Public sector restraint and innovation will be needed for years to come to improve the quality of frontline services, while also ensuring New Zealand climbs out of deficit and controls its debt, Finance Minister Bill English says.

"Although our economy has now been growing for a year, we are still looking down the barrel of five more years of deficits," Mr English said in a speech to the Australia New Zealand School of Government in Melbourne today.

"Even when we get back to surplus, there will be strong competing demands on Government spending - high Government debt will need to be repaid and, when surpluses permit, we will resume contributions to the NZ Super Fund.

"Therefore we are likely to require surpluses of at least 2 per cent of GDP before we even have the choice of significantly increasing public spending.

"In our first two Budgets, we have reprioritised almost $4 billion of spending over five years - about 1.1 per cent of our total spending - to put back into vital frontline services in areas like health, education and law and order.

"We now face a far more challenging task - finding further savings so we can improve the quality of our public services within tight fiscal constraints. We also need to rebalance our economy away from excessive Government spending and towards savings, exports and sustainable growth.

"We are laying the foundations for a public service that chooses innovation and change. We have left existing structures largely in place and pushed responsibility for managing resources clearly on to public sector chief executives, rather than the Treasury or the Minister of Finance.

"Longer-term effective change is driven by people who know the business, clearly understand the parameters they are working to and have the tools they need to implement change.

"It's not an option for the public sector to wait out these challenges. Hope is not a strategy. And it won't work because the New Zealand public want to see evidence that the public sector is living within its means, as New Zealanders are themselves."

Good afternoon and thank you for the opportunity to join you here today.

Today I want to take a Finance Minister's view of public sector management over the next 10 years.

As governments around the world strive to tackle the fallout from the global recession, good public sector management will be critical.

Many governments are facing a debt burden they are going to struggle with for years to come. This will place them under constant pressure to deliver similar or better public services for less money.

In Australia, the fallout of the global recession has been mild compared to many other countries - indeed it was the only developed country to avoid recession.

At the other end of the spectrum, countries like the UK and Greece are having to undertake some fairly radical austerity measures to balance their books. New Zealand's fiscal outlook lies somewhere between those of Australia and the UK.

Today I want to talk about the steps we are taking in New Zealand to improve the way our public service operates. But first, I want to touch on some of the economic challenges we face.

Our economic challenges

Some commentators have suggested New Zealand's economy was in good shape before the global recession hit in late 2008.

That is incorrect: In fact, our average annual growth was less than 1 per cent in the three years leading up to the global financial crisis in late 2008 and we went into recession several months earlier, before just about every other developed economy.

Our track record going back several years shows sluggish and unbalanced growth driven by excessive debt, consumption and government spending, rather than savings and exports. 

The bottom line is that we need to rebalance our lop-sided economy.

There are two main indicators of our economic under performance.

Firstly, the tradeables sector - the internationally competitive part of our economy comprising exports and import-competing industries - actually shrank in the five years from 2004 to 2009.

Even more alarmingly, there have been no net new jobs created in the manufacturing and agricultural sectors for the best part of a decade.

By contrast the non-tradeables sector - the spending side of the economy - has grown by 15 per cent since 2005.

And over the same period, government spending ballooned by about 50 per cent - twice the rate of revenue and twice the overall rate of economic growth.

                                             

That is unsustainable - no household or business could survive with its spending growth running at twice the rate of its income. And nor can a Government when it is running Budget deficits and surpluses are still several years away.

The second indicator of New Zealand's economic under performance is our net international investment position, which measures New Zealand's total debt to the world, including households, business and the Government.

In 2000, our debt to the world was just over $100 billion. It's now approaching $180 billion and, by 2014, it is forecast to be nearly $250 billion.

So our goal is to move resources to the export and earning side of the economy. That means the Government is likely to be losing jobs, rather than creating them in the next five years.

We have begun the task of rebalancing our economy with an array of changes across a wide range of areas.

As well as demanding more accountability from our public sector, another area of change I want to briefly mention is our tax system.

At a time when many countries are being forced to raise taxes, New Zealand has implemented a major package of tax reforms that cut income taxes across board and reduced company tax to 28 per cent.

From 1 October, every New Zealander earning above $55,000 a year will pay less income tax on a dollar-for-dollar basis than someone on the same income in Australia.

To pay for this, we've increased GST to 15 per cent, increased the taxation of investment property and closed a range of tax loopholes to improve fairness.

These changes have helped increase our international competitiveness and address some of the economic imbalances I've outlined.

Implementing these changes without a public outcry was helped by a fairly open policy development process which I'll talk about later in this speech.

 

Our fiscal position

The last two years has seen a dramatic turn around in New Zealand's fiscal position.

Following 15 years of government surpluses, our books plunged deeply into the red last year.

And although our economy has now been growing for a year, we are still looking down the barrel of five more years of deficits.

When we get back to surplus, there will still be strong competing demands on Government spending - high Government debt will need to be repaid and, when surpluses permit, we will resume contributions to the New Zealand Super Fund.

Therefore, we are likely to require surpluses of at least 2 per cent of GDP before we even have the choice of significantly increasing public spending.

That is still many years away and may not occur in the professional lives of a large group of middle to senior civil servants.

Our forecasts include an assumption of $1.1 billion annual increases in discretionary spending, plus other forecast spending increases that fall outside this cap. Taken together, they add up to 4.8 per cent real spending growth over the next four years - an average of just 1.2 per cent a year.

It is hard to directly compare this with the Australian Government's ceiling of a 2 per cent real increase in spending, because the New Zealand Government incorporates many of the Australian federal and state government activities under one roof.

However, it gives you some indication of how much tighter our financial constraints are.

In our first two Budgets, we have reprioritised almost $4 billion of spending over five years - about 1.1 per cent of our total spending - to put back into vital frontline services in areas like health, education and law and order.

However, these are the easy savings because they consist of quick wins from the previous decade of loose Government spending.

We now face a far more challenging task - finding further savings so we can improve the quality of our public services within tight fiscal constraints.

The outlook for the public sector  

So where will we look for new directions and ideas?

To be frank - they will not come from Australia and New Zealand.

In our countries, the prevailing public management literature and approach is conditioned by a decade of generous year-on-year increases in funding.

However, it is impossible to ignore the fact that globally public sector management is entering its next revolution.

That revolution will be driven by the large economic and geopolitical changes that are taking place as many Western governments grapple with the aftershocks of the global recession.

