NZ economy in good shape
Today’s topic, “trends and opportunities for the New Zealand economy,” is certainly one getting a great deal of commentary at the moment.
Looking across the media landscape lately you’ll notice we aren’t the only ones having this discussion. There has been an increasing amount of attention paid to the outlook for both the New Zealand economy and the global economy.
Today I want to voice my own perspective on this subject – namely that the New Zealand economy is in good shape. We have a lot to be positive about, and we should be careful not to talk ourselves into a downturn.
In a difficult global context, our Government has the plan and policies for building our resilience and taking advantage of the opportunities that are available to us.
Last weekend, the New Zealand Herald’s Liam Dann wrote:
“Cheer up. New Zealand's economy is not sliding into recession [...]. Over the next several months it looks like we'll see stabilisation. Increased government spending, monetary policy stimulus and a pretty healthy trade balance will battle with global uncertainty and the fallout from low business and consumer confidence.”
Similar views have recently been expressed by international observers.
In its latest annual review of New Zealand the IMF said it expects a pick-up in growth through 2020, supported by accommodative monetary policy and the fiscal impact of the Government’s increased levels of investment from Budget 2019.
Moody’s reaffirmed our Aaa stable rating in its latest credit opinion of New Zealand. It assessed New Zealand’s economic strength as “very high”, with expectations of economic growth of around our potential rate of 2.5% to 3% over the next few years.
The fundamentals of the New Zealand economy remain solid, given the volatile global environment that we’re operating in.
Growth in the June quarter was 0.5%, and 2.4% in the year. We are growing faster than Australia, Canada, the UK, Japan, the Eurozone, and the OECD average.
Unemployment of 3.9% is at its lowest rate in over a decade. And 92,000 more New Zealanders have found work under this Government.
Average wages have increased by 4.4% in the last year alone.
Just yesterday we released the Crown’s financial statements for the year to June 2019. The books reflected the strong state of the economy, showing a $7.5 billion surplus, net debt down to 19.2% of GDP, and an increase of $10.7 billion in the Crown’s net worth – now $146 billion.
The New Zealand economy is in a good place right now.
That is not to suggest that there are not challenges. As a small, open economy we are not immune to the effects of the uncertain global environment.
The US trade war with China continues without any resolution in sight.
Brexit is still a key uncertainty for the global trade system, with its final form yet to be concluded.
Data out of both Europe and the US points to declines in manufacturing.
These all impact the confidence of Kiwi businesses to invest and innovate.
And there will continue to be issues here at home. The most commonly raised with me by business is access to skilled staff.
I can assure you all that I am working on addressing and managing these ongoing risks.
Through Budget 2019 we have already significantly lifted the Government’s investment in the economy. We increased operating spending from the planned $2.4 billion per year to $3.8 billion per year, and announced capital expenditure of $10.4 billion over the next four years.
I have always emphasised that the Government is prepared to act further as is necessary. Our responsible management of the Government’s books mean we are in a good position to do so.
Over the next few months we will be working on the best options to support the economy through this period, if necessary.
As I have noted, we have made significant investments in support of our Economic Plan through Budgets in 2018 and 2019.
These are focussed on addressing the long-term challenges facing New Zealand.
In recent decades we’ve seen low productivity and wages, skills shortages, shallow domestic capital markets, a lack of diversification and under-investment in infrastructure.
Looking forward, we also face the challenges of climate change, aging and changing workforces, and technological change.
Fixing and facing up to these long-term challenges requires an Economic Plan that looks ahead to the next 30 years, not just three.
The Wellbeing Budget offered a new way of both measuring our success and for deciding what we invest in. We’re looking not just at economic prosperity but also the health and wellbeing of our people, environment and communities.
The Government’s Economic Plan is designed to build a more productive, sustainable and inclusive economy, that protects and improves the living standards and wellbeing of all New Zealanders.
The Plan identifies eight key shifts, and policy actions related to each shift, to achieve these goals.
The first shift is moving the New Zealand economy from volume to value, with Kiwi businesses, including SMEs, becoming more productive.
This means building on our existing strengths and international connections, and investing in new technology to innovate and compete more effectively.
The second shift is to ensure people are skilled, adaptable, and have access to lifelong learning. We are working to address skills and workforce needs in different sectors and regions, and making sure our education system equips people to adapt successfully to change.
Shift three is to have deeper pools of capital available to invest in infrastructure and grow New Zealand’s productive assets. We know that smart investment, from infrastructure to innovative firms, supports a modern, resilient and connected economy.
Shift four is strengthening and revitalising our regions. Through the Provincial Growth Fund and other initiatives, we’re investing to support regional businesses to grow.
The fifth shift is to enable a step change for Māori and Pacific economies. This is about strong partnerships that support the potential of whanau, hapu and iwi, and of Pacific peoples in our economy.
Shift number six is developing sustainable and affordable energy systems. As we make more use of technology and automation, supporting businesses to access low cost and clean energy is critical to our economic success.
Shift seven is that land and resource use delivers greater value and improves environmental outcomes. New Zealanders care that we use our land and resources in ways that are good for our environment, good for our businesses, good for our workers and good for our future.
Shift number eight is to transform our housing market to improve productivity and make houses more affordable. We want New Zealanders to have a choice in where they live, learn and work, and make it easier for the workers to live close to the best jobs for them.
The shifts we’ve identified won’t take place overnight. They will take time. But we are already making significant progress in some key areas.
