Post-Budget Speech: Trans-Tasman Business CirclePrime Minister Budget 2011
Ladies and Gentlemen
I am very proud to be leading a Government that is doing the right thing by New Zealanders.
And I am proud to be leading a Government that has faced the challenges of the last few years and is putting New Zealand on a path to stronger and more sustainable growth.
Yesterday’s Budget was another firm step on that path.
The plan the Budget sets out is very clear.
First, it’s about getting the government’s finances in order.
The Budget plots a remarkable turnaround from a record deficit of 8.4 per cent of GDP this year, to almost balancing the budget in only three years’ time, to a surplus of $1.3 billion the year after.
And that’s despite the difficulties that have been thrown at us over the past year – in particular, a stuttering global recovery and the two Canterbury earthquakes.
Forecast government debt has been kept below 30 per cent of GDP and is expected to reduce faster over time than previously envisaged.
These are very considerable achievements.
This Government’s responsible management of the books means New Zealand can afford to get on with the rebuild in Canterbury and continue to protect the vulnerable, while at the same time building a platform for strong, sustainable growth with lower interest rates and a more competitive economy.
If it’s possible, I would actually like us to return to surplus even earlier than 2014/15.
That’s because being in surplus means having choices – for example to invest more in public services, pay down debt, cut taxes, resume contributions to the Super Fund, or any combination of those things.
Second, the improvement in the government’s finances has been achieved by controlling expenditure, not by adding new taxes.
Other parties in Parliament want to put on new taxes to balance the books.
We don’t agree.
We think it is crucial to have a tax system that encourages hard work and savings, and ensures people pay a fair amount of tax.
That’s what our tax changes in the 2010 Budget were all about.
So we are not going to raise taxes or introduce new ones.
We think higher taxes would risk snuffing out the recovery and damaging New Zealand’s competitiveness.
And we think there is plenty of scope to be more disciplined about government spending.
Under the previous government, spending rose 50 per cent in just five years.
We are pulling that spending back, so that we can set out a credible path back to surplus while at the same time maintaining our newly-competitive tax system.
Third, the Budget is about helping to improve national savings.
New Zealanders have been saving more in the past year.
Last year’s tax changes helped this change in behaviour by reducing taxes on savings and investment and increasing taxes on consumption.
The key sector which is not saving right now is actually the government.
That’s why it is important for the government to return to surplus sooner than previously planned.
Our KiwiSaver changes will also increase national savings by raising the proportion of genuine savings in KiwiSaver accounts, and reducing the amount the government funds from overseas borrowing.
This year the Government will complete the re-regulation of the financial markets.
This includes the creation of the Financial Markets Authority, an overhaul of securities law, regulation of the insurance sector and of financial advisors, and prudential supervision of non-bank deposit takers.
And the mixed ownership model will certainly help to strengthen and deepen New Zealand’s capital markets.
Fourth, the Government has continued to invest in important infrastructure projects.
Infrastructure investment is crucial to improving productivity in our economy.
The Budget allocates almost $1 billion to ultra-fast broadband.
It makes a considerable investment in KiwiRail’s turnaround plan and in the Wellington metro rail network.
And it includes $100 million of new capital spending on schools.
These Budget investments are part of an ongoing infrastructure programme, which includes over $1 billion per year in state highway improvements, and a substantial upgrade of the nation’s electricity grid.
I doubt any government has been able to maintain such an investment programme through tough economic times before.
We are managing to balance the books and invest in New Zealand’s future at the same time.
Fifth, and finally, the Budget does all this while continuing to reflect the Government’s other priorities.
We have continued to protect the most vulnerable New Zealanders, who depend on the government for support.
We have boosted frontline health and education services.
The Budget provides $2.2 billion over the next four years for new health services.
These include improving care for first-time mothers, widening access to medicines funded through DHBs, additional elective surgery, more resources for patients with dementia, increased disability support services and training more doctors.
The Government’s commitment to raising education standards also remains strong.
The Budget provides $1.4 billion over the next four years for schools and early childhood education.
And, of course, a central goal of the Budget is to support the people of Canterbury and to help rebuild Christchurch.
The Budget establishes a $5.5 billion Canterbury Earthquake Recovery Fund to cover the government’s share of the costs of rebuilding New Zealand’s second-largest city.
This will provide reassurance to the people of Christchurch that the Government is right behind them.
Ladies and Gentlemen
This year’s Budget builds, of course, on the achievements of Bill English’s previous two Budgets.
