New Zealand went into recession before the rest of the world because our growth was built on government spending, the housing bubble and debt fuelled consumption.
Finance Minister Bill English says the recovery will be different from past recoveries and the government is firmly focussed on ensuring it’s a sustainable and long-term one.
“This recovery will be patchy at times – due to the uncertain global environment and the need for businesses and households to pay down large stocks of debt.
“In this credit-constrained world, the recovery will need to come first from the earnings side of the economy such as exports,” Mr English said today in a speech to the New Zealand Council for Infrastructure Development.
“All of this shows that tackling the economy’s imbalances will not be a short-term task. It’s not just a matter of shrugging off the global recession. The challenges we face started years earlier.
“Turning that around will require a relentless, long-term focus and commitment,” Mr English says.
This reality was reflected in stable rather than growing results for domestic industries like housing and retail, and indicators such as business confidence and the sharemarket.
Temporary solutions based on borrow, tax and spend policies pursued by past governments, and still favoured by some parties, would simply mask the underlying weakness of our economy.
Recent debate about the Government’s goal of catching Australian incomes by 2025 had attracted some comment – much of it characterised by a total lack of context about the recent economic performances of the two countries.
“In the three years to 2008, New Zealand’s economic growth was unbalanced and sluggish. In early 2008, New Zealand went into a recession that Australia simply didn’t have.
“This meant the Australian economy grew by about 11.5 per cent in the four years to March 2010, while our economy grew just 2 per cent.
“So the Government inherited a situation that makes the challenging target of catching Australia even more difficult. Let me stress that the Government remains committed to this target – but it’s a 2025 target, not a 2011 or 2014 target.”
Over the past 30 years, there had been many two year periods when New Zealand performed better than Australia, as dairy and other commodity prices fluctuated. But overall, the trend has been clearly in Australia’s favour.
“On the commodity front, Australia clearly has the edge at the moment,” Mr English says. “Put in simple terms, Australia’s mineral industry makes up nearly 70 per cent of its exports, while dairy makes up 20 per cent of our exports.
“Furthermore, Australian commodity prices roughly doubled in the five years to July 2010, while New Zealand’s commodity prices increased by only half as much.
“As a result, Australia’s minerals boom is likely to mean it will perform better than New Zealand in the near term, but it is the long-term trend we are determined to turn around.
“The only way we can permanently lift New Zealand’s economic growth is through considered and consistent reform and change, year after year.
“Budget 2010 took several steps in that direction – including across the board personal tax cuts from 1 October, which will help narrow the gap in after-tax incomes compared with Australia.”
More broadly, the Government has built its economic plan around six policy drivers. They include:
- Strengthening our tax system
- Better, smarter public services
- Reforming regulation
- Education and skills
- Business innovation and trade
- Investment in productive infrastructure.
These are what National campaigned on and it’s what the government has been delivering.
But it’s not a quick-fix.
The foundations of our economy have been undermined by high and unfair taxes, a bloated bureaurcracy, too much red tape, too many people without the necessary education and skills, too little innovation and trade and insufficient investment in the right places.
Considered and consistent reform and change, year after year is a long term strategy to turn that round.
It’s what we need to change from a nation fuelled by empty calories of debt, tax and government spending to one built on savings and exports.
The extracts above are from a speech delivered to the Council for Infrastructure Development.