Bill English says Budget 2010 includes 2% limit on spending growth; NZ$1.8 bln of reprioritised spending

Finance Minister Bill English has foreshadowed an extended clampdown on government spending in Budget 2010 due on May 20, including restricting rises in the current NZ$1.1 billion per year in discretionary spending growth to 2%. This appears to be a response to a push by ACT for a more formal cap on government spending. The government would also redirect a further NZ$1.8 billion of 'lower quality' government spending into 'high priority' areas between now and 2014, English said in a luncheon speech to the Wellington Chamber of Commerce. The National/ACT/Maori government redirected NZ$2 billion of spending in Budget 2009. He said the economy was recovering faster than Treasury forecast in December, but that the government would still need to borrow heavily in coming years and needed to return to surplus as soon as possible. Here is more detail below in an English news release on the speech, which is also below.

The Budget next month will redirect another $1.8 billion of lower quality government spending between now and 2014 into high priority areas, Finance Minister Bill English said today This follows Budget 2009 redirecting $2 billion of lower quality spending to higher priority initiatives, he said in a speech to the Wellington Regional Chamber of Commerce. “That’s a significant sum of money we’re making available for priority areas such as better healthcare services, better education and keeping New Zealanders safe. “The Government will continue to weed out low quality spending. We will live within the $1.1 billion annual operating allowance for new spending we have set ourselves, and restrict annual increases in this figure to 2 per cent from 2011/12.” Mr English repeated that most Government agencies would receive no budget increases over the next three or four years, as the Government moved to get back to Budget surplus as soon as possible. “It’s clear from the work we’ve done so far that there is considerable scope to provide better public services by improving processes, removing duplication and reallocating resources from low quality spending to improve frontline public services. “It’s about doing things better and smarter, after a decade where new funding flowed freely and constraint wasn’t required.” “Public service chief executives are coming to terms with this reality. The Government has given them time to prepare their agencies to provide better public services with little or no new money over the next three or four years. “I want to get the Government back into budget surplus as quickly as possible, because surpluses give us choices. “For example, surpluses give us choices to invest more in public services; to pay down public debt; to resume contributions to the New Zealand Super Fund – or to do any number of other things. “As long as we run deficits, we don’t have those choices,” Mr English said.

Good afternoon and thank you Charles for your warm welcome. It’s good to see so many people here today from the Wellington Chamber of Commerce and the wider Wellington business community. In exactly four weeks today, I will deliver the second Budget for the John Key-led Government. It will be delivered in a very different global economic and financial environment than we faced when preparing the Budget last year. The world was then gripped by a financial crisis on a scale not seen for many decades and the global banking system was creaking at the seams. Out of necessity, Budget 2009 focused on dealing with the immediate effects of that crisis. We had to work hard to get the Government’s deteriorating books in order - particularly turning around forecasts of ever-increasing public debt that last year threatened New Zealand’s international credit ratings. Looking back, I believe we struck the right balance. We helped the most vulnerable by preserving entitlements such as welfare benefits, New Zealand Superannuation and Working for Families. We took steps to help stem job losses and keep young people connected to the world of work. To do that, the Government absorbed much of the shock of the recession by significantly increasing borrowing. At the same time, we curtailed low-quality spending and were able to turn around deeply worrying medium-term debt forecasts. Now that we’ve come through the recession in reasonable shape, the Budget this year will focus squarely on building higher and sustainable economic growth. I will talk more about the Budget a little later. But let me say that growth really does matter. It matters because it’s the only way New Zealand can create the jobs, the higher incomes and the better living standards Kiwis deserve. We also need to show New Zealanders that there are opportunities for their families in this country – so they don’t have to move to Sydney or London. It’s good that New Zealand has come out of the recession in better shape than most other countries. The economy here has grown in each of the past three quarters, although the road to recovery will remain bumpy at times. In New Zealand, the dire immediate threats of the financial crisis have