Hon Bill English
Minister of Finance

Pre-Budget Speech to the Wellington Chamber of Commerce

Members Gallery, Westpac Stadium, Wellington

Thursday 12 May, 2016

Good afternoon everyone. It’s a pleasure to be with you again.

Thank you to the Wellington Employers’ Chamber of Commerce for once again organising this pre-Budget lunch.

Budget 2016 will include a wide range of initiatives that build on the good progress we’ve made over the previous seven Budgets.

It will have a strong focus on investing in a growing economy – further advancing the work we’ve been doing to support a more productive and competitive economy through the Business Growth Agenda.

And it will continue our focus on delivering better public services – with additional investment both to meet the needs of a growing population and to support the most vulnerable New Zealanders.

But today isn’t about taking you through the details of what is in the Budget. That has to wait for a speech I’m giving in two weeks.

Instead, I want to set out the economic and fiscal context behind the Budget and take you through the sorts of discussions Ministers have had over the last six months.

But before I get into that, I’m going to talk about the Budget’s role in setting the Government’s agenda and driving performance from the public sector.

A FOCUS ON EXISTING SPENDING

As Finance Minister, I’ve actually been working hard to make the Budget less of a focus each year.

The Budget has proven very successful as a lever for constraining spending increases to help us return to surplus and begin paying down debt.

Putting a top-down limit on new spending through the Budget is important. But even more important is understanding and addressing the drivers of demand for public services.

And by that I mean the things that are causing people to need a benefit, require medical help, commit crime or spend time in jail.

The way our spending system works is that current funding levels are essentially locked-in, with no automatic increases for things like inflation.

Additional discretionary spending is limited by the size of the new Budget spending allowance, and each year Ministers consider options for how to allocate this allowance.

However, the new spending allowance is only a tiny proportion of the over $70 billion that the Government already spends each year.

Historically, a lot more time was spent focussing on the new money in each Budget, rather than the very large base of existing spend.

We’ve been changing that process.

Partly that has been through our programme of Social Investment, where the goal is to make sure the baseline spend addresses the drivers of social dysfunction, rather than simply servicing misery.

Instead of passively paying a sickness benefit for 40 years, for example, we want to take steps to intervene now to help vulnerable New Zealanders get a job, lead a better life, and save the Government money in the long run.

It’s about using data and investment techniques to understand how to change a life.

And this is already happening – although it doesn’t generate the headlines that the annual Budget does.

In the Ministry of Social Development, for example, all the funding to support people from welfare into work – that’s $700 million per year – has been pooled together to allow the Ministry to channel it to where it will be most useful.

This approach has been successful – the latest figures show the welfare system’s future lifetime cost has reduced by $12 billion over the last four years as a result of Government actions.

That’s the equivalent of 60,000 people each spending 15 years less on a benefit, compared to pre-reform expectations.

We can’t achieve these sorts of results by just focusing on the marginal spending available in the Budget once a year. We need to be reviewing what the Government already does.

HOUSING

It is a similar story in other important areas such as housing.

In the Financial Stability Report released yesterday, the Reserve Bank Governor was clear about the risks of house prices rising too quickly, and the need for that to be contained.

I agree with him.

Our longstanding view has been that what matters most for housing affordability is supply – particularly land availability, the speed and efficiency of consenting and council infrastructure.

Demand measures can help at the margin.

And in fact the Government already spends more than $2 billion a year on housing assistance.

In the end what matters most is the ability to build houses.

But this isn’t a problem extra money in the Budget can solve.

What makes building a house so difficult is principally the planning rules set by councils that restrict, delay and raise the cost of development.

Very little low-cost housing is being built. Just 25 years ago, around a third of new houses were priced in the lowest quartile of overall house prices. Today it is less than 5 per cent.

This is the consequence of planning rules that, for example, limit house heights, set minimum lot sizes and maximum site coverage, force high ceilings, and demand lounges that face the road.

Poor planning can lock low and middle income households out of affordable housing.

So when we talk about housing affordability, let’s be clear about what makes it difficult to build a house.

