David CUNLIFFE Finance Spokesperson, 17 May 2011, SPEECH
Owning our future
Introduction
It is two days from the crucial 2011 Budget and, as expected, the parameters of the debate are now clear.
This is a Budget likely to bring in cuts that will hurt hard working New Zealanders but won't solve the country's
underlying economic problems. It is likely to fail both the tests of fairness and sufficiency.
The Government has been undertaking its usual pre-Budget softening up exercise, pointing to the size of the deficit and
the growing debt mountain, both of which are real and driven by choices as well as external shocks.
Citing "poor economic conditions" they are preparing the public for cuts to services like health and benefits like
Kiwisaver and Working for Families, contrary to 2008 election promises.
On the day no doubt there will be some minor silver lining in the clouds, and the Government will hope that its
consolidation will be enough to please the rating agencies and not too much to polarise the electorate.
Such is the politics of their supposed "middling" approach to things.
The question before all New Zealanders is, however, much bigger and deeper than this.
That is why commentators as far apart as the Council of Trade Unions, Fran O'Sullivan and Standard and Poor's are all
questioning the underlying logic of what looks like coming.
Economies do not exist in isolation and they are not ends in themselves. They are part of our society (and ecology) and
through them we hope to provide a better life for our people, now and into the future.
Will this Budget make a positive difference to turning this economy around? Will it provide a sustainable pathway to
that better future?
Will it restore business confidence and improve productivity?
Will it improve export performance and thus the current account?
Will it cut the private savings gap and sustainably reduce our dependence on imported capital?
Will it translate the benefits of business growth into improved conditions for Kiwi households and families so that they
can improve living standards and put more demand back into the domestic economy?
Sadly, the answers to these more fundamental questions do not lie simply in a deficit reduction programme, whether it is
mild, moderate or more radical.
It is therefore unlikely they will be resolved in this most crucial Budget, and that time will continue to run out on
our hopes for the future.
That is why, given the magnitude of the debt mountain in front of us and the depth of the rut our real economy is stuck
in, Labour believes that now is the time for boldness, for decisive moves that will actually fix the structural problems
holding us back, not slap on a coat of paint, or pretend that merely balancing the Crown accounts is a substitute for
structural change.
Without that, whatever the immediate reaction on Thursday, this government may end up selling out our children's futures
for generations.
We cannot allow that to happen. We must rise to the new challenges of our times. We must do so in a way that is both
sufficient and fair.
Outline
In light of this challenge, I am going to focus today on the question of what a good Budget should look like, and what
Labour would do to produce one.
I will not be announcing election policy but I will be giving a clear indication of the economic problems that we are
determined to tackle.
In doing so I will briefly recall how the current set of choices have arisen.
The key messages we want you to take away today are simple:
* A good Budget would have to rebuild and reorient our economy towards exports and sustainable high-value production and
employment;
* A good Budget would rebuild savings and redirect investment to its most productive uses, not see it drain offshore or
be wasted on property speculation;
* A good Budget would lift living standards for all New Zealanders and not just a few, and would provide some urgent
relief to the acute of living pressures being felt by many;
* And a good Budget must reduce debt over the medium term to ensure that we are living within our fiscal means, which
means being real about priorities and the need for everyone to pay their fair share...
Given the magnitude of the debt mountain in front of us and the depth of the rut our real economy is stuck in, now is
the time for boldness, not tinkering. It is a time for fixing the structural problems, not slapping on a coat of paint
or spin. It is a time for tough decisions, not lollies.
The Problem
In just 30 months, National has borrowed more than $36 billion; $16 billion in the past year alone.
Mr Key and Mr English blame their borrowing on the Canterbury earthquakes. That is an insult to the people of Canterbury
and to the intelligence of all New Zealanders.
We know the Government was borrowing $300 million a week before the earthquakes. Less than 10% of the money National has
borrowed so far has been to cover earthquake costs.
When we look at the real reasons for this record deficit two things stand out.
