Motor vehicle tariffs Parallel importing Primary products marketing Labour market regulation Our international airports industry Coal mining and marketing Provision for a further billion dollars worth of tax cuts Tariffs in general-a tax on tradeables activity Last but not least, the most ambitious effort so far mounted in this country to transform the lifetime prospects of our large beneficiary population, by treating them as full human beings, and creating personal plans for them as individuals, to help them re-engage in the work force.
Obviously there will be opposition to every one of those measures. In every case, there will be vested interests who benefit at the expense of the wider community from wasteful and inefficient government expenditure.
Notwithstanding opposition of that kind, these are all moves we can justly celebrate. They need to be made, and they need to be made now, to help launch New Zealand on the best possible basis into the new millennium.