Building a brighter future or returning to the failed policies of the past – these are the clear choices voters have been offered.
In contrast to Phil Goff’s promises for increased spending and borrowing, John Key is offering lower spending, less borrowing and a faster return to surpluses.
This year is about building a brighter future for New Zealanders and their families.
That is only possible if we lift the country’s economic performance, and by doing so deliver the jobs, higher incomes and better living standards New Zealanders aspire to and deserve.
That means making responsible decisions now, as the economy picks up, to increase national savings and reduce the country’s debt.
He’s trusting us to understand the need for short term restraint to give long term gains.
. . regardless of what unfolds, it is important to look through the quarter-to-quarter economic figures and focus on the longer-term challenge.
That challenge is to build a lasting recovery based on savings, exports and productive investment.
New Zealand has been through a recession and a global financial crisis. We have a chance, now the economy is gathering steam again, to build a solid platform for future growth.
If we get this right the possibilities are exciting.
Our trade is rapidly shifting towards Asia, which is growing much faster than our traditional markets in Europe and the United States.
New Zealand is a food-producing country and world demand for food is rising. Global prices for dairy, forestry, meat and other commodities are high.
We have a genuine competitive advantage in agriculture and other primary sectors. We have world-class firms engaged in high-tech manufacturing, software, film and other industries.
These are great opportunities for New Zealand.
But as a country we have to reach out and grasp those opportunities or we risk missing the boat.
The way for New Zealand to get ahead is to sell more to the rest of the world.
That means making some changes.
And why do we need changes?
Growth over the last decade was built on all the wrong things – debt, consumption, and government spending.
People borrowed heavily to buy houses and farms, property prices soared and New Zealanders felt wealthier as a result. They spent a lot on consumer goods, which led to a bubble of economic activity.
The Labour Government thought this bubble, and the tax revenue it generated, would go on forever and spent up large on permanent new spending programmes. The Government’s spending increased by more than 50 per cent in just six years.
High government and private sector consumption generated inflationary pressures, pushing up interest rates and discouraging productive investment.
High interest rates in turn led to an over-valued exchange rate which smothered the internationally-competitive sectors of the economy, like agriculture, horticulture and manufacturing.
Our exporters found it hard to sell their products at competitive prices overseas because of the high value of the dollar.
The internationally-competitive sectors of the economy actually went into recession in 2004, and experienced a 10 per cent drop in output over the next five years.
In contrast, the domestically-focused side of the economy grew strongly. Since 2004, almost 60 per cent of new jobs have been in heavily government-dominated sectors.
As a country we imported far more than we exported, leaving a gaping balance of payments deficit that persisted for year after year.
All this could never be a solid basis for growth.
Those are the failed polices of the noughties. They didn’t work when the global economy was booming, they definitely won’t work now it’s not.
By the time the National-led Government came into office at the end of 2008 the economy was deep in recession, and inflation was the highest it had been in 18 years.
The Government’s books had been left in a mess, with Treasury projecting no end to budget deficits and government debt spiralling out of control.
As an incoming government, we moved quickly to steady the ship, help the economy through the recession and set a credible path back to surplus.
Even so, when we tally up everything the Government is spending this year, we still need to borrow $300 million a week on average to pay the bills.
In the worst of the recession, running a budget deficit was the right thing to do, as it gave much-needed support to the economy.
Now, as the economy recovers, borrowing $300 million a week is unaffordable and is holding the economy back.
It is crowding out our internationally-competitive sectors of the economy, keeping the exchange rate high, and tying up resources that could be better used elsewhere in the economy.
And this borrowing will, of course, have to be repaid in future years, with interest.
Annual interest payments on our debt will, in four years time, cost more than spending on the Police, defence and early childhood education combined.
Rising government debt adds to New Zealand’s total indebtedness to the rest of the world.
Through decades of under-saving, over-spending and over-borrowing, the public and private sectors have together built up a net foreign debt equivalent to 85 per cent of GDP.
That makes us heavily reliant on overseas lenders who can at any time decide that we are just too much of a risk. And if we can’t raise money overseas, or can only do so at a high price, we face the risk of a protracted recession, with a significant loss of jobs and a fall in the value of everyone’s homes, businesses and farms.
To put it in context, the only other developed countries with a foreign debt the size of ours are Greece, Portugal, Spain and Ireland.
