The Government is supporting exporters through two changes that widen the scope and accessibility of the New Zealand Export Credit Office's trade guarantees, Finance Minister Bill English and Trade Minister Tim Groser say.

"The Government is focused on lifting New Zealand's exports, so we can build a faster growing economy with higher incomes and more real jobs," Mr English says.

"In an uncertain global environment, exporters still face difficulty getting the trade credit and financial guarantees they need to maintain existing overseas markets and establish new ones.

"These changes widen the scope and accessibility of NZECO's trade guarantees, supporting more New Zealand companies to trade abroad," Mr English says.

NZECO's guarantees facilitate trade by providing a guarantee to exporters or banks against defaults on contracts. The changes will:

• Allow NZECO to underwrite its trade guarantees in a broader range of currencies, including China's Renminbi.
• Give NZECO more flexibility to support transactions with benefits to New Zealand over and above the level of local value-added content.

Mr Groser says the changes reflect the shifting nature of New Zealand's export trade.

"New Zealand exporters are increasingly under demand from their buyers to trade in the buyer’s local currency. This will give them greater scope to do so.

"Giving NZECO more flexibility to support deals with wider benefits to New Zealand responds to a clear demand for trade finance for local companies that use offshore subsidiaries.

“This is about the internationalisation of local companies, which generally operate outside the traditional primary export sector, have a strong local design component and bring profits and other benefits back to New Zealand.

"More and more of these companies are establishing offshore entities to support their export effort from a New Zealand base. They are participants in the global supply chain, which is where the bulk of global trade lies and where New Zealand needs to have a strong presence," Mr Groser says.

Under the current rules NZECO can only provide trade guarantees to companies exporting products with at least 30 per cent New Zealand content.

Under the change NZECO will apply a wider 'benefit to New Zealand’ test. However if its products are oversubscribed it will continue to prioritise exports with New Zealand-value added content.

The changes, which will take effect later this month, don't require extra funding.

The NZECO has a maximum risk exposure of $740 million for its products, but the only cost to the Crown is in the event of an unrecoverable default. This potential cost is offset by premiums.

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Deputy Prime Minister Bill English will attend the 19th Asia-Pacific Economic Cooperation (APEC) leaders meeting on 13 November in Honolulu, USA.

Mr English will join leaders from 21 APEC economies to discuss the region's economic growth prospects and ways to advance APEC's vision for an Asia-Pacific-wide Free Trade Area.

"APEC supports closer trade and economic relationships in the region, making it easier for members to trade and invest in each other’s economies," Mr English says.

"This includes initiatives to make it easier, cheaper and faster for New Zealand companies to do business in the region.

"That's vital if we want to sell more goods and services to the rest of the world and build a faster-growing economy with higher incomes and more real jobs."

While attending APEC, Mr English will also hold a number of bilateral meetings, as well as participate in the APEC CEO Summit and other associated events.

"Closely following on from the G20 Summit in France, APEC will be an important opportunity for leaders to reaffirm their commitment to regional growth and multilateral trade," Mr English says.

Foreign Minister Murray McCully and Trade Minister Tim Groser will also travel to Honolulu to attend ministerial meetings as part of the leaders week.

Mr English departs for Honolulu on 11 November, while Mr McCully departs on 10 November and Mr Groser on 8 November.

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The Government plans to overhaul consumer credit laws to protect unwary consumers being preyed on by unscrupulous credit companies, Finance Minister Bill English says.

“There has been significant and much-needed reform of the investment side of the financial sector over the past three years,” Mr English says.

“However, credit providers remain largely unregulated and have no conduct requirements, leading some to exploit vulnerable people, resulting in severe financial hardship and spiralling debt. This is not acceptable.”

