Pre-Budget speech to the Craigs Investors ConferenceFinance
Thank you to Craig’s Investments for hosting us today. I’m excited to be here a week out from this year’s Budget – the Wellbeing Budget.
This morning I want to offer some comments on the economic outlook in New Zealand and overseas, and to talk about the Government’s economic strategy.
I also want to set out for you how this year’s Wellbeing Budget supports that strategy and our overall policy agenda.
Global economic outlook
As a small open economy, located in the South Pacific, the global economic environment will always have a significant impact on our fortunes. The living standards and wellbeing of New Zealanders are intertwined with the economies, and the politics of the rest of the world.
I recently attended the Spring Meetings of the World Bank and International Monetary Fund in Washington DC, where the slowing global economy was the dominant topic of conversation.
At those meetings the IMF downgraded its global economic forecasts for 2019, after having downgraded them only six months earlier. Global growth is now expected to be 3.3% for the year, with advanced economies growing 1.8%. According to IMF Head Christine Lagarde, the global economy is still growing, but it is growing more slowly.
There are significant challenges in the international environment.
The tariff war between the US and China was – and still is – a major issue for those I met in Washington. It has flared up again in the last couple of weeks, with the US increasing tariffs on $200 billion worth of Chinese imports and China retaliating with tariffs of its own. The US has not ruled out further tariffs, which would place further pressure on a softening Chinese economy. In turn, the US economy is also showing signs of slowing.
Uncertainty in Europe, due in large part to Brexit, is ongoing. This further adds to the global economic headwinds we face.
All of this adds up to a global environment in which New Zealand exporters operate that is both unstable and uncertain.
New Zealand is well positioned to face this instability and uncertainty, but we are not immune from its impacts. Growth rates are set to be lower than we have seen in recent years.
The IMF projections for New Zealand are that we will grow at around 2.5% in 2019 and 2.9% in 2020, which is ahead of our peers. We are projected to grow faster than the US, the UK, Japan, Canada, the Eurozone and Australia. Just recently the Reserve Bank of Australia further lowered its growth forecast for the Australian economy.
The OECD this week has also released new forecasts for the global economy. In their comments about New Zealand, they expect growth again ahead of our peers – with business investment expected to grow.
We know that the fundamentals of our economy are strong.
We continue to have historically low unemployment and stable, low inflation. We are running Budget surpluses and have low public debt due to our Government’s responsible fiscal management.
We are holding up well and are well positioned to deal with the global situation.
Consumer confidence, export and, commodity prices, and building consents and are all up. Last week’s Performance of Manufacturing index lifted.
Capacity constraints, particularly in a tight labour market, do remain a challenge. The need for skilled staff is the most common refrain I hear from business. And we still have our entrenched levels of productivity. But overall we have a solid base to see New Zealand through this challenging period.
In addition to the volatile global environment there are the mega trends that we have to keep in mind. The full effect of the rapidly changing nature of work, driven by forces such as automation and globalisation is not yet known. But we do know from developments like cloud computing, 3D printing, Uber and even Netflix that these mega trends already are, and will continue to be, disruptive to the status quo.
The recent report by McKinsey’s for the Prime Minister’s Business Advisory Council noted that around 21% of work activities in the New Zealand economy have the potential for automation by 2030. This requires a significant shift in how we think about and plan for work.
And then there is the challenge of climate change that effects every aspect of our economy. The urgency of our response has never been clearer, and New Zealand, with our reliance on a stable climate for a strong primary sector, has to move now to get ahead of the challenge.
These issues, and others, provide us with both challenges and opportunities going forward, and how we respond will shape the future of New Zealand.
At the same time, we need to move away from the main factors driving economic growth in the recent past, namely housing and population growth. The benefits of growth based on these factors has failed to translate into meaningful improvements to the living standards of many New Zealanders.
Buying and selling houses to one another and adding more people to the economy is not the basis of a sound economic strategy.
In the face of this environment it is important to be clear about our economic strategy and plan.
So, we are in a transition phase for our economy.
The core aim of our Government is to improve the living standards and wellbeing of all New Zealanders. Our success in achieving this will largely be determined by how adaptable and resilient we are to these challenges.
In short our Government’s vision is for a modern economy that is productive, sustainable and inclusive.
What do I mean by that?