That is very uneasy company indeed. And it is precisely the difficulties those countries are in that has led to Standard and Poor’s putting New Zealand on negative outlook.
So as the economy picks up, it is crucially important that our growth is not based, as it was in the 2000s, on debt, consumption and government spending but instead is built on the solid foundation of savings, exports and productive investment.
He then looks at what National has been achieved so far:
. . . we undertook the biggest reforms of the tax system in 25 years to increase the incentives to work hard, save and invest; and to remove distortions and clamp down on loopholes. Importantly, we designed these tax changes so that they won’t result in extra government borrowing across the forecast period.
We hauled back new budget spending allowances and reduced the size of the bureaucracy.
We invested in much-needed infrastructure, to unblock the arteries of the economy.
We have progressed an ambitious free trade agenda.
And we introduced a number of regulatory changes to make it easier to do business.
But structural change in the economy does not happen overnight. It is a bit like turning a super-tanker around.
New Zealand’s economic imbalances have built up over several decades, so it will take more than a year or two to fix them.
It will take a number of years and considerable effort.
The 2009 Budget concentrated on getting through the recession as well as possible, last year’s concentrated on tax reforms and this year’s will focus on savings and investment.
Over the last year or so, New Zealand households, businesses and farms have begun to save more, spend less and borrow less as a proportion of their incomes.
This is an encouraging change of behaviour but needs to be cemented in for the long term. And government needs to stop pushing the other way.
It sounds oxymoronic but we’ll gain more from a government that spends less.
The Savings Working Group is due to present its report to the Government in a few weeks. We will consider this very carefully, including ideas around tax, KiwiSaver, and investment products.
The Government has already made tax changes that are pro-savings. We remain conscious, however, that effective tax rates on some forms of savings remain very high.
The Government is also interested in ideas that increase participation in KiwiSaver and raise national savings, but which don’t result in an ongoing and unaffordable fiscal cost, which again would have to be borrowed.
And in terms of investment opportunities, the Government is interested in the Working Group’s thoughts on how to expand the range of investment opportunities available to New Zealand savers.
It would be better for both investors and the economy as a whole if people had the confidence to save more and invest in a wider range of assets, not just in property.
These are all areas where the Government may be able to influence the level or allocation of private sector savings.
But a point which has been made to us very clearly, by the Savings Working Group and others, is that the government is itself a crucial part of the national savings equation.
The government simply has to get its finances in order if New Zealand is to achieve a long-term improvement in its economic prospects.
Therefore I am announcing today that the Government intends to borrow less in the future than is currently forecast.
That is going to involve action on two fronts – on the operating side and on the capital side of the Government’s spending.
This is very welcome news and will come from a tighter fiscal policy. Spending will increase but more slowly than forecast and the government books will return to surplus in 2014/15, a year earlier than predicted.
In particular, the Government is determined to reduce the costs of running its own business. That process has started, but the public sector is still a long way from being a lean and efficient organisation.
National will also look at longer term savings.
Crucially, this year there will be no room at all for extravagant election promises.
We are going to campaign on being responsible managers of the economy, who make the right decisions to build a platform for future growth.
Any party that wants to ramp up spending is being economically irresponsible.
The only way to spend more money is to borrow it or to raise taxes. Borrowing more would lift our debt to dangerous levels, while raising taxes would snuff out the recovery and send even more Kiwis overseas.
Which part of this does Labour not understand?
But if the government isn’t borrowing and taxing what can it do?
As a country we have to fund more of our own future.
So we need to look at where we can change the mix of assets we own – identifying where new assets are most needed and where we have more money invested than we absolutely need to.
The greatest scope to change the mix of assets lies with the government’s portfolio of commercial assets.
In particular, the sort of mixed-ownership model under which Air New Zealand operates – where the government owns most of the company but there is a minority of outside equity – gives the best of both worlds.
Under this model, the government has a controlling stake in what is a crucial piece of transport infrastructure and guarantees that it will be majority New Zealand owned. But by not owning 100 percent of the airline, the government also has capital free to invest in other assets.
This model could be extended to more of the government’s commercial assets.
As well as freeing up capital, there are three other potential benefits of a mixed ownership model.
The first is that it broadens the pool of investments for New Zealand savers, either directly themselves, or through investment funds such as KiwiSaver.