Those Budgets have been part of the Government’s overall drive to rebalance the economy towards savings, exports and productive investment, and away from debt, consumption and government spending.
That rebalancing is crucial to the future of an economy that got thrown seriously out of kilter over much of the last decade.
As I mentioned before, government spending in the mid-2000s rose 50 per cent in just five years, as money was poured into expensive new programmes and the public sector was rapidly expanded.
The domestically-focused side of the economy, consisting of sectors like retail, construction and government services, grew strongly, fuelled by debt, consumption and government spending.
On the other hand, the internationally-competitive sectors of the economy – through which we earn our way in the world – went into recession in 2004, suffering from a high exchange rate and stiff competition for resources.
Those internationally-competitive sectors experienced a 10 per cent drop in output over the five years following 2004.
New Zealand was moving further and further away from what had previously been a successful formula – an internationally-competitive economy and well-focused government spending and regulation.
The growth generated by debt, consumption and government spending was never sustainable. The economy went into recession early in 2008, followed by the global financial crisis at the end of the year.
Our first Budget, in 2009, was about steadying the ship, helping New Zealanders through the recession, and turning around forecasts of permanent deficits and ever-rising debt.
At the same time, Budget 2009 began to implement our plan to rebalance the economy towards savings, exports and productive investment.
In our second Budget, in 2010, we undertook the biggest changes to the tax system in a generation. These changes increase the incentives to work hard, save and invest, and also remove distortions and clamp down on loopholes.
Budget 2010 also reduced the government’s forecast deficits, and pulled back our debt track quite significantly.
Budget 2011 is another important step towards rebalancing the economy.
And it continues to demonstrate the way this Government goes about doing things.
Over almost three years in government, we have made changes steadily, progressively, and by taking people with us.
We have been open with the public about why we need to do things and what we think needs to change.
And we have sought a mandate for what we are doing.
In this Budget, we are making changes to KiwiSaver, Working for Families, and the student loan scheme.
I’m sure you will have seen what these changes are from the media coverage of the Budget so I won’t go into them in detail here.
Suffice to say, the changes will ensure these programmes are more enduring and sustainable into the future.
We have managed to keep KiwiSaver as a very attractive savings scheme that will grow strongly over time.
And the modest changes we are making to Working for Families will be phased in over the best part of a decade. In fact most families will see increases in their Working for Families payments over this time.
Some people will be affected by our changes to these programmes, but none of the changes will affect people before the election.
So New Zealanders will be voting with all the information they need to make their own choices.
People will have the opportunity to decide whether a responsible approach to balancing the books and building growth is one they want to support.
Similarly, we are taking our policy of extending the mixed-ownership model into this year’s election.
That model of ownership – where the government owns most of the company but there is also some outside equity – is currently only applied to Air New Zealand.
We have satisfied ourselves, after advice from the Treasury, that extending the mixed ownership model to Mighty River Power, Meridian, Genesis and Solid Energy would meet the five tests we set at the beginning of the year.
This means that:
- the government will maintain a majority controlling stake by owning more than 50 per cent of each company
- New Zealand investors will be at the front of the queue for shareholdings, and there will be widespread and substantial New Zealand share ownership
- the companies involved will present good opportunities for investors
- the capital freed up – which could be between $5 billion and $7 billion – will be used on behalf of taxpayers to fund new public assets and thereby reduce the pressure on the government to borrow
- the government is satisfied that regulations, particularly in the electricity sector, do adequately protect New Zealand consumers.
We have therefore asked the Treasury to get some preliminary work underway now, but not to advance anything until 2012.
As we promised, we are clearly setting out our policy to New Zealanders well before the election.
I think New Zealanders will actually be excited about the possibilities this policy offers.
New, quality listings on the stock exchange will give ordinary retail investors the option of putting their savings into large and proven companies that produce something of value for New Zealand, rather than relying on property investments or putting their money into finance companies.
Electricity consumers will not be affected.
Consumer New Zealand came out a while ago and said that the mixed-ownership model wouldn’t drive up electricity prices.
That’s because power prices are actually influenced by government regulation not by ownership.
After all, power prices rose 72 per cent under Labour, when Meridian, Mighty River Power and Genesis were owned entirely by the Government.
And the companies are guaranteed to stay in majority New Zealand ownership.
That has to happen, because the Government will always hold at least 51 per cent of the shares.