Let’s talk about the fact that consenting requirements can add up to $110,000 to the cost of an apartment in Auckland.

Let’s talk about the fact that the price of land inside Auckland’s urban boundary is 10 times higher than the price of land just outside it.

Let’s talk about land prices that have increased five-fold in Auckland since 1996 – and have quadrupled in Wellington and Tauranga.

These issues come as a result of council plans that restrict development.

We are currently building around 9,500 houses each year in Auckland – which is the highest rate of housebuilding there in eleven years.

However, we need on average around 13,000 houses each year in Auckland for the next 30 years.

The Government’s very clear expectation of Auckland Council is that it will approve a plan in August that delivers this.

It is for Auckland to decide how and where that target is achieved.

In the meantime, the Government has an intensive work programme underway alongside the Council to free up more land to increase housing supply.

The Auckland Housing Accord has seen almost 24,000 dwellings and sections consented in its first two years. The target is 39,000 consents before the end of this year.

Government development projects are expected to deliver at least 10,000 houses by 2020.

Later this year we’ll be passing amendments to the Resource Management Act, and the Productivity Commission is also looking at options for a long term replacement for our planning system.

But this is ongoing activity.

As Nick Smith has said, the Government is working on strengthening national direction on housing, which would force councils to release more land and stop the type of problems which have developed in Auckland.

And we will be scrutinising the Auckland Unitary Plan in a few months.

These aren’t issues that can be solved with more Budget funding. So our focus is squarely on continuing to work with councils to get more houses built.

ECONOMIC OUTLOOK

As part of each year’s Budget, the Treasury undertakes a relatively intensive process to update their view on how the economy is tracking.

Economic growth – and particularly the size of the nominal economy – impacts on government revenue.

Last week I was in Europe for a series of meeting with finance ministers and central bank governors. The broad consensus was that the overall outlook for the world economy is a bit weaker than it was this time last year.

Low oil prices are positive, but otherwise there are a number of significant factors weighing on global growth, including:

ongoing low inflation driven by low commodity prices,
weakness in developing economies, and significant recessions in Russia and Brazil, and
risks around China’s rebalancing from investment-driven to consumption-driven growth.
However back at home, the economic context for Budget 2016 is more positive.

The dairy sector is certainly struggling, with dairy exports falling by $3 billion in 2015. But New Zealand has a diversified economy and total exports actually increased by almost $2 billion over that time.

Tourism is performing well, with a record three million international visitors achieved for the first time in the last year.

Annual beef exports are now worth over $3 billion – up by more than 10 per cent in the last year.

IT exports have more than doubled since 2008.

And wine exports are now worth $1.5 billion, up 14 per cent in the year.

As the Prime Minister said in a recent speech, we are an open and confident country that backs itself on the world stage.

Exporters who were forced to become more efficient when the dollar was around US 88 cents are now able to reap the rewards of a much lower exchange rate.

Business investment has increased from $31 billion in 2010 to $41 billion last year – and that is expected to grow to $48 billion by 2020.

And the Performance of Manufacturing Index shows the manufacturing sector has notched up 42 straight months of expansion.

Economic growth in 2015 came in higher than most forecasts, at 2.3 per cent.

We have the unusual situation where this growth is happening alongside low inflation, which otherwise might seem a sign of economic weakness.

But in fact the labour market is relatively robust with over 200,000 jobs created over the last three years.

The proportion of all New Zealand adults who are working - and this includes retirees and students - is the third highest in the OECD at 65 per cent.

That compares to 61 per cent in Australia, 60 per cent in both the UK and the US, and 52 per cent across the European Union.

The average annual wage rose 2.3 per cent in the last year to $58,000 – and low inflation means most of this is going into the bank accounts of New Zealand families, rather than being eaten up by a rising cost of living.

Ultimately these benefits of growth are driven by businesses choosing to take a risk, investing another dollar and hiring another person.

I want to acknowledge the Chamber of Commerce’s work in promoting the Wellington business community and in advocating policy to enable businesses in the capital to invest, employ and grow.