Cabinet has approved a package of changes including:

• Strengthening the Consumer Contracts and Consumer Finance Act (CCCFA) by adding new responsible lending requirements including that:
  • The borrower must be reasonably expected to repay the loan without substantial hardship.
  • The lender must be honest and transparent in dealing with the borrower.
• Creating a Code of Responsible Lending that sets out the types of practices accepted as meeting the principles of responsible lending.
• Giving the Financial Markets Authority (FMA) the power to issue formal warnings and cancel a person’s financial service provider registration if they fail to comply with the code and other relevant legislation.
• Provide that borrowers are not liable for the costs of interest or fees if their lender is not registered, as required, on the Financial Service Providers Register (a recent survey found 35 per cent of third-tier lenders were not registered).
• Amend the CCCFA to stipulate that advertising must not be misleading, deceptive, or confusing and must comply with the code, and allow the regulator to prohibit advertisements that fail to do so.
• Protect important goods, such as tools of trade, necessary household items, and motor vehicles with a value of up to $5000, from being used as security against a loan (except if the credit contract is for the purchase of such an item).
• Extend the 'cooling-off period', where a consumer has the right to cancel a credit contract, from three to five working days.
• Improve disclosure requirements, including that disclosure of key information and full terms and conditions must occur before the contract is made (presently this can happen up to five days after).
• Changes to the rules around oppressive credit contract provisions and hardship applications to provide increased consumer protection.

The package of reforms has been shaped by the Government’s Financial Summit, held in August, which brought together 250 people from community groups, budgeting services, NGOs, banks, financial regulators, and credit companies to look at ways of tackling irresponsible lending.

Because this is a complex area, the Government intends to release draft legislation for consultation on the proposed changes in advance of introducing final legislation to Parliament.

“These changes represent a multi-pronged approach towards promoting responsible lending by increasing consumer protections, requiring lenders to give borrowers more information and beefing up the powers of enforcement agencies.

“People need access to affordable credit. For some people who are a higher lending risk, the cost of credit will always be higher but that does not justify the highly exploitive and irresponsible lending practices of some lenders,” Mr English says.

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National is on track to get the Government’s books back to surplus by 2014/15 and start repaying debt when most other countries are still running deficits and borrowing more, National Party Leader John Key and Finance Spokesman Bill English said today.

This is in stark contrast to Labour, whose gimmicks and growing list of expensive promises will create a black hole of more than $16 billion in the government’s accounts over the next four years alone – costing thousands of jobs and pushing up interest rates for families and businesses.

“National has a straightforward and comprehensive plan to build a more competitive economy,” Mr Key said today in launching National’s finance policy in Wellington.

“First, we’re balancing the books sooner by getting back to surplus in three years.
That’s important because it means less debt and lower interest rates for households and businesses.

“The Savings Working Group said getting back to surplus is the most important thing we can do to increase genuine national savings and reduce New Zealand’s longstanding reliance on foreign debt.

“Second, we’re creating incentives for people to work hard, save and get ahead, through changes to tax and welfare.

“And third, we’re building better roads, broadband and other infrastructure so businesses can grow.

“Through these actions, we’re creating a more competitive economy and backing Kiwis’ ability to get out there and take on the world.”

Mr English confirmed National will keep a tight rein on spending over the next three years to achieve budget surplus, as part of its wider programme of responsible and balanced economic management.

“We will need to work hard and remain focused to get back to surplus,” Mr English said. “National will stick to its annual operating allowances of no more than $800 million in 2012/13 and 2013/14, and $1.2 billion in 2014/15.

“This new spending will go to health, education and a few carefully-targeted initiatives.

“There will be no new capital allowances until Budget 2017. Instead, the estimated $5-$7 billion proceeds from the mixed ownership model will be invested in National’s new Future Investment Fund for priority new assets like modern schools, hospital redevelopments and transport projects.

“We will make these investments without having to borrow from foreign lenders,” Mr English said. “That’s important when the assets we are managing on behalf of taxpayers are forecast to increase by $22 billion to $267 billion over the next four years.

Mr Key and Mr English said National will continue with its clear plan to build a more competitive economy that sells more to the rest of the world, creates new jobs and provides higher incomes for New Zealanders.

“By contrast, it’s the same old Labour wanting to take New Zealand backwards with more borrowing, more spending, more taxes and more costs on businesses,” they said.

