Speech to Wellington Chamber of CommerceTreasurer
I have been repeating the message for months that I keep hearing from economists, and that I believe - the economy is heading for better times.
Today the Treasury has released its assessment of where the economy is headed over the next three years.
This is one of the first sets of forecasts to include the June GDP number. Nobody expected the economy to contract in June. But as economists have looked at the June number, and reassessed the evidence, they remain convinced that the economy is headed for solid growth.
That's what these Treasury forecasts also say. The June contraction does lower the annual growth we will get in this current year from around 3% to 2.3%. But the medium-term outlook hasn't changed. Treasury forecasts that growth will accelerate to 3.5% in the year to March 2001, before easing back to a healthy 3%.
Solid growth is no surprise given that conditions for growth remain stimulatory.
World demand has picked up. Treasury's forecasts are based on September Consensus Forecasts, which showed growth in our top ten trading partners this year of 3.2%. Since then, forecasts for growth in our main trading partners have increased further to 3.4%.
On top of that, the exchange rate is at levels exporters were only dreaming of a couple of years ago. And interest rates remain low.
The outlook is for interest rates to rise slightly- already we have seen that this week with the BNZ lifting its floating rate. Treasury and most other forecasters expect 90-day rates to move to around 7% over the next two years as solid growth puts a little more pressure on inflation. This figure compares to a peak of 10% in the last interest rate cycle.
And these interest rates are built into the forecasts of more than 3% average growth over the next three years.
Strengthening world demand, a competitive exchange rate, and low interest rates, mean good, positive conditions for exporters.
Already we have seen strong growth in tourism and manufactured exports. Tourism receipts were up 17% in the year to June from a year earlier, and exports of high value-added manufactured goods are growing by 15% a year.
These sectors are able to respond relatively quickly to the competitiveness boost from the lower New Zealand dollar and improving world demand. Both these sectors are expected to continue to grow strongly.
What has been holding back our exports recently has been the agricultural sector, which has suffered from two consecutive droughts. This was plainly evident in the June GDP result, where weakness in agriculture contributed to the 4.8% quarterly fall in exports.
In bringing together the PREFU numbers, it has been estimated by MAF and Treasury that the effects of drought have knocked $1 billion off farm gate returns since the summer of 1997/98. When you realise that figure multiplies through the economy, and remember that the Asian Crisis had huge impacts on commodity prices and industries like tourism and forestry, our economic performance over the last two years is understandable.
The outlook, thankfully, is for agricultural exports to recover. Already we are hearing what a good start to the season dairy production is having, and the livestock kill has rebounded from June's record low. As we move forward, with stock numbers rebuilding, the sector will shake off the effects of the droughts.
We will then get all of our export sectors pulling together. That is expected to lead to export growth of over 8% in the year to March 2001, and average export growth of 6% over the next three years.
On top of improving export volumes, the improving world environment is also expected to lead to a firming in commodity prices. That too will serve to boost our incomes from exports.
This means we are on the verge of our long-awaited export-led recovery.
Given the lag in data - we are now into the December quarter - it's probably underway now.
The improving economy will encourage firms to take up investment and employ new staff. Treasury predicts that 115,000 new jobs will be created over the coming three years. That's well over 700 new jobs a week.
Growth in employment and wages, and next year's tax cut, will support household incomes. Households are expected to continue spending. However, households have increased their debt levels through the 1990s. Their capacity to increase debt further is now more limited, and the effect of rising interest rates is likely to lead to a slowdown in spending growth in the final year.
The strong overall economic outlook contains one problem area. That is a short-term spike in the current account deficit.
Over the next couple of quarters, the current account deficit is expected to widen to 8.3% of GDP on Treasury's estimate. This deterioration is driven by a number of one-off factors. The import of the second ANZAC frigate in the December quarter will add around 0.6% of GDP to our import bill. Rising oil prices will increase the cost of our imports. And the improving profitability of the New Zealand economy after weakness in 1998/99 will see a recovery in returns to foreign direct investment in New Zealand.
Next year these one-off factors start to drop out, and export growth will see a turnaround in the current account deficit. By the end of 2001, the current account deficit is picked to fall to around 6% of GDP, and below that in the forecast period.
There are no quick fixes to the current account.
The current account deficit therefore is a reminder to this Government, and any would-be government, that the Government must be careful not do anything that might shake investor confidence. In the face of a large current account deficit we must continue to have growth-oriented policies and we cannot run lax fiscal policy.
This Government has proved it is commited to this through a record of good fiscal management. We have run fiscal surpluses for six consecutive years. And the fiscal forecasts released today reinforce this.
The fiscal position is expected to be broadly in balance in the year to June 2000. Beyond that, fiscal surpluses are expected to gradually build as economic growth boosts Government tax revenue, rising to $2.3 billion in the final year of the forecast period.
These forecasts show rising surpluses even after we have included next year's planned tax cuts and further increases in spending - a track of 10 consecutive surpluses.
The forecasts incorporate the tax reductions that we announced in July and will come into place from 1 April next year. These tax reductions will see the income tax rate for middle income earners fall to 20 cents up to a threshold of $40,000.
And they include an extra $801 million spending over the forecast period for health and education, including the health package announced at the weekend by the Health Minister. In addition, the spending forecasts include a provision for future policy decisions.
But the forecasts still show the Government continuing to reduce debt as a percentage of the economy.
Debt has fallen from 52% of GDP in 1992 to 22% this year. By 2003 debt is projected to be down to 17.8%.
In 1991/92, every New Zealand man woman and child owed $11,109. We will have that down to $5,469 in four year's time.
The interest on debt cost the country nearly $5 billion 10 years ago. This financial year, that will be down to $2.3 billion.
Debt servicing used to take more taxpayer money than we spent on education and health. Now the money we are saving in interest costs is seeing steady growth in education and health spending.
And because we are saving by lowering our debt, and because we are keeping our economy growing, we have cut and will continue to cut taxes.
Economic management is a key election issue.
Employment, growth, debt and inflation have been the four key concerns in this country for over 20 years.
They are still the vital issues. Everyone knows you cannot achieve anything when the economy isn't working, when people aren't working.
What this PREFU shows is that the economy will continue to grow, prices will remain stable, jobs will keep coming, and debt will fall.
The other parties cannot have it both ways. They can't argue the books are bad and at the same time say they will spend all the dividends of growth.
And if they really want New Zealand to get ahead they have to support policies that drive growth rather than choke it.
There isn't a single business or enterprise that will benefit from the policies Labour and the Alliance are proposing.
What we need is to build on the policies that got us here: policies that get government under control, and allow business to get on with the job.
This Government is building on these foundations. We've brought competition to ACC. We are working to get our agricultural industries and producer boards working more effectively.
We are reducing compliance costs for businesses by simplifying tax payments. Through our Bright Future package we are reviewing research and development, introducing scholarships to get more out of ideas, working through a tertiary review, and looking to get a lot more commercial benefit from the large sums of money the government has committed to research.
What's important is that business also works through the long-term changes that our economic framework has provided. For example, with low inflation, investment now has to be driven by real return rather than capital gain.
So of course there are still challenges. But as I said, whatever else we do must drive from our strong economic base. And policies must have the same goal we've had through the 90s - of increasing our sustainable growth rate. That's what creates jobs.
That's what lifts our living standards.
With this National Government's policies the first three years of the new millennium will provide:
* 10% economic growth
* 115,000 new jobs
* stable inflation - and low interest rates
* lower public debt, and
* lower taxes
I don't believe that's as good as it gets. That's merely the benchmark we are setting ourselves, and it's what you can measure our political opponents against.