Speech to Employers and Manufacturers Association: Relief for today, hope for tomorrow

Kia ora,

Ngā mihi nui ki a koutou kātoa

Tāmaki Herenga Waka,

Tāmaki Herenga tangata

Ngā mihi ki ngā mana whenua o tēnei rohe

Ngāti Whātua ō Ōrākei me nga iwi kātoa kua tae mai.

Mauriora.

Greetings everyone. Thank you to the EMA for hosting this event. Let me acknowledge your Chair Andrew Hunt and Chief Executive Brett O’Reilly, together with your Board members and all the businesses, employers, and community leaders in the room today.

Thanks to all of you, not only for attending, but for what you do. 

Our government recognises that business is the engine of the economy. 

It is business, not government, that generates income to fund health, education and welfare services.  

It is business, not government, that employs most New Zealanders. And it is business, not government, that will drive the productivity and innovation on which New Zealand’s future depends. 

Let me also acknowledge the many social sector organisations represented here today. It is so often these non-Government groups that are getting on and solving the complex challenges in our communities, turning good intentions for our most vulnerable into real results. Thank you for what you do.

New Zealand’s future is important to everyone here today and it’s important to me personally. I say that as Minister of Finance but also as a proud New Zealander, and as a mother who’d like her kids to see their future here too. This is the place that I, like you, have chosen to raise my family and build a life and career. 

I have lived in Auckland and I have lived in Wellington. I could compare the two but that would require discussing what Treasury nicely refers to as “high quality wind resources”. 

Our Government is working hard to restore confidence in New Zealand. 

We want to remove barriers to people investing their own money in creating and growing businesses. 

We want to work with investors and firms to get on with building the infrastructure projects this country so badly needs. We want to remove unnecessary red tape. 

We want to ensure that young people leave the education system with the skills they need to make the most of their talents. We want to open doors for you overseas. 

Our Government has a resolutely pro-growth agenda and we are working at pace to change policies for the better.

Ministers will have more to say in these sorts of areas over the coming weeks and months.

Today, I want to give you an overview of how the coalition Government is approaching our first Budget, what we are trying to achieve and why that matters to you.

Let me start, however, by acknowledging how challenging economic conditions are for so many Kiwis right now. 

New Zealand is experiencing a difficult economic downturn. 

The post COVID-19 party, fuelled by ultra-low interest rates and large amounts of government spending is now a distant memory. Inflation climbed quickly in 2021, reached multi-decade highs in 2022, and has not yet come back to the target range.

Now that the laws of economic gravity have reasserted themselves, New Zealanders are faced with the cost of cleaning up.  This is the hangover after the wild party. And, as everyone knows, the wilder the party, the longer and messier the hangover. 

A long period of fast rising prices has eroded people’s purchasing power, reduced the value of their savings and sapped confidence.  The Reserve Bank has moved to control inflation with a substantial lift in interest rates. 

Economic activity has flattened and output has fallen sharply on a per person basis. This is causing considerable pain for households and businesses throughout New Zealand.

You see this in your own businesses and in your own lives.

We also see this in the government’s books.

Tax revenue forecasts have dropped considerably, making it a lot harder to get the books in good shape. Doing so will take several years and lots of hard work to make savings and reprioritise spending.

All of this makes for one heck of a backdrop to our Government’s first Budget.

My sense is that New Zealanders are realistic about the task our Government faces. No one is asking us to wave a magic wand. There isn’t one.

Instead, people are looking to us to show a clear, credible path out of this economic and fiscal mess. You are looking for a little relief today but most importantly you need that hope that tomorrow will be better.  That’s what our Budget will do.

As Minister of Finance, I am very aware of the economic forces our Government cannot control, at least in the short term. But there are things we can control.

One of those is fiscal policy – the management of government revenue, expenses and borrowing. 

Fiscal policy matters for real people, as recent history shows. The last few years have been something of an experiment to see what happens when the government fires money around in pursuit of transformational goals. The result has been high inflation, large deficits, growing debt, a struggling economy and nothing remotely transformational to show for it.

If bad fiscal policy can make things worse for businesses and people, then good policy can make it better.

Getting the government’s books back in order

You’ll see on May 30 that we have taken a very fiscally responsible approach in the Budget. We had to.

Over the last few years, government expenses have risen markedly. Some of this spending reflected temporary measures to support New Zealand through COVID-19 and subsequent weather events. But much of it proved not to be temporary. 