“These kinds of policies have failed under Labour’s watch in the past and they would fail again – at the cost of jobs and living standards for New Zealanders.

“The answer to a debt problem is not to run up more debt,” Mr Key and Mr English said.

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National will use the proceeds from the mixed-ownership model to set up a Future Investment Fund of up to $7 billion to pay for new infrastructure without extra borrowing, National Party finance spokesman Bill English says.

"A National-led Government is committed to investing in modern infrastructure that helps build a faster growing economy with more exports and more real jobs, while keeping our debt low," Mr English says.

"That’s precisely what our extension of the mixed-ownership model is all about. If re-elected, National will put the proceeds of mixed ownership – between $5 and $7 billion – into a new fund, called the Future Investment Fund.

"Through the Fund the public can be assured the proceeds of mixed ownership are not being lost. They will be used to buy new assets for New Zealanders, and to upgrade and modernise our existing assets, reducing the Government's borrowing from foreign lenders by $5-$7 billion.

"Investing the mixed-ownership proceeds in this way will result in assets that are long-lived, are here in New Zealand and are owned by the Crown on behalf of all taxpayers.

"They will be part of a growing asset pool, with taxpayers' assets forecast to expand from $245 billion now to $267 billion by 2016.

"We will set a high bar for projects to be paid for out of the Fund and the case for these projects will have to stack up. They will have to either improve public services or deliver substantial economic dividends for New Zealanders and can’t just involve the routine replacement of existing capital.

"Decisions on spending from the Fund will be made on a case-by-case basis, by ministers, as part of the normal Budget process.

"We intend the Fund to run for at least five years but this of course depends on how much the mixed ownership model raises. The higher the proceeds, the more new investment we can pay for without having to borrow.

"The Government has clearly laid out its plans to extend the mixed-ownership model, which Air New Zealand has operated successfully under for almost a decade.

"After the election, we intend to extend this model to four other State-owned companies – Meridian, Mighty River, Genesis and Solid Energy.

"The Government will retain at least 51 per cent of these businesses and Kiwis will be at the front of the queue for shares.

"This will provide an investment opportunity for savers looking to put their money in something other than housing or finance companies.

"A large and growing pool of New Zealand investment funds will ensure strong local demand for shares. As a result, we expect New Zealanders to own at least 85-90 per cent of these companies.

“The mixed ownership model is a win-win. New Zealand savers get to invest in good Kiwi companies. And the Government frees up $5 to $7 billion over three to five years to buy new assets like schools, hospitals and ultra-fast broadband, without having to borrow from overseas lenders and increase our debt."

Visit the policy at:

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The Government is on track to return to surplus in 2014/15, with the recovery continuing to pick up pace, Finance Minister Bill English says.

Treasury today released the Pre-Election Economic and Fiscal Update (PREFU) which forecasts average annual growth of almost 3 per cent between 2012 and 2016, more than 150,000 new jobs over the forecast period and strong growth in wages and household incomes.

"The Government has put in place a comprehensive programme over the past three years to improve the economy’s competitiveness and build faster growth.

"The economy has now grown in eight of the last nine quarters and growth in the first half of this year has been stronger than Budget 2011 forecasts. This has contributed to the creation of 43,000 new jobs in the past year – 20,000 more than forecast at the time of the Budget,” Mr English says.

"A solid growth outlook, combined with the Government's responsible economic management, has ensured we remain on track to move from a forecast deficit of $10.8 billion in the current year to a surplus of $1.5 billion in 2014/15.

"Getting back to surplus as soon as possible is one of the most important things the Government can do to lift national savings and rebalance the economy towards our productive sectors.

"However, while New Zealand is relatively well placed, the global waters are getting rougher. This is reflected in Treasury's forecasts for trading partner growth, which have been revised downwards.

"As a result, growth is forecast to peak slightly lower than expected in the Budget, but off a higher base. Growth of 3.4 per cent is still expected in the March 2013 year and average almost 3 per cent a year across the forecast period.