The Government’s role is to get the policy settings right – and under Steven Joyce’s leadership we’ve got a busy programme in the Business Growth Agenda. The more than 350 initiatives include:

reducing annual ACC levies by around $2 billion in the last five years,
negotiating new free trade agreements, including the Trans-Pacific Partnership, to support the export sector and diversify the economy,
rolling out ultra-fast broadband as part of an $11.5 billion capital investment programme over the next two years, and
launching three new ICT Graduate Schools – including one in Wellington that opened last week - to help people obtain the skills needed in this growing industry.
Ensuring New Zealand stays on track for sustained, moderate economic growth will be a key focus for Budget 2016.

Treasury’s latest view of the real economy – the quantity of goods and services we produce – is for solid, sustained growth over the next few years. And it is the real economy that matters for jobs and wages.

Importantly, this growth is starting from a larger base as a result of stronger-than-expected economic performance in the second half of 2015.

This means that in contrast to the downturn in the global economic outlook, New Zealand forecasts for both real and nominal GDP have improved since the Half-Year Update in December.

BUDGET 2016

We’ve made it clear that getting the finances in order is a key priority for this Government. And we’ve made significant progress.

By keeping on top of spending, we turned an $18.4 billion deficit in 2011 into a small surplus last year.

The 2014/15 surplus target was an extremely effective tool. But with that target achieved, the Government is focusing more on repaying debt - and we’re less concerned with minor overs and unders in Treasury’s short-term OBEGAL forecasts.

Net Government debt increased from six per cent of GDP in 2008 to 25 per cent of GDP last year as a result of the Global Financial Crisis and Canterbury Earthquakes.

Although our debt levels aren’t high by international standards, we could be stretched if another economic shock or natural disaster hit.

So to prepare for the future, we are working to get debt down to around 20 per cent of GDP by 2020.

The Government’s tax take is driven largely by the size of nominal GDP – so the improved economic outlook will be helpful.

But this comes on the back of significant reductions in Treasury’s forecasts of nominal GDP – which have largely been driven by inflation continuing to stay lower for longer than any forecasters expected.

Spending pressures have also changed as a result of higher-than-expected population growth, and further opportunities to invest in better public services

As a result, the new spending allowances for Budget 2016 and Budget 2017 have been rearranged.

These were previously set at $1 billion for Budget 2016, and $2.5 billion for Budget 2017.

With the revised allowances, a portion of spending previously earmarked for Budget 2017 has been brought forward into Budget 2016 in recognition of the additional spending pressures.

Another portion of spending previously earmarked for Budget 2017 has been used to reduce government debt, to help reach the 2020 debt target.

The capital spending allowance - which is for one-off investments in infrastructure and other public assets - will also be lower than previously signalled to allow for more debt repayment.

However, a significant amount of additional investment will be funded by reprioritising within the Crown’s large balance sheet.

These changes to the allowances will reduce spending by around $1.2 billion over the next five years, helping to further reduce debt and meet the Government’s 2020 net debt target.

Lowering income taxes remains a Government priority. In particular we want to address the higher marginal tax rates faced by low and middle income earners as their incomes continue to rise.

However, as we’ve always said, tax reductions remain dependent on fiscal and economic conditions.

With continuing tight fiscal conditions, we don’t currently have an explicit provision for tax reduction in the fiscal forecasts

At this point, we’ve prioritised additional debt repayment over setting aside money in Budget 2017 for tax cuts.

However, we are still committed to cutting personal taxes over time, and will consider these – either in Budget 2017 or after – as and when the fiscal situation improves.

Ladies and Gentlemen, Budget 2016 will be focused on investing in a growing economy.

In particular:

Investing in a more productive and competitive economy that delivers more jobs and higher wages for New Zealand families.
Investing in health, education, police and other public services to ensure they meet the needs of a growing population, and provide better support for vulnerable New Zealanders.
And, like the seven Budgets before it, Budget 2016 will demonstrate our continued commitment to responsible fiscal management.

It will deliver on these spending priorities while still getting debt down.

Because this Government defines success by the results it achieves for New Zealanders – not by how much it spends.

Thank you.

ends

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