After stripping out large one-off expenses, and adjusting for the economic cycle, the Treasury estimates a structural operating deficit of around 1.5 per cent of GDP in the current financial year. 

Structural deficit is a technical term. More colloquially, we’re borrowing to pay for the groceries. That is not sustainable in the long term as it requires continual borrowing to cover expenses, leading to a never-ending debt spiral.

So, we have made a series of careful decisions in our first Budget that mean we can get the books back in order and get debt tracking down again.

This task has become much harder to achieve as economic forecasts have deteriorated. For a while, it seemed like every time Treasury came to see me they brought with them a revised set of GDP forecasts. Revised down, that is. And each revision made the fiscal challenge harder.

Nonetheless, the Government is deliberately taking a medium-term approach to fiscal consolidation. We won’t be over-reacting to changes in the forecasts. We’re not doing that on the current economic downswing and we won’t do that on the upswing either. We will be making difficult decisions and trade-offs to turn the fiscal situation around, get back to surplus and reduce debt, but we want to look after New Zealanders on the way.

The details of that will be set out in the Budget. In particular, we will set out the operating allowances for future Budgets. These allowances represent the amount available in the next three Budgets for discretionary spending and revenue initiatives. They are the key tool the Government has for controlling growth in spending and driving savings and reprioritisation.

As I said, the size of those allowances will be set out in the Budget. But what I can tell you is that in the current economic circumstances, if we were to continue with the spending allowances set by the previous government, the operating balance would not get back to surplus until the year 2030/2031. That is very far off in the future.

As a responsible Government, we will certainly not be doing that. We will be getting back to surplus sooner. But in the words from a Florence + The Machine song I quoted recently, it is darkest before the dawn. The deficit is expected to be larger next year than it is this year, before starting to improve.

This reflects, for the most part, the deterioration in the economy and downgrades to the forecasts for GDP and tax revenue. It does not reflect the Government’s fiscal decisions in the Budget.

Inflation and tax relief

Let me now address two economic issues I know are top of mind for all of you: high inflation and high interest rates.  These challenges are top-of-mind for our Government too.

Getting government spending under control will support monetary policy to bring inflation within target, and maintain it there. 

The Reserve Bank, as you know, does the heavy lifting on inflation. But the Government can help that task or it can hinder it. We will be helpers.

We will be delivering tax relief in the Budget. It will be relatively modest but it is long overdue. Inflation and wage growth have pushed many people into higher tax brackets, meaning they are paying a greater share of their income in tax. 

I’ll give you an example. In 2011, the median full-time wage and salary worker earned $48,000 – and paid 15.5% of their income in tax. Today, the median full-time wage and salary worker earns $73,400 – and pays 20.6% of their income in tax. 

This is the consequence of not adjusting tax thresholds for 14 years – the average tax rate for someone who, by definition, is right in the middle of the income distribution has gone up by more than five percentage points.

That is not fair. People deserve a break, and they need to see a future for themselves and their families in New Zealand in which, if they work hard, they can get ahead. 

And the link to inflation is this – tax relief in the Budget will be fully funded from savings and other revenue initiatives. 

Contrary to what you might hear from some quarters, it will not require additional borrowing. Since tax relief will be fully paid for, it should actually – at the margin – take a bit of pressure off inflation, given that households may save some of their tax relief rather than spend it all.

More importantly, we will be reining back spending in future years and maintaining an overall contractionary fiscal stance.  Treasury has advised me that this means that interest rates could track lower than would otherwise be the case.

I know how important that is for every Kiwi with a mortgage and every business carrying debt.  Our Government has your back.  We will do our bit to support a lower interest-rate future.

Ongoing savings

Reining back spending over time does mean that savings and reprioritisation will be business-as-usual activities for our Government. They will be a feature of future Budgets, just as they are of Budget 2024.

The Government will continue to seek out areas of less effective government spending and redeploy resources to front line services to get better results from schools, hospitals and other essential services.  

We will look carefully at our costs, and be much harder-edged about what is necessary and what are nice-to-haves. We will find the headroom to fund future priorities without adding to debt.

I imagine this approach sounds like commonsense to the businesspeople in this room. It’s no different from what many of you have done in your businesses in these tough economic times. You’ve gone line-by-line through your spending to decide what costs can be reduced so that you can keep funding the things that really matter and that will drive your business forward.

