[Full PDF Executive Summary See... http://img.scoop.co.nz/media/pdfs/0705/execsum07.pdf]
Minister’s Statement
Budget 2007 focuses on sustainability – ensuring our economy, environment, and social fabric are set on a course that
protects our future generations. This Government is committed to sustainable action on all those fronts when advancing
policies and initiatives in its Families – Young and Old, Economic Transformation, and National Identity objectives. In
the medium term we face particular economic and fiscal sustainability challenges. We have already acted to mitigate some
of these challenges – for example, by establishing the New Zealand Superannuation (NZS) Fund to address some of the
future costs of our ageing population. Budget 2007 is about doing more to meet these challenges, such as raising our
household savings and increasing productivity.
Medium-term challenges – saving and investing
Our household saving rate is low by world standards. There is also an imbalance in our savings with relatively high
housing investment compared with financial assets. This creates difficulties for us – it means our capital markets are
too shallow and we must borrow from overseas to finance investment in our businesses. Foreign lenders demand a premium,
so this borrowing not only increases private debt but also means we are paying a higher price for the capital we need to
grow our economy.
In order to drive economic transformation, New Zealand must clearly distinguish itself in the global economy as a
dynamic and competitive place to do business. We must increase incentives for investing and innovating in our economy,
which will drive the productivity improvements we need to take a sustainable step up in our living standards.
Short-term imbalances – current account deficit, higher inflation, high exchange rate
The strong growth performance over the first two terms of the Labour-led Government has come with short-term challenges.
Macroeconomic imbalances have emerged in the form of a large current account deficit, higher inflation, and a very high
exchange rate. These imbalances have resulted in tighter monetary policy, which given the recent increase in domestic
demand, is expected to persist. This will likely result in slower growth in the March 2009 year – but with imbalances
projected to ease, looser monetary policy is expected to see growth pick up in the year to 2010 as exports respond to
lower exchange rates.
The Government’s response – KiwiSaver and the Business Tax Reform
Budget 2007 responds to these saving and investing challenges with two key packages: significant enhancements to the
KiwiSaver scheme, and the Business Tax Reform.
In designing Budget 2007 we have had both the short term and long term in mind. In considering the short term, we have
been careful not to unnecessarily exacerbate imbalances in the economy. For example, KiwiSaver has been designed to have
little impact on short run demand and hence inflation. Our long term goals focus on improving growth through policies
that enhance productivity, innovation, and savings in New Zealand. KiwiSaver and the Business Tax Reform are both
targeted at these objectives.
Over the longer term, KiwiSaver and the Business Tax Reform support economic and fiscal sustainability by promoting a
stronger savings culture and encouraging greater investment to create a more productive economy, a deeper capital base,
and a more secure retirement future for all New Zealanders.
KiwiSaver was first introduced in Budget 2005 as a scheme designed to sustainably improve household saving and provide
New Zealanders with a more secure retirement future. Budget 2007 invests $3 billion over the forecast period to
significantly enhance the KiwiSaver scheme by introducing a tax credit for members that matches their contributions to
KiwiSaver up to $20 per week (about $1,040 per year), requiring employers to match employee contributions to KiwiSaver
(up to 4% of their gross salary), and introducing a tax credit for employers to offset the cost of these matching
contributions (up to $20 per week per employee).
The Business Tax Reform provides incentives for our businesses to increase investment, increase innovation, and increase
productivity. The package includes reducing the company tax rate from 33% to 30% (at a cost over the forecast period of
$2.1 billion) and also $630 million over four years in tax credits for research and development. These changes will
encourage the innovation we need to keep our firms dynamic, competitive, and productive. Budget 2007 meets the cost of
the Business Tax Reform package in 2007/08 and Budget 2008 will meet future costs.
KiwiSaver and the Business Tax Reform continue this Government’s focus on targeted assistance to individuals, families,
and businesses to achieve the greatest gains – in contrast with expensive across-the-board solutions, which have less
impact for those who need assistance most. Previous targeted initiatives include our historic Working for Families
package (Budget 2004) and our interest-free student loan policy (Budget 2006).
Further elements of the Government’s theme-driven agenda
Like Budget 2006, Budget 2007 advances key policies and initiatives in our three themes: Economic Transformation;
Families – Young and Old; and National Identity.
In addition to KiwiSaver and the Business Tax Reform, initiatives in the Economic Transformation theme receive $706
million of new operating funding and $835 million of new capital funding over the forecast period. Additional
investments into strengthening our firms’ international links and connections with the tertiary education sector
complement the Business Tax Reform. Key investments in environmental sustainability, energy efficiency, and addressing
climate change make a positive impact across all three themes – and also ensure New Zealand plays its part in creating
solutions for a global problem.
Social investment is a hallmark of Labour-led governments. The enhancement in KiwiSaver will help redress the widening
inequalities in wealth in our society. Budget 2007 also continues the social investment tradition by investing over $3.9
billion in operating funding and $414 million in capital funding over four years into Families – Young and Old
initiatives. This funding meets commitments to our support partners by raising New Zealand Superannuation to 66% of the
average wage and continuing to roll-out further frontline police. We are also providing further substantial investment
into health and education.
In Budget 2007 we are spending over $1 billion in operating funding and $33 million in capital funding over four years
on initiatives that advance our unique National Identity – overseas as well as at home. Budget 2007 builds our
international presence, by boosting our official development assistance and defence spending.
The Government has recorded operating and cash surpluses in recent years. Beyond 2006/07, the Government is forecast to
record cash shortfalls averaging $1.4 billion per annum for the next four years. As a result, gross sovereign issued
debt is forecast to increase in dollar terms but to decline as a percentage of Gross Domestic Product from 22.6% in
2005/06 to 21.8% by 2010/11, consistent with the Government’s fiscal strategy.
Hon Dr Michael Cullen
Minister of Finance
9 May 2007
ENDS