Monday 28th May 2001 Richard Prebble Speech -- Economy

What to say of this budget. Well the first measure of any budget is what do the MPs themselves think?

I have heard 23 budgets. Budgets are by tradition heard in Parliament in silence by a full house. Normally every seat in the public gallery is taken.

Last year the gallery was full. As the Labour/Alliance MPs came into the House last year they were cock-a- hoop.

As Michael Cullen read out the ambitious spending proposals to close the gaps, the Labour backbench could not restrain itself. The Finance Minister's speech was broken up by repeated rounds of applause and even the public gallery joined in.

The Coalition was in a triumphant mood. There was no doubt that Labour, Alliance and Green MPs liked Michael Cullen's first budget. The budget is followed by the leaders’ speeches - the Leader of the Opposition, the Prime Minister, then the parties in order - the Alliance, ACT and Greens.

Again, last year, Helen Clark and Jim Anderton gave the defeated National Party a verbal blasting - Labour MPs cheered every line of Helen's speech.

MPs are weathervanes, straws in the wind. If they think things are going well they crowd into the Chamber. If it’s unpopular, no amount of whipping can get them to sit in Parliament.

As a Minister you can tell if you're doing well because the MPs, by some sixth sense, come down to the Chamber to listen. When you are announcing some good news your side of the Chamber fills with MPs keen to bathe in the popularity.

The converse is also true. The first a Minister knows that the tide is running out is when your own MPs fail to come to the Chamber to hear you. Budget Day, according to the Parliamentary opinion poll, was a turning day for the coalition. The public gallery was half empty. The Press Gallery, where normally every journalist is also listening, was nearly empty.

As the MPs came in the government MPs, who I presume had their normal pre-budget briefing, were talking in a very animated way. I think trying to decide what to make of what they had been told. The Chamber is not a large room. Government and Opposition MPs face each other, only two sword lengths apart. So we see each others’ body language. Over time you can read the mood.

Labour, Alliance and Green MPs were confused and bewildered by the budget. For some, this has become a frustrated anger. There is no enthusiasm for the budget.

Thursday’s budget was the first time I have listened to a budget when the government backbench has not found something in the speech to interrupt with applause.

At the end, Michael Cullen received the traditional standing applause, though Willie Jackson and John Tamihere made their disapproval plain by refusing to either applaud or clap until the Opposition loudly pointed out their abstention.

Jenny Shipley gave a good opposition rebuttal, frequently broken by spontaneous applause from an Opposition that senses victory.

Helen Clark could not turn the mood of the House. Helen is not a great Parliamentary speaker. She is no David Lange or Mike Moore.

The Opposition openly jeered at her and the Speaker had to come to her rescue. The Speaker never had to rescue Lange or Muldoon. What Helen demonstrated to her MPs is that she cannot sell this budget. If the Prime Minister can't sell it, none of her backbench can!

When the first backbencher to speak rose, by tradition the Chair of the Public Expenditure Committee, Mark Peck, the total government backbench was absent. There were more Opposition MPs than government. The budget had failed its first crucial opinion poll test.

There is nothing in this budget to stop the steady slide in the coalition's support. So why don't the government backbench like the budget? MPs listen to the budget to see how they can sell it to their voters. When Michael Cullen said, and I am quoting: “we are therefore producing an additional financial indicator, the OBERAC”, I could see a look of despair on Graham Kelly’s face as he wondered how he would explain this to the Porirua LEC.

While the average MP is economically illiterate and has difficulty in balancing a cheque book, MPs have a highly developed sense of smell.. Being in the selling game they can spot deceptive packaging immediately.

They know the idea that this budget will transform the economy is horse manure and an unsaleable proposition.

There is not one backbencher who believes that this budget will transform the economy. I think there is only one MP who believes it will, and that is Jim Anderton.

It is said that parties begin to die when they swallow their own propaganda. Jim's swallowed the whole bottle and his own MPs believe he is completely detached from reality.

So let's start with the budget's claim that it will transform the economy. Michael Cullen failed to present a coherent strategy for transforming the economy. His words were: "we need to set ourselves a goal of being back in the top half of the developed world in terms of GDP”. But did not actually set such a goal. He said: "even if we set the target for achieving that goal well into the future, it still means lifting our present sustainable growth capacity from about 3% a year to 4% a year or more”. He then dismissed even this modest goal by saying: "it would require something like the doubling of our productivity growth rate to levels not experienced for any extended length of time since the 1950s”.

If the Finance Minister does not believe the goal, no one else will. New Zealand is actually growing at just 1.6% - less than half the OECD average.

The coalition failed to achieve its last year's growth prediction of 3%. New Zealand today is ranked 20th in per capita income. Spain, Portugal and Korea, who are behind New Zealand, will overtake us, even if the government achieves the 3% growth target it failed to reach.

