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Budget Policy Statement 2010

Economic Strategy

This Government was elected with a mandate to lift economic performance. Economic growth alone can deliver New Zealanders permanently higher living standards and fund better-quality public services.

The current recovery does not put us on a track to achieve all of our objectives. The forecasts highlight the need for more balanced economic growth. In recent years the domestic side of the economy, including Government, has grown rapidly. This has been at the expense of exporters and tradeable producers more generally.

Recent data highlight the risk that these trends could continue. House prices have risen sharply, export volumes are expected to recover less rapidly and the decline in the balance of payments deficit in 2009/10 is largely temporary. While these trends in part reflect the rebound from recession, the longer-term need for growth based around those areas where New Zealand is internationally competitive remains.

Figure 2 - Economic growth rates
Figure 2  - Economic growth rates.
Source:  Motu, Statistics New Zealand, the Treasury

The longer-term objective is to close the income gap with Australia by 2025. This is a challenging goal. Per capita income in Australia is currently around one-third higher than in New Zealand. Moreover, the Australian economy is currently one of the best performing in the Western world. On current forecasts, New Zealand's growth would need to be an additional 1.8 percentage points higher every year to match Australia by 2025. This is a demanding step up, but one that is achievable.

In contrast, the potential growth rate has declined since 2000. This slowdown has reflected growing roadblocks to enterprise and investment within the economy. Growth has been both low and unbalanced in recent years, at a time of very large increases in government expenditure. The tradeable side of the economy has been in recession for five years, with total tradeable output now some 10 percent below 2005 levels. The public sector has grown rapidly. Public sector productivity has been poor, and this has lowered overall productivity growth. Unless we can create the right environment for New Zealand businesses to compete on the world stage, we will not achieve the sustained increase in incomes that this Government is committed to achieving.

In order to address these challenges the Government has identified six areas where material opportunities exist to lift economic growth. Collectively they form an integrated package that will deliver the sustained lift in growth that New Zealand needs. Budget 2010 will support and facilitate progress in all six areas.

The role of independent reviews and taskforces

During its first year in office the Government has been carefully considering these issues. A number of review groups or taskforces have been considering their designated area, largely in the public domain. The Government is committed to open and transparent debate on the issues. It is grateful for the broad input of expertise from all of those who have contributed. These review groups are now reporting and include:

  • The Regulatory Review Commission
  • The Capital Markets Development Taskforce
  • The 2025 Taskforce
  • The Tax Working Group, and
  • The first National Infrastructure Plan.

While the Government is not bound to accept the recommendations of these groups, their findings will be given careful consideration. It is likely that some of their conclusions will be integrated into and help shape the work streams in each of the six major areas identified as lifting growth. All of the reports will be available by early 2010.

The Government's overall intentions in the six major areas are summarised below.

We need to invest in New Zealand’s productive infrastructure...

Insufficient or low-quality infrastructure is a bottleneck to growth. The Government is investing in infrastructure, improving the management of Crown assets and strengthening the regulatory environment for infrastructure development and management.

The forthcoming National Infrastructure Plan will investigate each of these aspects with the high-level vision that New Zealand's infrastructure be of a quality, reliability and resilience sufficient to support our aspiration to become a competitive high-productivity, high-wage and sustainable economy with good living standards.

…and remove red tape and cumbersome regulation that acts as a roadblock to growth

Done poorly, regulation can be a roadblock for investment and productivity growth. But well-regarded, sensible regulation creates an environment where people want to invest and do business. The unrestrained growth of regulation under the last Government, coupled with reforms by competitor countries, mean that New Zealand is being overtaken in international indices of regulatory quality. The Government has responded by focusing on improvements to those areas which have a pervasive influence across the economy. Following our initial reforms of the Resource Management Act (RMA), we are currently undertaking a number of major regulatory reviews, including further reforms to the RMA, Building Act, Food Act, and Local Government Act.

