By Alex Tarrant
The economic recovery in 2011 could be patchy, Prime Minister John Key said in a speech opening Parliament today, as he outlined a number of overseas risks, including a possible asset bubble in China, that could counter positive signs for economic growth.
While the speech did not outline any new economic policies from the Government, Key said government would look to increase exports through new free trade agreements, strengthen the Government's accounts, raise the nation's savings rate, and get greater value for money in "the Government's own bureaucratic machine".
The Rugby World Cup, better science and innovation, ultra-fast broadband and more efficient transport infrastructure would also help businesses and the economy in 2011, he said.
Positive vs negative
There were some very positive signs for the economy, Key said.
"The global economy is starting to look much stronger, we’re seeing higher commodity prices – the Fonterra auction up 7% just last week, lamb prices starting to rise, wool prices starting to rise. Of course the Rugby World Cup [is] likely to have a big impact on the economy, and the stimulus impact from the earthquake," he said.
"That may well be the case, but we also have to lock in the trends that we’ve seen in the last two years of a National government. Because despite the fact that we inherited books that were a complete mess, despite the fact that we had to contend with the worst recession since the Great Depression, in the two years our government’s been in, after-tax wages have risen 16% while costs rose 6%.
However there were also risks.
"Risks to the global economy and we’ve seen that in recent weeks," Key said, refering to the political crisis in Egypt.
"Risks that there is a great period of unsettledness in the Middle East. There are also risks, or course, in China if there’s an asset bubble, there are risks around the global capital markets. We’ve seen that last year with Portugal, Greece, Spain and Ireland," he said.
There were also risks that New Zealand’s exchange rate would continued to rise against a "very weak US economy," as well as a risk from rating agency Standard and Poor’s, which put New Zealand’s credit rating on negative outlook late last year, Key said
"So it could be patchy, and there could be periods where it it one step forward and half a step back, but overall this economy has to change. Away from one of consumption and property, one to savings and exports," Key said.
More free trade agreements
While conclusion of the World Trade Organisation's Doha Round remained government's top priority in trade negotiations, it wished to prepare the ground for further FTAs, in particular with the 'Mercosur' countries of Argentina, Brazil, Paraguay and Uruguay, Key said.
"The Government will open up new markets for our exporters by progressing new Free Trade Agreements and making most of existing agreements," Key said in the speech.
"We have already signed FTAs with Malaysia and Hong Kong. We have commenced negotiations with (South) Korea, India, Russia and the Trans Pacific Partnership and this year we will continue efforts to conclude these negotiations," he said.
"In 2011 we will build awareness of the possibilities for New Zealand exports in emerging markets, both by promoting awareness of our products overseas and by supporting New Zealand businesses to make the most out of opportunities in new markets.
"We will progress work on an NZ Inc India Strategy and an NZ Inc China Strategy in order to better coordinate New Zealand's overseas links," he said.
High NZ dollar
Key said the government was conscious of the role the exchange rate played in exporters' confidence and competitiveness.
"In the past a high New Zealand dollar has made it harder for our exporters to compete internationally," Key said.
"Throughout the period of the last Labour government high levels of government spending put significant pressure on interest rates, which in turn put pressure on the exchange rate," he said.
"By contrast, this government is supporting Kiwi exporters by doing our bit to avoid overheating the exchange rate, by being disciplined about government spending and thereby keeping the pressure off interest rates."
Savings - government and private
Key reiterated his pledge to only increase budget spending by NZ$800 million to NZ$900 million in the May budget from last year.
"In addition, until we get back into surplus, we have committed to allocating any upward revenue surprises to further reducing the deficit," Key said.
He also said the Government would consider the Savings Working Group's report on how to improve the nation's savings rate, with any policy changes to be announced in the May budget.
"In 2011 the budget will have a focus on savings and investment and it will be taiking on board the information that we’ve received from the Savings Working Group," Key said.
"Because again, the message is very simple. We need to own more of our own future. We need to fund all of our own upside, and we need to have a stronger economy," he said.
Leaky homes
Government this year would address the risk posed by critical problems with New Zealand's housing infrastructure by implementing the Weathertight Homes Resolution Service's financial assistance package for owners of leaky homes, Key said.
Welfare reform
Government looked forward to receiving the Welfare Working Group's report on reforming New Zealand's welfare system, Key said, saying he anticipated three main changes.
"The first will be changes to better support sickness and invalid beneficiaries with children back into paid employment and to ensure they are fulfilling their responsibilities to their children," he said.
"The second will be new approaches to better support sickness and invalid beneficiaries back into employment.
"The third will be new approaches for ensuring young people have the skills and support needed to escape the benefit system and, ideally, to prevent them from joining it in the first place.
The economy
Despite two years of challenging and volatile global economic conditions, in 2011 the economy was expected to grow in excess of 3%, which would result in better job prospects and higher incomes for many New Zealanders, Key said.
"While the immediate crisis is over, our focus is now on repairing the structural imbalances that have built up in the New Zealand economy over a number of decades. We are rebalancing the economy away from debt-fuelled consumption and government spending and towards savings, investment and exports," he said.
"Under the last Labour government the economy got way out of balance. Since 2004, almost 60% of new jobs have been in heavily government-dominated sectors, while jobs were lost in the export-focused agricultural and manufacturing sectors.
"So this government is building the conditions for more enduring and better-paid jobs. Our strategy for job creation is to build the economic conditions that will give businesses the confidence they need to hire more workers.
