Next steps in Govt plan to build faster growth

Prime Minister John Key today outlined further steps in National’s plan to build stronger, enduring economic growth, deliver New Zealanders better paid jobs and put the Government’s finances in a stronger position.

In a speech in Auckland, Mr Key said the Budget this year will focus squarely on savings and investment – and the Government will play its part in lifting New Zealand’s national savings.

“In the worst of the recession, running a budget deficit was the right thing to do, as it gave much-needed support to the economy.

“Now, as the economy recovers, borrowing $300 million a week is unaffordable and is holding the economy back.

“The Government agrees with the Savings Working Group, in its interim report, that New Zealand as a whole needs to save more, spend less and reduce its reliance on foreign debt.

“A point which has been made to us very clearly is that the Government itself is a crucial part of the national savings equation. The Government simply has to get its own finances in order if New Zealand is to achieve a long-term improvement in its economic prospects.

“Therefore, I’m announcing today that the Government intends to borrow less in the future than currently forecast.”

Mr Key confirmed this would involve action on both the operating side and the capital side of government spending.

“As the first step in reducing spending growth, we will run a tighter Budget this year than was indicated in the Budget Policy Statement in December.

“Currently, we have a new spending allowance of $1.1 billion each year, compared with Labour’s average of $2.8 billion a year over its last five budgets.

“Our plan is to reduce that new spending allowance further, to around $800 million to $900 million, in Budget 2011.

“With a tighter Budget this year, and assuming revenue stays on track, the budget will return to a meaningful surplus in 2014/15 - a year earlier than forecast.”

As a second step, Mr Key said the Government will consider options to borrow less for its capital investment programme over the next few years, while at the same time developing more savings and investment options for New Zealanders.

“The Government’s first Investment Statement last month showed that the Government, on behalf of taxpayers, owns $220 billion of assets across a range of social, financial and commercial investments – everything from hospitals, roads prisons, schools and police stations to the Super Fund, electricity companies and coal mining operations.

“We also expect to buy $33 billion of net new assets over the next five years, including new schools, operating theatres, ultra-fast broadband and major investments in our state highways and other transport infrastructure.

“At the margin, there are two ways we can acquire these new assets – either we can borrow more or we can change the mix of assets we own. As I’ve said, the Government can’t keep building up debt indefinitely.

“So we need to look at where we can change the mix of assets we own – identifying where new assets are most needed and where we have more money invested than we absolutely need to.”

The Government’s commercial assets presented the greatest scope for changing this mix. In particular, Air New Zealand’s mixed ownership model – where the Government owns most of the company, but with a minority of outside equity – could be extended to more of the Government’s commercial assets.

Mr Key said that, apart from freeing up taxpayers’ capital for investing in other assets, the mixed ownership model could broaden the pool of investments for New Zealanders, bring sharper commercial disciplines to the companies and provide them with more capital to grow.

Therefore, the Government has asked Treasury for advice on the merits and viability of extending the mixed ownership model to Mighty River Power, Meridian, Genesis and Solid Energy. Advice has also been sought on the merits of reducing the Crown’s shareholding in Air New Zealand, while still maintaining a majority stake.

“No other SOEs are being considered and no decisions have been made,” Mr Key said. “We will carefully consider the advice we get from Treasury and will clearly spell out our intentions well before the election later this year.”

The Government would proceed with a mixed-ownership model for these companies only if it meets the following tests:

• The Government would have to maintain a majority controlling stake by owning more than 50 per cent of the company.
• New Zealand investors would have to be at the front of the queue for shareholdings, and the Government would need to be confident of widespread and substantial New Zealand share ownership.
• The companies involved would have to present good opportunities for investors.
• The capital freed up would have to be used on behalf of taxpayers to fund new public assets and thereby reduce the pressure on the Government to borrow.
• The Government would have to be satisfied that industry-specific regulations adequately protected New Zealand consumers.

“In particular, I want to stress that the Government is interested in what works, not in following any particular ideology,” Mr Key said.


Questions and Answers

What problem is the Government trying to fix?

