David CUNLIFFE Finance Spokesperson 16 May 2011, Pre-Budget speech, Manufacturers and Exporters Association, Christchurch

John Walley, CEO of the Manufacturers and Exporters Association, my colleague David Parker, invited members and guests.

We are three days away from one of the most important Budgets in our history.
Rod Oram commented that it may be our last chance as a country to get the economic mix right - and I agree - this is the third of three budgets from a government that promised to turbo-charge the economy and they haven't even started the engine.

New Zealand does not have years to waste, continuing to get things wrong, or deferring the important changes that we know we need.

Today a new Horizon poll shows that 48% of New Zealanders believe the economy is on the wrong track, 44% disapprove of the government's handling of it, compared to only 34% who think it is on the right track.

So today David and I will give you our take on what Thursday's Budget would look like if we really were going to turbo-charge the economy.

I will cover off on the framework and capital, saving and fiscal policy. David Parker will focus on the real economy through economic development and monetary policy.

The key messages we want you to take away today are simple:

* A good Budget would have to rebuild and reorient our economy towards exports and sustainable high-value production and employment;

* A good Budget would rebuild savings and redirect investment to its most productive uses, not see it drain offshore or be wasted on property speculation;

* A good Budget would lift living standards for all New Zealanders and not just a few, and would provide some urgent relief to the acute cost of living pressures being felt by many;

* And a good Budget must reduce debt over the medium term to ensure that we are living within our fiscal means, which means being real about priorities and the need for everyone to pay their fair share...
And above all else, given the magnitude of the debt mountain in front of us and the depth of the rut our real economy is stuck in, now is the time for boldness, not tinkering. It is a time for fixing the structural problems, not slapping on a coat of paint or spin. It is a time for tough decisions, not lollies.

So what is wrong? Defining what a good Budget would look like cannot happen in a vacuum.

An economy is not an end in itself - it serves the way of life that we seek for ourselves and provides the legacy for our children, our grandchildren and generations to come.

The economy doesn't exist in a vacuum. The fallout from the Global Financial Crisis led us into recession, but fortunately we entered that recession with a number of positives - non-existent government debt and very low levels of unemployment.

But since then we have had tragedy befall our nation unprecedented in living memory - first the lives lost at the Pike River Mine and then the February 22 earthquake that killed 181 people in Christchurch. The cost of rebuilding Christchurch is huge - multiple billions of unexpected expenditure will be required. That of course is an accident of fate and is not the responsibility of the government.

But how we respond as a nation in meeting that cost is very much the responsibility of the government. The people of Christchurch do not want to bequeath as a legacy to the nation the cost of their recovery through the sale of our country's assets and by halting their progress as cities.

The cost of living increases that are being experienced throughout New Zealand hit even harder on the Christchurch people, who have experienced considerable loss in so many ways. Across New Zealand wages growth of 1.9% in was swallowed up last year by inflation of 4.5% and food price rises of over 6%

Unemployment is up from 3.4% in 2007 to 6.5% today. But in Christchurch the numbers are even more alarming as the wage subsidy disappears and thousands more people find they are unable to maintain their previous standard of living.
We were promised an aggressive recovery in 2009 and if the government had delivered on that promise then we would have been in a better position today Growth has fallen from 3% in 2007 to just 1.5% in 2010. And that is not Christchurch's fault.

Every single time an economic update has been issued by Government in the last two years the promised recovery has been postponed and rosy growth forecasts revised downwards.

You can expect more rose-tinted growth numbers in Thursday's Budget, matched by real scepticism in the real economy.

Low growth, external shocks and a mismanaged economy have led to a massive fiscal deficit of $16 billion (before gains and losses) or $10 billion with these factors included.

The difference between the two is mainly the very strong performance of the NZ Superannuation Fund which the Government has refused to continue to contribute to since they have been in government!

The pre-funding of our universal superannuation scheme has been relegated to a 'nice-to-have' by a government that pays only lip-service to the need to boost national savings.

In just 30 months, National has borrowed more than $36 billion; $16 billion in the past year alone.

Mr Key and Mr English blame their borrowing on the Canterbury earthquakes. That is an insult to the people of Canterbury and to the intelligence of all New Zealanders.

We know the Government was borrowing $300 million a week before the earthquakes. Less than 10% of the money National has borrowed so far has been to cover earthquake costs.

When we look at the real reasons for this record deficit two things stand out.
First, National has mismanaged the economy. The weak recovery that began in 2009 stalled completely in early 2010, well before the earthquakes.

We are now going backwards while National does nothing. This has created a huge hole in the tax take that National is plastering over with increased borrowing.

Second, National's tax cuts for the wealthy were unaffordable and misdirected. $23 billion has been borrowed for tax cuts skewed to the top end of incomes.
People with very substantial incomes, are receiving hundreds, sometimes thousands, of dollars a week in tax cuts - every cent of it borrowed and to be paid off by the next generation - a great legacy for our children and grandchildren.

