07 May 2009
New Zealand’s Economic Prospects
Today represents an important milestone in the first term of the National-led Government.
It's around six months since we were elected. It is also three weeks until Bill English delivers our first Budget.
Given the state of the world economy, the red ink in the Government books and the tough choices facing Ministers, I could probably take this opportunity to complain about just how hard it is to be in government right now.
But I don't feel that at all. I feel as privileged to be leading this country today as I did the day I was elected.
What's more, I feel incredibly positive about New Zealand's ability to get through this tough time and to come out all the stronger for it.
I know it's hard for many of you at the moment. You may be losing customers, or having to cut costs, you may be worried about your job or the jobs of your employees. I share your concerns.
Despite this, I'm here to tell you why I think the future for New Zealand is still very positive, and why, in spite of everything, we can use this recession as an opportunity to boost our future prospects.
So today I'm going to talk about my hopes and goals for the New Zealand economy, National's plan for achieving those goals and the role Bill English's first Budget will play in getting us there.
Because in a turbulent world where all the economic news seems to be bad, it's easy to lose sight of where it is we are headed to, and the many reasons we have to be grateful.
What the Global Downturn means for New Zealand
Let's start by putting a little perspective on our current predicament.
New Zealand has not been as badly hit by this recession as many of the countries we compete with.
Unemployment in New Zealand was today recorded at 5%, up from the 4.7% it was measured at past quarter.
I am very conscious that this percentage represents real New Zealanders who are out of work.
Increased levels of unemployment are the harshest result of the global recession and I feel for those people.
The Government's Jobs and Growth plan aims to have as many people in work as possible during this recession, while ensuring recovery, and the jobs it will bring with it, comes as soon as possible.
It's no easy task, and I'm not going to stand here today and claim we have a magic wand that will create new jobs over night.
But we are very aware of the problem.
That's why we had a Job Summit to bring together ideas for pulling through the recession, it's why we've introduced a nine-day fortnight scheme, it's why we're fast-tracking infrastructure projects.
It's also why I've put such a priority on protecting entitlements and providing boosted support for those hit hard by redundancy, as provided by our ReStart package.
But amidst the gloom it's worth remembering that New Zealand's unemployment figures aren't as high as they are in Australia at 5.7%, the UK at 6.7% and the US at 8.5%.
This is small solace for those out of work, but it does show that New Zealand has not been as badly hit by the global recession as many other countries.
Similarly, our banking system is in relatively good shape.
Our retail deposit and wholesale guarantees are working.
Unlike Gordon Brown or Barack Obama's Governments, New Zealand hasn't had to pour hundreds of billions of dollars into bailing out collapsing financial institutions.
The reality is that banks in New Zealand are ranked amongst the best in the world.
The stability of our financial system gives New Zealand a huge advantage as we strive to get on top of this recession.
So does the make-up of our export base. Because in tough times people still have to eat. They still want our dairy products, our wine, our meat, and our fruit.
What they don't necessarily want to buy is LCD TVs.
This means that many countries have been hit much harder by the global fall in demand than New Zealand. Japan, for example, has experienced a 70% drop in car exports in the past year.
Alongside this, our exchange rate is working for us, with a falling dollar having made life a little easier for our exporters.
In addition, New Zealand's monetary policy is working well. Our interest rates had a long way to fall and they have fallen quickly, with the benefits flowing through to everyday Kiwi borrowers.
Since this time last year, the cost to Kiwis of paying off their mortgages has, according to some economists, dropped by about $4 billion.
That, combined with the billion dollars of tax cuts delivered in April, adds up to significant new funds available to New Zealanders who are looking for breathing space in this recession.
Those funds provide an economic stimulus but they do so in a way that doesn't distort the underlying incentives in the economy. While the UK has been pushing up the top tax rate, and the US has been bailing out car manufacturers, New Zealand has been able to stimulate our economy with growth-enhancing tax cuts and effective monetary policy.
Finally, while the Government books aren't looking as healthy as we would like them to, we will not be borrowing nearly as much in relation to how much we earn as the US, the UK or many other countries are planning to.
These factors - our relatively low unemployment rate, the health of our banking system, our export base, reductions in tax and interest rates and our Government finances, mean New Zealand is relatively well placed, despite the global downturn.
