Pre-budget speech to Wellington Chamber of Commerce

Finance

It is a pleasure to be here at the traditional pre-Budget speech hosted by the Wellington Chamber of Commerce, for my sixth time as Minister of Finance.

The sixth time around there is some familiarity in the Budget process. 

There is the usual dance of me not wanting to be filmed eating while not appearing rude to my hosts. 

I am also well used to my colleagues’ commitment to putting in far more Budget bids than there is money to fulfil them. 

And then there is the now traditional pandemic, natural disaster or global economic shock that accompanies our Budgets.

In fairness to the global economy, it has continued to come up with novel and creative shocks for us to deal with each year.

Most notably we faced the effects of COVID-19 and the necessary economic and public health response that followed from that.

As you are well aware this was followed by supply chain disruptions, including global labour supply issues, and the energy crisis sparked by the illegal invasion of Ukraine, both of which have fuelled elevated rates of inflation.

In April, the IMF again downgraded its forecasts for global growth in 2023, to the point that growth in advanced economies is now expected to be only 1.3 percent. Over the next five years, the global economy is set to grow at the slowest pace since the 1990s. 

More recently we have seen a number of extreme weather events that have brought the increasing impact of climate change to the forefront of our minds. 

We continue to acknowledge the significant impact that the cyclone and flooding has had on a number of communities, many of whom have been hit with further deluges this week. I will have more to say about our further support for these communities in the coming days.

During the last few years our economy and our society have undergone a series of whiplash shifts that have tested the resilience of our households, our communities, our business sector and our Government.

It is hard to imagine a period in our post-War history when the wellbeing of our nation has been put under greater strain, from an economic, environmental and a social perspective.

These are of course global trends, but in the face of these challenges, there is positive news for New Zealand. We have managed these challenges better than many countries who have been in similar positions.

The success of our health response to COVID-19 is well-known and has been recognised by many international organisations and observers. We can be extremely proud as a country that we have had the lowest excess mortality rate in the world across the period of the pandemic. 

And at the same time since the emergence of COVID-19, economic activity in real terms is more than 6 percent above its pre-pandemic level.

In the face of an historic economic shock, unemployment peaked at 5.2 percent and as of the first quarter of 2023 sits at a near-historic low of 3.4 percent. Unemployment has now been below four percent for seven consecutive quarters.

We are also beginning to see the shift in immigration numbers that many of you have been looking for. Numbers to the end of February show that we have net migration of 52,000. In the following month of March 2023 we saw more visas processed for people to work here than we did in the equivalent month in March 2019 before COVID hit.

These statistics are not meant to downplay the current economic environment which is seeing many New Zealanders struggling with the cost of living, and businesses feeling the pressure of increasing prices and slowing activity. 

I know it is tough out there for many people. What I also know is it’s better to be facing this situation with the numbers I just mentioned and public debt significantly lower than many other countries and inflation that is in the bottom third of the OECD. 

Our solid starting point comes from the hard work of businesses and workers, with the support of government through the last few years.

This means that the challenges of 2023 can be met, and that we will emerge strong and resilient through these difficult times.

In response to all of this the Government has continued the balanced approach that took us safely through the COVID emergency. We have targeted support to those low and middle income households that are most exposed to cost of living pressures, including superannuitants, families and those on low incomes. 

Despite the welcome news that inflation appears to have peaked, there is no doubt it remains too high, and we are committed to playing our part in bringing it down, including by reducing our spending as a percentage of the economy over the coming years. 

I stand by our approach to COVID that saved lives and livelihoods, and now is the time to move back to a more sustainable fiscal position. 

Budget 2023 Priorities

This is the context in which Budget 2023 has been developed. The Budget will have four overarching themes. They are:

  • supporting New Zealanders with the cost of living,
  • delivering the services New Zealanders rely on,
  • recovery and resilience, including economic resilience and
  • fiscal sustainability.

It is the last of these – fiscal sustainability – that I am focusing on today.

However well we have responded to some of the shocks the economy has faced in recent years, these events have still come at a cost.

Lives have been disrupted by COVID-19 and those effects can endure in a way that is obscured by the success of the overall response.