"That growth outlook underpins Treasury's forecasts of more than 150,000 new jobs and average annual wage growth of almost 4 per cent between 2012 and 2016. In the Budget, Treasury predicted an extra 170,000 new jobs over the forecast period. The new estimate of 150,000 jobs recognises that actual jobs are already 20,000 ahead of Budget forecasts.”

The lower global growth outlook is expected to keep interest rates lower for longer - reducing financing costs for mortgage holders, businesses and the Government.

"While the outlook for many developed countries has weakened, New Zealand is expected to benefit from our growing trade links with Australia and the faster-growing Asian economies, which now take about 60 per cent of our exports.

"The Canterbury rebuild will also support growth, with Treasury revising its damage estimate from the earthquakes from $15 billion to $20 billion, meaning the rebuild will be longer and contribute more to economic activity.

"Household saving is expected to continue to strengthen after becoming positive in the past year for the first time in over a decade. This will have a dampening effect on growth in the near term, but build a stronger platform for future growth.

"This year's PREFU is in stark contrast to that delivered three years ago, which revealed a decade of deficits and sharply rising debt. By December 2008 those forecasts had turned into never-ending deficits and ever-rising debt.

"The Government has worked hard to turn those forecasts around, while managing the many challenges we have faced along the way.

"It's crucial we stick to our programme of responsible financial management and policies that build a more competitive economy if we are to make the most of the opportunities that lie ahead," Mr English says.

Economic and fiscal data at a glance

Economic Data
March Years	2011	2012	2013	2014	2015	2016
Real GDP Growth (annual % change)	1.6	2.3	3.4	3.3	2.9	2.4
CPI Inflation (annual % change, March quarter)	4.5	2.8	2.2	2.4	2.5	2.7
90-day interest rate (March quarter)	3	2.9	3.7	4.3	5	5.3
Unemployment rate (March quarter, seasonally adjusted)	6.5	5.8	5.2	4.9	4.7	4.7
Fiscal Data
June years	2011	2012	2013	2014	2015	2016
Core Crown expenses ($bn)	70.5	74.5	71.6	72.9	75.6	78.0
Core Crown revenue ($bn)	57.6	61.2	65.7	70.4	74.8	79.2
Crown operating balance before gains and losses ($bn)	-18.4	-10.8	-4.4	-0.9	1.5	3.1
Crown operating balance before gains and losses (% of GDP)	-9.2	-5.1	-2.0	-0.4	0.6	1.2
Net debt ($bn)	40.1	53.8	63.2	67.8	71.3	72.5
Net debt (% of GDP)	20.1	25.4	28.5	28.9	29.0	28.2
Gross Sovereign Issued Debt ($bn)	72.4	79.8	80.0	88.4	87.1	89.8
Gross Sovereign Issued Debt (% of GDP)	36.2	37.7	36.1	37.7	35.4	34.9

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The Government will proceed with KiwiSaver auto-enrolment in 2014/15 subject to returning to surplus, as part of its programme to build genuine national savings, Finance Minister Bill English says.

“In the current environment, we need to be mindful of the fiscal costs of all programmes. So we will proceed with KiwiSaver auto-enrolment in the same fiscal year in which we return to surplus and start to repay debt,” he says.

“As signalled in the Budget, we believe there is merit in a one-off KiwiSaver auto-enrolment exercise, where people in the workforce not already in the scheme would be signed up with the ability to opt out.”

Details of the auto-enrolment framework will be finalised next year, after the Government considers submissions on a public discussion paper to be issued in early 2012.

The exercise complements a series of Government measures to build genuine national savings. They include:

• Mapping a path back to budget surplus by 2014/15 – the Savings Working Group said this is one of the most important things the Government can do to build national savings.
• From 1 April 2013, increasing the minimum KiwiSaver contribution for individuals to 3 per cent from 2 per cent – which will also be the default rate for new members.
• From 1 April 2013, increasing the employer contribution rate to 3 per cent from 2 per cent.
• In Budget 2010, reducing tax on work and savings and increasing tax on property speculation and consumption.
• Resuming contributions to the New Zealand Superannuation Fund when the Government returns to sufficient surplus and can contribute genuine savings rather than borrowing.
• Providing New Zealanders with investment options through the mixed ownership model for five state-owned companies.

