Pre-Budget Speech to the Wellington Chamber of CommerceFinance
I want to start by thanking our hosts the Wellington Chamber of Commerce who graciously do this every year as we lead into the Budget.
I want to make a particular acknowledgement of the recent partnership that the Chamber has entered into with Te Awe the Maori Business Network and the Wellington Pasifika Business Network. This is a truly significant development in harnessing the potential of businesses in Wellington and one of which all three organisations should be proud. Although, having experienced the lobbying and inquisition of all three organisations over the years, I need to be careful what I wish for having you coming at me as one!
Today I want to take the opportunity talk about where the New Zealand economy is at as we put Budget 2022 together, and highlight the course that we are charting through our economic plan to take it forward.
Budget 2022 is being delivered in uncertain and volatile times. It seems I have said that almost every year, but if the shadow of COVID were not enough, we now have highly elevated global inflation, exacerbated by the war in Ukraine which is driving significant cost of living pressures for businesses and households alike. It is tough going for many people and after two years of COVID it is even more keenly felt.
And, despite my fervent hope that the word “COVID” would not feature so much in my vocabulary this year, the pandemic remains ever present. We have managed to protect New Zealanders from the impacts of the deadly earlier variants, and through vaccination, testing and continuing public health measures we are in a better position than most countries to deal with an Omicron outbreak. But it is still not easy and like you I am well and truly over it.
However, as we navigate this challenging time I do think it is important not to lose sight of what we have achieved together in the face of this extraordinary shock. Our health and economic response are among the best in the world. And this is recognised as such by the major credit ratings agencies, the IMF and the OECD to name a few.
Through COVID the New Zealand economy suffered the single biggest hit to GDP on record. It is now 3.5% above its pre-crisis level.
At the time I was presenting the Budget in 2020, Treasury forecasted that unemployment would get close to 10% within a short period of time.
As we know, unemployment in fact peaked at just 5.3%. New Zealand took a total of 6 quarters to return to its pre-crisis level of employment – a year and a half. By way of comparison, following the Global Financial Crisis unemployment in New Zealand remained elevated across the next decade.
This did not happen by accident. It happened because we put in place policies like the wage subsidy that kept Kiwis in work and because businesses and workers stepped up and battled through.
In the last two quarters, unemployment has been at 3.2% - the equal lowest rate on record. The Māori unemployment rate has declined from a peak of 9.1% to a current level of 6.3%. Pacific unemployment peaked at 10.4% and now sits at 6.7%.
These rates are still too high and there is remains much to be done to give all New Zealanders the opportunities and dignity that comes with work. However, the strength of our economic recovery has meant that sections of our population are seeing opportunities in the labour market in a way that they have not done for decades.
Other economic indicators show that we are in a strong economic position. Our GDP is up 5.6% from the same time last year. We have used our balance sheet to support the economy through the pandemic. However, our OBEGAL deficit for the nine months to the end of March was $8.1 billion; $4.1 billion lower than what was forecast at the Half-Year Economic and Fiscal Update in December 2021.
And we are now forecast to reach a surplus in 2024/25. This will be five years after COVID began, compared with the six years it took to get there after the GFC.
Our debt is set to peak at about half of Australia’s, around a third of that in the UK and around a fifth of the US, based on comparable measures.
As a result of New Zealanders hard work and our health-led response, we are now in a strong position to face our latest set of hurdles, but importantly also deal with the long term challenges and opportunities that New Zealand has put in the too hard basket for too long.
The short term challenge of inflation is significant.
Global supply chains have struggled to deal with the volumes of goods that have hit international ports and shipping networks as demand has rebounded strongly. On-going policy localised lockdowns in China have caused further disruptions. And, of course, the recent illegal invasion of Ukraine by Russia has caused volatility in global energy and food markets, and pushed inflation rates to even higher levels.
I have heard a great deal recently about the impact of government spending on inflation. We do need to be careful with what we spend, make sure it is value for money and targeted where it can make a difference. We did this through COVID with our health and economic response and we continue to do so today. There were, and are, no costless decisions. Doing less would have seen unemployment grow, or put people’s health at risk. It is a balance and one that I think we got about right.
We cannot control the global drivers of inflation, but we can control how we respond to it. The actions we have taken to date have been targeted towards those most affected by the types of inflation we have been seeing. Low-and middle-income households have been supported by a range of income support measures that came into effect on 1 April this year. We have also taken action to alleviate the broader impacts of higher fuel prices by cutting fuel excise and halving the price of public transport to make that option more attractive for New Zealanders.
