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Budget 2011 Home Page Budget Policy Statement 2011

Economic Strategy

Our economic objectives for Budget 2011 reflect the Government's view of where the economy needs to be in the next three to five years.

  • First, we need to lift our rate of economic growth. The Treasury is forecasting average annual real economic growth of slightly less than 3% over the next four years. Higher growth will be needed if we are to close the income gap with Australia.
  • Second, we need to ensure that our economic growth is more balanced than during the previous period of expansion. To do this, we need to build an expansion that does not rely on debt and consumption, but on saving, investment and exports. Part of this is creating the right environment for our tradable sector - which comprises firms that compete internationally - to prosper. We need to ensure that the non-tradable sector, which includes government, does not absorb resources that could be put to better use in other areas.
  • Third, we want to see an economy where the gains from growth are widely distributed through sustainable employment and wage growth, where there are high levels of participation in the labour market and where unemployment is low.

In 2009 the Government outlined six policy areas where we see material opportunities to lift New Zealand's rate of economic growth and to reduce its vulnerability to future economic shocks. These areas are the tax system, public sector performance, education and skills, science innovation and trade, the regulatory environment and productive infrastructure - as Figure 5 shows. Taking advantage of opportunities in these areas will permanently lift the living standards of New Zealanders, which will allow us to afford better quality public services and infrastructure. Budget 2011 will build on the progress already made in these areas.

Figure 5 - Six policy areas to lift growth and create jobs
Figure 5 - Six policy areas to lift growth and create jobs.

Strengthening our tax system

Figure 6 - Company tax rates
Figure 6 - Company tax rates.
Sources: OECD, the Treasury

The tax package the Government delivered in Budget 2010 is the biggest tax reform in New Zealand in 25 years. The 1 October 2010 tax changes were implemented smoothly. Further parts of the package, including the lowering of the company tax rate to 28%, the removal of tax depreciation on buildings, amending the tax treatment of loss attributing qualifying companies and tighter thin-capitalisation rules for foreign investors will apply from the 2011/12 income year. These changes will further improve incentives to work, save and invest and reduce tax biases in favour of property investment.

International dynamics, such as the steady reduction in OECD average company tax rates over several global business cycles, shown in Figure 6, underscore the need for ongoing work to ensure that the tax system continues to reflect New Zealand's evolving economic and social priorities. The Government will continue to consider the impact of the tax system on savings and investment behaviour.

Better, smarter public services

To realise our aim to lift productivity levels in the public sector, all major departments will face significant change over the next four years. We have already capped growth in the public service and moved almost $4 billion of spending into frontline public services such as health, education and law and order. Government Procurement Reform will also help to achieve public sector productivity gains. This includes a suite of initiatives on cost savings, building capability, simplifying suppliers' interactions with the Government and improving governance.

We are sharpening the economic policy advice we receive by using a series of working groups with clear briefs, tight timetables and a mix of public and private sector expertise. We have already had useful results from working groups in areas such as tax and capital markets.

The Welfare Working Group is closely examining the welfare system. A key focus for this group will be reducing long-term welfare dependency, which is associated with child poverty and adverse health consequences. In 2008, approximately 170,000 people had been on a benefit for at least five out of the last 10 years. The Welfare Working Group is due to report to the Government in early 2011.

Lifting education and skills

The Government has introduced National Standards, which will deliver improvements in literacy and numeracy skills among primary school children. In 2011 the Youth Guarantee will provide 2,500 places for 16 and 17 year olds to study school-level qualifications at a tertiary education institution fees-free. We have also made changes to the tertiary education sector to drive greater efficiency, value for money and enhanced performance incentives on institutions and students.

Looking ahead, we expect growth in the labour force to slow due to demographic changes. This means that the economy will need to exploit its skills potential to the full. We will need to become more effective in moving young people from education and training into the labour market, and also in utilising the skills of others such as older workers, part-time workers, migrants and women with dependent children who may want to work more. We will also need to reduce the incidence of young people becoming trapped into long periods of welfare dependency that reduce their attachment to the labour market.

Better science, innovation and trade agenda

In Budget 2010 we confirmed an investment of $337 million over four years in new research, science and innovation initiatives.This includes spending on technology development grants to support firms that invest productively in research and development, research infrastructure and the national Food Innovation Network of research and pilot facilities. We have also invested heavily in tourism, including an additional $30 million for increased destination marketing and a further $13 million to promote New Zealand as both a film production and tourism destination in a strategic partnership with the makers of The Hobbit films.

In addition to this, we will look to realise gains from our free trade agreements. New Zealand has recently signed agreements with China and South-East Asian nations, and we are developing others with Korea, India and Russia, as well as the Trans-Pacific Partnership.

Cutting red tape and unnecessary regulation

We are committed to improving the rigour and quality of both our existing regulation and new regulation. We have made it compulsory for all departments to assess the need for and effectiveness of each piece of legislation. A number of substantial reviews of existing regulation have or will soon be completed, largely focused on improving the quality of New Zealand's business environment and promoting growth. For example, we have simplified the Resource Management Act 1991, and further reforms are underway in areas such as water, infrastructure and urban design. Other significant reviews include employment law, the Building Act 2004 and the Securities Act 1978.

The Government will be establishing a Productivity Commission in early 2011 to provide a steady stream of independent policy advice. This Commission will help boost economic performance across the public and private sectors.

Investing significantly in productive infrastructure

The Government is investing heavily in ultra-fast broadband, road, rail and upgrading the national grid. Within land transport alone, $10.7 billion will be spent over the next 10 years on state highways, including Roads of National Significance. We will also bring a stronger commercial discipline to our investment decisions. An updated National Infrastructure Plan which sets out the Government's goals for infrastructure and a plan for how these will be achieved will be released in 2011.

We will improve the way we procure social assets, and we are exploring a range of procurement options to ensure value for money from Crown investment. An important milestone in this process has been the Government's announcement last month that it is taking the next step towards implementing a public private partnership for delivering a new prison at Wiri, South Auckland.

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