First, National has mismanaged the economy. The weak recovery that began in 2009 stalled completely in early 2010, well
before the earthquakes.
We are now going backwards while National does nothing. This has created a huge hole in the tax take that National is
plastering over with increased borrowing.
Second, National's tax cuts for the wealthy were unaffordable and misdirected. $23 billion has been borrowed for tax
cuts skewed to the top end of incomes.
People with very substantial incomes, are receiving hundreds, sometimes thousands, of dollars a week in tax cuts - every
cent of it borrowed and to be paid off by the next generation - a great legacy for our children and grandchildren.
National's solution to the situation it has created is wide-spread spending cuts that will affect the things that will
help us get back on our feet - like KiwiSaver, which allows all New Zealanders to make regular contributions with a mix
of their own deductions, government and employer contributions.
But the problem is not just that the current government's cuts will damage our recovery. The problem is that there is no
sign of a coherent strategic plan to address the underlying drivers of failure that have led us into this very difficult
situation
So if this is the problem, a mountain of debt and inadequate structural change to solve the underlying problems what
then would a good Budget look like? It must be fair to all New Zealanders and it must get the economy moving forward. It
must be strategic in that it must address the key drivers of productivity, exports, capital adequacy and growth.
Building a stronger economy
A good budget would..
First, a good Budget must be a budget that is good for the real economy.
A good Budget would build genuine productivity growth by addressing shortages of skills, technology and capital. It
would bring back apprenticeships and address the fact that nearly one in three Maori or Polynesian school leavers
graduates straight to unemployment.
It would rekindle the innovation engine that was undermined by the cutting of R tax credits. Instead we should be getting behind innovators like Lanzatech, or Rakon, or Fonterra's Via Lactia, or the
geothermal expertise contained in Mighty River Power and others.
A good Budget would bring down a credible plan for small and medium business development that addresses critical
shortages of capital at start up, scale up and internationalisation stages.
A good Budget would address the urgent problems of exporters trying to fly against the headwind of a volatile Kiwi
dollar currently trading around all-time highs of 80c to the USD.
Labour Will
Labour will build a strong export economy with more good jobs. It will do so with an aggressive programme of economic
development, innovation and monetary reform that will unleash the potential of the real economy. My colleague David
Parker will provide more on this shortly.
You are at the front end of the real economy. You know that the problems before us are real. The slope we must climb to
get our country out of the rut of decline is steep.
Labour will take seriously the problems of New Zealand's export community who have been battered by high and volatile
exchange rates. We announced over a year ago that we will be departing from the previous monetary policy consensus and
at the time that sounded radical.
Since then the IMF, the Basel banking committee, the OECD and the Reserve Bank - among many central banks, have quietly
moved towards doing just that.
Specifically Labour will amend the Reserve Bank Act and the policy targets agreement to better balance the objectives of
employment and growth while retaining a primary focus on price stability and the current 1-3 % target inflation range.
We will retain the operational independence of the Reserve Bank.
We will provide explicitly for macro-prudential policies like core assets and liquidity ratios and for their potential
use as counter cyclical tools to address future property bubbles and to assist the OCR to achieve macro-economic
adjustment.
Monetary policy can in short make an enhanced contribution to our broader economic goals.
Labour will implement an active economic development strategy in partnership with business, to lift the performance of
key sectors and to unlock untapped opportunities.
We will place more emphasis on economy-wide programmes - for example, tax incentives for R and D and will incorporate
sector based strategies where these have high potential to add value.
Renewable energy and clean technology are areas where New Zealand has a pre-existing brand advantage and a strong group
of companies able to move forward.
Labour will not forget that a vibrant commercial sector must include dynamic pathways for small and medium enterprise.
We are well aware of the constraints imposed by difficulties accessing capital at the start up scale up and
internationalisation stages.
Owning our Own Future
A good budget would..
A good Budget would address the critical shortages of local capital that are keeping businesses too poor and interest
rates too high.