The future opportunities for New Zealand are great. Economically-speaking, we are in the fastest growing region in the world and are very good at producing the goods and services that are in rising demand.
Key also noted that the company tax rate would come down on April 1 this year from 30 cents in the dollar to 28 cents. This would make New Zealand's companies more competitive with Australia and the rest of the world, he said.
External liabilities too high
New Zealand could not continue to have external liabilities that were at 85% of its GDP, Key said.
"We cannot be in the same company as Portugal, Greece, Spain and Ireland, and if we are we know what the picture looks like. We are prepared to be responsible economic managers," he said.
"So for that reason we will not only be looking at the operating budget, but also the capital budget. Late last year we recognised that New Zealand taxpayers have around about NZ$220 billion worth of assets. As a government we want to aquire NZ$33 billion worth of new assets over the next five years. We only have a number of options.
"One is to borrow more – that will not be acceptable to the rating agencies. The second option is to not build that infrastructure – that will not deliver us the jobs and the economy we want. The third option is to release some capital from assets we already own," he said.
Selling the family silver
Government was therefore looking into mixed ownership models to sell off 49% of Meridian, Mighty River, Genesis and Solid Energy.
"The Crown will always, as a minimum, retain 51% control. The second thing is we will be asking the Treasury to provide for us advice for how to ensure those Kiwi Mums and Dads are at the top of the list for buying any of the equity that we release," Key said.
"That includes the 1.6 million Kiwisaver accounts. You see the interesting thing is that we as a government want those 1.6 million KiwiSaver accounts and New Zealanders to be investing in our economy and our future," he said.
See our new KiwiSaver section here.
"We will be ensuring that the Crown Financial Institutes – ACC, New Zealand Super Fund – are investing in those kinds of assets, along with Iwi," Key said.
Sheppard attacks Kiwisaver-SOE talk
Following Key's speech, Kiwsaver adversary Bruce Sheppard rubished the idea Kiwis would benefit from the SOE sales through their Kiwisaver accounts. He suggested it was mainly the fund management sector that would reap the benefits from the sell-off.
"It’s not good for the national economy because it’s sucking money out of direct productive investment and recycling it back into direct productive investment through a fund manager who clips their ticket," Sheppard told interest.co.nz.
"But that isn’t the problem. The problem is once that has happened the liquidity in the market is removed and given these fringe KiwiSAver funds only invest in listed companies. The declining liquidity in the stock market is actually a risk to our national sovereignty," Sheppard said.
"What Key is actually saying is the institutions are going to get first dibs at it, not ma’s and pa’s. He obviously doesn’t understand what's going on or he’s chosing to be disingenuous," he said.
(Updates with Bruce Sheppard comments, comments on external liabilities, Kiwisaver comments at end, new head, comments on risks and positive signs, links to KiwiSaver articles)
12 Comments
I thought I was living in a comedy but now I know its a tragedy.
(stranger than fiction)
Colin, how can you complain, %3 growth this year. Including "better job prospects and higher incomes." On top of this they are building the conditions for "more enduring and better paid jobs". He obviuosly not talking about the grape industry. However when he said "%60 of new jobs since 2004 have been in Government-dominated sectors" i do wonder - how many jobs is he talking about and is he going to go back to 04 levels? If so wouldnt that be hard on a struggling economy.
"Colin, how can you complain, %3 growth this year."
A promise from a politician in election year. I am not buying it. And even if we did get 3% growth, 7-8% of our GDP would be from government borrowing to maintain entitlements. Thats a volume of borrowing bigger than our dairy export value and more than enough to keep the exchange rate up.
Exactly. No one EVER wants to discuss the direct pass on inflationary effects of mass wage increases. Wages go up, and...........so do consumable prices. Nothing gained but a value in currency again lost.
This simple fact means you will alway have rich and poor, haves and have nots, while eroding more and more middle class if any are left
Just stupid!
"The third will be new approaches for ensuring young people have the skills and support needed to escape the benefit system and, ideally, to prevent them from joining it in the first place.
With minimum wage now $27k for a 40hr week who will employ the school leaver?
Yeap exporters are really comfortable with the xrate in mid 70s..not meanwhile.
POSTAL Service Recall NEW Zeland Post created a stamp with a picture of Maori Electorate , Hone Harawira The stamp was not sticking to envelopes This enraged Hone, who demanded a full investigation After a month of testing and spending of $1.5 million of tax payers money A special commission presented the following findings. 1. The stamp is in perfect order 2. There is nothing wrong with the adhesive 3. People are spitting on the wrong side of the stamp.
"As a government we want to aquire NZ$33 billion worth of new assets over the next five years. We only have a number of options."
"One is to borrow more – that will not be acceptable to the rating agencies."
So John, tell me again why we are borrowing $300 million a week to keep up entitlements if it is not acceptable to the rating agencies?
"The second option is to not build that infrastructure – that will not deliver us the jobs and the economy we want."
Again John, how well is the current infrastructure spend delivering us the jobs and economy we want?
"The third option is to release some capital from assets we already own," he said.
So we sell very profitable power generators and build more roads. Now John, tell me how much higher the returns from having roads "improved" are than from owning the power generators?
John, what about considering a fourth option - stop digging. Stop stupid spending to get your government re-elected?
JK could absorb all the unemployed and even the unemployable while also getting the infrastructure he thinks will save the nation...it's a dive into the future JK but we know you can do it...we need a tunnel under Cook Strait linking north Wellington with Nelson....hand dug of course.
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