The reason the Finance Minister did not set a goal of reaching the top half of the OECD is because even at 4 percent growth, it will take 31 years. Or put it another way. Dr Cullen is asking to be Finance Minister until he is 88 years old, at which time he will have reached his economic goal.

Dr Cullen, having failed to set a clear goal and a measurable benchmark, instead falls back into cliches. He says, let me quote, that the budget will “create high-value, high technology, high wage jobs”.

The only measure announced in the budget to achieve this is the New Zealand Venture Investment Fund. The money is taken from the Crown Research Institutes - so there is less money for research, and from the State-Owned Enterprises - so it's from higher electricity prices.

The only other funding is $194 million over four years to fund Jim Anderton's business welfare. It works out at less than $40 million a year.

New Zealand has a $100 billion a year economy. Just to stand still the country needs to invest at $18 billion a year. To grow sustainably at 3% a year we need to invest over $25 billion.

Air New Zealand alone has said it needs to invest $500 million a year in new aircraft. The absurdity of the proposition that $40 million a year can transform a $100 billion economy, can be seen even by the innumerate.

So the budget fails by its own terms. Let me now deal with the question that has the government MPs baffled. Where has the money gone? How come after lifting the top income tax rate by 18%, and having slapped a $100 million tax on smoking, there is so little money?

One could feel the government Maori Caucus anger when Michael Cullen announced a mere $3 million for Maori, called an “economic empowerment".

The money has gone on two items. The largest single increase in this year's budget that did not get a mention is welfare expenditure. Welfare expenditure is $585 million more this year than last. The 3.9% indexation of benefits alone cost $500 million. Welfare now takes nearly 40% of the budget. It should be renamed the "Welfare and Other Matters Budget."

The cost of having 430,000 people on benefits, of having one adult in three on State assistance, is unsustainable.

The second item is the first payment into Cullen's State Superannuation Fund of $600 million. Next year it doubles to $1.2 billion.

As the government intends borrowing $3.5 billion and repaying just $2.6 billion, the reality is Michael Cullen is borrowing the $600 million for his Super fund. Every financial planner advises against borrowing to invest.

This is Nauru Island economics. The Nauru Islanders received payments for their phosphate and set up a government fund to invest it for the future. Of course the government blew the lot!

For the $600 million to achieve a positive balance the government will need a rate of return of over 8% - something many private funds fail to achieve.

The third problem that Cullen has is that his tax revenue forecasts have turned out to be hopelessly optimistic. Future tax revenues are being consistently revised downwards. It's now clear that every taxpayer who could be paid early before the new 39 cent rate kicked in, did so. This boosted tax revenue.

It's also clear that this lead Treasury and IRD to overestimate future tax revenues. Tax revenues are predicted to be $667 million less than forecast.

It's my view that the downward revisions have not finished. With income tax at 39 cents and the six cent difference to companies, aggressive tax planning is worthwhile.

The work of economists like Patrick Caraggata predict that an increase in the top rate of tax in New Zealand will not only fail to raise any more money, the long term affect will be a reduction in economic activity and so less tax revenue.

Despite the strong rise in farm incomes, I predict that tax revenues in the budget will prove over optimistic and in election year Dr Cullen will find he has less revenue than forecast.

The reality of the dominance of the budget by welfare can be illustrated by two facts. First, expenditure when adjusted for inflation in health, education and for every other department has fallen in real terms. The students are protesting because the universities are poorer.

A second way to illustrate welfare spending is to put the new spending proposals in to welfare dollars. Every hour of every day. 365 days of the year, the taxpayer spends $1.5 million. Since I started this speech, the taxpayer has spent $250,000 on welfare.

The so-called Green package of $2.7 million that the Alliance and Greens are so proud of is less than two hours welfare spending.

Jim Anderton's $200,000 regional development is less money than Northland spends in welfare payments in two hours every day.

The government spending proposals are so small they will be totally ineffective. Indeed, most of the new spending will do more harm than good.

Before I come to ACT's alternatives, let me comment on another major issue. Tertiary spending. The government funding increase of 2.6% is a cut in real terms.

There is no way the universities will accept the deal and so I expect through the winter we will see universities rejecting the offer and university course fee increases of $500 or more.

The universities expect the government to buckle and give them the extra funding, and a capped fee increase.

Reading between the lines, it is clear the government intends to interfere massively in tertiary education to direct what will be taught, and by whom. The government is clearly planning to reduce the number of university courses and the number of tertiary providers. Top of the government’s hit list are private education providers, despite the fact that many private providers are out-performing state institutions.

