Post-Budget Speech to Trans-Tasman Business Circle Auckland, May 31
Thank you for inviting me to speak here today.
I want to start by discussing the rationale behind our first Wellbeing Budget and focus on two initiatives in my portfolio areas that I hope will be of interest to you.
While economic growth is of course important – and we will continue to pursue it and measure it – it does not in itself guarantee improving living standards.
Our Wellbeing Budget takes a different approach than has been traditional, and it is one the OECD is watching quite closely. That was reinforced to me during my trip to the OECD ministerial meeting in Paris last week.
We are trying to take a more integrated approach to thorny issues which have been problematic for decades and in some case are still getting worse.
New Zealand has seen solid rates of GDP growth relative to our peers but what about the quality of that economic activity and how it has been shared?
None of us want to live in a country where, despite a strong economy, families are homeless, our environment is being degraded, our water quality is poor, and where people with mental health issues do not receive the support they need, and where we have shocking levels of teen suicide, family violence and child poverty.
Yet despite a widespread view that current methods of organising government priorities have not overcome these challenges, there has not been a fundamental change to how we organise budget priorities since the 1980s.
Budget processes have remained the same, cost benefit analysis is often short term. Perhaps we shouldn’t be surprised then that many of these long term difficult problems are unresolved, with siloed initiatives biased towards the status quo.
Approach to Wellbeing Budget
The Wellbeing Budget delivered yesterday has five priorities, which were developed using the Treasury’s Living Standards Framework, evidence from sector-based experts and the Government’s Science Advisors, and through collaboration among public sector agencies and Ministers.
These priorities, which – obviously – must always include - include prospects for improvement of our economy, but need to go beyond that. We identified the areas where we believe we can make the biggest difference to New Zealanders’ wellbeing.
- Transforming the Economy: Creating opportunities for productive businesses, regions, iwi and others to transition to a sustainable and low-emissions economy;
- Building a Productive Nation: Supporting a thriving nation in the digital age through innovation, social and economic opportunities;
- Improving Child Wellbeing: Reducing child poverty and improving child wellbeing, including addressing family violence;
- Taking Mental Health Seriously: Supporting mental wellbeing for all New Zealanders, with a special focus on under 24-year-olds; and
- Supporting Maori and Pasifika Aspirations: Lifting Māori and Pacific incomes, skills and opportunities.
The Budget bids from ministers were then addressed, by asking three big questions:
- was the bid intergenerational, and will it make a difference now and for the lives of our children, grandchildren and beyond?
- does it move us beyond narrow measures of success to take into consideration a wider set of factors?
- does it take a whole of government approach?
If you have delved into the Budget and followed the announcement we have made over the past 22 hours you will have seen how we put that approach into practice.
Mental health and family violence initiatives have rightly received the most attention.
But today I want to focus on two policies which sit within the first two of those five priorities; Creating opportunities for productive businesses, regions, iwi and others to transition to a sustainable and low-emissions economy; and supporting a thriving nation in the digital age through innovation, social and economic opportunities.
The first I will cover is our plan to Deepen our Early Stage Capital Markets
Let me start by putting this in an economic context.
We know that lifting productivity is crucial. New Zealand’s productivity problems have been well canvassed.
Both diffusion of technology and the development of innovative new products and services are inhibited by low per capita investment in our productive businesses.
Finding ways to address this is a key part of our work programme. Recent initiatives like the R and D tax credit, ring fencing of losses and extending the brightline test are intended to weight investment towards the productive sectors, and to lift economic performance. In some ways it’s simple. We want to grow our productive sectors and reduce speculative investment.
To do this we need to apply more financial capital and more people to the task, and as the saying goes people will follow the money.
The world is in the midst of a technological revolution born of the confluence of affordable computer power, mobile positioning systems, sensors, robotics, big data and the internet of things, artificial intelligence and genetics.
We all know the digitalisation of many parts of the economy create challenges we are dealing with under the banner of the future of work. The flip side of that challenge is the enormous opportunity to improve the efficiency of existing methods of production or to commercialise the new products and services born of this revolution.
New Zealand needs to chase down as many of these commercial opportunities as we can and harness the jobs and the value.
There is another factor at play. The Productivity Commission recently noted the dichotomy we face in this digital world. Many of these new niches are narrow but have global potential. The same technology which enables innovation in New Zealand without large institutional form, also enables that technology to be applied globally. These global characteristics, which makes them very valuable, and the journey to scale and dominate the niches is costly. The capital markets and dominant ecosystems are more naturally found in larger economies that are competing with us.
Of course it’s a race. Competitors in other countries are chasing these opportunities too. In a decade of two the seemingly limitless opportunities will evolve into the law of diminishing returns. I am determined that we do our utmost to help the businesses that are succeeding in this space to scale I do not want holes in our capital cycle to frustrate their success.
We need to properly fund these business to lift productivity.