I want to make a particular acknowledgement of the mental health impact of the last few years.

I recently spent time with a small business owner who having successfully navigated COVID, found themselves dramatically affected by Cyclone Gabrielle. They were stoic, but battered.

The Government has moved to provide further financial support to this person and others like them, but the mental toll is considerable.

I urge anyone in these circumstances to reach out, including to the 1737 helpline and for all of us to be aware of supporting those around us. 

In the case of businesses I can also recommend the First Steps programme, developed by the Government with the Auckland Chamber and EMA which is specifically targeted to helping small and medium enterprises to cope with the strains they are facing. 

Increases to the cost of living are also adding pressure. These are not felt equally across society.

Indeed, one of the pernicious things about higher inflation is that those with the economic power to do so are often able to pass on increased costs, while those with little economic power are the ones who ultimately bear the burden of inflation.

The period of elevated inflation that we have seen in recent times has also put public services under considerable pressure.

You may have heard some people suggesting that periods of high inflation are a positive for the Government, and it is true that some of it flows through to higher revenue.

However, what this view does not take into account is the pressure that is put on the funding of public services that New Zealanders rely on in periods of high inflation.

As I mentioned earlier I don’t need to tell you that the labour market has been tight and that finding staff, coupled with accelerated wage growth, has put pressure on businesses. Given that the Government is the largest employer in the economy, I also understand that.

We have been working to backfill the infrastructure deficit that has built up due to decades of underinvestment, including changes to improve the supply of housing in New Zealand in order to make home ownership more affordable, and to accelerate the building of our public housing stock.

These projects are central to the vision that the Labour Government has for this country. But they are not immune to the limits that construction sector capacity has hit up against, or to the supply chain disruptions that have pushed up material costs. 

We are buying the same GIB you are and having the same difficulties of accessing skilled labour at a time when unemployment rates are low across developed countries. 

Others may suggest to you that inflation means that the Government can afford to do any number of things, including tax cuts. 

This might be a convenient political line to run, but it is not an economic policy appropriate to this time in New Zealand.

Adequately funding the services that New Zealanders rely on every day is a serious challenge and one which has occupied much of our time and resources in the Budget I will deliver next week. 

Making sure we meet the needs of our people in health, education and housing is core, and it simply has to come first.

This requires hard trade-offs and difficult decisions. I appreciate that not all of you will have agreed with every decision that I have taken as Finance Minister. But I do hope that people would credit me with always being upfront about the challenges that we are facing and what these difficult decisions mean for our future.

I don’t go around telling people that spending on public services will go up, public debt will go down and taxes will be cut, all at the same time. 

That fiscal Bermuda Triangle is the domain of the Opposition, and I don’t believe it is either realistic or credible.

If someone is asking you to trust them with running the Government and they can’t clearly tell you how they will pay for it or what we would be giving up in order to meet their promises, then they are not taking you seriously or the responsibility of governing.

Budget 2023 - Fiscal Approach

Our approach is to find a balance in our fiscal strategy. We will continue to make use of our balance sheet, particularly to fund long term infrastructure.

When we refer to ‘using the Government’s balance sheet’, what we mean in effect is making a judgement that supporting each other through the difficulties of a particular shock, or meeting a long term need, is worth spreading some of those costs over a longer period of time.

We have made good use of our balance sheet, and I do believe that was worth doing because we made it through these challenges in a stronger position as a country than we otherwise would have.

At times in the past the debate around public debt in New Zealand was one that went beyond what was a sensible level of caution for a small, open economy to one that prioritised reaching a specific level of low debt as an end in itself, to the neglect of many other important considerations.

We also need to be clear eyed about the fact that as a result of climate change, extreme weather events are occurring more frequently and with greater intensity, and we need to build up our resilience.

From the point of view of the Government’s finances, we do have the space within the fiscal rules that we set to manage the costs associated with responding to COVID-19 and the recent extreme weather events.

Our debt sits at around 19 percent of GDP, well below the 30 percent ceiling that we indicated when we set the fiscal rules last year. It continues to compare well to the countries we often compare ourselves to, such as Australia at 36 percent, the United Kingdom at 95 percent and the United States at 96 percent.