Since the mid-2000s, the domestic side of the economy, including both private consumption and government spending, has grown strongly, while exports and related sectors have stagnated. As a result, per capita GDP has not grown in six years, while foreign debt and other liabilities have grown rapidly. These trends are unsustainable. We need to revitalise export sectors where New Zealand has comparative advantage to create sustainable jobs. This will help ensure our consumption is paid for from earnings rather than accumulating debt.

Why is it important that New Zealand lifts its national savings?

While there is no “correct” level of savings, it is concerning that New Zealand has run balance of payments deficits every year since 1974 and net external liabilities have jumped to almost 90 per cent of GDP. As the Savings Working Group said: “The bottom line is that New Zealanders collectively have been spending too much and saving too little, using large amounts borrowed offshore to fund new investment.”

How does the Government's own budget fit with national savings?

National savings include all sectors of the economy: households, business and government. Households and business have lifted their savings rates sharply since the 2008 recession, but the Government has deliberately done the opposite, partly absorbing the downturn on its own books. This was appropriate while the economy was being steered through the recession, but is not appropriate now the economy is growing again.

What role will KiwiSaver play?

The Government is committed to KiwiSaver. It is particularly interested in ideas that increase participation in KiwiSaver and raise national savings, at an acceptable fiscal cost. However, KiwiSaver is already highly subsidised and expanding KiwiSaver alone is unlikely to raise national savings on the scale required. It is only part of the solution.

What else is the Government doing to strengthen the economy?

The measures announced today are the next steps in the Government’s six-point plan to build faster growth by tilting the economy towards savings and exports and away from excessive borrowing and consumption. For example, the Budget last year included the most significant tax reforms for 25 years. The Government is also providing better, smarter public services; lifting education and skills through policies like National Standards and the Youth Guarantee; investing billions of dollars to boost infrastructure including ultra-fast broadband; opening up trade opportunities; and cutting red tape and regulation to reduce the cost of doing business. Budget 2011, which will have a savings and investment theme, will include more steps to improve New Zealand’s national savings and reduce our vulnerability to overseas lenders.

GETTING BACK TO SURPLUS SOONER

Why will the Government slow new spending in Budget 2011?

Spending increased rapidly from about 2005, growing from about 29 per cent to 35 per cent of GDP. This harmed exporters and damaged the economy - helping put New Zealand into recession before the global financial crisis in 2008. Now the economy is gathering steam, New Zealand has a chance to build a more solid platform for growth. Borrowing $300 million a week is unaffordable in the medium-term and will hold the economy back through higher interest and exchange rates over the medium term. Much of what the Government spends contributes directly to consumption; very little of it contributes directly to exports. Returning spending to more normal levels is essential to building a stronger overall economy.

What does this actually mean for spending?

Government spending will still increase, but at a slower rate than the rest of the economy. Until now, we have allowed for a new spending allowance of $1.1 billion a year. That will be reduced in Budget 2011 to around $800 million to $900 million. To put this in context, new spending in Labour’s last five budgets averaged $2.8 billion a year, far above what the economy could support. Most of this year’s spending allowance will be allocated to priority areas of health and education.

Have tax changes contributed to the deficit?

No, if anything they have been marginally revenue-raising. This Government has made two significant tax changes and both have been fiscally neutral. The first change lowered income tax rates from April 2009, as well as altering Research and Development tax credits and KiwiSaver subsidies. The second change raised GST, tightened depreciation rules, lifted taxes on foreign investment and further reduced personal income tax rates. These tax changes have also improved incentives to save and discouraged speculative investment – pushing the economy in the right direction.

When does the Government now expect to get back to budget surplus?

With a tighter Budget this year - and assuming the revenue track follows current Treasury projections - the budget is expected to return to surplus in 2014/15 - a year sooner than expected previously.

What does this mean for Government agencies?

Most government agencies will receive little or no extra money in Budget 2011. This means they will need to continue finding innovative ways to improve public services while operating with ongoing restraint.

OPTIONS FOR BETTER MANAGING CROWN CAPITAL

How does Government capital investment relate to savings?