While things are tough, we are not experiencing nearly the level of economic shock as the US, UK or many other countries.
Against this backdrop then, the real question for New Zealand is not whether we will come through this recession. The question is how we can come out stronger, and better placed than before.
My job, and the job of my Ministers, is to spend every day focused on the answer to that question.
That is what we have done for the past six months, and that is what has guided us as we've prepared this year's Budget.
The good news is that we remain optimistic about New Zealand's prospects and we think that this recession can be a springboard for better times ahead.
We believe that by making smart decisions now and avoiding some potential pitfalls New Zealand can emerge from this recession much stronger than some of the countries we compete with.
But to do so, we need to remain focused on the big picture and we need to make the changes to the New Zealand economy that were needed before this recession hit and that are even more urgent now.
New Zealand's Longer-term Economic Prospects
Because this Budget isn't just about planning for next year, or the year after that. This Budget is about laying the path towards a brighter future for this country.
It's the promise of that brighter future that brought me into politics.
I have a very clear vision of where New Zealand can get to and what it is we're going to succeed at.
I believe we are capable of leap-frogging the other countries we compete with economically so that New Zealanders are much better off on a relative basis.
We can be wealthier than we are now, we can offer our children better opportunities, we can provide more financial security for our families, we can provide better-paying jobs for our young people and we can have better schools and better hospitals.
This can be a country that more New Zealanders living overseas want to come back to.
It's more than my sunny nature that's contributing to this optimism, although that helps too. But on any clear-eyed analysis of this country, it is obvious that our potential is huge but under-utilised, and that we have considerable strengths to play to.
We are experts at food production, and the growing middle classes of China and India are increasingly demanding better quality food products.
New Zealand has the potential to make much more of this market and to fill pantries and fridges throughout the world with high-quality, efficiently farmed products.
We are blessed with a beautiful landscape, a unique culture and a clean green environment that tourists want to experience.
We have only just begun tapping into the tourist markets in Asia, and if we can continue to grow those markets and encourage those tourists to spend more then it can have significant flow-on effects for the economy.
We have some of the smartest niche companies and entrepreneurs in the world. From specialist digital-effects producers to makers of merino clothing, our Kiwi ingenuity constantly shows what is possible on the smell of an oily rag.
Now ultra-fast broadband is the breakthrough technology that gives these firms, and others not yet imagined, the ability to overcome the tyranny of distance and to reach new consumers throughout the globe.
What's more we are situated in the high growth region of tomorrow's world.
Asia is shaping up to be the economic engine of the new century, with booming middle classes, increasing prosperity and an increased capacity to buy goods from the rest of the world.
New Zealand has strong and long-standing relationships with these countries, and we have laid the ground with the trading agreements needed to make the most of the opportunities they offer.
We already have free-trade agreements (FTAs) with China and the ASEAN countries, and we have begun negotiations for further bilateral FTAs with Korea, Malaysia and Hong Kong.
Taken together, I am in no doubt that we have much more to offer as a country.
But to make the most of our potential we have to improve the economic fundamentals of New Zealand. We have to make this a better place to do business, to invest, to work and to get ahead.
That's why our Government campaigned on a Jobs and Growth plan for New Zealand.
Our plan is comprised of a number of important goals.
They include reducing the tax burden, removing the regulatory road-blocks to growth, investing in productive infrastructure, putting discipline into government spending and improving frontline services, and lifting the literacy and numeracy skills of our young people.
National campaigned on making those improvements, and New Zealanders elected us because they wanted them done.
They are designed to improve our productivity growth and to ensure Kiwi businesses can produce more with the same amount of inputs, so that they can grow, create new jobs, invest and pay their employees more.
It's a plan that values enterprise and entrepreneurialism, that rewards people for effort and encourages them to get ahead under their own steam.
This is the brighter economic future National campaigned on, and it's the brighter future the National-led Government is determined to deliver.
The changed context
But there is no escaping the fact that the context for delivering this future has changed significantly since the General Election last year.
The reversal in the world's fortunes since that time has been dramatic.
In October 2008 the world economy was forecast to grow by 3% in 2009. By April 2009, that forecast had been replaced by a prediction that the world economy would shrink by 1.3% in 2009.