passed. There is no doubt that we have benefited from the relatively strong performances of China and Australia through the recession. Moreover, New Zealand businesses proved to be resilient and the Reserve Bank here moved swiftly in its monetary policy response. And finally, we cannot underestimate the enormous advantage we enjoyed by having strong banks and therefore avoiding the hugely expensive taxpayer-funded bank bailouts required in the United States and parts of Europe. Focus on new jobs and growth So, despite New Zealand having come through the recession in reasonable shape, our long-term economic challenge remains as acute as it was a year ago. That’s particularly so with unemployment at more than 7 per cent and predictions that it will fall only slowly as the recovery takes hold. Every new job created and every existing one saved gives one more New Zealander choices and opportunities. Many New Zealanders have had no wage increases for up to two years. In the longer-term, sustainable jobs will be created only when people have the confidence to invest in productive businesses so they can expand and take on new staff. There is still a perception that New Zealand’s economy was growing strongly before the global financial crisis. That perception is wrong. In fact, New Zealand’s economy is not much bigger now than it was in 2005 - and it was already in trouble before the global recession. In the three years before the Lehman collapse in late 2008, the economy grew by less than 1 per cent a year. This was less than half our trading partner average, and less than one-third of Australia’s growth rate. During this time, the growth we did see came from all the wrong places. Output from exporters and import-competing industries, often termed the tradeables part of the economy, is now about 12 per cent smaller than in 2005. So we’ve had five years of severe export recession. In fact, overall the tradeables sector has not grown at all since 2002 – and in that time Government spending has accelerated and New Zealand’s indebtedness to the rest of the world has grown significantly. New Zealand’s habit of spending more than it earns has accelerated in the past five years. New Zealand’s total external debt has ballooned from $130 billion to about $170 billion over this period. This is forecast to approach $250 billion by 2014. Government debt by global standards is relatively low, but increasing sharply. On the other hand, private sector debt is much higher. As a country, we must finance that debt on world markets, when other countries are also borrowing heavily and global financial markets remain fragile and far from stable. For New Zealand, that is a significant vulnerability. Our other vulnerability is our lop-sided and under-performing economy. Government spending has ballooned, growing 50% in the five years to 2009, more than twice the nominal economic growth. As the tide of global growth went out, the costs of this have been laid bare. The property market soared, and is now in a long term correction. It has absorbed too much of New Zealand’s productive capital, for too little gain. This legacy has both an economic and a human cost. The economic cost is obvious. The human cost is everywhere: New Zealanders who have lost their jobs, have decided to live abroad, or families who are struggling. So we have a clear choice: We can continue to muddle along, handicapped by these imbalances and falling further behind other countries. Or we can set our sights higher and create the kind of country the Prime Minister spoke of soon after taking office. Recession costs to the Government Like the rest of New Zealand, the Government has a vested interest in getting a better performing economy. The fiscal costs of the recession and the previous Government’s big spending increases are evident in the deep red ink flowing through the Crown’s own financial statements. The latest published forecasts in December show the Government borrowing about NZ$240 million every week for the next four years to roll over existing debt and to fund growing deficits. Net core Crown debt was forecast to more than treble to NZ$65 billion by 2014. And the Crown’s annual interest payments are expected to double to $5.9 billion by 2014 – equal to the combined annual budgets of police and law and order. And the December forecasts predicted the economy would shrink by 0.4 per cent in the year to March 2010, before growing by 2.4 per cent in 2011 and 3.2 per cent in 2012. The updated economic and fiscal forecasts for the Budget are still to be finalised. Having said that, it’s clear that the economy is recovering slightly more strongly than the Treasury forecast in December and that growth is predicted to strengthen further in the year ahead. This reflects a continued recovery in the global economy; rising world demand for commodities improving our terms of trade; and some higher business and consumer confidence. However, risks remain for New Zealand – and it will be some time before GDP recovers to previous levels. We are not yet seeing the traditionally strong bounce out of recession – where the exchange rate falls, primary producers in