The public sectors in the countries we usually compare ourselves with - the United States, the UK and much of Europe - will spend the next two decades dealing with the consequences of large government deficits and high and fast growing public debt.

As a result of the global financial crisis, changes that may have taken 20 years to occur will happen in five years.

This is a significant shift.

The last decade was characterised by optimism that smart people using the massive resources of government could transform society. That experiment has run out of money and has little that is genuinely transformational to show for it.

The new experiments will have less aspirational goals - sorting out which public services and income support measures really matter and working out how to do it for a lot less money.

I believe we will see radical changes in the scope and cost of public services in the UK, United States and most of Europe They have no choice.

However, at the same time as the global financial crisis has inflicted large debts on some governments, many fast emerging economies in the developing world are travelling in the opposite direction.

These countries, which are generating large surpluses as their economies rapidly expand, are likely to develop stronger consumer and service economies, along with a demand for more public services.

Most of these countries are starting with low levels of income support and minimal government provision of public services. India and Africa are now developing sufficiently consistent economic growth to stimulate demand for public services.

They too will be looking for solutions and creating experiments.

Australia and New Zealand will not be at the cutting edge of either of these revolutions.

Our role may be to sell our frameworks for accountability and transparency to the emerging economies developing their public services, while borrowing some of the cost-crunching innovations that are developed in the UK, United States and Europe.

Public sector reform

In New Zealand, we are laying the foundations for a public service that chooses innovation and change.

I want to first describe how we are thinking about the next five years and discuss some of the factors we believe will drive further change - as well as the core public sector management system change that will be required.

Faced with fast growing deficits, we have chosen what I call the 'responsibility model'.

As an incoming government, we had a choice to make savings across the board and restructure the public service to get efficiencies.

However, we have left existing structures largely in place, and set out clear fiscal constraints for the next four years. We have pushed responsibility for managing resources clearly on to public sector chief executives, rather than the Treasury or the Minister of Finance.

So rather than embarking on wholesale change, we are stress testing the existing devolved model of public sector management.

There are two reasons for this. The 2008 election was fought in the world before the global financial crisis.

Then, in Opposition, we made undertakings to leave existing income support measures in place, and to focus on moving public sector resources from the back office to the frontline.

This positioning effectively ruled out rationing public services or pushing more cost back on to the public. So that is not a debate we are entering into.

Instead, we are focused on getting value for money from the current level of resources. In this context, we also specifically ruled out large scale structural change and we have kept to those undertakings, despite the change in circumstances.

The second reason is that New Zealand's previous experience of fiscal restraint shows that longer-term effective change is driven by people who know the business, clearly understand the parameters they are working to and have the tools they need to implement change.

So chief executives -not the Cabinet or the Treasury - are responsible for delivering better services and policy advice with less money and fewer people.

This model requires ministers and chief executives to clarify the results they want. 

We are using the basic tools of ministerial and chief executive accountability, not inventing new ones. We spend time on the Prime Minister's expectations of ministers, and getting ministers to focus clearly on their expectations of their chief executives.

These expectations are driven off pragmatic political commitments and clearly understood fiscal constraints. This process needs constant reinforcement to maintain focus over time. And it takes time to build momentum.

The culture of caution and risk management in the public sector has been deeply embedded in the last 10 years. So the Government has to keep demonstrating political support for change, and mandating tools chief executives can use without fear of political consequences.

This approach is being reinforced by increased oversight of our largest entities - the 10 departments and entities that make up over 80 per cent of government spending. 

It has required a lot of work to merely slow down the strong growth in spending driven by an expansionary fiscal policy, particularly since 2005.

The challenges of reform

In practice, the challenges are predictable.

The first is that everyone in the public sector hopes the rules will change - in particular that politicians won't stick to self-imposed spending constraints.

Some are still trying to wait it out.

However, it's not an option for the public sector to wait out these challenges. Hope is not a strategy. And it won't work because the New Zealand public wants to see evidence that the public sector is living within its means, as New Zealanders are themselves. 

So the political case for staying the course, for constraint and better value for money, remains strong in New Zealand.

Secondly, in a devolved system, it takes time and effort to get the balance between collective and individual interests among ministers.

This is more of a challenge in a centre right Government, where ministers tend to come from self-employed or business backgrounds.

Ministers have impressive degrees of freedom to do, or not do things. So it is vital to achieve a strong common understanding of our collective purpose, and to turn this understanding into clearly aligned processes of accountability.

And we need to achieve this within the political timetable of a three-year election cycle.

A third challenge is whether our public management system permits the kind of solutions that are now required.

Solutions such as shared services, joint procurement, or joint decision making across a sector have not fitted naturally into our framework.

In the last 20 years, there have been many attempts at joined up or collaborative government. Most, but not all, attempts have failed because the processes of joining up can be very inefficient and large committees collaborating do not make for strong accountability.

So it's a challenge for the public service to develop strong internal governance to run joint processes - in our case without strong central processes to dictate to them.

In our approach, Cabinet has supported a handful of collective processes for the public sector, such as joint procurement and - beginning soon - administrative and support services benchmarking, as well as shared services in the health sector.

We have also set up an internal infrastructure unit to create better capital management and project assessment.

In each of these examples, chief executives have the choice of picking up the tool and using it, or not.

Progress has been slow to start with. But momentum is now picking up as chief executives understand they will need to take action as they see the growing gap over the next four years (our projection period) between rising costs and flat revenue.  

At the same time, voluntary participation in collective initiatives keeps a healthy tension on the proponents to show value for the time and effort.

We are beginning to see more collective activity among these independent chief executives, which shows the public service is developing a sense that it wants to influence its own destiny.

That is because they understand the world has changed and that the only other viable alternative is politicians and the Treasury, armed with public support, going in and finding the savings themselves.

However, the governance of joint back office savings exercises is just a first step.

The next step is to fulfil the theory of our public management system by setting outcomes and structuring accountability and governance around those outcomes.

Currently, governance and accountability are driven by the parliamentary appropriations process. That process accounts for the money, but not the results.

Resolving the tension between parliamentary accountability and effective management for outcomes is one of the biggest challenges for the New Zealand public service. We need far-reaching solutions to make the far-reaching change dictated by fiscal constraint and public expectations.

