Hon Bill English
Minister of Finance

22 April 2009 Speech

Speech to CEOs and senior executives
Sky City Hotel, Auckland

Good afternoon – it’s a pleasure to be here today.

It’s always good to hear first hand from business leaders like yourselves about what keeps you awake at nights - and particularly how we in Government might work with you to steer New Zealand through what are clearly the most difficult economic times the world has seen in three generations.

I believe strongly in sharing ideas – no matter where they come from.

I don’t think governments over the years have been particularly good at doing that – we would like to change that, because we are all in this together, facing the same challenges.

You will find that this Government and its ministers are a pragmatic bunch. We’re keen to listen to good ideas that will make a positive difference.

This is a time for open minds and positive action – and we need open dialogue with a range of people like yourselves for that to happen.

During the new Government’s busy first five months in office, the economy has understandably taken centre stage.

Running your own businesses, you will be very aware of why that is. What started last year as a crisis in the financial markets of the United States and Europe has quickly developed into a concerted economic recession across the developed world.

The Government is confident about New Zealand’s prospects - we have a genuine opportunity to emerge from the recession in a stronger position than most other countries.

New Zealand has clearly not escaped the global downturn – but fortunately the impact here has been far less severe than we have seen in parts of the United States and Europe.

That’s due in large part to the stability of our banking and financial system, which along with Australia’s and Canada’s, are among the most stable in the world.

This Government came into office with a plan to lift New Zealand’s economic performance after a decade of under performance and missed opportunities. The deepening global recession has reinforced the need for us to implement that plan with even more urgency and focus.

Our plan to boost New Zealand’s economic performance has three themes:

1. Reforming or removing government regulations that were roadblocks to the economy

2. Investing in productive infrastructure to help lift our economic performance
3. And improving the business of government - providing better, smarter public services

In our first 100 days in office we focused on quickly implementing many of our pre-election promises - we were determined roll up our sleeves and get things done, rather than becoming stuck in endless consultation and strategy meetings.

We legislated for $1 billion worth of income tax cuts that took effect on April 1 – more than 1.5 million New Zealand workers will benefit from the cuts

We have started to reform unwieldy legislation such as the Resource Management Act – and we’re also moving on others such as the Overseas Investment Act, the Building Act and electricity market regulation.

We’ve brought forward nearly $500 million of roading, housing and school building projects that are ready to start immediately

We’ve introduced a $500 million assistance package for small and medium businesses.

And we’ve made it clear to the public service that we expect them to deliver better services with the same or fewer resources

Since the election, it’s become clear that the international economic downturn will be deeper and longer than just about any commentator had expected.

On that score, our Jobs and Growth Plan has two elements:

Firstly, to cushion the hardest hit New Zealanders from the effects of the recession. The Government is focused on helping businesses protect jobs – or giving New Zealanders who lose their job the best possible chance of finding a new one.

We’ve introduced the ReStart package to help workers made redundant as the recession bites;
We’ve cut income taxes as I’ve mentioned
We’re preserving entitlements such as NZ Super, Working for Families and social welfare benefits – this is important to us.
And the Government continues to spend more than it did last year, but with a sharp focus on reprioritising low quality spending into areas that make a positive difference to the economy.

New Zealand’s fiscal stimulus combined over this financial year and next will amount to about 5 per cent of gross domestic product – which is high by world standards.

The Government is borrowing a significant amount of money and pumping it into the economy to support jobs.

The second part of our Jobs and Growth Plan is setting out a credible road to economic recovery, so that we emerge stronger from the recession than we went into it. This includes longer-term measures to lift productivity, improve competitiveness and sharpen New Zealand’s economic performance.

Only then will we raise New Zealanders’ incomes and begin to narrow the income gap that has opened up with Australia and other trading partners.

Since 2000, we’ve managed to increase our national productivity by a meagre 1 per cent a year - well below levels of our trading partners and our poorest performance for 30 years. That’s simply not good enough.
A significant focus of our first Budget will be a credible plan for managing the Government’s debt

It goes without saying that the Budget is being prepared against a backdrop of global and domestic economic conditions considered unthinkable – even by the most pessimistic forecasters - just one year ago. Just about every unlikely event has occurred and every worst case scenario has become reality.