“These measures are pushing in the same direction households are already moving,” Mr English says.
“Having spent more than $1.10 for every dollar they earned three years ago, households will this year have a positive savings rate for the first time in more than a decade.”

The Government decided against introducing auto-enrolment before 2014/15 because its immediate focus remains on returning to budget surplus.

“While we’re running deficits in the next two years, that’s money the Government would have to borrow. Borrowing more money to put into KiwiSaver accounts is not real savings – we are applying the same approach to resuming contributions to the Super Fund,” Mr English says.

“Depending on the uptake and design, officials estimate a KiwiSaver auto-enrolment could cost the Government up to $550 million over four years – including the one-off $1,000 kick start payments to new members and ongoing annual member tax credits. We intend to fund this from within existing budget allowances.”

These estimates assume a 55 per cent take up rate among people in the workforce who are not currently in KiwiSaver.

The exercise will be included as a specific fiscal risk in the Pre-Election Economic and Fiscal Update to be issued next week.

The Government agrees with the Savings Working Group that a compulsory savings regime is not warranted, Mr English says.

“Many New Zealanders have already opted out of KiwiSaver because they have valid reasons for not saving for retirement right now – including paying off their mortgage or being members of private savings schemes.”

With about 1.8 million members, KiwiSaver funds are expected to rise rapidly – from about $8 billion this year to $25 billion by 2015 and almost $60 billion in 10 years. Auto-enrolment will accelerate that growth.

The Government has delayed issuing public discussion paper until next year because of the proximity of the election next month.

“It’s important this is done thoroughly, so we can minimise administrative and compliance costs for both employers and the Government,” Mr English says.

FACT FILE

What is changing?

• A one-off automatic KiwiSaver enrolment campaign for employees, with the ability to opt-out, will take place in 2014/15 – subject to the Government returning to budget surplus. Currently, employees are signed up – with the ability to opt out - when they change jobs.
• The enrolment exercise will:
• enrol people who would benefit from KiwiSaver membership
• be based around the current auto-enrolment model, which applies when employees take up new jobs
• minimise inconvenience for non-members who do not want to become members
• minimise administrative costs for employers and the Government
• align with the 2014 re-tendering of KiwiSaver default providers.

Why wait until 2014?

• The Government decided against introducing auto-enrolment sooner because its immediate focus remains on returning to budget surplus by 2014/15. While the Government is running deficits, the estimated extra cost of up to $550 million over four years for auto-enrolment would have to be borrowed. That is not real savings.

What is the expected cost to the Government?

• The enrolment campaign is expected to attract between 200,000 and 275,000 new KiwiSaver members, with an estimated fiscal cost of up to $550 million over four years.

Membership and cost projections under different take-up assumptions
(indicative costs based on employees not already in a superannuation scheme)

Estimate of uptake	Number of new members	Costs ($m)
		2014/15	2015/16	2016/17	2017/18
55% uptake	275,000	361	74	65	52
40% uptake	200,000	256	42	33	20

Why increase voluntary membership?

• New Zealand’s low savings rate has created a longstanding dependence on foreign capital. This makes the New Zealand economy vulnerable to market shocks and is likely to damage our economic performance and reduce growth.

What else is the Government doing to increase national savings?

• In Budget 2011 the Government said it would reduce debt and return to fiscal surplus by 2014/15. It also announced increases to employee and employer contribution rates that will see KiwiSaver funds continue to grow rapidly, but with a larger share of contributions coming from members and employers, and a lower share from borrowed Government money. This is expected to raise national savings, as Government borrowing to fund private savings will reduce.
• The Savings Working Group highlighted encouraging private individuals to save more, as well as returning to fiscal surplus, as among the most important ways the Government can increase national savings. The Government is acting on both of these issues.