One example is the criminal justice system. At a time when funding is tight, we have to find ways to foot the bill for tougher sentences for serious criminals, which the public demands. One response is to reduce offending and prosecution and imprisonment rates for less serious offenders.

Over recent years, justice sector agencies have begun to work together to understand better who gets arrested and why, how they move through the police and courts system to prison or otherwise and at what cost.

This has generated at least some initial operational solutions for a more effective and more just system.

But driving these changes further will require something even more difficult than good political management. It will require joint governance and accountability in what is currently a strongly siloed system.

The agencies involved in the justice pipeline have some statutory independence, strong cultures and embedded practises.

The politicians' task is to turn the objective of community safety into some high level outcomes, like reduced prison numbers, or reduced youth offending rates. The public service needs to think about the governance and accountability structure that can drive decisions to achieve these outcomes.

We have any amount of policy analysis and any amount of public support for success. But there is very little accumulated wisdom on what governance and accountability will deliver the desired policy result.

In this sector, as with many others, we simply won't meet the fiscal constraints and public expectations with the current institutional arrangements.

You will hear debate about these issues across a number of sectors in the next few years - long-term welfare, delivery of social services, housing, defence and others.

The evolution of the policy process

The policy-making process itself will be subject to same pressures for change. It will need to be more efficient and better incentivised.

The model of large-standing policy capacity, available just in case the Government needs it, is the product of a time when money was easier.

Since becoming the Government, we have found ourselves using a different model when we needed results.

Instead of relying exclusively on the public service, we've used a mix of officials and people who are experts in their fields - either from the private sector or academia.

That has meant a more open process after a decade of very tight discipline in the public service where officials were not encouraged to think or speak freely, or to take risks.

One example of a more open process is that used in the initial stages of our Budget 2010 tax reforms, which I referred to earlier.

At the start of last year, we decided to take a look at the tax system. Instead of relying exclusively on Treasury and Inland Revenue advice - with the whole process taking place behind closed doors - we took a different approach.

We convened a Tax Working Group comprised of academics, private sector experts and officials, led by Victoria University in Wellington.

We did not prescribe what they could and couldn't look at and we allowed them to publish their work - in real time - as they covered a wide range of topics over several months.

This generated a high degree of media interest and, over several months, the group's ideas were widely discussed and debated by commentators and the public.

This open discussion generated a consensus that there were indeed genuine problems that needed to be fixed.

It was in this context that the Government was able to put in place a fiscally neutral package of reforms that increased GST and the taxation of property - alongside income tax cuts - without causing a public backlash.

I believe this kind of open policy development will become increasingly popular

The barriers to entry into policy development are dropping quickly, as technology makes access to stores of knowledge virtually costless. A teenager can now access synthesised policy thinking on most issues at no cost.  

Feedback loops can be set up quickly and cheaply and government can feed the process by making its own data and analysis readily and immediately available - all now possible at reasonable cost.  

The public service never experiences the benefits politicians get from being in Opposition. The political process now requires opposition parties to develop a range of detailed policy and implementation plans in order to compete credibly in elections.

The National Party put together over 100 specific undertakings, a multi billion dollar tax cut package, general direction for a three-year term and a detailed first 100-day plan - all with just three policy advisors.

Of course, good public policy is underpinned by a professional public service with its inherent continuity and institutional knowledge - but not at any cost, and not as an excuse for inertia.

Public service management of knowledge is neither as specialised nor as uniquely ethical as is often presumed.

 

I believe a more open policy process - with the potential to engage a wider range of people and institutions and encourage more public discussion - can help address some of these problems.

And, as our experience with the Tax Working Group shows, it can inject a higher level of energy into the policy process, provide a stronger focus on what matters and ultimately get better results.

Conclusion

The last decade has seen an excess of cash and confidence in the public sector. The results of large dollops of both are not impressive - government is bigger, but core social problems remain intractable, and voters are sceptical that their cash has been well used. 

The benign economic conditions of the last decade will not occur again for decades, so we face permanent fiscal constraint.

Ask this question: Has the way we think about public services and public policy changed as rapidly as the world around us? The answer is no, not yet, but larger forces of economics, technology and public demand mean our thinking will have to change.

In New Zealand, we have chosen a path of considered and consistent change over time and engaging the leadership of the public service in the mission of significantly changing the way we do business.

I am confident that if we use the tools available, and draw on a wider range of resource outside the public service, we will succeed in the immediate task of meeting reasonable public expectations with fewer resources.

We also have a larger obligation to the next generation. Fewer of them will be supporting more of us as we leave the workforce.

The cost of inertia and inaction will be a double burden of large public debt and an ageing population. We owe it to them to innovate, to take risks, to push the boundaries and to pay our own way. The clock is ticking.

Thank you.

"In this credit-constrained world, the recovery will need to come first from the earnings side of the economy such as exports," Mr English said today in a speech to the New Zealand Council for Infrastructure Development.

"All of this shows that tackling the economy's imbalances will not be a short-term task. It's not just a matter of shrugging off the global recession. The challenges we face started years earlier.

"Turning that around will require a relentless, long-term focus and commitment," Mr English says.

This reality was reflected in stable rather than growing results for domestic industries like housing and retail, and indicators such as business confidence and the sharemarket.

Recent debate about the Government's goal of catching Australian incomes by 2025 had attracted some comment - much of it characterised by a total lack of context about the recent economic performances of the two countries.

"In the three years to 2008, New Zealand's economic growth was unbalanced and sluggish. In early 2008, New Zealand went into a recession that Australia simply didn't have.

"This meant the Australian economy grew by about 11.5 per cent in the four years to March 2010, while our economy grew just 2 per cent.

"So the Government inherited a situation that makes the challenging target of catching Australia even more difficult. Let me stress that the Government remains committed to this target - but it's a 2025 target, not a 2011 or 2014 target."

Over the past 30 years, there had been many two year periods when New Zealand performed better than Australia, as dairy and other commodity prices fluctuated. But overall, the trend has been clearly in Australia's favour.

"On the commodity front, Australia clearly has the edge at the moment," Mr English says. "Put in simple terms, Australia's mineral industry makes up nearly 70 per cent of its exports, while dairy makes up 20 per cent of our exports.

"Furthermore, Australian commodity prices roughly doubled in the five years to July 2010, while New Zealand's commodity prices increased by only half as much.

"As a result, Australia's minerals boom is likely to mean it will perform better than New Zealand in the near term, but it is the long-term trend we are determined to turn around.