We are a small trading country and many of our trading partners are in worse shape than we are.

The economies of the European Union, the United States and the UK are forecast to shrink by around 3 per cent or more in the year to the end of April 2009.

The situation in Asia is even more severe – Japan and Singapore are facing economic contractions of at least 6 per cent this year, and Taiwan more than 5 per cent.

Australia’s economy, which is not yet technically in recession, is faring relatively better – its economy is seen slipping by just 0.6 per cent this year.

Who would have picked such a coordinated global downturn? New Zealand had already gone into recession before these other countries – we’re now in what we expect to be our sixth quarter of recession.

All of this means the Government’s books are undoubtedly in worse shape now than Treasury predicted in the December downside forecasts, with ongoing budget deficits and an expected doubling in Crown gross debt over the next three years.

To put the recession into context, using publicly available forecasts, we now expect the New Zealand economy to permanently lose about $50 billion of output over the three years to 2012, compared with what would have happened without the recession.

That’s $50 billion we will not recover as a nation – and $50 billion that cannot be taxed by the Government.

While the forecasting environment is uncertain and volatile, the arithmetic behind the worsening fiscal outlook is relatively simple. Like all households and businesses, if the Government spends more than it earns, we must make up the difference by borrowing.

Householders know all about that. They’ve fed their appetite for buying houses and consumer goods by borrowing ever-increasing amounts and pushing the current account deficit to a record $16.1 billion in calendar 2008 – or 8.9 per cent of GDP.

Fortunately, there is more recent evidence that New Zealanders are now starting to save and are reducing debt levels.

But the combination of an already high current account deficit and deteriorating Crown accounts leaves us especially vulnerable. That’s why we must act now.

When we lose $50 billion of GDP it makes its mark on the Government’s books. Our tax revenue and receipts for the eight months to February were $1.8 billion lower than forecast in the Pre-Election Update. Our revenue will remain under severe pressure until the economy recovers.

On the spending side, it’s now clear that year-on-year increases in Crown expenditure cannot continue at the same levels we have seen in recent years

Core Crown expenditure in the current year to June 30 is expected to be $63.5 billion – up $21.6 billion or 51 per cent in the past five years.

By contrast, the economy is estimated to have grown by just 23 per cent in that time – and tax revenue by just 24 per cent.

While the previous Government refused to use surpluses for tax cuts, they did use them for permanent spending increases.

The point I’m making here is that Government spending growth cannot continue at this rate, particularly with revenue falling so significantly in the current environment.

If we had continued on the same spending track, preliminary Budget forecasts showed recurring operating deficits of more than $10 billion a year indefinitely.

With no policy change, Crown gross debt would hit 45 per cent of GDP by 2013 –up from the main December forecast of 33 per cent. And it would exceed 70 per cent by 2023 – up from 57 per cent in the main December forecast. In other words, Crown debt would have jumped by more than $100 billion to around $135 billion by 2023.

Most worrying of all, debt would continue climbing, with no sign of levelling off.

At the predicted 2023 level, gross debt would equate to about $30,000 for every New Zealander and it would force the Government to pay an extra $8 billion a year in interest costs than forecast in the pre-election update.

In the Budget Policy Statement last December, we made it clear that the forecasts – even as they stood then - were unacceptable. The fact remains that every dollar borrowed today must be repaid eventually, with interest, by future taxpayers. It will represent a cut to their living standards.
Borrowing and hoping is not an option.

Many of you will remember the long and painful experience of paying down Crown debt in the late 1980s and early 1990s. We don’t want to be in that position again.

We’ve learned that getting debt down will put us in a better position for managing the next economic shock.

If debt was allowed to rise to currently forecast levels, it would eventually require radical steps to bring it under control. We will not let that happen.