Why have some people not joined KiwiSaver?

• A 2010 Colmar Brunton survey of people not in KiwiSaver indicated 28 per cent had not got around to joining and 13 per cent wanted more information about KiwiSaver. This indicates that, of the people not already members of KiwiSaver, over a third would be willing to save through KiwiSaver if actively prompted.

Why not make KiwiSaver compulsory?

• Not everyone would benefit from KiwiSaver membership – and many have valid reasons for not joining right now. People on lower incomes, or those with large mortgages or already in other superannuation schemes, may be forced to reduce their spending on essential items to pay into KiwiSaver. 
• The Savings Working Group recommended against making KiwiSaver compulsory because some people may prefer to save for their retirement in other ways.

What are the next steps?

• The Government will early next year issue a public discussion paper on the design of the enrolment exercise. It will carefully consider submissions – particularly on minimising administrative and compliance costs for employers and the Government – before finalising details.

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12 October 2011. Finance Minister Bill English talks about the state of the economy in general, with particular focus on the credit rating downgrades - why they happened and what they mean for us. 

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GOVERNMENT MAKING PROGRESS DESPITE CHALLENGES 

Click here to watch my latest video briefing on YouTube.

The Government is making good progress in getting on top of deficits and debt, despite numerous challenges. The Crown's accounts for the year to 30 June 2011 recorded an unusually large deficit of $18.4 billion - reflecting the $9 billion cost to the Government of rebuilding Canterbury. Setting aside those earthquake costs the Government has made good progress since the Budget in May, reducing the underlying deficit by about $2.8 billion.

We remain committed to halving the budget deficit this year - and again next year - before returning to surplus in 2014/15. In the current uncertain global environment, it's important the Government remains focused on its plan to return to surplus faster and build a more competitive economy so we can sell more to the world. For more information read my media statement.

PRIVATE DEBT FALLING, SAVINGS INCREASING

We've also been making progress reducing New Zealand's main economic vulnerability - our high level of debt to the rest of the world. New Zealand's combined government, household and business debt - known as our net international liabilities - grew from 64 per cent of GDP in 2001 to 85 per cent of GDP in 2008. It has since fallen to about 69 per cent of GDP, as New Zealanders have gone from spending about $1.10 for every dollar earned to actually saving in the current year.

But while the New Zealand ship is in better shape than it was three years ago, the global waters have become significantly rougher and that has been reflected in a tougher stance from ratings agencies. Standard & Poor's and Fitch both downgraded New Zealand's sovereign rating one notch last month. This change reflects the fact the market goal posts have changed - amid global uncertainty and heightened debt fears - and what has been acceptable in the past is no longer acceptable now. This reinforces the need for the Government to continue with its balanced plan to return to surplus and get on top of debt. Read my media statement for more information.

EQC LEVIES RISE TO REFLECT INCREASED COSTS

The Government is committed to rebuilding Christchurch and supporting the people of Canterbury. The Government is providing $5.5 billion through the Canterbury Earthquake Recovery Fund alongside the roughly $7.5 billion EQC expects to pay out in Canterbury earthquake claims. To help meet EQC's share of these costs EQC levies will rise next year. This is a responsible step to ensure EQC can meet its long-term costs and continue to provide disaster cover around New Zealand in a sustainable way.

Without a levy rise EQC would have a cash shortfall of about $1.2 billion. This is the estimated cost of EQC claims over and above the funds it holds in the Natural Disaster Fund. Increasing levies will provide enough revenue to meet EQC's higher reinsurance costs, begin rebuilding the Natural Disaster Fund and it will reduce the shortfall the Government may have to cover under EQC's Crown guarantee. Read my media statement for more information.

ROUGHER GLOBAL WATERS

Meeting Ben Bernanke, Chairman of the US Federal Reserve

Late last month I attended the World Bank board of governors' annual meeting in Washington DC. I also visited the International Monetary Fund and held meetings with a range of US business, financial market and government representatives. The clear message was the US and parts of Europe still face large challenges stemming from too much debt - and it will take a while to sort it out.