National's solution to the situation it has created is wide-spread spending cuts that will affect the things that will help us get back on our feet - like KiwiSaver, which allows all New Zealanders to make regular contributions with a mix of their own deductions, government and employer contributions.

But the problem is not just that the current government's cuts will damage our recovery. The problem is that there is no sign of a coherent strategic plan to address the underlying drivers of failure that have led us into this very difficult situation.
What would a good budget look like?

A good Budget must therefore manage down debt as part of a strategic plan that takes the tough decisions needed to put our economy on a sustainable growth path, with the real economy at the heart of our thinking and policy.

First, a good Budget must be a budget that is good for the real economy.

A good Budget would build genuine productivity growth by addressing shortages of skills, technology and capital. It would bring back apprenticeships and address the fact that nearly one in three Maori or Polynesian school leaves graduates straight to unemployment.

It would rekindle the innovation engine that was undermined by the cutting of R&D tax credits. Instead we should be getting behind innovators like Lanzatech, or Rakon, or Fonterra's Via Lactia, or the geothermal expertise contained in Mighty River Power and others.

A good Budget would bring down a credible plan for small and medium business development that addresses critical shortages of capital at start up, scale up and internationalisation stages.

A good Budget would address the urgent problems of exporters trying to fly against the headwind of a volatile Kiwi dollar currently trading around all-time highs of 80c to the USD.

David Parker will update you on our monetary policy package designed to do just that.

Second, a good Budget would address the critical shortages of local capital that are keeping businesses too poor and interest rates too high.

It would contain a strong, credible package to lift private savings. Further undermining Kiwisaver, the most successful savings programme New Zealand has seen since Mr Muldoon killed the last one, would have to be the antithesis of a strong savings policy.

And let's not forget that Kiwisaver despite being relatively new has earned the active support of 1.7 million New Zealanders, who trust it to provide a secure and affordable means of building relatively secure financial assets for their future.

A good strong policy mix to encourage saving and get the incentives right for investment to flow to its most productive uses, will mean New Zealanders will be able to own more their own future, both as individuals and as a country.

That is a point not lost on the Aussies, who have a strong, compulsory saving scheme that has built a huge pool of domestic investment capital. According to Brian Gaynor, (Herald, May 11, 2011) almost all of the 10 largest companies on the ASX at the end of 1987 are still Australian owned.

By contrast the largest listed New Zealand companies at the end of 1987 were as follows: Fletcher Challenge (split and largely sold offshore, other than Building ), Brierley Investments, NZI (Australian-owned), NZ Forest Products (Graeme Hart-owned), Bank of New Zealand, Petrocorp (on-sold by FCL to overseas interests), Lion (Japanese-owned), Carter Holt Harvey (Graeme Hart), LD Nathan (merged with Lion and now Japanese-owned) and Robt Jones Investments (Hong Kong-owned).

We do not object to productive foreign investment; but we do not want to live in an economy that is largely hollowed out of ownership of its most productive strategic assets. David parker will expand on this shortly.

The government is arguing that cutting the fiscal costs of savings incentives fixes the saving problem by "saving" for the Government, but this is ludicrous. After all, 90% of New Zealand's net international debt is private and only 10% is public - the key driver must be private savings rates.

That means more active work is needed to rebalance private borrowing. The housing bubble is still with us, and to be fair, its magnitude was underestimated worldwide during the last decade, including by the fifth Labour government here.
With house prices still overvalued according to the Reserve Bank we face a decade of decay and stagnation unless the underlying drivers of capital allocation are addressed.

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The third thing a good Budget would remember is that the economy serves our way of life; not the other way round. Increasing inequalities create for our society an ever-increasing burden that we must address. Shifting resources from lower and middle income earners to the top end of the scale, as has been done in the last two budgets, is both recessionary and regressive. It's not just the tax cuts - it's taking money out of early childhood education and adult & community education and putting it into private schools.

There is strong empirical evidence that more equal societies perform better economically as well as socially. Ensuring adequate demand is in the wallets of middle and lower income families is a crucial economic as well as social objective.

So deep cuts to Working For Families would take us in the wrong direction. A good Budget would provide immediate relief to those struggling to feed their families and would put in place a credible medium term strategy to lift living standards across the board.

Fourth, of course a good Budget must be underpinned by a fiscal strategy that contains debt within acceptable levels and manages it down across the business cycle.

That does mean responsibly seeking excellent value for money in all that the state does.

It does not mean demonising the public sector, nor pretending that this debt reduction can be achieved simply by shifting resources to the so-called front lines or dispensing with the so-called "nice to have's".

Is early childhood education a "nice-to-have" or a smart investment? Or investment in clean technology? Or early detection of cancers? Or preventive dental health in schools?

A good Budget would not rely on the rhetoric of conservative politics that - here as in the United States - is not matched by fiscal reality.
What Labour Would Do?

Let me begin to outline Labour's strategy for rebuilding our shattered economy by saying what we will not do.

We will not pretend that the fiscal situation facing New Zealand is not serious.
We are clear that tough decisions need to be made, and Labour in government will make them.

