Rt Hon Helen Clark Prime Minister

Address to Auckland Chamber of Commerce Post Budget Luncheon

Hyatt Regency Hotel Auckland

12.30 pm

Friday 20 May 2005

Thank you once again to the Auckland Chamber of Commerce for the invitation to address this post Budget luncheon.

As is usual, the Budget has received a great deal of media coverage last night and this morning, and this well informed audience will have heard, seen, and read a lot of that reporting.

Today I will address some aspects of the Budget, but I also want to look at its broader context and why the government has shaped the Budget in this way.

Everyone here is aware that the economy has had five years of good growth, averaging 3.8 per cent per annum over the last five calendar years.

That has been well above OECD average growth rates, and, in particular, exceeds the growth rates of our top three trading partners, Australia, the United States, and Japan.

That 3.8 per cent average rate also compares well with the average growth for the nine calendar years of our predecessors in office – that average was 3.1 per cent.

What has been of critical importance to this Labour-led Government has been to establish a strong reputation and credibility on the economy.

The record is clear: this government has presided over a strong economy, and it has delivered sound budgets and surpluses. Critical to the latter is the ability to say no to the queues of interest groups and lobbies at the door. As Dr Cullen said bluntly yesterday: too much jam today leads to crumbs tomorrow.

The strong economy and strong budgets have been felt in homes across the country.

Over the past five years there has been spectacular growth in employment, with more than a quarter of a million new jobs coming into the economy.

That’s a quarter of a million more people adding to GDP, paying their taxes, and not seeking benefits from the Department of Work and Income.

The average annual rate of unemployment has virtually halved from the 1999 March year to March year 2005.

It was 7.4 per cent then, and it’s 3.8 per cent now.

Maori and Pacific peoples’ unemployment rates are both down 52 per cent in that same period.

The unemployment benefit numbers are down 62 per cent on 1999 figures – that’s down from over 140,000 to under 55,000 – the lowest figures in twenty years.

There are now more than 100,000 fewer working aged people living on benefits than in 1999.

From the outset, our government has put in place policies for the medium and long term, rather than for each electoral cycle.

We will not be getting into a tax cut and spending auction for this election because we do not believe that is in the interests of good economic management.

Everyone is aware that the economy is coming off the peak of the 4.8 per cent growth rate achieved last year.

Our job has been to work for a soft landing which does not create difficulties for monetary policy.

The decline of the United States dollar, and New Zealand’s ongoing economic success, and the current level of interest rates here have had the combined effect of pushing our dollar up.

That has made life harder for exporters – although good commodity prices for the large agricultural sectors have cushioned the effects there.

However, neither forestry nor manufacturing are benefiting from that factor. To retain competitiveness, those sectors, as indeed the agricultural sectors in the medium and long term, must look to higher productivity and higher levels of innovation and value in what they produce.

My point is that this Budget has had to be prepared in the context of an economy which, while still predicted to grow at credible levels by international standards, is slowing – and is slowing at a time when significant parts of the export sector are under pressure, the dollar is high, and inflation is towards the top end of the agreed range.

This calls for a prudent response from the government.

In our judgement, a spending break out now, whether through large scale tax cuts or through money pumped directly into projects and services, would have highly adverse effects.

Not least, a response from the Reserve Bank could be expected, resulting in higher interest rates, and in all likelihood a higher dollar – and the impacts of that would be felt by households and businesses throughout the country.

This is why we continue to run large operating balances at the top of the cycle.

Operating balances, excluding revaluations and accounting changes are projected at $7.4 billion in the coming year; $6.7 billion in 2006/7; and an average of $4.8 billion in the following three years.

This year, all core Crown capital investment will come out of that operating balance, leaving a cash surplus of $2.43 billion dollars. We are electing not to borrow for that investment at the top of the economic cycle.

For next year, the cash surplus falls away to $30 million. For the 2007/08 year, we project a cash deficit of $1.606 billion, and the following year a cash deficit of $2.776 billion.

Those who have been urging far higher levels of spending, including large tax cuts, need to explain why they would risk an adverse monetary policy response with all the consequences that has for the economy.

For my part, I am satisfied with the current settings. I am fully cognisant of the risks of pushing spending and tax cuts further at this time. And I know that the government’s books are in a very strong position.

In my speech here last year, I advised that the government’s net debt was due to drop to zero by 2007/08. We are now projected to reach that position next year, a year early.

This will be the first time the New Zealand Government has ever been in a net positive financial asset position.

This Budget contains many initiatives of considerable interest to business, across the business-related tax initiatives, and economic development, skills, research, transport, and trade policy initiatives.

The business tax package is aimed at encouraging a more productive use of capital and to be positive for attracting international capital, skills, and labour.

Its key elements are:

Changing tax depreciation rates to reflect better how assets decline in value. Depreciation rates for short-lived plant and equipment will increase and rates on buildings will reduce.

Raising the low-value asset threshold from $200 to $500, thereby reducing compliance costs from having to maintain fixed asset registers.

A temporary tax exemption of five years on foreign income for people who are recruited to New Zealand to work, be they foreigners or New Zealanders who have been living abroad for ten years or more.