"The only way we can permanently lift New Zealand's economic growth is through considered and consistent reform and change, year after year.

"Budget 2010 took several steps in that direction - including across the board personal tax cuts from 1 October, which will help narrow the gap in after-tax incomes compared with Australia."

More broadly, the Government has built its economic plan around six policy drivers. They include:

• Strengthening our tax system
• Better, smarter public services
• Reforming regulation
• Education and skills
• Business innovation and trade
• Investment in productive infrastructure.

"In the past 18 months, we have been extremely busy rolling out policies within this plan, and you will see more announcements in the coming months," Mr English says

"The Government holds about $220 billion of assets and that is forecast to grow by another $30 billion over the next four years. Despite those large sums, Government knowledge and performance in this area has been poor.

"At a time when our finances are constrained, even small improvements in this area could yield substantial gains to reinvest in vital public services and assets like schools, housing and hospitals."

"So while our opponents are obsessed with the subject of asset sales, we're getting on with the unglamorous, but far more important task of improving the public sector's management of the Government's large asset base."

Changes announced today include:

• Plans to regularly publish a Government Investment Statement - as signalled in the Budget - which will clearly set out the Crown's assets and liabilities, identify any emerging issues and state how the Government plans to manage its large and growing investment in taxpayers' assets.

• A package of measures to enhance public sector decision making around infrastructure investment including a requirement that agencies proposing projects with a whole-of-life cost over $25 million consider and evaluate alternative procurement options, including a PPP.

"We intend to release the first Investment Statement before the end of the year. This step will bring this important aspect of the Government's financial management into line with other regular fiscal reporting.

"We believe this level of transparent information will allow the public to demand a much greater level of accountability from the Government and lead to significantly better decision-making across the public sector.   

"In regard to the other measures, PPPs will be appropriate only for some projects, but we believe putting this to the test will increase price competition and ensure that taxpayers get the best possible value for money.

"We are also giving chief executives greater discretion to commit to projects with a whole-of-life cost of less than $15 million but there will be a tighter focus on getting results.

"Agencies will have to take a more consistent approach to the development of their business case with a focus on clearly displaying the economic and financial rationale for any investment. 

"In addition, they will be required to explicitly report back to Cabinet on the results of major investments so the Government can ensure it is getting the expected benefits.

"We are confident the combination of all of these measures will help lift infrastructure investment and asset management practices across the public sector," Mr English says.

Just over half-way through our term, the Government's infrastructure programme is swinging into full gear and we are keen for continued engagement with providers like yourselves.

This investment represents a significant part of the combined $36.5 billion in Budget cash deficits we are forecasting over the next four years. The Government is running these significant deficits to invest in infrastructure, raise productivity and support the economy as it recovers from recession.

Today I want to share with you some of our thinking, the challenges we face and the progress we have made as we try to lift New Zealand's infrastructure performance.

Our economic challenges

But first, I'd like to outline some of the economic challenges we face.

Some commentators have suggested our economy was in good shape before the global recession hit in late 2008. That is incorrect: in fact, our average annual growth was less than 1 per cent a year in the three years leading up to the global financial crisis in late 2008 and we went into recession several months before just about every other developed economy.

Our track record going back several years shows sluggish and unbalanced growth driven by debt, consumption and government spending, rather than savings and exports. 

The bottom line is that we need to rebalance our lop-sided economy and correct our fiscal imbalances.

That is the only way we can deliver the sustainable growth, jobs and the higher incomes Kiwis deserve.

There are two main indicators of our economic under performance.

Firstly, the tradeables sector - the internationally competitive part of our economy comprising exports and import competing industries - actually shrank in the five years from 2005 to 2010.

Even more alarmingly, there have been no net new jobs created in manufacturing and agriculture for the best part of a decade.

By contrast the non-tradeables sector - the spending side of the economy - has grown by 15 per cent since 2005.

The second indicator of New Zealand's economic under performance is our net international investment position, which measures New Zealand's total debt to the world, including households, business and the Government.

In 2000, our debt to the world was just over $100 billion. It's now approaching $180 billion and, by 2014, it is forecast to be nearly $250 billion.

So we have a big task to turn this economy around and rebalance it towards savings and growth.

Early signs of progress

But I've been encouraged by some early signs of progress.

Firstly, after experiencing five quarters of recession, the economy is growing again. It expanded 1.9 per cent in the past year and growth of about 3 per cent a year is forecast for the next few years.

Secondly, the tradeables sector grew 3.4 per cent in the nine months to March, 2010, compared with just 1.2 per cent in the non-tradeables sector. This is the largest positive gap between the two sectors over a nine-month period since December 2002.

Thirdly, New Zealanders are being more careful with their spending. Per capita private sector consumption increased by only 1 per cent in the past year, after consistently increasing by more than 4 per cent, year on year, between 2002 and 2007.

Reserve Bank figures show household debt is also easing for the first time in more than a decade.

So we are seeing signs of a fairly orderly, if quite slow, rebalancing of the economy.

Many businesses and individuals are now realising what we've been saying for some time - this recovery will be quite different from others in our recent past.

This recovery will be patchy at times - due to the uncertain global environment and the need for businesses and households to pay down large stocks of debt.

In this credit-constrained world, the recovery will need to come first from the earnings side of our economy such as exports.

All of this shows that tackling the economy's imbalances will not be a short-term task. It's not just a matter of shrugging off the global recession. The challenges we face - as I've just outlined - started years earlier.

Turning that around will require a relentless long-term focus and commitment.

We are seeing this reflected in stable rather than growing results for domestic industries like housing and retail, and indicators such as business confidence and the sharemarket.

It's clear that the recession bottomed in early 2009 and unemployment peaked late last year. Since then, we've also seen steady, if modest growth, in the number of hours worked.

Of course the Government is concerned about the loss of any job. That's why we are running large cash deficits over the next four years - taking a lot of the economic shock on the Crown's balance sheet to protect households and businesses and to help keep Kiwis in jobs.

Our infrastructure programme plays a key part in supporting New Zealanders in work and I'll talk more about that later.

Catching Australian incomes by 2025

In the last few weeks, the Government's goal to catch Australia by 2025 has attracted some comment. That debate has been characterised by an almost total lack of context and I'd like to take a moment to bring it back to reality.

As I've said, in the three years to 2008 New Zealand's economic growth was unbalanced and sluggish. In early 2008, New Zealand went into a recession that Australia simply didn't have.