For some reason, governments have found this very difficult. Our Government has to do it because the alternative is fiscal vandalism.

In the Budget you will see the extent of the savings we have already made. As I said, tax relief in the Budget will be fully funded through savings and revenue initiatives. 

These initiatives will be broadly similar to those the National Party campaigned on at the election, adjusted to reflect commitments made in our coalition agreements.

There will also be other savings in the Budget – quite significant ones. What I think is less understood by commentators is that our savings go well beyond tax relief. The Government is making active choices to stop some areas of spending so that we can redeploy those funds to better uses in frontline public services and other Government priorities.

We share your desire to see better education results, better health services, and a restoration of law and order and we will be prioritising our investment to support those things.  Schools, hospitals, police: they will all continue to need new funding, in this Budget and in future Budgets.

We’ve already announced some of these decisions.

We announced an extra $571 million to upgrade ageing Defence equipment and infrastructure and to improve remuneration for servicewomen and men. $100 million of that is being reprioritised from back-office Defence functions.

We announced an additional $1.9 billion for more Corrections officers, increased support for offenders to turn away from crime, and additional prison capacity. Almost $442 million has come from savings found in the back office.

We have worked carefully to find the money for the school lunch programme, which was left unfunded by the last Government.  At the same time we’re embracing commercial expertise and innovation to make it more efficient, saving taxpayers around $107 million.  This means we can put funding into a new targeted programme to provide food for around 10,000 two to five year olds who attend low-equity, not-for-profit, community-based early learning services.

You’ll see many more examples of reprioritisation in the Budget next week, and in Budgets to come.

This is what sensible families and businesses already do and it’s about time the Government caught up.

When the going gets tough, the tough get going.

Investing for the Future

Our Budget will also make investments for future growth.  We have an infrastructure deficit and more challenges ahead. Our climate is changing.  New Zealand has to invest now, not only to reduce carbon emissions, with more renewable energy and lower-emission transport options, but also to build the stopbanks, seawalls, and flood protection schemes needed for resilience.

We are ambitious about delivering the infrastructure needs, not just talking about it, but actually building it.  

We recognise this will require increased Government investment, and you can expect an uplift in capital funding in the Budget, but it’s about more than that.  The previous Government allocated significant levels of capital funding in recent Budgets, with an investment pipeline larger and lumpier than agencies and the market could deliver, as evidenced by significant cost escalations and delivery delays. 

Haphazard planning made for some incredibly poorly thought through projects – like the i-Rex ferry project, invited extensive critique from the Auditor General and meant that other much talked about projects, think Auckland Light Rail, never moved beyond the design stage.

Our Government will maintain a more stable and sustainable investment pipeline.  We have funded a modest number of high-quality investments in Budget 2024 and ensured funding for the extensive transport agenda already signalled in our Government Policy Statement, including 15 roads of national significance.  

We have also deliberately put aside significant sum of funding to support additional infrastructure projects, not yet agreed, which we can fund when they reach the investment-ready stage.

Aligned with this work, our Government is taking a new approach to social spending.  The Social Investment Agency I am establishing is designed to disrupt the cosy complacency that for too long has characterised much of the Government’s social service delivery.

I share your frustration with an approach that has repeatedly put large Government bureaucracies at the centre of expensive programmes, strategies, and action plans, ripe with good intentions to help our most vulnerable but too often failing to move the dial.  

We know it is non-Government organisations working on the ground who have some of the best ideas and who know our communities best.  We want more of the impact you deliver.  So we are thinking differently and starting a social investment fund to drive change.  Social impact bonds, devolution, social outcome contracts – it’s all on the table.

Conclusion

Ladies and Gentlemen

New Zealand has so much going for it. We are located in the fastest growing region of the world, we have a stable democracy, peaceful borders, clean air, a rapidly growing Māori economy increasingly fuelled by capitalised post-settlement entities, extensive natural resources and abundant sources of renewable energy – including Wellington’s wind.

I have boundless confidence in the creativity, capability, ingenuity and work ethic of my fellow New Zealanders.

But we need to strengthen the foundations for future economic success.

An important part of that is sound government finances. You will see that in the Budget on 30 May. It will show the Government to be a good steward of public money. One that respects taxpayers – the people who get up early in the morning to go to work and earn money for their family. And one that thinks the right measure of success is not how much money you spend, or how much you say you care, but results that are achieved for New Zealanders.

Thank you.