On top of that, there will be considerable demand for shares from the likes of KiwiSaver funds, the Super Fund, iwi and Kiwi ‘mum and dad’ investors.
That interest will ensure there is a substantial, widespread and continuing New Zealand shareholding, on top of the majority stake held by the Government.
Ladies and Gentlemen
Budgets are about the future.
At the risk of stating the obvious, the difficulties we have faced over the past couple of years have already happened.
The Budget gives us an opportunity to set a platform for the future.
And I am hugely optimistic about that future.
The changes we have made over three Budgets are working, and reinforcing what is going on in the economy.
Over the past three Budgets we have been creating the conditions for New Zealand to make the most of the exciting opportunities in front of us.
Households and businesses have been saving more and shifting away from an excessive reliance on borrowing to fund their consumption and investment.
That is an important sign that the economy is moving onto a more sustainable footing.
Interest rates are at historical lows, which will stimulate business investment. Floating mortgage rates, for example, have halved over the past three years, and are at 45-year lows.
The Rugby World Cup will provide a boost to the economy at the end of this year, and rebuilding in Christchurch will significantly increase activity in 2012 and beyond.
Export prices are at record levels, up 25 per cent over the past year according to the ANZ’s Commodity Price Index.
The terms of trade – a measure of export prices compared to import prices – are up 19 per cent since late 2009 and are forecast to remain at high levels over the next few years.
Growth among our trading partners has remained strong, which means they will continue to want what we produce.
In particular, we have been well-served by our strong ties with Australia and our growing links with Asia.
The Government has been increasing its efforts to foster trade with Asia. In 2010, for example, the Government took six trade missions to China. Exports to that country have increased 40 per cent in the past year alone.
Our competitiveness with Australia is near an all-time high. A very favourable exchange rate is helping our exporters compete across the Tasman, and our 28 per cent company tax rate is below Australia’s.
Putting all this together, the Budget forecasts, prepared independently by the Treasury, show the economy growing at an average of 3.6 per cent a year over the next two years.
That is a return to good, solid growth.
The Treasury is not alone in forecasting this growth. The Budget forecasts are almost identical to the average of all the other growth forecasts prepared for New Zealand, by organisations like the Reserve Bank, the OECD, the IMF, the banks and the NZIER.
These organisations don’t base their forecasts on sentiment or how they are feeling that particular morning. They use their best professional judgement and they have to because there is often a great deal of money riding on those judgements.
In addition, the forecasts show very encouraging job growth, including 100,000 new jobs over the next two years.
Unemployment is coming down and we want to bring it down further – especially among young New Zealanders.
The Budget forecasts also show average weekly wage growth of 4.1 per cent a year over the next two years, considerably higher than forecast inflation of 2.6 per cent a year.
As I said at the beginning of this speech, the government is forecast to post a meaningful surplus in 2014/15.
Government debt is expected to peak at 29.6 per cent of GDP before beginning to decline rapidly.
In contrast, if we had not made any extra savings in this Budget our return to a meaningful surplus would not have happened until 2016/17, and debt would have reached almost 34 per cent of GDP.
The savings we are making in this Budget alone mean we can borrow $10 billion less over the next four years than we would otherwise have had to.
In fact the savings we have achieved across all three of our budgets now come to about $45 billion over the period to 2015.
That is $45 billion we won’t have to borrow, compared to the fiscal settings we inherited when we came into office.
And we will achieve this despite some of the most difficult circumstances an incoming government has probably ever faced in New Zealand.
That outlook is not guaranteed, however. Crucially it depends on the Government maintaining its tight rein on spending.
That is not easy.
Difficult choices lie ahead.
I am confident in this Government’s ability to navigate through those choices with the best interests of New Zealanders at heart.
But in the end, politics is a contest of ideas. That is especially true in an election year.
People can support the balanced approach we are taking.
Alternatively, they can choose to support parties which want to borrow billions of dollars more and spend up large.
Or they can support other parties which advocate for severe and indiscriminate cuts and make a virtue of conflict.
For my own part, I stand behind all the decisions we have made in this Budget. I believe this is the best proposition for the future of the country.
It contains both spending and saving initiatives.
It provides certainty of funding for the reconstruction of Christchurch and the surrounding area.
And it builds a stronger platform for jobs and growth into the future.
Here in New Zealand we have a chance, now the economy is gathering steam again, to build a solid platform for future growth.
If we get this right the opportunities are endless.
That is what Budget 2011 is all about.