This meant Australia's economy grew by about 11.5 per cent in the four years to March, 2010, while our economy grew just 2 per cent.

So the Government inherited a situation that makes the challenging target of catching Australia even more difficult. Let me stress that the Government remains committed to this goal - but it is a 2025 target, not a 2011 or 2014 target.

Over the past 30 years, there have been many two year periods where New Zealand performed better than Australia as things like dairy and other commodity prices fluctuated. But the overall trend was adverse.

On the commodity front, Australia clearly has the edge at the moment.

Put in simple terms, Australia's mineral industry makes up nearly 70 per cent of that country's exports, while dairy makes up about 20 per cent of our exports.

Furthermore Australian commodity prices roughly doubled in the five years to July, 2010, while New Zealand's commodity prices increased by only half that rate.

As a result, Australia's minerals boom means it is likely to perform better than New Zealand in the near term, but it is the long-term trend we are determined to turn around.

The only way we can permanently lift New Zealand's economic growth is through considered and consistent reform and change, year after year.

Budget 2010 took several steps in that direction - including across the board personal tax cuts from 1 October, which will help narrow the gap in after-tax incomes compared with Australia.

More broadly, the Government has identified six drivers of economic growth, which I talked about at this symposium last year. In the past 18 months, we have been extremely busy rolling out policies within this plan, and you will see more announcements in the coming months.

We've already made good progress, including:

Strengthening our tax system - you will have all seen the major changes we made in the Budget.

At a time when many other countries are being forced to consider income tax increases, we have delivered across-the-board personal tax cuts that will leave the average household about $25 a week better off, even after the GST increase to 15 per cent. The average wage earner will be about $15 a week better off.

From the 2011/12 income year, our company tax rate will fall to 28 per cent - lower than Australia and ensuring that we remain competitive. It also helps provide businesses with the right incentives to invest and export.

Better, smarter public services - this has involved getting forecasts of never-ending Budget deficits and ever-increasing government debt under control.

We've reviewed the performance of major departments and agencies; we've capped the bureaucracy and moved nearly $4 billion of spending into frontline public services such as health, education and law and order.

And we're reviewing longstanding issues such as welfare dependency and pressures on social housing through the Welfare Working Group and the Housing Shareholders Advisory Group, which you will have seen in the media over recent days.

Lifting education and skills - we've introduced national standards in literacy and numeracy; we're investing a record $12 billion in education services; we're introducing the Youth Guarantee and trades in schools; and we're focusing tertiary education on achievement by improving the quality and relevance of qualifications.

Better business innovation and an ambitious trade agenda - we recognise the benefits to growth and jobs this area makes.

Last year, we announced the $140 million a year Primary Growth Partnership with the private sector; and in Budget 2010 we confirmed a $321 million investment over four years in new science, research and technology initiatives.

And our ongoing drive for free trade agreements will deliver more benefits for New Zealand businesses - we've signed agreements with Malaysia, Hong Kong and ASEAN, and we're in talks with India, the Gulf States, Trans-Pacific Partnership countries, Korea and Russia.

Cutting red tape and regulation - just last month, we outlined a package of employment law reforms to give businesses the confidence to invest and take on new staff.

We've simplified the Resource Management Act to reduce costs and promote growth, and further RMA reforms are underway in areas such as water, infrastructure and urban design.

And we've progressed aquaculture reforms and building regulations.

And last, but not least, we're investing significantly in productive infrastructure.

Before the 2008 election, we promised to unclog the economy's arteries and address how New Zealand provides its infrastructure.

We promised to increase funding, reform regulation and get the best from our limited resources by being smarter in planning, financing and executing our infrastructure projects.

First-class infrastructure is an important enabler of higher productivity and economic growth.

The costs of inadequate infrastructure are not too hard to find. Bottlenecks have become apparent and are now being addressed in roads, electricity transmission and telecommunications. We believe these bottlenecks have held our economy back.

In principle, infrastructure is no different from any other type of investment. It is about investing to provide users with excellent services and the country with worthwhile returns. 

The challenge is to ensure the right level of investment is made in the right places by organisations with the knowledge and incentives to invest. 

New Zealand needs infrastructure that is properly selected, designed, built and maintained using modern, whole-of-life approaches. 

Progress to date

The Government's approach to infrastructure so far is three-pronged. 

Firstly, we've increased investment and pushed ahead in areas where the need for investment was obvious. We've started the task of reforming regulation to remove the barriers to getting projects off the ground and we've taken steps to improve the quality of the Government's infrastructure investment.

The first part of our plan is well underway.

We've prioritised the construction of Roads of National Significance and we are spending $11 billion over 10 years on State Highways. Total spending on roading and other Land Transport priorities is now about $2.8 billion a year.

Soon you'll see the rollout of fibre to the home as part of our $1.5 billion ultra-fast broadband plan. We have now received refined bids from a large number of regional and national bidders and we expect that new fibre will be in the ground before the end of the year.

There has been a substantial rise in spending on the National Grid - investment of about $4 billion is planned in the next five years to give businesses and consumers confidence they will have a secure electricity supply.

And we are investing in Rail - committing in principle to a $750 million contribution over the next three years to Kiwi Rail's turnaround plan.

We have also outlined Budget capital spending of $7.5 billion over five years. Much of this will be used to build and upgrade schools, housing, hospitals and telecommunications. 

This is a significant step up in investment and with the commercial property market experiencing a lull, Government projects are supporting the infrastructure sector on this side of the Tasman.

For example, in the three months to May this year, Government projects made up about 55 per cent of non-residential building consents.

In terms of major projects - jobs worth more than $5 million - Pacifecon estimates 80 per cent of them are Government generated.

So the Government's investment is having the added benefit of supporting thousands of jobs.

Reforming regulation

The second leg of our infrastructure programme is reforming regulation to remove barriers preventing vital projects from being built.

Just last week, Parliament passed four bills that will remove unnecessary barriers to infrastructure development and improve the consistency of regulations. In particular, they will greatly improve arrangements for managing access to road and rail corridors by utility companies.

The Government was concerned that the rules until now had been inconsistent across utilities, creating inefficiencies, uncertainty and disputes.

This is in addition to other reviews I have already mentioned, including the Building Act and phase two of the RMA reforms.

Taken together, these changes will contribute to a smoother pathway for infrastructure development in New Zealand.