It would contain a strong, credible package to lift private savings. Further undermining Kiwisaver, the most successful
savings programme New Zealand has seen since Mr Muldoon killed the last one, would have to be the antithesis of a strong
savings policy.
And let's not forget that Kiwisaver despite being relatively new has earned the active support of 1.7 million New
Zealanders, who trust it to provide a secure and affordable means of building relatively secure financial assets for
their future.
A good strong policy mix to encourage saving and get the incentives right for investment to flow to its most productive
uses, will mean New Zealanders will be able to own more their own future, both as individuals and as a country.
We do not object to productive foreign investment; but we do not want to live in an economy that is largely hollowed out
of ownership of its most productive strategic assets. David Parker will expand on this shortly.
The government is arguing that cutting the fiscal costs of savings incentives fixes the saving problem by "saving" for
the Government, but this is ludicrous. After all, 90% of New Zealand's net international debt is private and only 10% is
public - the key driver must be private savings rates.
That means more active work is needed to rebalance private borrowing. The housing bubble is still with us, and to be
fair, its magnitude was underestimated worldwide during the last decade, including by the fifth Labour government here.
With house prices still overvalued according to the Reserve Bank we face a decade of decay and stagnation unless the
underlying drivers of capital allocation are addressed.
Labour Will
Labour will help all Kiwis to own their own future through increased savings and appropriate protection of strategic New
Zealand assets.
Labour will not strip KiwiSaver but will build on it and broaden it into an even more effective vehicle to lift New
Zealand's crucial savings rate while providing every Kiwi family with the opportunity to secure their future.
National's intended cuts to KiwiSaver have dismayed the 1.7 million New Zealanders in the scheme.
They have drawn criticism from everyone from us and the CTU to Standard and Poors. Labour's savings policy will be
announced once we see the Budget baselines and the full extent of National's plans.
Labour will stop the sale of state owned enterprises. We will prevent the indiscriminate sale of farmland of more than
5ha.
Labour will ensure the sustainability of New Zealand superannuation by resuming prefunding through contributions to the
NZ Superannuation Fund.
And Labour will work to put owning your own home back within reach of average income-earners.
Raising Living Standards
A good budget would..
The third thing a good Budget would remember is that the economy serves our way of life; not the other way round.
Increasing inequalities creates for our society an ever-increasing burden that we must address. Shifting resources from
lower and middle income earners to the top end of the scale, as has been done in the last two Budgets, is both
recessionary and regressive. It's not just the tax cuts - it's taking money out of early childhood education and adult & community education and putting it into private schools.
There is strong empirical evidence that more equal societies perform better economically as well as socially. Ensuring
adequate demand is in the wallets of middle and lower income families is a crucial economic as well as social objective.
So deep cuts to Working for Families would take us in the wrong direction. A good Budget would provide immediate relief
to those struggling to feed their families and would put in place a credible medium term strategy to lift living
standards across the board.
Labour Will
Labour will help all Kiwis to get ahead by lifting living standards, giving real relief from the rising cost of living,
and introducing a fair tax plan.
We have already announced plans to zero-rate GST on fresh fruit and vegetables; and to work towards a $5000 tax free
zone.
We have also indicated we will ring fence property tax losses and will focus carefully on avoidance issues to improve
the fairness of the tax system.
Labour will carefully review key utility markets, including worrying signs of monopoly rents in electricity markets. We
will review the Government's misguided broadband plan and will repeal the ridiculous and globally unique 10-year
regulatory holiday on broadband fibre.
Labour will bring down a fair tax package that will ensure a broad and sustainable tax base, and will contribute to
aligning the economic incentives with New Zealand's strategic economic needs. A good Budget would be fair to all -
giving every New Zealander a fair go - the opportunity to do better, but also expecting everyone to play their part in
the rebuilding of our battered economy.
That includes, frankly, paying a fair share of the tax burden rather than - for some - structuring businesses that do
not show income, sheltering income in trusts, or pretending not to trade property after buying and selling a dozen
rentals. Those folks have fair warning that we are all in this together and that they too will pay their fair share.