The Government runs a large investment programme, but until now this has had little visibility. The first investment statement issued last month has details of the Crown balance sheet and where the Government is investing. This deserves equal scrutiny to operating spending. More efficient capital spending lifts productivity, reduces pressure on government debt and helps national savings.

What is happening with the Crown balance sheet?

It will grow substantially in coming years. As at June 2010, the Crown had $223 billion of assets. They are projected to grow by $33 billion by 2015, reflecting ongoing investment in schools, hospitals, broadband, electricity, roads, rail and a wide range of other assets.

How large are the Crown’s commercial assets?

The commercial value of equity in all SOEs was around $20 billion in 2010 - they make up around 10 per cent of the Crown’s total balance sheet.

Is the Crown a buyer or seller of assets?

Both, but on balance it is strongly a net buyer. The current exercise is about identifying the highest priorities for investment and reallocating capital towards them.

What precisely is the Government considering for the four SOEs and Air New Zealand?

The Government has asked Treasury for advice on the merits and viability of extending a mixed ownership model - where the Government retains a controlling shareholding but offers a minority stake to New Zealand investors - to Mighty River Power, Meridian, Genesis and Solid Energy. It has also sought advice on the merits of reducing the Crown’s shareholding in Air New Zealand, while still maintaining a majority stake. No other SOEs are being considered and no decisions have been made.

What is a mixed ownership model?

It is where a minority shareholding in a Government-controlled company is listed on the NZX, but the Government retains majority ownership. Air New Zealand has operated along these lines for some time.

What are the advantages of a mixed ownership model?

It has several advantages:

It allows companies to access capital and grow without being fully dependent on the Government;
It allows the Government to reallocate some capital to higher priority areas;
External oversight places sharper discipline and more transparency on a company’s performance. It is doubtful that Air New Zealand would have performed as well as it has outside of this model; and
It improves the pool of investments available to New Zealand investors and deepens the capital markets.
What will guide the Government’s final decision?

After considering Treasury’s advice, the Government will proceed only if five tests are met. They are:

The Government maintains a majority controlling stake by owning more than 50 per cent of the company;
New Zealand investors are at the front of the queue for shareholdings, and the Government is confident of widespread and substantial New Zealand share ownership;
The companies involved present good opportunities for investors;
The capital freed up is used on behalf of taxpayers to fund new public assets and thereby reduce the pressure on the Government to borrow; and
The Government is satisfied that industry-specific regulations adequately protect New Zealand consumers.
When will the Government announce its decision?

No decision has been made. The Government has a clear policy that it will not sell any assets during its first term in Government. If that position changes with respect to a further term, we will clearly spell out our intentions well before the election later this year.

Will New Zealanders own the shares that are issued?

New Zealand investors will be given first priority in any issues. There is substantial capacity between KiwiSaver funds, other managed funds, retail investors, the Crown’s own investment arms and iwi. While it is too early to consider how any issue would be allocated, these groups would be at the front of the queue.

Will foreigners be able to buy shares?

Majority government ownership means that control will always rest in New Zealand hands. If companies were listed on the NZX, then private New Zealand owners would be able to sell and foreign investors could buy. However, we expect that most New Zealand investors would be long term holders. This has been the experience with previous floats, such as Contact Energy. It is therefore likely that foreign ownership would be limited.

What about other SOEs like Kiwibank and NZ Post?

We are not considering any sale, partial or otherwise, of other SOEs.

Why have you chosen Meridian, Mighty River Power, Genesis and Solid Energy?

These companies represent quality investment opportunities for New Zealanders who want to put their money into something other than housing. They are also sizeable, well-established companies.

What impact would extending the mixed ownership model for power companies have on electricity prices?

Power prices will always in part reflect the cost of generation, moderated by the level of competition in any given market. Prices will reflect the ability of supply to meet demand. Having competing sets of investors will only enhance that scenario.

The Government has just completed the most extensive electricity market reforms since the 1990s and evidence to date is a more stable price path for consumers and increased competition.