Rt Hon John Key
Prime Minister

John Key - Pre-Budget speech to North Harbour Club

Today I want to talk about the Budget, which will come out on 15 May.

This will be the National-led Government’s sixth budget.
Some of those budgets have felt at times like an exercise in crisis management.

So I take my hat off to Bill English, who has done a great job of steering the country through the recession, the global financial crisis and the aftermath of a very destructive and expensive natural disaster.

Everyone’s circumstances are of course different and some people are still finding it hard.

But on the whole, New Zealand has come through the trials of the past few years in remarkably good shape.

Yes, we have taken on more debt to protect the most vulnerable families, to maintain living standards and to support the rebuilding of Christchurch.

But that period is coming to an end.

Budget forecasts will show that in the coming financial year the Government is going to post a surplus, albeit a small one.

Once that has been achieved, we can start getting our debt down.

The Budget will show that we remain on track to reduce net government debt to below 20 per cent of GDP by 2020.

At the same time – over successive budgets – we have set out on a longer-term path to repair the damage to our economy from the excessive borrowing, consumption and government spending of the mid-2000s.

That path has involved reforms like the tax switch of 2010, that significantly reduced personal income tax rates across the board, and encouraged savings and work.

As I’ve said, the worst times are now behind us and the risks of another global crisis have lessened considerably.

So the Government’s focus has moved from managing our way through a recession, with persistent budget deficits, to managing a growing economy.

Initially, growth in the economy has been driven by low interest rates, high prices for our exports, a catch-up in housing supply and the rebuilding of Christchurch.

But this momentum has now turned into a much broader recovery where consumer and business confidence has lifted, employment is rising and wages on average are increasing faster than the cost of living.

Our focus is on sustaining economic growth over the medium term, so the economy doesn’t just burn brightly for a couple of years and then run out of oxygen.

Because when we talk about the economy – about things like GDP and the balance of payments – we’re ultimately talking about people’s jobs, their wages, and the costs they face in going about their daily lives and raising their families.

Therefore, it’s hugely important to continue the progress we’ve recently been making.

Over the past year, for example, 66,000 more people have got a job.

Average weekly wages have gone up 2.8 per cent, compared to inflation of only 1.6 per cent.

And the economy as a whole has grown 3.1 per cent – one of the faster growth rates in the developed world.

The Budget will show that this employment growth is forecast to continue and the unemployment rate is expected to fall.

Wages are forecast to continue rising faster than inflation.

And economic growth is forecast to continue.

So we are setting out to manage the growing economy with a five- to 10-year view in mind.

Our task is to take the opportunity of a reasonable growth outlook to deepen investment, upgrade skills, intensify and diversify our export base and become more competitive.

I want to talk about two aspects of that today.

The first is about maintaining our fiscal discipline so we don’t put upward pressure on interest rates and the exchange rate over the next few years.

And the second is about international connectedness and exports.

Firstly, on the Government’s fiscal strategy:

We have had an on-going commitment to discipline around government spending and that will continue this year, next year and for as long as we lead the Government.

One way to illustrate our approach is this – in the last five years of the previous Labour government, new operating spending each budget averaged $2.7 billion a year.

But in the five budgets of our government, new operating spending has averaged only $250 million a year.

So that’s less than a tenth of the rate of new spending under Labour.

In the last five years of Labour, government spending in total went up 50 per cent.

Bill English often describes that period as a kind of experiment to determine if indiscriminately spending large amounts of money would solve social problems.

Turns out it didn’t.

In contrast, we’ve had a different approach, which is to focus on what is really driving social outcomes like crime, welfare dependency and underachievement at school, and address those underlying causes.

That approach is delivering real results, without breaking the bank. In fact, over the longer term it saves money.

In prisons, for example, we have focused very strongly on literacy and numeracy, skills training, treatment for drug and alcohol addiction, working prisons and reintegration of ex-prisoners into the community.

That is giving offenders the opportunity to turn their lives around and stay away from crime.

Already this approach has reduced reoffending by 12.6 per cent, which is halfway to the target we’ve set ourselves of a 25 per cent drop.

So far, it has meant around 2,300 fewer offenders and 9,300 fewer victims of crime each year.

In welfare, we have focused on getting people off benefits and into work, because that is the best way to lift people and their families out of poverty.

This has involved an upfront investment in case management and support, but it’s expected to have a considerable pay-off as people leave life on a benefit to get established in full-time work.

Addressing these and other issues hasn’t meant big increases in spending.

In fact, we’ve found that the possibility of more spending can be a distraction from a growing focus in the public sector on solving complex problems rather than throwing money at them.

Government spending has actually been declining as a proportion of the economy, at the same time as we have been achieving these results.