Better access to tax deductions for R&D expenditure for companies who bring in new equity investors, so as to match the growth cycle of technology companies.

Finally, a range of tax simplification measures including alignment of payment dates for provisional tax and GST and changes to FBT.

The cost of these and other tax measures in the Budget will be an estimated $1.86 billion around the forecast period. This will be partially offset by revenue from the new carbon charge of around $720 million over the same period. However, we are talking of a net reduction in revenues of over $1.1 billion from these measures.

To repeat, this tax package is targeted at encouraging investment in technology, in skills and in savings. It is not the kind of across the board tax cut that our opponents are proposing, which, in the current environment of capacity constraint, would more than likely stoke up inflation and prompt tighter monetary policy.

This Budget also contains new policy and provision for personal income tax thresholds. They will be adjusted every three years by using the mid point range of the Policy Targets Agreement with the Reserve Bank. This equates to a 6.12 per cent movement every three years. The timing of the policy taking effect in 2008 is driven by all the constraints on spending and tax cutting which I have referred to earlier.

Some reference has been made to personal tax cuts in the recent Australian Budget. It is our understanding that they delivered about $6.00 a week to the average worker, and that key areas like health had funding constrained to finance those cuts.

Far bigger gains for working families with children on modest incomes can be delivered, and are being delivered through the Working For Families package.

By 1 April 2007, a family on an income of between $25,000 and $45,000 will be $95 to $100 a week better off than they were before 1 April this year.

And not only will they not see health funding cuts, but also health spending rises by another $1 billion this year, and $4 billion over the next four years.

Health spending is now up 62 per cent on its 1999 levels, as we strive to provide enough quality services and retain a high skilled health workforce.

On skills, every year of this government, funding has increased.

Spending on industry training is now over 100 per cent up on what it was in 1999.

A new target for young people in the Modern Apprentices Scheme has been set, at 9000 by December next year.

Already there have been 7,760 placed in the scheme, and 1,000 have graduated.

On top of that there are many more tens of thousands of people in industry training overall.

Underinvestment in industry training particularly in the 1990s left New Zealand short of skills, and the whole economy is paying the price for that now. We are running as fast as we can, in partnership with industry, to make up that skills deficit. Skilled migration is part of the answer, but so is giving New Zealanders the chance to upskill.

Government spending on research, science, and technology is up again, by $204 million over the next four years. Comparing the spending level for 2005/06 with 1999, the investment by government is up 56 per cent. As in previous budgets, a good deal of the new spending will go to industry-related research and partnerships.

The vote for Economic, Industry, and Regional Development continues to expand to support growth and export initiatives, with a new project, Project Collaboration, being launched to support management and business skills training.

As is well known, our government has put a high priority on trade negotiations and opening up markets for New Zealand exporters. That is supported by another $31 million over the next four years, and will also enable our agencies to engage more with the business community to lift awareness of new market opportunities arising from FTAs.

The Thailand – New Zealand FTA comes into effect on 1 July; the Trans Pacific agreement with Singapore and Chile is close to finalisation; several rounds of negotiation have been conducted with China; and we are at early stages with ASEAN and with Malaysia.

As well, the WTO round must remain the top priority because it stands to deliver the greatest gains for our exporters long term.

On transport, Budget 2005 gives a further boost. The total available to the Land Transport Fund over the coming four years will be $8.4 billion. This includes all of the proceeds from the increase in excise duty that came into force on 1 April, taking the resources available to the Fund from $1.54 billion in 2004-05 to $1.75 billion in 2005/06. In addition, a further $100 million a year will be provided to the Fund in the three years to June 2009 to enable planning to proceed for a higher rate of roading construction.

Finally I should mention the significant new policy announced in the Budget to encourage New Zealanders to save.

The Securing Your Future package makes it easier for people to develop a long-term savings habit. At an estimated cost of $588 million over the next four years, components include:

KiwiSaver, a government-sponsored work-based savings scheme, including features to assist first home purchase;

A substantial expansion of the Mortgage Insurance Scheme, and;

Education programmes for financial literacy and first home buyers.

KiwiSaver will be a voluntary scheme, enabling people to put 4 or 8 per cent of their gross salary automatically into a managed savings fund. However, to make participation easy, new employees will be automatically enrolled in KiwiSaver and have three weeks to decide whether to remain members. Existing employees, the self-employed and beneficiaries will be able to opt in.

Savers will have personalised accounts they can take with them as they shift jobs.

There will be no tax incentives for savings per se; however, the government will contribute directly with a contribution of $1,000 to each new account. It will also pay part of the fund management fees, increasing the return that people get on their investment.

The policy design for KiwiSaver is well-advanced. We expect to introduce legislation to the House toward the end of this year and see it passed next year, enabling KiwiSaver to open on 1 April 2007.

In conclusion, this is clearly not a radical big spending Budget. Nor would anyone expect that from this government.

This government is well known for putting a premium on economic and fiscal credibility. That is the benchmark against which we evaluate our Budget choices and proposals. We want the decisions we make to be prudent and sustainable. This Budget is both, and it is consistent with maintaining economic growth and rising living standards into the future.

ENDS

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