Reducing Debt
A good budget would..
Fourth, of course a good Budget must be underpinned by a fiscal strategy that contains debt within acceptable levels and
manages it down across the business cycle.
That does mean responsibly seeking excellent value for money in all that the state does.
It does not mean demonising the public sector, nor pretending that this debt reduction can be achieved simply by
shifting resources to the so-called front lines or dispensing with the so-called "nice to have's".
Is early childhood education a "nice-to-have" or a smart investment? Or investment in clean technology? Or early
detection of cancers? Or preventive dental health in schools?
Labour Will
Labour will again demonstrate prudent fiscal management that will manage down net debt including Crown financial assets
across the business cycle.
We did that during the last Labour Government where we ran a net capital surplus in under a decade.
Labour will ensure that public investments are wise, well managed and measured.
Labour will ensure that everyone gets a fair go, and that everyone pays their fair share.
But Labour will not pretend that fiscal management is an end in itself - it is simply the financial framework through a
wider programme of economic and social rebuilding must be achieved.
Labour will bring to the 2011 general election a responsible, fully-costed policy budget package. We will not be
releasing that this Thursday. We need to carefully consider the revised Budget baselines and work them through our own
investment plans.
We will release our policies systematically, once that due diligence has been completed, over the next few months.
Summary
This week, as you assess the current Government's third Budget, ask yourselves whether if meets the test of courageously
addressing the structural problems, and prudently managing our resources for everyone while acting as a platform for the
future.
Labour is laying down four tests for you to view the current Budget against:
* Does it rebuild and reorient our economy towards exports and sustainable high-value production and employment?
* Will it rebuild savings and redirect investment to its most productive uses, or will it see more drain offshore or be
wasted on property speculation?
* Will it help to lift living standards for all New Zealanders and not just a few, and provide some urgent relief to the
acute of living pressures being felt by many?
* And will it reduce debt over the medium term to ensure that we are living within our fiscal means, which means being
real about priorities and the need for everyone to pay their fair share the necessary structural changes required to get
our economy on a better footing for the medium term?
These are the key tests for economic policy in this week's Budget.
It has to grow our economy in a sustainable way.
It has to see our savings grow and our debts fall, so more New Zealanders can own their own future, and so that as a
country we can own our own destiny rather than see it hollowed out and sold off to foreign control.
It has to focus on the creation of well-paid jobs, so that people will stay here to work and to live.
And it has to ensure that ours is a more equal society, where all children regardless of the circumstances of their
birth have the opportunity to achieve their full potential in life.
Because as I said at the start, the economy must support our New Zealand way of life and must be a legacy for the
generations that follow.
Conclusion
To conclude, there is a widespread sense that this year we stand at a hugely important crossroad in our history. We face
serious challenges as an economy and as a nation.
It seems that the political choices are becoming much more stark.
48% of new Zealanders think the economy is on the wrong track, compared with only 34% who think it is on the right one,
according to Horizon polling.
People are looking for answers, for straight talk, and a recognition that things need to change.
So here is some straight talk from us. Labour will not pretend that the fiscal situation facing New Zealand is not
serious. We are clear that tough decisions need to be made, and Labour in government will make them.
We will not oppose prudent fiscal measures just because they involve cutting spending.
But we will relentlessly expose the hypocrisy of those who preach restraint to the squeezed middle class while
practicing favouritism to themselves and to privileged constituencies who either don't pay their fair share or who need
help the least.
And we will not allow the government to pretend that fiscal entrenchment is a substitute for a proper economic strategy
that will address the key drivers of growth.
There is a real danger that Budget 2011 will be neither fair nor sufficient.
Unfair to those who need help the most and insufficient to achieve the dynamism our economy so badly needs.
That would not be good enough.
Not good enough for struggling families.
Not good enough for struggling businesses.
Not good enough to own our own future.
Thank you.