To get continuous improvement over time, we are strengthening checks and balances so that proposals for new regulation are well argued and deliver net benefits, and the stock of regulation is improved. Additionally we are investigating enshrining good regulatory practice in legislation to ensure it is followed in the future.

Getting the Government's own house in order will play an important role

An integral part of the economic strategy is how the public sector's finances and activities are managed. The Government will deliver better, smarter public services that cost fewer taxpayer dollars. We have to do this to meet the expectations of our citizens. This will require substantial changes in the way that the public service operates. The Government intends to drive productivity improvements in public services. We will continue to support frontline delivery of services to those in need. And we will demand stronger governance across all government agencies. On behalf of taxpayers, the Government will also demand much stronger performance from State-Owned Enterprises (SOEs) and other commercial and semi-commercial Crown entities.

The Government is committed to improving public services and delivering them more efficiently. In the period from 2003/04 to 2008/09, core Crown spending grew by 53 percent while the economy as a whole grew by only 26 percent. This has placed substantial strain on the remainder of the economy, and is clearly unsustainable. The Government can contribute to getting the economic recovery right by following a prudent and responsible fiscal strategy. This will allow monetary policy to play a responsive role to developments in the economy, keeping interest rates lower than they otherwise would be. In turn, this will improve investment opportunities for businesses seeking to put the recession behind them and expand.

We need to raise skills...

Skills matter because they increase the productivity of individuals and those they work with, and help firms adapt and innovate. Without a strong skills base, firms will struggle to grow. But skills are also crucial because of their role in ensuring people from all walks of life can access the ladder of opportunity and share in the benefits of growth.

The Government is committed to improving our skill levels through a higher-performing education system. We are implementing National Standards for literacy and numeracy in primary schools to make sure all young people have a strong grounding in these core skills. We are also implementing the Youth Guarantee to ensure that 16 and 17 year olds can gain qualifications they need to succeed in the modern economy whether it be at school, a tertiary institution or in the workplace. And we will take steps to improve the performance of the tertiary education system. These changes, as outlined in the new tertiary strategy, will shift funding from low-quality qualifications with poor completion rates or poor labour market outcomes to high-quality qualifications. In concert with the Youth Guarantee, a priority will be placed on lifting the participation and achievement of young people in tertiary education.

…and support business and innovation

Helping firms make stronger links with international markets, create value from innovation and gain better access to resources will be key components of our economic strategy. This will require having a close look at how New Zealand's offshore network operates, and rethinking how we organise and support research and development. In particular, we need to build stronger links between the public science system and business, encourage greater levels of private sector R&D, and seek ways to derive greater national good from our investment in Crown Research Institutes. In some cases, action to lift constraints on the growth of specific sectors may be required.

The Government has already established a Primary Growth Partnership with the agriculture sector to help encourage growth through innovation, and has indicated its intention to lift unnecessary regulatory barriers to the development of aquaculture. Further actions will be announced in 2010.

The Government is committed to boosting New Zealand's export performance. Our firms will capture more of the value from greater innovation if we can help them reach more global consumers. The Government has continued to open up New Zealand exporters' access to world markets. We are committed to bringing the Doha Development Round of WTO negotiations to a conclusion as soon as possible. As well, we have recently signed Free Trade Agreements with Malaysia and the 10 countries of the ASEAN bloc; concluded free trade negotiations with Hong Kong and the economies of the Gulf Cooperation Council; and are progressing negotiations with other countries throughout the world, including the United States through the Trans-Pacific Partnership.

We need a smart tax system

The tax system should encourage individual effort and productive investment. We compete with other countries for capital, skilled workers and ideas. We need a tax system that makes New Zealand an attractive destination for individuals and firms to locate.

A specialist Tax Working Group has been examining the current system and will provide advice to the Government on options to achieve a world class tax system that will be sustainable into the medium term. It is clear that the Tax Working Group believes the current system is in serious need of improvement so that it better supports growth and is fairer to taxpayers. The Government will consider the Working Group's final report and any options for change to see if there are practical reforms that could improve incentives for work and investment and lift New Zealand's competitiveness.

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