Productive means doing more with what we have, moving our products up the value chain, and producing things in new and innovative ways.
Sustainable means meeting the needs of the present without compromising our ability to do so in the future, both in an environmental sense, and in an economic and fiscal sense.
Inclusive means ensuring that all New Zealanders get a fair go, have a chance to contribute to our economy, and get to share in the benefits of growth.
When the Prime Minister outlined the Government’s priorities last year she identified four economic objectives that will help deliver on this vision. These are to:
- Grow and share New Zealand’s prosperity more fairly;
- Support thriving and sustainable regions;
- Transition to a clean, green and carbon neutral New Zealand; and
- Deliver responsible governance with a broader measure of success.
One way to think about this is the six “I”s.
We need to develop more transparent and enduring institutions, and enhancing our social partnership. We are making good progress here through, for example, reform of the Reserve Bank, the introduction of the Zero Carbon Bill and establishing the Climate Change Commission, and the establishment of the Tripartite Future of Work Forum bringing business, workers and Government to the table.
Our Investment priorities need to change. New Zealand’s capital markets need to encourage more productive and sustainable investments. We have established Green Investment Finance, restarted contributions to the Super Fund and set about updating our Overseas Investment regime.
We need to do more with Innovation and our Innovative industries to drive productivity and shift from volume to value. We are leading the world with our work on a just transition towards a low carbon economy, highlighted by the recent summit in Taranaki. We have already made significant investment in research and development including support for business R and D through the R and D Tax credit, and more is to come as we move towards our goal of two percent of GDP from our position below the OECD average
Improving our International connections has become more important. We are diversifying and deepening New Zealand’s international connections to lift exports, and deliver fairer free trade for the benefit of all New Zealanders. The latest export data shows that we have lifted from 26.6 percent of GDP to 28.8 percent. This comes after several years of a downward trend. Having concluded the CPTPP, we are deep in negotiations for an EU free trade agreement, and just last week the Prime Minister formally signed a refreshed economic cooperation agreement with Singapore.
I think that we must modernise and adapt our Infrastructure. We are expanding investment in the infrastructure necessary to support a more modern economy that can meet challenges like climate change. A major step forward in giving certainty on the pipeline of infrastructure is the recent establishment of Te Waihanga, the Infrastructure Commission. This is backed by record levels of investment in critical infrastructure including transport, schools and hospitals. We are also developing new infrastructure funding and financing tools to leverage more private sector capital in infrastructure provision.
And finally, we need to deliver inclusive work by ensuring the labour market, education, and welfare systems support opportunities for high-quality and fair work. This does include lifting the minimum wage, but also more active labour market policies to ensure that we take on the number one issue raised with me by business: access to skilled labour.
There is, of course, much more to the Government’s work programme than I have time to talk about today. But it needs to be clearly focused on seeing New Zealand through our current global headwinds and towards a modern economy that gives our businesses and our people confidence to face the future.
Budget 2019 Economic Priorities
In next week’s budget you will see investments to support our economic strategy.
This year’s Budget is different. There are three fundamental elements to the Wellbeing Budget.
First, a whole-of-government approach. This is about stepping out of the silos of agencies and working together to assess, develop and implement initiatives to improve wellbeing.
Secondly, a wellbeing approach means looking at intergenerational outcomes. We have to focus on the long-term thinking about the impacts of policy on future generations as well as thinking about meeting the needs of the present.
Thirdly, we need to move beyond narrow measures of success. This can be seen through the development of the Living Standards Framework Dashboard and from the Indicators Aotearoa New Zealand work led by Statistics New Zealand.
We have developed our Budget priorities on the basis of a wellbeing analysis. We looked at the evidence and got expert advice to assess where we have the greatest opportunities to make a difference to New Zealanders’ wellbeing. We have focused our efforts on those opportunities.
This approach has led to some significant and different programmes, like the $320 million investment announced last weekend to address domestic and sexual violence. This is the wellbeing approach in action. The evidence shows the long-term impact that domestic violence has, especially on children. We are taking a joined-up government response to start addressing this long term challenge. We have brought together eight government agencies, working with the community to take on this scourge that has such massive social and economic consequences.
From an economic perspective, our wellbeing analysis showed that we have some way to go in achieving our vision of a productive, sustainable and inclusive economy.