We will not oppose prudent fiscal measures just because they involve cutting spending.

But we will relentlessly expose the hypocrisy of those who preach restraint to the squeezed middle class while practicing favouritism to themselves and to privileged constituencies who either don't pay their fair share or who need help the least.

And we will never agree to a mindless plan of fiscal retrenchment that creates an even more divided society while failing to solve the underlying economic problems that hold us all back.

Labour will again demonstrate prudent fiscal management that will manage down net debt including Crown financial assets across the business cycle.
We did that during the last Labour government where we ran a net capital surplus in under a decade.

Labour will ensure that public investments are wise, well managed and measured.

Labour will ensure that everyone gets a fair go, and that everyone pays their fair share.

But Labour will not pretend that fiscal management is an end in itself - it is simply the financial framework through a wider programme of economic and social rebuilding must be achieved.

Labour will build a strong export economy with more good jobs. It will do so with an aggressive programme of economic development, innovation and monetary reform that will unleash the potential of the real economy. My colleague David Parker will provide more on this shortly.

Labour will help all Kiwis to own their own future through increased savings and appropriate protection of strategic New Zealand assets.

Labour will not strip KiwiSaver but will build on it and broaden it into an even more effective vehicle to lift New Zealand's crucial savings rate while providing every Kiwi family with the opportunity to secure their future.

Labour will stop the sale of state owned enterprises. We will prevent the indiscriminate sale of farmland of more than 5ha.

Labour will ensure the sustainability of New Zealand superannuation by resuming prefunding through contributions to the NZ Superannuation Fund.

And Labour will work to put owning your own home back within reach of average income-earners.

Labour will help all Kiwis to get ahead by lifting living standards, giving real relief from the rising cost of living, and introducing a fair tax plan.

Labour will carefully review key utility markets, including worrying signs of monopoly rents in electricity markets. We will review the Government's misguided broadband plan and will repeal the ridiculous and globally unique 10-year regulatory holiday on broadband fibre.

Labour will bring down a fair tax package that will ensure a broad and sustainable tax base, and will contribute to aligning the economic incentives with New Zealand's strategic economic needs. A good Budget would be fair to all - giving every New Zealander a fair go - the opportunity to do better, but also expecting everyone to play their part in the rebuilding of our battered economy.

That includes, frankly, paying a fair share of the tax burden rather than - for some - structuring businesses that do not show income, sheltering income in trusts, or pretending not to trade property after buying and selling a dozen rentals. Those folks have fair warning that we are all in this together and that they too will pay their fair share.

Labour will bring to the 2011 general election a responsible, fully-costed policy budget package. .

We will not be releasing that this Thursday. We need to carefully consider the revised Budget baselines and work them through our own investment plans.
We will release our policies systematically once that due diligence has been completed over the next few months.

You are at the front end of the real economy. You know that the problems before us are real. The slope we must climb to get our country out of the rut of decline is steep.

And no-one can better demonstrate the resilience and courage of the New Zealand spirit better than the people of Canterbury.

We salute that courage and aim to honour it with policies that dare to do what is right, rather than just what seems popular. And we will not allow the people who have suffered here to be further burdened by the failure of this government to develop a plan for our recovery as a nation.

This week, as you assess the current Government's third Budget, ask yourselves whether if meets the test of courageously addressing the structural problems, and prudently managing our resources for everyone while acting as a platform for the future.

Labour is laying down four tests for you to view the current Budget against:

* Does it rebuild and reorient our economy towards exports and sustainable high-value production and employment?

* Will it rebuild savings and redirect investment to its most productive uses, or will it see more drain offshore or be wasted on property speculation?

* Will it help to lift living standards for all New Zealanders and not just a few, and provide some urgent relief to the acute cost of living pressures being felt by many?

* And will it reduce debt over the medium term to ensure that we are living within our fiscal means, which means being real about priorities and the need for everyone to pay their fair share the necessary structural changes required to get our economy on a better footing for the medium term. ?.
These are the key tests for economic policy, and for this week's Budget.

It has to grow our economy in a sustainable way.

It has to see our savings grow and our debts fall, so more New Zealanders can own their own future, and so that as a country we can own our own destiny rather than see it hollowed out and sold off to foreign control.

It has to focus on the creation of well-paid jobs, so that people will stay here to work and to live.

And it has to ensure that ours is a more equal society, where all children regardless of the circumstances of their birth have the opportunity to achieve their full potential in life.

Because, as I said at the start, the economy must support our New Zealand way of life and must be a legacy for the generations that follow.

And as I said, given the magnitude of the debt mountain in front of us and the depth of the rut our real economy is stuck in, now is the time for boldness, for decisive moves that will actually fix the structural problems holding us back, not slapping on a coat of paint for spin, or pretending that merely balancing the Crown accounts is a substitute for structural change.

Without that, we may end up feeling better about today but selling out our children's futures for generations. We cannot allow that to happen. We must rise to the new challenges of our times.

That is the real challenge for Budget 2011. Let us see what the week brings.

Thank you.

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