Looking forward, we need to be conscious of the fact that the economy is experiencing capacity constraints. Skilled labour is scarce in a range of areas, and many businesses who a short time ago were wondering if they would survive are now wondering where they will find the workers to meet current levels of demand.
Fiscal policy needs to be set with these conditions in mind, and it will be. The spending that we provided to support the economy through COVID-19 was time-limited. Government spending as a percentage of GDP is about the same as after the GFC, and is set to reduce over the coming years.
But what we must not do while dealing with the pressures of the here and now is put off dealing with long-term challenges. If we decided against reforming our health system, we would not see lower petrol prices; we would just have both high petrol prices and a health system that was not set up to meet our needs.
Too often, the New Zealand economy has been run along those lines. Investment has been turned on and off in response to short term considerations, resulting in a long series of chain reactions delaying planning decisions, business case development, workforce recruitment and investment in sector capacity.
I don’t believe that this approach has served our current needs. I certainly don’t think it is adequate for our future needs. Whether it is addressing our long-standing productivity gap with other advanced countries, addressing the housing crisis, or fixing our planning or three waters systems, a short term, hands off approach is not going to cut it.
Economic Strategy and Plan
Budget 2022 marks a move past the crisis Budgets of COVID to a new normal. We will bring the stability and certainty of fiscal rules, but also take the lessons of COVID to take on the big challenges and opportunities, and address the shortcomings and inequities of the old normal.
My vision for our economic future can be summed up in one sentence. I want a high wage, low emissions economy that gives economic security in good times and bad.
The building blocks to reach that goal are being put in place.
Last week I announced the new fiscal rules that will guide us over future Budgets.
The first is that we will on average run an OBEGAL surplus of between 0 and 2% of GDP.
Alongside that we have set a net debt ceiling of 30% of GDP, using a comparable and more accurate measure of our debt.
The underlying idea behind these changes is quite simple. We will continue to pay for our current spending through current revenue. But we will use the debt ceiling to buffer us against economic shocks, and it will give us more room to make infrastructure investments that will enhance our productivity, help us meet the challenge of climate change and are of high quality. It makes sense for us to spread the costs of these investments over time.
And there is no shortage of things to do when it comes to infrastructure.
Last week, the Infrastructure Commission released Rautaki Hanganga o Aotearoa, the 30-year New Zealand Infrastructure Strategy. The report not only highlighted the infrastructure deficit which has been building up over previous decades, but also set out the need to comprehensively change the way in which plan, deliver and maintain our infrastructure.
We all know the real life impact of failing to invest enough or in an efficient way. It’s the congestion on our roads, the broken pipes, the poor quality hospitals and schools. We now have the strategy, the pipeline of work and the funding to start to address that deficit. In last year’s Budget we outlined $57 billion worth of capital spending over the next five years to take this on, and in this Budget we will make use of the multi-year capital allowance to add to that.
Dealing with our infrastructure deficit is only part of addressing our decades-long productivity challenge and getting to a higher wage economy.
The Government is focused on lifting our research, development and innovation performance, on diversifying who we trade with and what we are able to offer them.
We want to support businesses to access new markets, raise the capital they need and help provide the skilled workforce that will move them forward. This includes the Industry Transformation Plans that are currently underway, the Regional Strategic Partnership Fund and the work we have been doing to help lift productivity through the Digital Boost programme.
I am immensely proud of the work we have done to lift skills and provide training opportunities. More than 190,000 people have benefited from our free apprenticeships, targeted trade training and employment programmes. And just this week we announced the extension of the Apprenticeship Boost programme through to the end of 2022 to enable a further 38,000 apprentices to finish their on the job training.
We need to do more to draw upon global sources of knowledge and to attract skills and investment to New Zealand in a way that benefits everyone involved.
We have been through an extraordinary period in which inward migration has been heavily constrained due to public health requirements.
As the Prime Minister announced yesterday, our immigration rebalance will reopen our borders to inward migration, but in a way that embodies our objectives as a Government. A green list will provide a streamlined pathway to residency for workers with skills that are in high demand. This approach will enable us to support the development of high-value industries and to alleviate some of the supply constraints that are present in areas such as construction.