Productivity growth is a key driver of incomes both at a household and country level. Despite working longer hours on average than workers in many developed countries, New Zealanders’ incomes have for some time remains in the bottom half of the OECD.
In addition, the Government has set ambitious greenhouse gas reduction targets to meet the 2015 Paris Agreement goal of keeping temperature rise to no more than 1.5 degrees.
As a result, two of the priorities in this year’s budget are:
- 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.
Come Budget day you will see targeted investments in these areas to support more productive, sustainable and inclusive economic growth.
Of course, fiscal sustainability is an inherent part of maintaining and improving intergenerational wellbeing and a sustainable economy.
That’s why this Government made a commitment to our Budget Responsibility Rules when we came into office.
Delivering a sustainable operating surplus across the economic cycle. The key word here is sustainable.
That means our surpluses will exist after we have funded our policy objectives, so that issues are not kicked further down the road for the next government or generation to deal with, as I discovered after coming into my role as Finance Minister.
We are, reducing the level of net core Crown debt to 20 percent of GDP within five years of taking office. New Zealand has low levels of Government debt by international standards, but we remain vulnerable to shocks that are beyond our control, such as earthquakes and other natural disasters. We have made our commitment to keeping debt under control to ensure that future generations of New Zealanders are in a position to be able to respond effectively to any such shock.
Thirdly, this Government will prioritise investments to address the long-term financial and sustainability challenges facing New Zealand. This is apparent in the intergenerational wellbeing priorities we have identified in this year’s budget and restarting contributions to the NZ superfund and our focus on issues such as climate change.
Fourthly, we will maintain Government expenditure within the recent historical range of spending to GDP, which has averaged around 30 percent over the past 20 years. We are also focussed on the quality of spending, with Ministers running prioritisation exercises across their portfolios to identify spending that doesn’t fit with the Coalition Government’s priorities.
I am pleased to announce today that on the 30th of May the Budget will show that we are meeting these rules again, as we did in last year’s budget.
I know there has been some criticism of this approach – particularly around the debt target. For me it is a question of balance. We have made, and will continue to make, significant investments in our future, but we also know that the volatility of the world, be it economically or through natural disasters, biosecurity incursions or unexpected events, is never far away.
The Public Finance Act obliges Governments to outline their long-term fiscal strategies at Budget time. One of the key elements of this is the Government’s approach to debt.
People in this room will all have different views on what it could or should be. That in part depends on the levels of investment you believe the Government should be making and in what areas.
We also have to take into account capacity constraints at any point in time – like in our construction sector. With this in mind, I am comfortable with the 20% point that we have been targeting. But circumstances can obviously change.
Beyond the Budget Responsibility Rules, our fiscal intentions in this budget will signal a shift to a net debt percentage range, rather than a single figure. At this point we are looking at a range of 15-25% of GDP, based on advice from the Treasury. This range is consistent with the Public Finance Act’s requirement for fiscal prudence, but takes into account the need for the Government to be flexible so that it can respond to economic conditions.
Essentially, our current 20% target falls in the middle of the new range that will exist from 2021/22 onwards.
A range gives governments more capacity to take well-considered actions appropriate to the nation’s circumstances – circumstances that change over time. It establishes boundaries within which debt is kept to sensible and sustainable levels and where fiscal choices are driven by impact and value.
For example, a government may choose to move higher up the debt range to combat the impact of an economic recession, or where there are high value investments that will drive future economic dividends. At other times it may be prudent to reduce debt levels to the lower end of the range to provide headroom for future policy responses.
Our Budget Priorities are focussed on the outcomes New Zealanders want to achieve and all Ministers and agencies will be collectively accountable for delivering them. And in their delivery, this Government will follow a disciplined fiscal strategy. The strategy gives the balance to be both a responsible manager of public finances and responsive to New Zealand’s intergenerational wellbeing needs.
To wrap up, I am really looking forward to delivering this Budget. We are doing things differently.
We’ve prioritised spending that improves the wellbeing of all New Zealanders. This means tackling the big long-term issues, by investing in an economy that is more productive, sustainable and inclusive.
You will learn much more about this in a weeks’ time.
Come Budget day you will be able to see that this is not simply the same old Budget repackaged with softer edges and brighter colours. You will see a Budget that is new, with a more structured approach and a new, explicit emphasis on what we want to achieve for the long term for our country.