In 2008/09, government spending came to 34.5 per cent of GDP. In the coming year it’s forecast to be 30.6 per cent before going under 30 per cent and staying there.

That is hugely important when the economy is on an upswing because – as the Reserve Bank regularly points out – on-going spending restraint from the Government helps to dampen the interest rate cycle.

The Reserve Bank has already begun to raise interest rates from the historically low levels they’ve been at, towards more neutral levels that aren’t going to over-stimulate the economy.

But keeping government spending under control means that, over the course of the cycle, interest rates will be lower than they otherwise would have to be, and for longer.

In turn, that helps to keep the exchange rate lower than it would be, which is important for the overall competitiveness of the economy.

If you want a real live example of the relationship between government spending and interest rates, think about what happened in the mid-2000s, when the Labour government was putting large cash injections into the economy.

Government spending overheated the economy so much that the Reserve Bank was forced to keep putting up rates, higher and higher, to get on top of it.

By 2008, households faced mortgage rates of almost 11 per cent. Business lending rates were also very high.

In the end, the country went into recession in 2008, well before the global financial crisis.

The National-led Government will avoid repeating the glaring mistakes made in the previous economic cycle.

While some increase in interest rates is an inevitable consequence of a healthy and growing economy, we need to do everything we can to help keep rate rises to a minimum.

And we believe we have the support of New Zealanders who can remember the dashed hopes of debt-fuelled growth and floating mortgage rates above 10 per cent.

So there is not going to be a lolly scramble in this year’s Budget. And we also won’t be doing that in the election campaign later this year.

In this year’s Budget we will be sticking to our new spending allowance of $1 billion.

Together with some sensible savings, this allows us to focus new spending mainly on health and education – which are always at the heart of our budgets – and on families and children.

And sticking to the allowance will enable us to post a small budget surplus in 2014/15, which we have long promised.

In future budgets, we will be posting consistent and larger surpluses. Those surpluses will allow us to begin reducing debt as a proportion of GDP.

This is what sensible and responsible fiscal policy is all about.

In difficult times, governments run deficits and built up debt, to support the economy and jobs. In good times, they run surpluses and pay down that debt.

The second part of this equation is just as important as the first.

There may also be an opportunity in the future for a very modest increase in the new spending allowance, as long as that doesn’t put pressure on interest rates in any material way.

But, at the risk of labouring the point, higher spending than that would be imprudent, and would lead to higher interest rates and a higher exchange rate than would otherwise be the case. And higher spending means you’re not paying down debt.

I said earlier that our task is to take the opportunity of a reasonable growth outlook to deepen investment, upgrade skills, intensify and diversify our export base and become more competitive.

So I also want to talk today about international connectedness and exports.

We all know that a big part of doing well as a small country is successfully selling our goods, services and ideas to the rest of the world.

That is why “building export markets” is one of the six areas we are focusing on in the Government’s business growth agenda.

This area of work involves a wide range of initiatives.

In our time in government we have focused on negotiating and implementing free trade agreements that lower and remove barriers to trade with other countries.

We have also put considerable effort into promoting New Zealand as a destination for tourists and students, and this is paying off. Tourist arrivals were up seven per cent last year – the highest annual growth rate in a decade.

We have launched the New Zealand Story, to help Kiwi companies tell a stronger story about New Zealand’s innovation, resourcefulness, our culture and integrity, and our beautiful landscapes.

We have extended important business-to-business and personal links through numerous Minister-led trade missions.

In the past four weeks alone, we have had Steven Joyce in Indonesia and Viet Nam; Tim Groser and Nathan Guy in South America; Bill English in Hong Kong; and Tim, Nikki Kaye and me in China.

My visit was important because China has now become our biggest trading partner, overtaking Australia.

In 2010, I agreed a goal with the Chinese leadership to double two-way trade between our countries to $20 billion by 2015.

That seemed ambitious at the time, but we’ve almost reached that goal already.

On top of that, there has been a doubling in the number of visitor arrivals from China and new airline links between our two countries.

So on my visit to China last month, President Xi and I set a new goal.

That new goal is to get two-way trade to $30 billion by 2020.

This will be a stretch, but it’s achievable because every year millions more consumers in China are reaching income levels where they can afford to buy our products.

China is also planning a rebalancing of its economy towards more consumption.

So that means it will be a stable and dependable source of export demand in the future.

Of course, we need to make sure we haven’t got all our eggs in one basket.

So we are actively promoting trade with a range of countries and regions, not just in China.

We are keen to broaden the range of products we export to China.

And actually, we are far more diversified now than we’ve been in the past, when exports to the United Kingdom dominated our trade.

This drive to increase and diversify our trade takes a lot of work by everybody involved, including the companies themselves, and our diplomatic, political and trade representatives.

