Embargoed until 1.00 pm
Friday 18 May 2007

Rt Hon Helen Clark
Prime Minister

Address to
Auckland Chamber of Commerce
Post Budget Luncheon

Langham Hotel
Auckland

1.00 pm

Friday 18 May 2007

Thank you for the opportunity once again to make this post-Budget address to the Auckland Chamber of Commerce.

Yesterday’s Budget has been described as both bold and the most spectactular Budget since 1991. I agree. It is a big step forward in boosting savings and investment, which are critical to the long term strength of the New Zealand economy.

The Budget has big and overwhelmingly positive implications for business. It delivers the first reduction in the corporate tax rate since the Fourth Labour Government’s reduction in 1988. And it does much else besides that to boost economic growth and development.

So, what’s the background against which this major structural Budget has been written?

It’s certainly not a background of doom and gloom.

Only in the last week, the Hong Kong Shanghai Bank described New Zealand as now “the miracle economy”, when employment figures came out with a lift five times greater than the Bank had predicted for the March quarter.

Berl’s Monthly Monitor for May reported that its economic indicators are now at their most positive for any time in the last five years – with 32 of their 42 measures higher than they were a year ago.

The economy has been enjoying near continuous growth for a decade.

That shows up in our very low levels of unemployment and tumbling benefit rates.

Unemployment benefit numbers have dropped dramatically, and the downward trend is now apparent in domestic purposes, sickness, and invalids benefits as well.

The government’s fiscal position has been strong, as revenues have generally outperformed the forecasts.

All this is positive – but there is concern about the imbalances which have developed in the economy.

Our GDP growth is bouncing back, but that’s been mainly driven by the growth in domestic demand.

The Reserve Bank has acted to curb inflation pressure, but the resulting higher interest rates and Kiwi dollar have put further pressure on the export sector and the current account. Our exporters have showed extraordinary resilience in these circumstances, but we know many are finding it tough going.

This situation constrains the Government’s Budget options – we are not in the business of adding further fuel to the flames of the domestic economy.

That’s why this Budget, promoting investment and savings is the best Budget for our times.

It takes forward our economic transformation and sustainability agendas at the same time as it tackles the well known imbalances in the economy.

The Budget has three big new features :

1. the business tax reform and assistance package at $3.4 billion promotes investment, R & D, upskilling, and exporting

2. the $650 million rail infrastructure package builds up public transport on rail and relieves congestion in Auckland and Wellington. As well, the state highway programme is guaranteed.

3. the $3.2 billion KiwiSaver package provides tax credits for employees and employers to boost private savings.

The enhanced KiwiSaver scheme has the virtue of being good for savers and good for the economy :

- it helps provide greater security in retirement

- it boosts our nation’s overall saving rates – making us less dependent on foreign capital

- it gives us greater control over our own economic destiny

- it gives New Zealanders an economic dividend from our growing economy – without risking fanning domestic inflation in the way outright personal tax cuts would right now, unless offset by significant spending cuts. I’m hard pressed to see where such cuts could be found, given the ongoing public support for the maintaining and improving of services for health, education, families, older citizens, and law and order and infrastructure which absorb so much government spending.

The enhanced KiwiSaver scheme does include a compulsory employer contribution where an employee is in the scheme, offset by a tax credit of up to $20 a week.

The contributions will be phased in over four years, rising from one per cent to four per cent of gross salary over that time.

The net cost for most firms at full implementation and taking into account the employer tax credit is estimated to be not much more than one per cent of the total wage and salary bill.

In Australia, by comparison, employers contribute nine per cent of each employee’s ordinary time earnings to compulsory superannuation.

The major business tax reform and assistance package is the outcome of the business tax review initiated after the last election.

Alongside major infrastructure investments and policy settings, it forms a critical part of our economic transformation agenda.

The cut to the corporate tax rate will help businesses invest in their future. That will drive growth and development, and jobs across the whole economy.

Other aspects of the package ensure that business is also incentivised and supported to move up the value chain to produce goods and services of higher value. The medium to long term solution to New Zealand’s perennial current account problem lies in exporting at a higher value across all sectors.

The new R & D tax credit of fifteen per cent of eligible expenditure is a major breakthrough in government R & D policy, and will place New Zealand in a much more competitive position vis-à-vis Australia.

The technology sectors have especially welcomed the fact that the credit is paid in cash to loss making start up and early stage companies. It will be a particular boost to those sectors, as well as supporting all businesses seeking to grow through innovation.

The move on R & D tax credits is complemented by a boost in the government’s overall science and research spend, a good part of which is directed to supporting innovation by businesses and industry sectors.

The Budget also provides more funding for industry training and for the tertiary sector generally.

Smart businesses need skilled workers – and they’ve been in short supply as our economy has been growing. In 7 ½ years, our challenge has switched around from finding more jobs to finding more workers with the skills industry needs.

In the short term, migration, permanent or temporary, can help address skills shortages, but our priority must always be to grow home-grown skills and talents.

