The right Budget for these times

My eighth budget is the right budget for these times. It deals with our economic priorities without compromising our fiscal objectives.

---------------------------------

Speech notes for Post-Budget Business Luncheon, Wellington Chamber of Commerce, Majestic Centre, Wellington

It's a pleasure to be here with a business audience today because yesterday's Budget introduced the most significant package of business tax measures in twenty years.

Budget 2007 deals with the imbalances we face today and the challenges we face tomorrow.

It directly targets our low household savings rate; and it encourages greater investing by business to help lift productivity. It continues our progress in building world-class infrastructure and in lifting the skills of our workforce.

And it maintains a prudent fiscal policy to support monetary policy. It's a potent mix providing the foundation for higher sustainable economic growth.

It is useful to remember that our economic successes over the past seven years have been encouraging, but imbalances have built up.

Inflation is a concern, especially in the non-tradeables sector.

There are worse problems for a finance minister to have than a domestic economy growing too fast. But growth depends too much on demand. The consequences via tight monetary policy and a high exchange rate are making the external imbalances worse.

Household savings have continued to fall, both by comparison with our own modest performance in the past and compared to other countries. Statistics NZ data shows on average households spend $1.15 for every dollar earned. Poor household savings have helped to push the current account deficit to around nine per cent of GDP. We have an appetite for debt when we should be hungry for savings.

No government can ignore the imbalances, nor fix them by squeezing our eyes shut and hoping they go away.

Budget 2007's emphasis on saving and investing targets the imbalances and puts in place measures that will make the economy more dynamic and innovative.

First, we are supporting monetary policy by restraining the fiscal stimulus. A loose fiscal stance now would exacerbate the imbalances in the economy and so we are being judicious in our spending and revenue decisions, despite the exhortations this week by some for the kinds of tax cuts even Bill English, but not John Key, is backing away from.

The second pillar of the budget's approach is to promote a shift in the mix of growth away from domestic demand and towards saving and investment.

The enhancements to KiwiSaver are a central part of the shift. We need to help Kiwis save more.

The case for strongly enhancing our savings policies has been growing with some urgency.

The Treasury, for example, has been regularly reviewing New Zealand's savings performance. It has previously been skeptical of the need for any policy intervention. In 2003, for example, Treasury completed a major report that warned that private savings were too low - but it favoured a 'wait-and-see' response. We did wait, and we have seen - household savings have continued to fall.

In the briefing to the incoming government, less than two years ago, Treasury argued for more policies to support private savings. KiwiSaver as it was originally designed met the demand. But Treasury has reviewed the area again and today its latest report on saving is being released. Treasury's position has changed significantly. It now warns "in light of the recent data, evidence and analysis.on balance we think that further or stronger pro-saving action is now justified."

Treasury now says a 'least-regrets' approach is called for and action to achieve better household savings is "a matter of priority."

You can see the urgency of our growing savings problem in the way serious analysis has changed in a relatively short time.

It is vital New Zealanders save more so we can better deal with our economic and social challenges.

The enhancements to KiwiSaver I announced yesterday will increase household savings without exacerbating short-run demand and inflation. In fact over time shifting the savings/consumption balance towards saving should reduce demand pressures.

The government is supporting savings to the tune of $40 a week. Everyone who signs up to KiwiSaver will get up to $20 a week by way of a tax credit which is paid into their KiwiSaver account.

In addition each employer will be required to make matching contributions of four per cent phased in over four years, but offset by a $20 a week tax credit per employee.

This is a very substantial investment in the future for everyone who joins. New Zealanders should join KiwiSaver - it's good for households, good for businesses, good for our future prosperity.

From next year, matching employer contributions will be phased in, starting at one percent of an employee's gross salary and rising to four percent in four years' time.

Since the Budget I have seen some quite strong reaction, in some cases, plain scaremongering. There is even warning of "industrial strife" in one quarter.

And there is just plain mischief making by the Opposition. John Key claimed the scheme would cost employers $2 billion a year. Wrong. For starters, Mr Key made his back-of-the-envelope calculation on the basis of all workers, not full time equivalents. And he failed to offset the tax credit employers receive which, after full implementation, offsets the first $26,000 of an employee's salary.

Netting all that out, the cost may be of the order of some $600 million a year assuming a 50 per cent uptake. That's about half the total cost to employers of their contribution on average.

But after allowing for some modest nominal wage offset from any bargaining that will follow - say just a total of 0.5 per cent over four years and the net cost may be reduced further to around $300 million a year.

So I want to emphasis that the cost will not be a significant burden for most companies.

In the first year the employer tax credit will meet the full cost of the contributions for 95 per cent of the workforce. Overall, the net additional costs to employers by 2011/12 should overall be no more than about one per cent of the national wage and salary bill at that point and that's, as I said, not considering any offset from wage bargaining.
And to those who say that there won't be any scope for bargaining I would just say that I have had a lot experience negotiating under MMP where accommodation may at first glance look impossible and eventually we end up with a sensible compromise.

Quite apart from wage bargaining, I would urge employers to consider the many macro and micro benefits.

On the micro front, can I quote from NZX CEO Mark Weldon, a statement many
in the business media seem to have ignored.

He said:
"the matching tax credits for employer contributions will give businesses a competitive edge in attracting and retaining high value employees.

There's no doubt we're swimming in a global talent pool. Now employers will be able to contribute to their employees' savings in a low-cost, tax-efficient way, adding a degree of flexibility to structuring pay packages that will help them attract and keep the best people."

I have no doubt it will lead to greater staff loyalty and overall I believe it will help keep skilled staff here because their savings are locked in. Should they leave permanently and withdraw their KiwiSaver funds the tax credits are clawed back.