Improving the quality of our infrastructure investment

The third leg of our infrastructure programme is improving the quality of the Government's procurement and management of assets.

We've set up the National Infrastructure Unit within the Treasury. This is the centre of Government expertise, covering areas such as major project evaluation, infrastructure-related regulatory issues and contracting with outside finance. 

Almost all mature infrastructure markets we have looked at have a similar body. Many of you would have had some engagement with the unit over the past year.

One of the unit's roles was to produce the first National Infrastructure Plan, which was essentially a stock take of current demands and planned investment to provide a degree of certainty to the business community. 

The plan has provided a useful list of existing planning and projects in the pipeline and a clear sense of where the sector is heading. Private sector participants like yourselves have long been calling for such a document. 

However it was very much a first effort and next year we will release the second plan. It will include a closer look at how central and local government can work better together and where the planning gaps might be looking out 10-20 years.

The National Infrastructure Unit is backed by an advisory board of private sector experts, who are assisting us with the plan as well as general policy. 

Engaging with the private sector

The Government wants to see as much private sector expertise and discipline used as possible. We welcome engagement.

That's because we believe there are big gains to be made by exposing the public sector to private sector skills and techniques - particularly in the area of risk management and better assessment of whole-of-life costs. 

This is part of the rationale behind our recent steps towards New Zealand's first public-private partnerships.

We have announced our intention to build a PPP prison at Wiri in south Auckland, subject to consents and a successful tender process.

We have also announced our intention to proceed with a PPP for new school property and developed our ultra-fast broadband initiative with a commercial structure that partners public and private investment.

Initial investigations show these projects will provide savings for taxpayers, as well as providing a range of other benefits.

The Government's basic position is clear: We're open to any innovative ideas - from both the public and private sectors - that can maximise economic efficiency, get better value for money for taxpayers and help the economy grow faster.

The Government will enter into PPPs only if they work and deliver value for taxpayers. In Australia where about 50 PPP projects worth about $30 billion have been completed since 2000, PPPs still only comprise about 20 per cent of projects.

And we must acknowledge our own specific circumstances.

New Zealand is smaller and this means there will be more small and medium-sized projects and there is unlikely to be the same constant pipeline of PPP projects there is in Australia.

These projects are likely to be both more varied and of a more one-off nature than the Australian market.

However, that will mean good entry-level PPP opportunities for smaller or emerging firms, allowing them to move up the value chain and extend into Australia.

There is further work to be done to develop this market in New Zealand, but to date I have been impressed by the level of interest from the market.

New measures to drive improvement

As I've said many times, this Government is determined to improve the management of its assets - both the existing stock and the way decisions are made about future investment.

Today I want to announce some new measures designed to improve public sector performance in these areas.

Given that we are borrowing - and investing - significant sums of money on behalf of taxpayers, we will be running a tough ruler over our investments. Local government will need to do the same on behalf of their ratepayers - and they will need to be realistic about how much they are paying and where they can invest.

At present the New Zealand Government holds about $220 billion of assets - about half of them physical assets like roads, schools and prisons. This investment base is set to grow by about $30 billion over the next four years.

This means the Crown is by far the largest asset owner in the country. Every one of those assets was built up using PAYE taxes from hard working New Zealanders, so we have a huge responsibility to manage it well.

However, Government performance in this area has been poor.

Before we came into Government, there was very little knowledge in the public service and little work being done about where this value resided, which assets were rising in value, which were dropping and why.

Crucially, there was almost no work being done on how to raise the bar on how we manage the Government's assets - despite the huge sums of money involved. Wehave set about to rectify this.

At a time when our finances are constrained, even small improvements in this area could yield substantial gains to reinvest in vital public services and assets like schools, housing and hospitals.

So while our opponents are obsessed with the subject of asset sales, we're getting on with the unglamorous, but far more important task of improving the public sector's management of the Government's large asset base.

We want to make sure we are allocating future capital funding where it can best raise productivity and lift New Zealand's economic performance. 

Taking the lead from the first National Infrastructure Plan, which provides the strategic basis for our five-year $7.5 billion infrastructure investment in assets like schools, hospitals, broadband and prisons, the Government is now undertaking a wider stock-take of its entire balance sheet.

Government investment statement to be published

It is our intention to release a Government Investment Statement - signalled in the Budget - which will clearly set out the Crown's assets and liabilities, identify any emerging issues and state how the Government plans to manage its large and growing investment in taxpayers' assets.

We intend to release the first Investment Statement before the end of the year. This will bring this important aspect of the Government's financial management into line with other regular fiscal reporting.

We believe this level of transparent information - in a regular publication - will allow the public to demand a much greater level of accountability from the Government and lead to significantly better decision-making across the public sector.   

I am also pleased to announce today that Cabinet has recently agreed to a package of other measures aimed at enhancing public sector decision making in regard to infrastructure.

From today all Crown agencies proposing new infrastructure with a whole-of-life cost over $25 million will need to consider and evaluate alternative procurement options, including a PPP.

PPPs will be appropriate only for some projects, but we believe putting this to the test will increase price competition and ensure taxpayers get the best possible value for money.

We are also giving chief executives greater discretion to commit to projects with a whole-of-life cost of less than $15 million, but there will be a tighter focus on getting results.

Agencies will have to take a more consistent approach to developing their business case, with a focus on clearly displaying the economic and financial rationale for any investment. 

In addition, they will be required to explicitly report back to Cabinet on the results of major investments so the Government can ensure it is getting the expected benefits.

We are confident this combination of measures will help lift infrastructure investment and asset management practices across the public sector.

Conclusion

In summary, these are exciting times. We have the opportunity to get the best from our limited resources by being smarter. The challenge is to get to the forefront of world practice. 

That is a goal worth pursuing and one we are committed to.

Thank you.

The Government is carefully considering the Housing Shareholders' Advisory Group report on options for improving the social and affordable housing sector, Finance Minister Bill English and Housing Minister Phil Heatley said today.

"The aim of this review was to identify how we could help those most in need get the assistance they need for as long as they need it," Mr Heatley said.

"The Government has around $15 billion invested in social housing and is committed to retaining state housing. However, a significant number of houses are in a poor state of repair, are of the wrong size and are in the wrong places to meet demand.

"We want to ensure this significant asset is utilised to the best effect. We also want the system to be fairer and to work better for those families most in need," he said.