I want to spend a bit of time this morning on three of these elements: infrastructure, innovation and skills.
Quality infrastructure investment is essential to improving New Zealand’s long-term economic performance.
Coming into office, this Government inherited years of underinvestment in infrastructure. Our transport and urban infrastructure has struggled to keep up with population growth, increasing demand and changing needs.
New Zealand’s regional infrastructure is not always at a standard required by the communities that it serves.
This infrastructure deficit has manifested in unaffordable housing, congestion, poor quality drinking water and lost productivity.
As a result, we know that New Zealand needs a level of infrastructure investment that is unprecedented.
This week’s Crown accounts show the scale of this Government’s commitment to infrastructure investment. Capital investment in the 2019 year was over $6.7 billion, building on the $5.9 billion we invested in 2018. This compares with just $3.7 billion dollars in 2017 before we came into office.
This commitment has to, and will, continue.
At Budget 2019 we increased capital allowances to help reverse the infrastructure deficit we inherited. Treasury forecasts total capital expenditure to be over $41 billion through to 2023.
- $1.7 billion to build and fix hospitals such as Middlemore and further money set aside for a new Dunedin hospital, and
- A $1.2 billion commitment towards the construction of new schools and classrooms for 100,000 children
With this level of investment, we want to make sure we take a longer-term view and make decisions that align with our Economic Plan.
A short-term, incremental project-by project focus by previous Governments means that many of our key infrastructure networks now need critical planning and investment.
That’s why we are establishing the independent New Zealand Infrastructure Commission - Te Waihanga.
The New Zealand Infrastructure Commission will help improve how we coordinate and plan our infrastructure, make the most of the infrastructure we already have, and plan long-term to ensure our investment delivers what we need, where and when we need it.
Working alongside central and local government, the private sector, and other stakeholders, the Commission will develop a 30-year infrastructure strategy.
It will take a joined-up nationwide approach, looking across agencies, sectors and regions. The new Infrastructure Commission will help ensure that the Government, and taxpayers, can have greater certainty that we are making make the right infrastructure investments, in the right places and the right time.
It will also provide the market with better information and greater certainty by providing a pipeline of significant future infrastructure investments.
Alongside better infrastructure, R&D investment plays a crucial role in boosting New Zealand’s productivity by generating innovation and new ways of doing things.
As a Government we’ve set an ambitious goal to boost New Zealand’s R&D spending to 2% of GDP by 2027, from 1.3% when we came into office.
That’s why we’ve instituted an R&D tax credit, which is expected to benefit up to 3,000 businesses, compared to the 300 receiving Growth Grants. The key features of the incentive include a 15 per cent credit rate, a $120 million cap on eligible expenditure, and a minimum expenditure threshold of $50,000 per year.
We have also established two funds to leverage private sector investment in sustainable and innovative businesses, through the Green Investment Fund and the new $300 million Venture Capital Fund.
In addition, we recently announced two new initiatives that use the tax system to remove barriers to innovation.
The first of these is to allow a tax deduction for cases where feasibility expenditure is otherwise not deductible. This addresses a long-standing issue for businesses by helping to ensure that tax is not a barrier for those seeking to invest in new projects or assets.
For the second initiative, we will consult on options to relax the tax continuity rules and review the R&D tax loss cash out scheme.
Current loss continuity rules do not work well for start-ups that require capital to grow, during an often loss-making period of growth. A range of innovative firms – particularly high-growth start-ups – will benefit from changes to these rules.
Of course, for most firms, greater productivity is not determined solely by incentives to innovate. The skills and training of staff also plays a critical role.
As I mentioned earlier, the major barrier businesses are reporting to me across the country is difficulty finding skilled staff.
That’s why we’ve made significant investments and reforms aimed at improving the skills and training of the Kiwi workforce.
Under the Government’s Fees Free policy, we’ve helped ease the cost barrier for those who haven’t trained or studied before, to incentivise them to do so.
Through the Mana in Mahi apprenticeship programme, we’re helping young people who have been on a benefit for 6 months or more gain sought-after skills and qualifications. We’re doing this by helping employers with the cost of taking these people on as the scheme subsidises income equivalent to the benefit.
Budget 2019 included a $49.9 million boost to extend the number of places available in the Mana in Mahi scheme up from 150 to 2,000, on the way to a goal of 4,000 places.
We’re also addressing the mismatch between training provided and the needs of employers by comprehensively reforming vocational education.
The changes we are making will give industry greater input into core aspects of vocational education and training.
Industry and employers will identify skills needs, set standards and approve qualifications and credentials, and influence funding decisions – making the system more responsive to employers’ needs.
We need to make sure that trades and vocational education are recognised and valued. There are great, well-paid jobs available out there for people with the right skills.
In addition to this, we recognise that immigration will continue to play an important role in meeting skills needs. We have recently made a number of policy shifts to ensure that we get the right person in the right place at the right time, for the right job.
This includes regional skills lists, sector agreements and making it easier to include new occupations on the skills shortage list.
To conclude, I want to re-emphasise the strong position New Zealand is currently in.
We have solid foundations upon which to build up our resilience and meet our goals for a productive, sustainable and inclusive economy.
While we do face significant challenges as we look ahead, one of my main concerns is that we talk ourselves into a funk.
We must remember that we can’t control what happens globally. But under the Government’s Economic Plan we will make our economy stronger and ensure we are well-placed to face any challenges that come our way.