I’ve said many times – and I’ll confirm this again for you today –this Government is committed to retaining social entitlements and improving public services. But to continue to do that effectively, we must take active steps to ensure that Crown debt does not get out of control.

The Budget will set out a plan to do that – and it will require some trade offs, which we will make.

There will be considerable new spending in this and future Budgets. But out of necessity, this rate of increased spending will be less than we have seen in recent years. We will also reprioritise spending to ensure we meet the commitments we made before the election and to maintain entitlements.

I will set out those parameters in the Budget itself – and I’ve set out a clear message of restraint to both Ministers and to public sector CEOs.

Furthermore, we’ll have to change the way we do things in Government. We will need to put a much sharper focus on improving the quality of our spending –delivering better, smarter services with little more money.

Public sector CEOs are taking a lead in this process. I am impressed with the way that Ministers and CEOs are taking a lead in this process. They understand that the restraint I’m talking about is permanent.

In preparing for Budget 2009, we’ve also focused on reprioritising large sums of low quality spending into higher priority initiatives. I’ve actually been quite surprised by how much of this low quality spending we’ve found and we’ll continue doing this in future Budgets.

Again, public sector CEOs are taking the lead in this.

Finally, we’ve also signalled that personal income tax cuts planned for 2010 and 2011 will go ahead only if we can afford them. The Government believes lower taxes will benefit the economy, but we must consider whether they can be afforded in the economic and fiscal environment that I’ve talked about today.

We’ll announce a decision about future tax cuts in the Budget.

So to summarise, the Budget’s on May 28 will have three main parts:

First, it will continue with the steps we’ve taken already to help New Zealanders through the current global downturn.

Second, it will put in place longer-term initiatives to lift productivity, improve competitiveness and sharpen New Zealand’s future economic performance
And third, Budget will take steps towards consolidating the Government’s fiscal position and implementing policy changes to ensure that growth in Government debt is minimised and brought under control.

Despite the tide of global and domestic bad news of recent months, I personally remain optimistic about New Zealand’s prospects. One of the reasons I say that is the resilience I’m seeing from New Zealanders as I visit businesses and talk to ordinary Kiwis across the country.

Most people are doing what they need to do to get through the current challenges. That wasn’t really my sense during the recessions of the 1980s and 1990s, when I remember feeling that many people were paralysed by the economic conditions and put off making decisions.

I’m not saying that the rest of 2009 and 2010 will be easy. Conditions will remain difficult. You will know that from your own businesses.

But the vast majority of New Zealanders, who have kept their jobs, have actually got a bit more cash in their pockets than they did six months ago.

They’ve seen the tax cuts introduced by the previous government last October; another round of tax cuts by this Government on April 1; and many people with a mortgage have already benefited from the sharp fall in interest rates triggered by the Reserve Bank’s unprecedented monetary policy easing.

The Government’s focus now is to build on those initiatives through a credible plan that will set New Zealand down a path of strong recovery, improved economic performance and rising incomes.

This Government is determined to do everything it can – recognising constraints imposed by the economic and fiscal environment – to help individuals and businesses meet the very real and personal challenges they face.

We have several goals in our sights:

• We’ll get our debt under control and turning down
• We’ll help create new jobs to replace those being lost in the current market
• We’ll improve New Zealand’s international competitiveness
• We’ll create an environment where businesses thrive and where people want to live and work
• We’ll raise New Zealanders’ living standards
• And we’ll create a government sector that provides better services and delivers better value for taxpayers.

The Prime Minister has made clear this Government’s aspirations for an economy that values enterprise, rewards people for effort and encourages them to get ahead under their own steam.

In the current environment, that will be challenging – there is a huge degree of uncertainty about how long the recession might continue. But we’re up for the challenge.

We have a unique opportunity to improve New Zealand’s standard of living and economic performance relative to other countries.

The National-led Government intends to take that opportunity.

As I said earlier, I believe that with the right plan, New Zealand can come out of this recession in a stronger position to maximise future growth.

The Budget next month will provide the next steps in that plan and set out a credible road to recovery that New Zealand needs and deserves.

Thank you.

ENDS

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