The independent Group's report identifies a number of challenges to be addressed regarding social and affordable housing in New Zealand. It makes 19 recommendations, which the Group believes will help to ensure New Zealanders have access to social and affordable housing in the future.

Mr Heatley said the Housing Shareholders' Advisory Group had produced a comprehensive report and, in the process, would help to generate constructive debate.

He welcomed the Group's call for the need to diversify the funding of social housing by increasing community sector involvement.

"I note the Advisory Group's concern that many countries are grappling with similar issues but New Zealand has yet to adopt some of the strategies observed offshore to address them," he said.

Mr English said the Group had decided to widen its brief and include housing affordability and social housing's relationship with the wider benefit system.

"As the scope of the report has widened, it needs further consideration and we want to gain a deeper understanding of the issues and to get feedback from the wider sector and officials before making any decisions on the report," he said.

"There are a number of challenges to be addressed and there is no quick fix. We want to ensure we carefully consider the report and consult with the sector before considering any changes to government policy," he said.

"We have asked the Housing Shareholders' Advisory Group to engage with key stakeholders in the wider sector on the implications arising from their recommendations and to report back to the Government later in the year."

Mr English said the Government would only consider making changes to the current system if it meant it was going to work better and deliver the right results for those most in need.

The seven-member Advisory Group was chaired by Dr Alan Jackson, a former senior vice-president in the Auckland office of global consultancy firm, the Boston Consulting Group.

Other members of the Group included Major Campbell Roberts (Salvation Army), Diane Robertson (Auckland City Mission), Brian Donnelly (New Zealand Housing Foundation) and Paul White (iwi, social services and housing), who all have considerable experience working in the social and affordable housing sector. Andrew Body and Martin Udale are experienced in the business, banking, corporate and investment communities.

Mr English and Mr Heatley commended the Group for its work so far and thanked them for the professional job they had done.

"We look forward to hearing back from the Group later in the year on the outcomes of their discussions with the wider sector."

To view a copy of the report, terms of reference, or profiles of the members of the Housing Shareholders' Advisory Group visit: http://www.dbh.govt.nz/vision-for-social-housing-nz

To view questions and answers about the Housing Shareholders' Advisory Group click on the link under 'Related Documents' below.

Related Documents:

Questions & Answers.pdf (pdf, 32 Kb)

Clutha-Southland is experiencing one of the driest winters in a long time. There is plenty of grass and if this weather keeps up we are looking at early growth which is great for calving and lambing. Farming is important to our communities and this country's economic growth.

In the electorate

Watch out for the Ranfurly Shield challenge in Invercargill on Saturday. Otago and Southland meet over the Log O' Wood which The Stags won last October.  

Budget meetings

I followed up my second Budget with meetings throughout the country, two of these being very successful events in the electorate.

Both the Eastern Southland Chamber of Commerce's Business After Five meeting in Gore and the Queenstown Chamber of Commerce's Business Lunch Series were well attended, with 200 people at the Queenstown event. It is good to hear what people think and answer their questions.

Books in Homes

Aside from constituent appointments I have met many people around the electorate, including pupils and staff at Riversdale Primary School where I talked about National Standards, and at Mataura Primary School where I presented Duffy Books to the pupils.

The Alan Duff Charitable Foundation, better known as Duffy Books in Homes, provides free books to more than 100,000 New Zealand children, three times a year.  

Visit their website for more information and you can also find out how to support literacy in New Zealand by donating, sponsoring a school or becoming one of their Role Models.
http://www.booksinhomes.org.nz/Home.aspx

Supporting our rescue helicopter
 
I had great pleasure in presenting a $60,000 to Lakes District Air Rescue Trust chairman Jules Tapper at Queenstown airfield. This is part of a $48 million commitment to implementing a New Zealand Ambulance Services Strategy over the next four years.    

Representatives from the Police, Search and Rescue, St Johns and the helicopter industry were present.

These funds have enabled the purchase of an onboard LifePak monitor and defibrillator.

Young achievers

In Balclutha, I spoke to the Balclutha Rotary Club and met members during the meal.  

I have also met with some terrific young people in recent weeks. Platinum Clothing, a Young Enterprise Group from South Otago High School, are selling singlets printed with the Prostate Cancer NZ emblem on the front and their personal company logo on the back.

For every singlet sold 30 per cent of the sale goes to Prostate Cancer NZ. These are young men who have a great attitude and we can be very proud of them.

Youth Parliament

Emily Bowden, a Year 12 student at South Otago High School, represented the Clutha-Southland electorate at the recent Youth Parliament.

Emily was one of 122 young New Zealanders, aged 16 to 20 years, representing each sitting MP who took over Parliament for two days during the school holidays. Youth Parliament is held once each parliamentary term.

I was delighted to be able to spend time with Emily and other Youth MPs during their time in Wellington.

Young Farmer of the Year

What a great experience to be involved in the National Bank Young Farmer of the Year competition that was held in Gore.

With author Christine Fernyhough, and Southland-based financial planner Peter Flannery we heard from each contestant on the Thursday for the 45-minute personal interview.

The next morning I attended the breakfast. Mary I attended the dinner and prize giving on Saturday evening. This whole event was exceptionally well organised and it was a privilege to be part of it.

Oamaru agricultural consultant Grant McNaughton was the winner. Our own local finalist Peter Gardyne, of Gore, came a very credible second.

Survey: You have probably received my survey in your mailbox recently. As your local Member of Parliament what you think is important to me. This survey helps me to understand the issues that influence your lives. I appreciate the time that many of you are taking to complete the survey and return it to me. If you didn't receive one please contact my electorate office and they can ensure you do.

In Wellington

Creating job opportunities

National is working hard to lift the long-term performance of the economy and create more jobs. Our employment law package will reduce compliance costs, give businesses more confidence to take on new staff, and provide more choices for employees and employers.

We're extending the voluntary 90-day trial period to all employers so that every business and new employee can benefit from it. Changes to the personal grievance process will see employment problems resolved more quickly, costs reduced, and improved confidence in the system.

We're also giving employees the ability to trade one of their four weeks' annual leave for cash. And we're changing the law around sick days so employers, at their expense, can require a medical certificate from employees who take one sick day.

Our employment law package is one more step on the road to a growing economy and more jobs.

