Rebuilding Christchurch
Mr Speaker,
Let me first address issues raised by the Canterbury earthquakes.
Christchurch is not only our second-largest city - it is also a major industrial, tourism and regional hub, and is essential to the performance of the wider economy.
The estimated combined cost of the two earthquakes to the economy is around $15 billion, which is about 8 per cent of GDP.
To put this in context, the recent earthquake off the north-east coast of Japan is estimated to have caused damage equivalent to around 3 to 5 per cent of Japan's GDP.
The Treasury's estimate of the direct impact on Crown expenses from the two earthquakes is $8.8 billion. This comprises a $3.3 billion cost to ACC and EQC, net of reinsurance, and an estimated $5.5 billion for all other costs. This includes repairing infrastructure, roads, schools and hospitals, providing temporary housing and providing the business support package.
The $8.8 billion cost is too much for Christchurch residents alone to bear.
But it is manageable within the Government's fiscal programme. New Zealand's annual GDP is around $200 billion. The Government spends around $70 billion a year and has assets of over $220 billion.
For these reasons, the appropriate response is to initially debt fund this cost. That will ensure that the burden of reconstruction is borne evenly across all regions and spread across time.
Debt funding is both the quickest and fairest way to pay for it.
Budget 2011 will provide certainty of funding for Christchurch by establishing the Canterbury Earthquake Recovery Fund.
This Fund will initially include up to $5.5 billion to meet all of the Government's earthquake-related costs, other than those funded by EQC and ACC.
The Canterbury Earthquake Recovery Fund will ensure that there is transparency and control over the cost of the earthquakes. It is expected to take several years for the final bills to arrive, after which the Fund will be wound up.
The Government will also launch a new four-year maturity Earthquake Bond for New Zealand investors. The proceeds will be directed to the Canterbury Earthquake Recovery Fund.
These arrangements mean that reconstruction of Christchurch can proceed with certainty that the Crown's contributions are fully funded.
Mr Speaker,
The OECD, the Savings Working Group and others have pointed out that we need to make the economy more competitive and lift national savings.
Currently, most businesses and households have successfully lifted their own savings. While that has hurt retailers for now, in the long term it is a good thing.
The main sector not saving is the Government.
The deficit in 2010/11 will be large, at $16.7 billion or 8.4 per cent of GDP. This includes a range of one-off costs, including the earthquakes.
The Government believes there is a strong case to eliminate the deficit faster and target a lower level of public debt. This is for a number of reasons.
The fallout from the global financial crisis of two years ago is gradually receding.
The recent fiscal expansion, which began in the mid-2000s and saw nominal spending rise 50 per cent in just five years, has placed much strain on the economy. Exports, growth and productivity have all stagnated.
Finance costs would otherwise rise unacceptably, squeezing out more worthwhile spending.
Rising debt leaves the Government vulnerable and less able to meet future shocks. Its double-A plus credit rating is on negative outlook with two rating agencies.
And productivity growth over the past decade has been less than one-sixth of that in the 1990s.
For all these reasons, stronger government finances are an essential component of moving to sustainably higher growth and job creation.