As the same time, we will be working with some industries via sector agreement to help them transition away from reliance on low-wage international workers. This approach recognises that industries will not be able to transform overnight and that some of the sectors are still feeling the effects of COVID-19.
But the direction that we are setting out is clear. Where a shortage of skilled labour is a barrier to economic development, then there is a place for immigration to help lift our economic performance. But we do not intend to return to the level of immigration that we saw throughout the previous decade, or to the level of dependence on temporary migration that we saw in some sectors.
We already have good examples where a partnership approach with businesses can help make sure that everyone is pushing in the same direction. Budget 2022 will continue to build on this approach.
Low Emissions Economy
On Monday we will release our Emissions Reduction Plan, and the funding to back that up through the first allocations from the Climate Emergency Response Fund. That fund has been created by recycling the revenue from the Emissions Trading Scheme directly to emissions reductions initiatives.
Dealing with climate change is something that we need to get right, and get right now. We all know the environmental imperative that we are facing. But there is also real risk that if we were to drag our feet on emissions reduction, we face the possibility of the world moving on from the sorts of things that New Zealand is currently a world leader in producing.
Every country in the world will have to change the way in which it meets the needs of its people. This is a challenge, but also an extraordinary opportunity for New Zealand. There are areas such as hydrogen, renewable energy, wood processing and agritech where we can lead the world and create the high wage jobs we need.
We will partner with businesses to support them in making the transition toward low-emissions technologies, and work with sectors with more hard-to-abate emissions to develop more sustainable ways of operating. We will also provide support to make lower-emissions alternatives accessible to a greater number of households.
We can no longer put off meaningful action on climate change. The emissions reductions plans that we have created are ambitious but achievable, and will meet the task set in our emissions budgets.
Taking action on climate change is also a matter of economic security.
Our economy is less reliant on fossil fuels than it once was and the areas where the Ukraine crisis is hurting us are the areas where we have made less progress in decarbonisation, such as in our private transport fleet. Increasing the uptake of low-emissions vehicles will help us meet our emissions budget, but it will also soften the blow to households the next time we see a global energy crisis.
Economic security also comes from strong public services. As I have signalled previously, a key focus of Budget 2022 will be on our health system. The health of our people is central to our wellbeing approach. When people do not get the care that they need, it affects all aspects of their life. And for many years now, New Zealanders have not received the outcomes that they deserve from their health system.
The quality of healthcare and the availability of specialists differs from region to region. The system is fragmented and inefficient, with management structures too often getting in the way of the best approach to care. Prioritising issues at a national level, as we had to do with COVID-19, is extremely difficult while working across numerous DHBs. Long-term planning in our system is inadequate and we continue to see large inequities in health outcomes for Māori and Pacific peoples.
New Zealand has also underinvested in its healthcare system, with predictable outcomes. Part of this is due to the lack of financial control and mixed levels of financial capability that is characteristic of the DHB system. But we also have to acknowledge the fact the culture of DHB deficits is a direct result of the chronic underfunding of the Health budget.
Budget 2022 will be about health. It will be about setting up a national health system that can meet the needs of our nation. It will be about setting up the infrastructure that will direct the attention of our health workforce to where the need for care is greatest, not to where the vagaries of our current structures direct them.
To get this right, we also need the workers that our system needs. In addition to those that we train here, the green list process will prioritise and provide a residency pathway for a range of occupations that are in critical need – nurses, clinical psychologists, medical technicians and a range of specialist occupations.
Getting the foundation of our health system right will require sustained investment. Budget 2022 will lay the groundwork for that change. Health will move toward a multi-year funding track, initially through a 2-year transitional investment in this year’s budget, before moving to 3 year budgets from 2024/25. This reform will provide the certainty that is needed for the system to plan for long-term health priorities.
These have been an extraordinary past couple of years for everyone. As a country we should be proud of how we have responded. Now, we need to take that pride and the lessons we have learned and put them to work on shaping our new normal.
Uncertainty and volatility are part of that new normal. But so is a New Zealand economy that is the envy of many in the world. We are in a strong position to weather the storm of global inflation and build that high wage, low emissions economy that provides economic security for all New Zealanders, in good times and tough times.
At every Budget there is a balance to strike - to get the basics right, to do what is right for current and future generations and to secure a better tomorrow. It is a balance we have struck before, and on that I believe we will do so again.
Thank you for coming today, and I look forward to your questions.