rural areas reap the benefits and enjoy higher incomes, which eventually flows into the cities. The recovery from the recession of the past two years appears slower and more tentative. And we still face some economic headwinds: The global recovery remains fragile; our high exchange rate against the US dollar and the pound is hampering exporters; and New Zealand household finances are extended. So the domestic recovery, although welcome, is quite patchy across different sectors and from region to region. This slightly better-than-expected economic outlook won’t bring any dramatic changes to the fiscal forecasts accompanying the Budget, compared to the December forecasts. There may be slightly stronger revenue and slightly lower spending on income support, but nothing that significantly eases our medium-term fiscal pressures. That means several more years of Budget deficits and increasing debt - and certainly no dramatic reduction in the $240 million that we need to borrow each week to roll over existing debt and to fund ongoing deficits. So it’s critical the Government continues to responsibly manage public finances on behalf of taxpayers. We can’t take our eye off the ball. Freeing up low quality spending The Government will continue to weed out lower quality spending. We will live within the $1.1 billion annual operating allowance for new spending we have set ourselves, and restrict annual increases in this figure to 2 per cent from 2011/12. In the Budget last year, we identified $2 billion of lower quality spending over the subsequent four years to redirect into higher priority areas. In this year’s Budget, we will find another $1.8 billion of low quality spending between now and 2014 for reprioritising into higher priority initiatives. That’s a significant sum of money we’re making available for priority areas such as better healthcare services, better education and keeping New Zealanders safe. I said in last year’s Budget that most Government agencies will receive no budget increases over the next few years. And in this Budget, I will say the same thing again. Not because they don’t deliver worthwhile services, but simply because we cannot allow debt to escalate further. It’s clear from the work we’ve done so far that there is considerable scope to provide better public services by improving processes, removing duplication and reallocating resources from low quality spending to improve frontline public services. It’s about doing things better and smarter, after a decade where new funding flowed freely and constraint wasn’t required. We shouldn’t forget that the money we spend on behalf of taxpayers comes from the weekly PAYE taxes of hard-working New Zealanders. Public service chief executives are coming to terms with this reality. The Government has given them time to prepare their agencies to provide better public services with little or no new money over the next three or four years. I want to get the Government back into budget surplus as quickly as possible, because surpluses give us choices. For example, surpluses give us choices to invest more in public services; to pay down public debt; to resume contributions to the New Zealand Super Fund – or to do any number of other things. As long as we run deficits, we don’t have those choices. The Government’s economic programme So what is the Government doing to meet these considerable challenges? We’ve embarked on a substantial programme to arrest New Zealand’s economic under performance of the past decade. It has included a multi-billion investment in infrastructure such as roads, ultra-fast broadband and electricity transmission. We’re reviewing regulations and cutting red tape, and we’re improving education and skills. And, as I’ve said, we’re lifting productivity and improving services in the public sector – with the core Government making up about a quarter of the economy, we want to get our own house in order. Our starting point is that we need to change the incentives so resources go towards productive investment, savings and exports - and away from the unsustainable consumption, borrowing and government spending increases of the past decade. Some of the policies we have promoted – for example, government spending restraint or plans for tax reform - have not met with universal support. However, this Government is prepared to make the difficult calls where they are necessary. We are taking a balanced and pragmatic approach to lifting economic growth. It would be futile to launch a one-off package of big-bang reforms that pleases a few commentators, but sparks an overwhelming public backlash. We’ve seen this happen in New Zealand before. History shows this approach has been followed by extended periods of economic policy inertia and – most damaging of all – economic underperformance. Instead, we’re embarking on a consistent programme of considered, broad-based reform, year after year. This is what Australia has done over many years. Goals of Budget 2010 Let me now turn to the Budget. The Budget next month will set out the next steps in that programme. Budget 2010 will have four main goals: * Lifting the long-term performance of the