Industry-government skills partnerships have become very strong in recent years, leading to a near doubling of the numbers in work based training. Now the aim is to lift those numbers from the 160,000 in 2005 to 220,000 by 2011.

Boosting exporting features in the Budget’s business package too.

The new funding for the Market Development Assistance Scheme means a near doubling of the baseline spending for those grants.

As well, both the Beachheads programme and NZTE in-market assistance are being expanded to support our exporters in Asia’s fast growing markets.

And there will be a new US contract bonding product for exporters bidding for US Federal or State contracts. This is to help overcome the barrier of the high bond required to bid for such contracts.

Our government has long identified the state of the country’s infrastructure as a brake on economic development, particularly in Auckland.

For many years our region’s infrastructure was neglected, and we suffered gridlock with no end in sight.

Now the progress of our government’s huge transport investment is obvious throughout the region, from the North Shore’s new interchanges and busway, to the Central Motorway Junction, the work on State Highway 20 at Wiri, and the double tracking of the railway line to West Auckland.

But there’s more to come as we invest to make Auckland move the way a world class international city should.

First, Auckland benefits from the guarantee we’ve given to the five year State Highway Construction Plan, so that it can be delivered in the event of any unanticipated cost increases.

Another $145 million capital has been set aside for that purpose in this year’s Budget – on top of the $13.4 billion provided for the five year programme last year.

The spending on roading, public transport and rail now exceeds the revenue collected from fuel excise duty – a major turnaround from 1999 when only 42 per cent of that duty was kept in the National Land Transport Fund.

Now we are looking at permanently dedicating fuel excise duty to land transport – a move which was welcomed yesterday by the Automobile Association.

But on top of all that, there is still a demand for more investment on road and rail projects. There are regions including Auckland, whose priorities are not yet fully included in the current large investment programmes.

One of those priorities is rail electrification in Auckland. That is important for relieving road congestion, providing a sustainable transport alternative, and enabling urban intensification within the existing urban limits.

This Budget allocates another $650 million for rail projects – the bulk of it to Auckland electrification, with a component also for Wellington and the general rail network.

But that won’t cover all the costs of rail expansion or all worthy regional land transport priorities. So the Budget proposes a regional fuel tax to raise funds for specific transport projects. In Auckland, for example, it’s estimated that a ten cent a litre regional fuel tax on petrol and diesel could raise $120 million a year, and support a debt of $1.5 billion over thirty years. That really would get Auckland moving. Our proposals enable regions themselves to recommend the size of the regional fuel levy.

Our government has had a big vision for the development of the New Zealand economy – and this budget enables us to take further steps on that journey.

On the road to economic transformation, New Zealand needs more business investment, it needs more skills and innovation, it needs greater export orientation, it needs the deeper capital markets which higher savings levels support, and it needs a modern infrastructure.

This Budget addresses all those issues.

It strengthens New Zealand’s economic development potential – it doesn’t squander it for short term gain.

Fifteen months ago in my first Prime Minister’s statement for this term of Parliament, I laid out an ambitious agenda for a step change in New Zealand’s economic development.

A lot of work has been done to advance that agenda in last year’s Budget and this one.

A revolution in the telecommunications environment has been effected by the far reaching legislation passed last year to enable New Zealanders to get access to faster, cheaper broadband and more advanced telecommunications services.

On the energy front, far reaching draft strategies have been issued and debated, and they come back to government for determination in the coming months.

Energy and transport, along with land management, water allocation, and waste management are big issues in our sustainability agenda.

Sustainability is an imperative in the 21st century. There will be no prosperity without it – but a commitment to sustainability will improve our prospects of prosperity.

That’s why I’ve suggested that New Zealand aspire to be a truly sustainable nation.

Already our brand image in this respect is positive, and there are real opportunities for business to build sustainability into their own brand and leverage off our nation’s brand.

I am very impressed by the private sector leadership on these issues – from the NZX Carbon Exchange Working Group’s proposals for a carbon trading platform, to those companies signing up to Landcare Research’s CarboNZero programme and others undertaking significant sustainability initiatives in their businesses – often with significant cost savings.

In government we want to work with business networks to get the message across that increasing attention to environmental issues is a win-win for companies, the economy, and the environment.

We think New Zealand can be positioned as a world-leading exponent of smart, innovative, and business-savvy responses to environmental issues, leveraging off our clean, green image and our reputation for business integrity.

This year we are reviewing how our business capability programmes can support sustainability initiatives in businesses and sectors. We have dedicated funding to strengthen our business partnerships for sustainability.

Everything I have talked about today is focused on lifting New Zealand’s sustainable economic performance. That is the central thrust of Budget 2007.

We all know our country’s potential – and we all want it to be realised.

The Budget’s focus on savings and investment – and all associated initiatives which add to our economic capacity will contribute to building a growing and sustainable economy, delivering opportunity and security to all our people.

ENDS

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