There is currently a “gap” in the availability of capital - in early stage capital markets.
New start ups are well served by angel investors with some seed capital support from the Government.
The gap is in markets beyond seed or angel investment, where companies are looking to scale up; typically requiring between $2 million and $10 million capital injections in order to grow. In the Venture Capital world these are known as Series A and Series B.
This lack of venture capital is inhibiting the growth of our start-ups, and preventing them from achieving their potential both within New Zealand and on the world stage. I know Simon Moutter, Michael Stiassny and others have tried hard to find a solution to this problem in recent years. They were right and their efforts helped highlight the issue.
We need fast growing firms to be operating in a healthy, well-capitalised start-up ecosystem so that more of our start-ups can succeed, meaning more benefits can be retained domestically.
The Minister of Finance and I (along with Treasury and MBIE officials) have, over the past few months explored a number of options to address the venture capital gap.
The solution we have devised is focused on achieving three objectives:
First, raising the number of starts ups that progress and develop into successful companies.
Second, to increase the volume of technology that is commercialised - this comes with the added benefit of increasing innovation across the entire economy.
Third to build the capacity of the sector so that institutional and other investors over time better service this part of the capital cycle.
The effect will be to keep more of our start-ups in New Zealand for longer, along with the wider benefits this brings.
I would add that I am not arguing they shouldn’t be sold overseas. I am not in a way even trying to discourage it. But I am keen that they have access to capital to grow are not forced to sell – or forced to sell too soon – by the current capital constraints.
Which brings me to the practical step we took in yesterday’s Budget – the creation of a $300m pool of capital available to be invested through a new fund-of-funds model to support New Zealand’s venture capital markets.
This comes from two sources. The first is $60 million of existing NZVIF assets. The second is by redirecting $240m of contributions from the New Zealand Superannuation Fund over four years.
This $300m of new investment is in addition to about $100m of existing Seed and Venture investments.
It is expected the addition of $300 million in this market will be leveraged several times over by investments from private sector players – so we will see far more than the first $300m invested into the sector. Two times worth of matching funds in the sector from other investors would see a total investment of around $1 billion.
The new fund will be administered by the Guardians of New Zealand Superannuation, and invested via the New Zealand Venture Investment Fund by private sector venture capital managers.
The New Zealand Superannuation and Retirement Income Act 2001 will be amended to enable a ‘New Fund’ to be set up and allow the Guardians of New Zealand Superannuation to administer this new fund in a commercial arrangement with NZVIF. This contract will bring the depth of expertise of the Guardians and the experience of the NZVIF, while using the private sector to invest the funds.
To be clear, this will not change the Guardians existing mandate or independence over investment decisions for the New Zealand Super Fund.
Once legislation has been passed, the new fund can start to deploy capital in the market. The legislation will be progressed in parallel with negotiations and contracts with VC managers.
We believe this initiative aligns with the objectives of institutional investors - to seek opportunities for high potential investments - and gives confidence that the Government’s market engagement is executed with commercial rigour.
Attracting those institutions from New Zealand and abroad into New Zealand’s early stage capital market is essential to building a healthy and sustainable investment environment that will enable New Zealand’s high potential businesses to thrive and grow.
After 15 years, all funds – that is the returns plus the $240m and the $60m from the NZVIF - will be returned to the Crown for pre-funding superannuation.
In parallel with this new fund, we will continue to support the Angel and Seed stages of our early capital markets through the successful Seed Co-Investment Fund programme.
Ensuring we have a good pipeline of early stage companies that are growing is an essential part of our well-functioning capital cycle. It will not be lost on any of you that this should also flow through to more opportunities in later stage capital markets.
The second priority area I want to highlight today is our initiatives to address land use and environmental issues.
Some of you will have heard me say it before. I believe it is the birthright of all New Zealanders to pop down to their local river in summer for a swim and be able to put their head under without getting crook.80% of measured river sites outside of National Parks don’t currently meet swimming standards.
To fix this requires putting a stop to further degradation, the reversal of past damage. These in turn require water allocation issues to be addressed. Land use lies at the heart of the challenge.
Improving the way we use land will have significant benefits for the health of our waterways and contribute to our climate change goals, while supporting our communities and business. Recuing pollution can also reduce the waste of costly inputs.
The $229m sustainable land use package over four years that we announced yesterday invests in three broad areas to support this.
- getting the right framework in place for managing our environment in the interests of all New Zealanders;
- providing on the ground, practical support and advice to the land and water users who are at the forefront of this transition; and
- making sure these people have the right information and tools to support informed decisions about reducing climate emissions and discharges to waterways.
Just about all New Zealanders now accept that our water, our land and our climate are all under pressure. This year the Government has made significant decisions on the framework for addressing these issues.
These decisions include:
- a Zero Carbon bill, which will require New Zealand to be making no contribution to global warming by 2050. We’re allocating $54.2 million over 4 years in climate-related measures to support this – the Climate Change Commission and the Zero Carbon Bill.