Worse still, the predictions for New Zealand's trading partners slipped from 3% growth in 2009, to a 2% shrinking.
Inevitably this means the immediate economic outlook for New Zealand has worsened in the short to medium-term.
Our economy has shrunk, businesses have made less money, wage growth has slowed, many have lost their jobs, and investments have lost value.
The Government has had a two-pronged approach to addressing these issues which has seen us taking immediate steps to take the sharp edges off the recession, while continuing to prepare the economy for future growth.
The immediate measures have been significant.
We've maintained retail deposit and wholesale guarantees for our banking system.
We've implemented a Restart package to help those hit hard by redundancy.
We've fast-tracked $500 million of infrastructure spending to stimulate the economy.
We've introduced a $500 million small business relief package.
And we've introduced a nine-day fortnight scheme to help protect jobs in stressed businesses.
The Government has taken all of these steps because we are determined to take the sharp edges off the recession and to get this country through the current downturn.
We've also resolutely stuck to our plan for strengthening the fundamentals of the economy, so that when this recession ends our economy can grow as strongly as possible and provide long-term jobs.
We have resisted the urgings of some to throw fiscal discipline and economic good sense to the wind, and we've continued to roll out the changes we campaigned on making.
We've introduced significant personal tax cuts, making a Kiwi on the average wage $18 a week better off.
We've got started on our Build New Zealand Infrastructure Plan by boosting state highway investment by more than $1 billion a year for the next 10 years, and we've layed out our preferred investment model for ultra-fast broadband.
We've been removing roadblocks to growth with a regulatory review programme, the introduction of legislation to reform the Resource Management Act and a plan for improved Auckland Governance.
We've started improving frontline services by putting a focus on value for money in government spending, and ensuring more resources are pushed to the frontline in the form of things like Herceptin medication and Plunketline services.
And we've brought a resolute focus to addressing the underachievement in too many of our schools by legislating for National Standards in literacy and numeracy and working with schools to implement them.
The 2009 Budget
These are just some of the steps the Government has taken to strengthen the economy since we took office.
This month's Budget will set out the next steps in our plan for the future of New Zealand's economy.
There's no getting away from the fact that this Budget has been prepared in much leaner times than I, Bill English, and indeed all New Zealanders had hoped for during the election campaign.
The Government's books give a very different picture than they did six months ago.
As you will have read about today, when we were campaigning in October 2008 the Government books were in surplus to the tune of $3.4 billion. They're now in the red by $7.7 billion.
The red ink includes $5.3 billion worth of losses on the Government's investments.
It's also the result of a falling tax take, almost $2 billion lower than forecast before the election and, to a lesser extent, increasing outgoings in the form of unemployment benefits, borrowing costs and other expenses.
While some of these losses will be recovered as the world economy comes right, there is still a growing gap between what the Government is earning in its tax take and what it is spending.
Bill English has already pointed out in recent weeks that with no policy changes in this Budget the Treasury predicts that New Zealand could expect to see annual deficits of $10 billion or more well into the future.
If New Zealand left that to happen Crown debt would blow out to 70% of GDP by 2023.
Bill has put considerable effort in recent weeks into spelling out what's causing the deficits, what they do to Government debt levels, and what they mean for New Zealand's future borrowing needs.
I don't want to traverse the ground again today, but rather to repeat Bill's point that the Government is determined to get those borrowing levels under control.
If we don't do that, New Zealand risks being pushed well back in the queue of countries needing to borrow money.
A credit downgrade of that sort would mean lenders would no longer see us as a good credit risk, they would be reluctant to lend us money and when they did, they would charge us ever-higher interest rates.
I don't want to see New Zealanders weighed down by that burden
So, as Bill has signalled, this Budget will see the Government taking some steps to get New Zealand's borrowing costs under control.
I make no apologies for facing up to this challenge.
New Zealand simply can't afford a runaway balance sheet.
In the end being a country is no different from being a household or a family: if you want to have the things that you think are important and deliver those things on a long-term basis, then you have to be able to pay for them. Not just this year, but next year and the year after that, and the year after that.
So the Government will make some responsible decisions in this Budget. These will include delaying some steps in our economic plan that we would have rather made sooner. They will also include reducing the amount of extra spending available for future Budgets and making some savings in less effective areas of government spending.