New, quality listings on the stock exchange would give “mum and dad” investors the option of putting their savings into large and proven companies, rather than relying, as is so often the case, on property investments.
The second is that the company reaps the benefits of sharper commercial disciplines, more transparency and greater external oversight.
Under the mixed ownership model Air New Zealand has been a creative and innovative company and a model corporate citizen. It has also offered some very competitive prices for air travel.
I am convinced that Air New Zealand would not be run as well, nor provide as good a service to customers, if it was owned 100 percent by the government.
And the third potential benefit is the opportunity for the companies involved to obtain more capital to grow further, without depending entirely on a cash-strapped government to support them.
For all these reasons, the Government has asked Treasury for advice on the merits and viability of extending the mixed ownership model to four other state-owned companies – Mighty River Power, Meridian, Genesis and Solid Energy.
In each case, the government would retain majority ownership and control, and the freed-up capital would be used to purchase other public assets, thereby reducing the government’s need to borrow.
The Government has also asked Treasury for advice on the merits and viability of reducing the government’s shareholding in Air New Zealand, again while retaining a majority stake.
The left will paint this as a radical wholesale sell off of state assets but it is a very moderate policy:
Only the companies I have just mentioned will be considered for a mixed ownership model. But the Government will continue to look for commercial arrangements in other areas where private involvement can help drive performance, in the way we have been doing with public-private partnerships, for example.
I can see a strong appetite from New Zealand investors for participation in a mixed ownership model. Between KiwiSaver, other managed funds, iwi, mum and dad investors and the government’s own investment arms – including the Super Fund – there is a very substantial capacity to invest in quality New Zealand assets.
We would envisage these groups being at the front of the queue in any offering, and taking the majority of any stake that was offered.
A lack of domestic investment opportunities is one of the weaknesses of our economy which will be addressed by this policy.
Ownership by New Zealand investors would of course be on top of the government’s majority stake, which is held on behalf of all New Zealanders. That majority stake would always ensure New Zealand control for the benefit of New Zealanders.
As far as possible, without compromising commercial sensitivities, the Government will publicly release the advice we receive from Treasury.
We have always been clear that if there was to be any change to our policy on state-owned assets in any way, we would seek the support of New Zealanders at an election, and that is exactly what we will do.
Our final policy will be decided prior to this year’s election, and we will seek a mandate from the electorate before proceeding with any change.
National was careful to say before the election it would not sell any assets in its first term and if that policy changed it would form part of the next election manifesto.
It kept the promise about not selling assets and is now clearly offering voters the opportunity to accept, or reject, partial sales in the next term.
But let me be clear – we will only proceed with a mixed ownership model if it meets the following tests:
the Government would have to maintain a majority controlling stake by owning more than 50 per cent of the company;
New Zealand investors would have to be at the front of the queue for shareholdings, and we would have to be confident of widespread and substantial New Zealand share ownership;
the companies involved would have to present good opportunities for investors;
the capital freed up would have to be used on behalf of taxpayers to fund new public assets and thereby reduce the pressure on the Government to borrow; and
the Government would have to be satisfied that industry-specific regulations adequately protected New Zealand consumers.
In particular, I want to stress that the Government is interested in what works, not in following any particular ideology.
What works rather than ideology, that’s another refreshing contrast to the Opposition.
I want to finish by emphasising the importance of getting the New Zealand economy back on a solid and durable growth path.
We got off that path in the mid-2000s, and doing so has proven very harmful.
Getting back on the growth path again means playing to our true strengths – allowing our export industries to start expanding again, and not tying up resources in less-efficient, domestically-focused government sectors.
Increasing national savings is key to supporting this shift.
That is why the theme of this year’s Budget is going to be savings and investment.
We recognise that New Zealand’s high level of foreign debt is our biggest vulnerability.
We have asked the Savings Working Group to consider policy options to increase national savings.
But the Government is already committed to playing its part. We have to increase our own savings and reduce public sector debt.
That is why the Government is going to reduce growth in its spending, get back to surplus faster than previously indicated and look to better allocate its assets across competing uses.
This is leading by example.
Many National supporters were disappointed by the constraints the party put on what it could do this term because of promises made before the last election.
But it was important to show the electorate it could be trusted and it’s done that.
Now it’s time to ask voters to trust it again and in doing so is trusting voters to recognise there is no money for extravagant promises.
A Q&A on the asset sale policy follows this media release.