It is clear that the economic outlook has slowed, both in New Zealand and internationally.

It is inevitable that this will have an impact on our key fiscal indicators. We can also expect to see tax revenue lower than previously expected as we saw in this Crown accounts released this week.  

Our position remains strong and we are resilient, but there is no avoiding global and climatic forces.

As the Prime Minister has demonstrated through the reprioritisation exercise, we have brought our focus back to a smaller number of things that matter to the country right now, done well. 

Other priorities which, while they may be important, are ultimately discretionary and have been stopped or deferred.

We have seen a large amount of the spending associated with COVID-19 come out of the system, and spending is now tracking back toward the low-30 percent of GDP range that New Zealand has tended to operate around in recent decades.  

We are striving for a balance here as well. Going faster than we are in that track would require significant cuts to core services to austerity levels and would have long term consequences for people and communities. 

I am not prepared to do that.

In order to make sure that we can ensure the wellbeing of our people through an increasingly uncertain future, there a few key things that we are doing.

First, as the Prime Minister mentioned in his pre-Budget speech at the end of April, the further costs that the Government will incur in relation to the cyclone recovery will be met within the Budget operating allowance or Multi-year Capital Allowance.

This means that on the operating side in particular, we have put responding to the cyclone ahead of some of the other priorities that Ministers would have liked to progress.

I am not suggesting that this is the way in which Governments should always choose to respond to major shocks. However, we are in an environment where the economy is still tight and it is therefore important that fiscal policy continues to works alongside monetary policy.

Secondly, to ensure that we have an ongoing focus on efficiency and on prioritisation within the Public Sector.

This is not just something that we will be asking Ministries and Agencies to do in the current tight conditions – it is something that we need to continue to drive and get better at if we are going to achieve the sort of nation that we want New Zealand to be.

I appreciate that this is the sort of thing that Ministers of Finance are supposed to say, and that regardless of political orientation, it is part of the job to want to see more efficiency, greater value for money and greater prioritisation among other agencies.

But we have to take action to prove that it is more than words.

Finally, the Budget sees the outcome of the request that the Prime Minister made of Cabinet to look closely at their baselines for opportunities for savings, efficiencies and reprioritisation.

For the Budget I will announce next week, agencies were told that we would be looking at a wide range of factors in determining their level of budget funding, including how many vacancies they were carrying, historical rates of underspends and the growth of FTEs over time.

Ministers were sent a clear message that if they wanted to progress particular priorities, they needed to be looking for savings opportunities within with their own agencies’ existing budgets.

The outcome of this exercise is that Budget 2023 will include $4 billion of savings and reprioritisations over the four year forecast period. For the most part, this funding has gone toward funding agencies’ existing cost pressures.

We will detail in full what makes up this number when the Budget is released, but to be clear, these savings have been found across a wide range of areas, some of which have been well publicised already.

This includes: closing contingencies that we weren’t convinced were still needed; reassessing the forecast requirements of government departments; and returning as savings underspends from existing initiatives.

The reprioritisation exercise has seen programmes such as the public media merger stopped, the clean car upgrade and social leasing schemes curtailed, and funding associated with the affordable water reforms and COVID programmes that are no longer needed returned.

This kind of work is on-going, but we have re-doubled our efforts in this Budget process. We owe that to New Zealanders as they are carefully considering their spending, and making trade-offs in their lives, that we do the same.

Conclusion

As I said at the beginning of the speech there is a certain familiarity for me now in putting a Budget together. 

But equally I approach each of the Budgets with a sense of the privilege of being in the position to be able to put together a programme that will support New Zealanders to achieve their potential. 

The shift we made to Wellbeing Budgets four years ago was driven by my belief that for all the numbers, percentages and forecasts that underpin a Budget, our focus has to be on what it does for our people, our environment and our communities. 

And it has to focus on what we are doing for future generations. This Budget continues that approach.

Equally we cannot deliver our wellbeing approach without being careful and considered when it comes to the financial domain.

That is what you will see in this Budget. 

You will see a balanced approach that will also have an eye to a future of high wage, low emission economy that delivers economic security in good times and bad.

We must support people today, while building a better tomorrow.