New Zealand Trade and Enterprise is our trade organisation dedicated to helping Kiwi companies succeed overseas.

Because of our small home market, New Zealand companies often have to start exporting when they are much smaller than a company from the United States or Europe, for example.

NZTE helps our businesses by giving them a leg up – assisting them to enter and grow in international markets.

Under this Government, NZTE has had quite a makeover.

Its new Board and management have been doing a great job, and more and more companies are seeking its help as New Zealand businesses gain the confidence to market their products and services to the world.

Today I can announce a boost in NZTE’s presence in China, and also in South America and the Middle East.

This is about getting the right level of resources, in the right place.

I can also announce that NZTE will work intensively with up to 200 more New Zealand companies, to help them internationalise.

And there will be a lift in NZTE’s high impact programmes for sectors operating overseas.

Budget 2014 will contain new funding of $69 million operating over the next four years to enable these changes to happen, with $14 million funded from reprioritisation.

As a result of this new funding, NZTE will add seven new positions in greater China. This is on top of the 60 NZTE staff already working there.

And the announcement today follows one I made in China last month regarding a boost to our diplomatic and agricultural presence, with seven new MFAT positions and five new Primary Industries positions based in China.

And the rebuild of our Chancery in Beijing will make it New Zealand’s largest offshore presence.

In China, NZTE is experiencing increased demand from companies for assistance. It currently works with 150 customers who have targeted, intensive engagement in China.

The increase in staffing is also recognition of just how complex and difficult the Chinese market can be to break into and operate in successfully.

New Zealand companies receiving support in China often require greater levels of guidance and assistance compared to other markets, and require that assistance for longer periods of time.

NZTE will also boost its presence in South America with three new positions – one each in Brazil, Chile and Colombia.

And it will create two new positions in the Middle East – in Riyadh and Abu Dhabi.

There will also be some other smaller-scale rearrangements in NZTE’s footprint, with single positions, for example, being disestablished in Noumea and Karachi, and others being created.

Southeast Asia is another important market for New Zealand.

NZTE has already expanded in this region, including a new trade post in Jakarta.

And New Zealand’s relationship with the ten-member Association of South East Asian Nations has been receiving greater priority since the Government came into office.

There has been a significant upgrade in our ASEAN engagement in the lead up to the 40th anniversary of New Zealand’s partnership with ASEAN in 2015.

In 2013 we opened a new mission in Myanmar in preparation for their chairmanship of ASEAN, bringing our representation to seven of the ten capitals.

And today we have announced the appointment of our first ever dedicated ASEAN Ambassador.

This growth in our international footprint, particularly across Asia, South America and the Middle East, is all about our continuing drive to help New Zealand exporters succeed in international markets.

And as well as expanding its international network in areas of greatest demand and complexity, the new Budget funding will enable NZTE to deal in a more intensive way with more companies.

NZTE currently works intensively with 500 New Zealand companies. These are companies that have the greatest potential for high growth and have strong ambitions to grow internationally.

In the last year or so, NZTE has found that its resources have been stretched by demand from an increasing number of firms seeking to break into or expand international markets.

Therefore, the Budget funding increase will enable NZTE to intensively focus on more companies – 700 in all.

Finally, the new funding will also provide more money for NZTE’s high impact programmes in sectors such as health, wine, agribusiness, ICT, food and beverage, marine and aviation.

NZTE helps firms in these sectors work closer together to ensure New Zealand competes more effectively overseas.

Why does all this matter?

Well, to become a wealthier country that can afford higher incomes and better public services, we have to boost our trade.

That means more Kiwi businesses selling their goods, services and ideas into international markets, which creates higher paying jobs for New Zealanders and their families.

We have to grab these international opportunities as they arise, and that is what we intend to do.

Ladies and Gentlemen, can I conclude by saying that this year’s Budget will continue the Government’s careful economic management.

You will see us continue to keep spending under control.

That means we will be posting a surplus in the coming financial year and afterwards starting to reduce debt.

There won’t be a big spend-up either in the Budget or closer to the election, because anything more than a modest increase in spending will mean higher interest rates over the economic cycle than would otherwise have been the case.

And we need to get on and reduce our debt, instead of using taxpayers’ money in a series of election bribes, which is the opposition’s approach.

Instead of throwing money around, we are actually addressing the real causes of problems and we are having a great deal of success.

At the same time, we are prepared to invest in programmes that have a pay-off, either socially or economically – that support jobs and higher incomes and provide security for New Zealanders and their families.

That’s why we are investing $69 million over four years in boosting NZTE’s international presence and increasing the number of New Zealand companies it works with.

We are willing to be judged on our economic management when we seek a mandate for a third term at this year’s election.

We’ve proven we can be trusted and we deliver what we say we will.

Thank you.

Ends

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