economy – to deliver New Zealanders the jobs, increased incomes and better living standards I have already alluded to. * Reform of the tax system – to make the system fairer, more sustainable and more supporting of economic growth. I’ll speak more about tax in a moment. * Better delivery of public services to meet New Zealanders’ expectations of modern public services, while at the same time recognising the ongoing pressures on taxpayers. * Maintaining firm control of the Government’s finances – so we can return to Budget surpluses and pull back our rising debt. All of these goals are inter-linked. Keeping a tight rein on government spending, for example, helps ease pressure on the exchange rate. This in turn helps rebalance the economy toward the tradeables sector, lifting long-term growth, creating sustainable jobs and boosting incomes. Tax reform I’d now like to spend a little time now talking about taxation. Developing a growth-enhancing tax system is one of our economic policy drivers and it is also a goal for the Budget. Tax reform has been the subject of considerable public and media debate over the past 12 months, which is a good thing. I don’t think I’ve seen such an open and constructive process around such an important policy area before. Our decisions about tax changes will be announced in the Budget – and I won’t pre-empt them today. But I can say there is a compelling case to rebalance our tax system to support our goal of tilting the economy towards savings, investment and exports and away from borrowing, consumption and investment housing. Taxation has a pervasive influence on both the economy at large and on decisions made by individuals. Remember: we have an economy where we’re spending more than we earn. Tax is one way to change people’s choices and help turn that around. So any tax changes need to contribute to a better-performing economy, more jobs and higher incomes for families. The starting point for the Government is that lower personal taxes across the board are a good thing because they give people incentives to work hard, improve their skills and get ahead here in New Zealand. We have this opportunity at a time when many other countries will be forced to increase taxes. This is an important competitive advantage for New Zealand. But this will not be a lolly scramble. We simply cannot afford one. Our tax package will be broadly cost neutral, with a focus on fairness. We are committed to protecting the most vulnerable, while improving New Zealand’s long-term prospects. The Prime Minister has said that any tax switch involving cutting personal taxes across the board and raising GST to 15 per cent would leave the vast bulk of New Zealanders better off. That will definitely be the case. Any increase in GST would be accompanied by immediate compensation for low and middle income earners, beneficiaries, superannuitants and people receiving Working for Families. Additional regular adjustments for other ongoing inflationary pressures would be provided as usual. As I mentioned in Parliament yesterday - Statistics New Zealand has independently calculated that increasing GST to 15 per cent would increase the price of goods and services subject to GST by 2.22 per cent. A product priced at $100 excluding GST currently sells for $112.50. If GST were increased to 15 per cent, that product would sell for $115 – an increase of 2.22 per cent – not the 2.5 per cent some commentators have assumed. Secondly, Statistics New Zealand has also confirmed that an increase GST to 15 per cent would raise overall consumer inflation, as measured by the basket of goods in the CPI, by 2.02 per cent. This is because several consumer items, such as housing rentals, mortgage payments and school donations – which together make up about a tenth of the consumers price index - are not subject to GST. It’s also important to remember that actual CPI inflation in nine of the past 10 years has been higher than the inflationary impact of the GST increase the Government is considering. In addition, under the tax package being considered, superannuitants and people on lower wages would also receive income tax cuts. As we’ve said, we are looking at income tax cuts across the board, not just for people on the top marginal rate. So it will be important on Budget Day to look at the tax package as a whole, rather than individual components in isolation. Our opportunity to stand out from the crowd Finally, I would like to end today on a note of optimism. The global recession has presented New Zealand with an opportunity – probably one that comes along only once in a generation. We will stand out from other countries if we come out of this challenging period with low debt and low tax rates by world standards. We will stand out from the crowd if we deliver a rebalanced economy with growing exports and higher-paying, sustainable jobs. And we will stand out in the eyes of New Zealanders if we provide the financial security and opportunities for hard-working Kiwis and their families to get ahead here in this country. If we achieve those things, the John Key-led Government will have done New Zealand a great service. Thank you.