- planned new systems and regulations to protect freshwater quality from both urban and rural pollution;
- and commencing a significant reform of the main law setting out how we should manage our environment, the Resource Management Act 1991 (RMA).
To support improved land use, the Government is investing $17 million to develop good practice standards, and ensure farm advisors are trained and qualified to support effective environmental planning through farm environment plans.
We are also committing $35 million in improving advisory and ‘extension’ services to provide on the ground support to adapt farming operations to meet these farm environment plans. And there is a further $10 million to invest in improving pathways to market for high-value products.
Getting every farmer and grower operating at good practice can then be demonstrated to customers to extract value from New Zealand’s brand values. This will be a significant step forward. A lot of the on the ground support will be focused on identified at-risk catchments, to prove to New Zealand that we can turn things around.
Assistance to farmers will go hand-in-hand with the new rules that will have to be met. While regulation is not of itself sufficient it is essential. And the Productive and Sustainable Land Use investment will support the implementation of stronger new rules for freshwater. It is a package. We will help people to meet the necessary new rules but those new rules are critical.
The Budget includes $12 million to support councils to develop and implement freshwater plans to give effect to the new national direction.
We are investing $59.6 million over four years in strengthening decision support tools and improving environmental data and monitoring in the primary sector. This includes important enhancements to the Overseer software management tool.
The Wellbeing Budget also includes $30 million to strengthen the integrity of the environmental management system, including improving our science and data. The Environment Aotearoa 2019 report showed us the need for this.
We are elected to do better. And we are. These efforts are grounded in my own belief that if, with all our advantages, New Zealand can’t overcome its environmental problems, then the world won’t. That is a very dark prospect.
I am pleased that the Wellbeing Budget takes us a further step towards showing the world that New Zealand can and will.
The Economy – the big picture
I would like to finish by putting the Budget into the context of the international picture including trade – which is one of my other portfolios.
As you all know we will always be impacted by global events.
There are significant challenges facing the global economy, which I have seen first-hand in the last few weeks with visits to China for the Belt and Road Forum, to meetings of APEC in Chile and the annual OECD and a mini-WTO trade ministers meeting in Paris, and in Brussels to advance a free trade deal with the EU.
Protectionism is on the rise. Trade tensions are palpable. The tariff war between the US and China has flared up again in the last couple of weeks. The economies of China and the US are showing signs of slowing. Brexit in Europe is adding more uncertainty which is undermining investor confidence.
The IMF has downgraded global growth forecasts three times on the last year.
All of this means the global environment in which New Zealand businesses operate is both unstable and uncertain.
Fortunately we are well positioned to face this instability and uncertainty. Although growth rates are set to be a bit lower than we have seen in the last year, the Budget forecasts New Zealand will grow at 2.4% in 2019 and 3.0% in 2020. We are still tracking ahead of most of our major trading partners. The average growth for advanced economies in the same period is projected to be 1.8% and 1.7% respectively.
We are projected to grow faster than the US, the UK, Japan, Canada, the Eurozone and Australia. Just this week the OECD released its latest outlook which also shows us growing faster than our peers, while last week the Reserve Bank of Australia further lowered its 2019 growth forecast for the Australian economy.
We expect low unemployment, forecast to hover around 4% or just above for the next four years. Inflation is low and stable at around 2 per cent across the forecast period.
This is supported by our forecast Obegal surpluses, rising from $1.3b next year to $4.7b three years out. Crown expenses are forecast to stay below 30% of GDP.
Public net debt, reflecting our Government’s responsible fiscal management, stays in a narrow band between 18.7% and 20.7% cent of GDP through to 2023.
These are all consistent with our Budget Responsibility Rules.
- Increasing trade and broadening our trade agreements to help our exporters and those who work in the export sector. We have finalised the CPTPP and the Singapore upgrade. We are pursuing an EU FTA, RCEP (including India) and upgrades of our various agreements including the FTA with China.
- We are reforming skills and trade training to address long term labour shortages and productivity gaps in the New Zealand economy, to make sure we are prepared for ongoing automation and the future of work. We have created 38,000 new jobs and lifted the minimum wage to $17.70 an hour.
- We are addressing our long-term infrastructure challenges – and that doesn’t just mean billions in investment, but establishing long-term planning through the Infrastructure Commission.
- We are transitioning to a sustainable carbon-neutral economy. Our focus is not only having a long-term plan through the Zero Carbon Act, but also investing in R&D as the economic transition occurs.
- Through the Provincial Growth Fund we are boosting our regions, which have been long starved of investments and development.
- And, of course, we are investing in the wellbeing of our people with this Budget’s focus on mental health, childhood poverty and family violence and with other measures already taken, including the $5.5 billion Families Package last year which has lifted up many families with children… because our wellbeing is inextricably linked to our economic success.
Thank you again for this opportunity to meet you today.
Happy to take questions.