More information
http://www.beehive.govt.nz/feature/securing+brighter+future+-+employment+law+package

Food Bill passes first reading

The Food Bill has passed its first reading with unanimous support.  It will now be considered by a select committee which will report back later in the year.

The Food Act 1981 has not been updated for 30 years and I'm pleased that all parties have agreed to work together on the passage of this bill.

The new Food Bill has been developed over the past three years and is aligned with the New Zealand Standard platform, which provides the basis for our food exports.

Ultimately this Bill will make it easier for food businesses to understand how safe food needs to be produced and ensure they take primary responsibility for everything they sell. 

Organisers of community-based fundraising activities like cake stalls and sausage sizzles won't need to jump through hoops. 

Food handler guidance will be made available to these people to help them keep food safe and local councils will have more certainty around their role in regulating food premises.

More information
http://www.beehive.govt.nz/release/food+bill+passes+first+reading

New tenancy laws passed

Changes to the Residential Tenancies Act will better meet the needs of landlords and tenants in today's rental market.

The changes include clearing up confusing processes around terminating and renewing tenancies, and introducing new financial penalties for tenants harassing neighbours of up to $2000, or for landlords providing sub-standard housing of up to $3000.

Over recent years, the private rental market has been increasingly important in housing those who choose, or need, to rent their homes for lifestyle or affordability reasons.

It is therefore imperative the legislation governing the sector supports adequate provision of stable, good quality rental housing.

The new laws will come into force later this year once supporting regulations have been approved and published.

For more information, visit the Department of Building and Housing website at www.dbh.govt.nz/rta-review or phone 0800 TENANCY (0800 836 262).

Growing the economy

Click on the link below to watch my latest briefing on the economy.

http://www.youtube.com/nationalparty#p/u/6/Drb_OPOuFfk

I talk about:

• National's plan for building the recovery
• Budget 2010, a step forward
• National's policy tool kit across economic policy
• Ways National is correcting the imbalances in the economy

Regards,
Hon Bill English MP

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Gore Office
15 Main Street,
P O Box 266,
Gore 9740
ddi 03 203 3000
gore.eo@parliament.govt.nz

Balclutha Office
68 Clyde Street,
P O Box 103
Balclutha 9240
ddi 03 418 4288
balclutha.eo@parliament.govt.nz

Queenstown Office
1085 Frankton Road,
P O Box 2192,
Queenstown 9349
ddi 03 441 4093
queenstown.eo@parliament.govt.nz

 

EARLY SIGNS OF ECONOMIC REBALANCING

Click here to watch this video briefing on YouTube

Over the last 18 months we've done a lot of work to rebalance our economy towards exports, savings and investment in a bid to lift sustainable economic growth. Today I want to highlight two more indicators that show there are some early signs of progress. In brief, the tradeables sector - that's exports and import competing industries - has outperformed the non-tradeables sector - imports, housing and government spending - by the largest margin in years in the nine months to March 2010.

Secondly New Zealanders are being more careful with their spending and in the past year household debt has eased for the first time in more than a decade. This rebalancing towards the parts of our economy that earn us a living with the rest of the world is vital if we are to get on top of the $170 billion New Zealand owes abroad. That is critical to building the kind of sustainable economic growth that creates jobs and helps families get ahead. You can hear more about this in the video presentation above or read about it in the presentation slides.

REVIEW OF SPENDING ON POLICY ADVICE

A crucial part of our economic rebalancing is ensuring Government spending doesn't run out of control, swamp us with debt and squeeze out growth in the more productive parts of the economy. That's why this week we announced a review of spending on policy advice. Between 2003 and 2009 total Government spending on policy advice across all ministries, departments and agencies jumped by more than 70 per cent to $880 million a year. This is over half of what the Government spends on policing or about the same amount we spend on state housing.

This kind of growth is not sustainable. We need to make sure the level and breadth of spending on policy advice is actually aligned with the Government's priorities. The review is just one part of a wide-ranging programme ensuring available resources are focused on frontline services and the public sector is delivering better value to taxpayers.

BETTER MANAGING THE GOVERNMENT'S ASSETS

I've made it pretty clear that one of the Government's priorities is better managing the $220 billion of assets we hold. Even small improvements in this area could yield substantial sums of money to reinvest into vital infrastructure such as roads, schools, broadband and prisons.

Initial investigations show that building and maintaining some new school property through a public-private partnership will offer a small saving for taxpayers and will free up boards and principals to focus on their core activity - teaching. That is why Education Minister Anne Tolley and I have announced we are taking the next step towards a PPP for some new school property. We believe introducing new methods of procurement will increase contestability and expose the public sector to different ideas and techniques that will help them raise their game when it comes to managing assets. 

HEADING ACROSS THE DITCH

Over the next two weeks I'll make two trips to Australia to speak to business audiences and hold discussions with financial and industry leaders. Australia is our largest trading partner and its economy has performed very well through the global recession. Our close economic relationship is helping us build on our recovery. It's important we maintain and build on these strong links. This week I'll speak to business audiences in Sydney and Melbourne before returning to Melbourne next week to speak to the Australia New Zealand School of Government.

THINGS TO LOOK OUT FOR

• 5 August: Statistics New Zealand will release the Household Labour Force Survey for the June quarter.
• 11 August: Speech to the New Zealand Council for Infrastructure Development in Auckland.
• 12 August: Speech to the Australia New Zealand School of Government in Melbourne.

Regards,
Bill English, Finance Minister

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Finance Minister Bill English provides a briefing on the economy, augmented by graphs and charts showing the main features of the existing situation and the path to recovery.

Finance Minister Bill English will visit Australia in the next two weeks, where he will speak to business audiences and have discussions with various financial and industry leaders in Sydney and Melbourne.

"Australia is our largest trading partner and our close economic relationship has certainly helped New Zealand as we brought our economy out of recession and took early steps to build the recovery," Mr English says.

"It's important that we maintain our strong links with the business and investment community across the Tasman, because we have many common challenges and opportunities."

Mr English will visit Sydney on 4 August, where he will speak to the International CEO Forum and the Australian Business Economists.

In Melbourne the next day, he will speak to the Infrastructure Partnerships Australia conference, where he will discuss progress with the Government's multi-billion infrastructure programme and the National Infrastructure Plan.

Mr English will return to Melbourne on 12 August to speak at the Australia New Zealand School of Government annual conference.

During both visits to Australia, Mr English will also meet a number of business and infrastructure sector leaders.