But the budget reveals an even bigger problem. The effect of making student loans while at university interest-free is causing student debt to skyrocket. The budget projects student debt to rise by a massive $1.9 billion. Student debt is now $3.3 billion. The increase will take the debt to over $5 billion.

The student loan scheme is in urgent need of radical reform and is a major policy challenge to every party. I have said to our Policy Committee that ACT must have a practical, workable solution in our next manifesto.

So what is ACT's alternative to Michael Cullen's welfare budget? The budget should have tackled the measures we need to lift New Zealand back into the top ten of the OECD - the top half is too low a goal.

To attain a first world standard of living, New Zealand needs to grow at six percent a year - less than Ireland, Hong Kong, or Singapore's growth rate, but double Cullen's forecast and four times our present growth rate. So tinkering will not achieve the goal. We need a change of direction.

International experience chows that to achieve growth, jobs and prosperity a country needs: - a low and certain tax regime - a deregulated, low-cost-compliance business/commerce environment - a free and dynamic labour market - strategic investment in education, determined by market-driven outcomes - legal certainty.

It’s the exact opposite direction to that which this government is going. To quote Dr Cullen: “we need an economic transformation”.

New Zealand must create a competitive edge in the world economy. There are two steps that are within our governance to achieve. New Zealand must have a lower tax rate. New Zealand business will simply not compete at a higher company tax rate than Australia.

But going to 30 cents is not enough. A 27 cent company tax is a competitive edge to Australia, but not the world. Hong Kong tax rate is 15 cents, Ireland is 12½ cents.

To attract investment, New Zealand needs a company tax rate of less than 20 cents.

To stop the loss of talented graduates, who have nothing to lose by leaving New Zealand except their student debt and a 39 cent income tax rate, we need to cut the top rate of tax and resolve the student debt mountain.

Second, the budget must resolve the Resource Management Act bureaucratic nightmare. Michael Cullen boasted about the super-yacht development in West Auckland that will create, he claims, 200 jobs and generate sales of $100 million next year.

Sovereign Yachts, a foreign company, could have expected a two-year wait and a $400,000 bill for a resource consent. The super-yacht proposal is going ahead because of crony politics. Jim Anderton, the Deputy Prime Minister and Bob Harvey, former Labour Party President, managed to waive the usual RMA consent procedures that are stopping hundreds of New Zealand firms from investing, growing and creating jobs.

The Resource Management Act needs to be repealed and replaced with a streamlined law that protects the environment and allows sensible development. That's simply good governance and costs nothing.

A third requirement is real welfare reform. One adult in three on welfare is simply not sustainable. We know that over half of those now on benefits are able-bodied adults. To have over 100,000 people on the unemployment benefit for over a year, at a time of labour shortages in many parts of the country, is not acceptable. Real welfare reform is achievable.

All those on the dole should be required to do some form of work, voluntary service or training. The unemployment benefit should be time-limited. Five years over a life time and two years at one time. Other beneficiaries need also to be work-tested.

The goal of reducing the numbers on benefits by a half over five years is achievable. Those on benefits need real assistance to get out of dependency, including training, and, in many cases, childcare. The investment is worth it.

We can only get extra growth from either productivity improvements, or more people working.

If you accept the official line that unemployment's just 5% - that leaves productivity. As Cullen admits, the sort of productive improvements needed are not available.

But if we admit that the benefit system disguises the true level of unemployment and under-employment, and unemployment is really over 10%, getting people off benefits and back to work is the fastest way to grow the economy.

It’s a positive cycle. As people go off benefits, we save taxpayer money. As they go to work, people pay tax, so lowering the tax burden. People in work produce goods and services, so adding to the nation's prosperity.

But it does not stop there. Reducing the number of people on benefits reduces child abuse, alcohol and drug abuse, family break-ups and crime.

Real welfare reform, together with tax cuts, is the reason for the United States’ amazing economic growth and prosperity. Real welfare reform should be New Zealand’s top priority. Only ACT is willing to tackle welfare issue.

Prosperity also depends on another factor. Education. We must lift our education standards. I notice in the media that schools are now doing fewer tests than ever. Standards without testing is meaningless.

Our philosophy should be that every child is able to read and is numerate before leaving primary school. And no child should be left behind.

A good Budget would also outline three other objectives. We need to set out a clear programme to have fair, full and final treaty settlements, with the goal of one law for all.

Second, we must not accept rising crime. A Budget must adequately fund the police and a truth-in-sentencing policy.

And finally, ACT does not accept Labour’s policy of non-alignment, reducing our army to peace-keepers, our navy to a coastguard and the airforce to a military version of Freedom Air. Defence is an obligation that must be funded.

So you can see that an ACT Budget, which we will deliver in two years’ time, will be radically different.

ENDS

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