And on the macro front, there is no doubt greater savings will help us better deal with the imbalances we face.

First, greater local savings deepen capital markets. That means more options and a lower cost of capital. It means less reliance on the savings of foreigners to finance business expansion in New Zealand. In effect we end up retaining ownership in New Zealand.

The shift away from consumption has an important macroeconomic benefit.
To quote from the Treasury report that is being released today, "a higher structural level of national saving, over the longer term, would see a reduced current account deficit and a lower equilibrium exchange rate."

We can see the advantages when we look across the Tasman at the trillion dollar-deep pool of savings generated by Australia's compulsory scheme. Every time an Australian private equity firm crosses the Tasman and invests here, they are doing so with money saved by Australians who have been encouraged to save through active government policies for well over a decade.

KiwiSaver is a landmark in our social and economic history. It will help build a stronger economy and a fairer society.

It will help New Zealanders build up more financial assets more quickly. It will help more New Zealanders feel wealthier and more secure. It is one of the most significant savings measures ever introduced in New Zealand.

Saving and investing are the centerpieces of Budget 2007. I've just talked about saving; investing is the other side of the coin.

It is the focus of the Business Tax Reform package. The package provides incentives for our businesses to increase investment in new products and processes and to expand overseas. It's about raising productivity and improving competitiveness.

It's also about lifting the sustainable rate of growth in the economy so the imbalances we see today will not plague as much tomorrow.

The $3.4 billion of measures over four years will help grow more of the globally competitive businesses New Zealand needs.

The headline corporate tax rate is being cut from 33 per cent to 30 per cent. The company tax rate cut alone will cost $2.1 billion over four years.

I should like to remind you gently that it as Labour government that last cut the corporate rate in 1988.

When I looked at opportunities for changes to business tax, I wanted to ensure we moved on the areas with the greatest potential effect on economic growth. Business has a responsibility to talk to New Zealand about the importance of this step. It's understandable that many people are going to ask why a corporate rate cut is coming ahead of a cut in the personal rate. Businesses know the answer: Because the cut in the corporate rate will help strengthen our economy.

The overall business tax package builds strongly on the $1.4 billion package of depreciation and other measures announced in Budget 2004.

The corporate rate cut will help businesses reinvest their profits. It improves the rewards for your risk taking. And it puts us in a more competitive position with other OECD countries. For some overseas investors there is no doubt the headline rate does matter, we are now putting our hand up in the crowded marketplace and are saying take a closer look at us.

That is backed up by the other measures.

Tax credits for research and development are also about attracting more R&D from overseas. But they are fundamentally about encouraging home grown businesses to invest in research and development. R&D helps develop products capable of meeting demand and commanding a premium in export markets. If you are investing in research and development you will be eligible for a tax credit of fifteen per cent.

Perhaps more important than both of these is possible reforms to the international tax regime

I am particularly excited by the proposed introduction of a tax exemption for the active income of kiwi businesses operating overseas. I have been told frequently that this is one of the most important ways we can help many of our larger companies expand offshore.

The exemption allows businesses with international operations to remain in New Zealand and compete more effectively in foreign markets. Until now, kiwi companies were taxed on their worldwide income. Other countries distinguish between the active and passive income of controlled foreign companies. Income from manufacturing and income from investment is treated differently by tax law in those countries. We will join the international norm, and active income earned for example from manufacturing by New Zealand resident companies from their controlled foreign companies will be exempt from New Zealand tax.
Only 'passive', or investment income, will be taxed.

This is an active measure in every sense to encourage our companies to grow their global connections.

When the Business Tax Package was first presented for comment, it floated the potential for a tax credit for export market development. I received a lot of feedback on that suggestion. Most in the business sector believed a tax incentive was not the best policy design, and I agreed.

Instead, Budget 2007 will provide additional funding of nearly $88 million over four years for the Market Development Assistance Scheme.

The Budget is also investing heavily in two other areas that are a high priority for increasing our productivity and the speed at which our economy can grow: skills and infrastructure.

Budget provides additional funding to back up the new "investing in a plan" approach for tertiary education organisations. We are strengthening their ability to better fulfill New Zealand's economic and social needs and at the same time provide better value for money for taxpayers and students.

There is also an additional $53 million over four years to expand industry training.
World-class infrastructure is also critical to achieving higher growth and sustaining it.

The Labour-led government has done much over the last seven years. Annual investment in state highway improvements has risen seven fold since 1999. We are spending over $2 billion a year on roading improvements. Investment in public transport has increased seven fold.

And we are doing more. Transport, especially in Auckland but also here in Wellington, is holding back the development of our economy and Budget 2007 opens the way for new projects. It makes possible regional fuel taxes for specific capital projects that would otherwise not attract funding as quickly.

Here in Wellington, a regional fuel tax could become a significant contributor to Transmission Gully if the region wants to pursue that option.

Another $650 million over six years is being made available to help move commuters off roads by electrifying the Auckland passenger rail network and upgrading the urban passenger network here in Wellington.

It's a core part of our desire to shift the economy to a sustainable footing - an economy which both meets the short term imbalances we face and the long term need to deal with the economic and environmental challenges ahead.

My eighth budget is the right budget for these times.

It deals with our economic priorities without compromising our fiscal objectives. Those priorities are very clear: We need to invest in innovation and productivity and we need to save more.

Saving and investing will build on our progress over the last seven years and continue to transform New Zealand into a more dynamic and innovative economy.

The budget provides solutions to meet challenges we face today and tomorrow so we can all enjoy a more prosperous future.

Thank you.

ENDS

© Scoop Media