But we will make these decisions in a way that keeps New Zealand squarely on target for the brighter future we campaigned on.
And we will do so in a way that makes the very best of the tough economic and fiscal position we find ourselves in.
I want to make it very clear today that this will not be a doomsday Budget.
There is no way I will pull the rug out from under New Zealanders when they most need the Government's help.
In a time of economic uncertainty I think it's absolutely vital that the Government provide New Zealanders with certainty about the public services they can expect and the support they are entitled to.
In this Budget the Government will continue to maintain the entitlements New Zealanders rely on including unemployment benefits, Working For Families payments, superannuation payments and student support.
We will continue to fund the public services that New Zealanders have a right to expect.
In fact, we will be spending more than has ever been spent before on public services in health and education. That is because health and education are priorities for this Government and we recognise that they should be funded accordingly.
We will preserve entitlements and health and education spending because we believe it is fair on New Zealanders and because it is the responsible course for the long-term good of this country.
Maintaining government spending is also the right economic response to the conditions we face, because it helps stimulates demand in the economy, and ensures those who are hit hard by the recession are provided with the safety net they need to recover.
But this Budget will also start laying out changes to ensure we get more value out of government spending and to ensure that increases in expenditure actually result in better frontline services for New Zealanders.
Because, while the Government will be spending more in this Budget than it has in previous years, and while we will continue to do so in the years ahead, we simply won't be able to keep increasing that spending at such a rate as we have for the past decade.
That will require ending some government programmes and reshaping others. It will mean that just like any family with a big mortgage, the Government will have to carefully prioritise our funds and resist some luxuries.
I have no doubt that the opposition will snipe at this.
They can't help but see the world through the lens of the high-rolling economic times they grew accustomed to in government.
Under Labour, the operating allowance for new budgets - what they said they'd spend - averaged $2.96 billon over the past five years, while the final amount they spent was even higher at an average of $3.82 billion in the final year.
The world has changed, and that kind of additional funding simply won't be available to future governments.
Trade-offs will need to be made.
So the National-led Government will be working hard to get more bang for every taxpayer buck.
This Budget will also contain plenty of good news in the form of new measures for getting this economy moving.
These will relate to promises National and our support partners made in the election campaign and, in some cases, they will build on ideas raised at the Job Summit.
But most importantly, this Budget will start making the long-term changes that National promised to make and that are needed to lift New Zealand's long-term economic performance.
It will get us closer to realising the vision that brought me into politics.
But it won't get us there in one swoop.
In fact, it may not get us there as quickly as I had hoped.
But it will keep us on course, and it will do what is needed at this point in New Zealand's history.
It will put in place the immediate steps needed to take the sharp edges off this recession, to get through this downturn and to maintain entitlements and public services for New Zealanders.
It will begin consolidating the Government's fiscal position by taking steps to reduce our need for future borrowing.
And it will start making the long-term changes that National promised to make and that are needed to lift New Zealand's productivity, improve our competitiveness, sharpen up our economic performance and raise our incomes.
Ladies and gentlemen, when I look at New Zealand with my business hat on, I can see that for a country as blessed as we are and with the capacity we have, then there's no doubt that we underperform.
We are capable of doing much better, of making so much more of our considerable potential.
But we need to make some choices and we need to stay focused on the big picture.
It's all too easy to lament the tough conditions facing New Zealand.
I prefer to see these challenges as providing an even bigger prize for getting it right.
So when I look ahead to where we can be a decade from now I can say:
New Zealand is going to change the position we have in the world.
We are going to become wealthier on a relative basis.
We're going to have better living standards.
We are going to be more attractive to New Zealanders wanting to come home.
We are going to be a more successful place to house a business.
We are going to provide better opportunities for New Zealanders from all walks of life.
All of these things are possible.
And my sense is that if New Zealanders put those things together, and weigh up what they would mean for them, then there is no doubt that they will understand why the Government is working so hard to make the right decisions in this Budget.
These may be tough times, but the National-led Government remains committed to the goals it campaigned on.
Those are the goals and dreams that New Zealanders elected us to deliver.
That's why we're determined to deliver on the promise of making New Zealand a much better country.
Starting with this Budget, and continuing every Budget after that.