The mood among politicians, ratings agencies and international financiers was pretty sombre. In fact, I would describe the mood as ugly. This has been reflected in the decisions of the ratings agencies and in some fairly turbulent market movements. As I've said this reinforces the need for the Government to stick to our economic programme aimed at lifting savings and reducing debt.

THINGS TO LOOK OUT FOR

• 25 October - Treasury will release its updated forecasts as part of the Pre-election Economic and Fiscal Update (PREFU).
• 25 October - Statistics New Zealand September quarter Consumer Price Index.
• 27 October -Reserve Bank will release its latest review of the Official Cash Rate.
• 27 October - Statistics New Zealand Overseas Merchandise Trade data for September.
• 3 November - Statistics New Zealand Household Labour Force Survey for the September quarter.

Regards,

Hon Bill English
Finance Minister

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Earthquake Commission (EQC) levies will rise early next year to help rebuild the commission's Natural Disaster Fund (NDF) and to more realistically reflect EQC's operating costs, Finance Minister Bill English says.

"The Government is committed to rebuilding Christchurch and supporting the people of Canterbury," Mr English says.

"The levy increase is a responsible step to ensure EQC can meet its long-term costs and continue to provide disaster cover around the rest of New Zealand in a sustainable way.

"Strengthening EQC's finances will provide additional confidence to homeowners throughout the country that EQC has the capacity to meet its obligations now and in the future.

"This is particularly important given the Government's tight fiscal position, which is reinforced today by the Crown's financial statements for the year to 30 June 2011."

Insured homeowners currently pay 5c per $100 of insurance cover, up to a maximum of $69 a year (including GST), as part of their insurance premiums. Under the proposed changes, homeowners will pay 15c per $100 of insurance cover, with an annual cap of $207 (including GST).

The increase, which will take effect from 1 February 2012, will:

• Provide revenue to meet EQC's operating costs, which for many years have been subsidised by NDF investment income, and to cover higher reinsurance costs.
• Enable EQC to rebuild the NDF to its pre-earthquake level of $6 billion in about 30 years.
• Reduce EQC's estimated $1.2 billion cash shortfall to $490 million, reducing the amount the Government may have to provide under EQC's Crown guarantee.

It will increase annual levy revenue from about $86 million to about $260 million.

"Raising levies for those who benefit from earthquake insurance cover is the fairest way to ensure EQC can meet its long-term costs," Mr English says. "The levy rise will add about $2.65 a week to most homeowners' insurance bill.

"The increase is not based on a full actuarial forecast of future liabilities, which will be calculated as part of a review of EQC in the future.

"I expect to take terms of reference for a review to Cabinet in coming months, but the exact timing will depend on getting more issues resolved on the ground in Christchurch. The Government and the EQC's first priority has always been progressing the recovery in Canterbury and that remains the case.

"However it is clear the current levy is too low and needs to increase now to pay for EQC's operating costs and to begin rebuilding the NDF," Mr English says.

The full Cabinet paper is available at:
www.treasury.govt.nz/publications/informationreleases/canterburyearthquakes/eqc

Questions and Answers

What is being announced today?
From 1 February 2012 the Earthquake Commission (EQC) levy that homeowners pay as part of their insurance premium will rise from 5c per $100 of insurance cover to 15c per $100. The maximum amount a homeowner can pay, including GST, will rise from $69 a year to $207 a year. This change will be made by regulation.

The levy contributes to EQC's earthquake cover, which covers the first $100,000 of house damage, the first $20,000 of contents damage and damage to land, which is not covered by commercial insurers.

How will the levy increase affect homeowners?
Insured homeowners will pay a higher levy. This is automatically included in their insurance bill, so it is not necessary for them to do anything. The increase will add about $2.65 a week to most homeowners' insurance premiums.

Why is the levy being increased?
The current levy, which raises about $86 million a year, is not enough to pay for EQC's day-to-day operating costs, which include the cost of reinsurance, let alone the cost of rebuilding the Natural Disaster Fund (NDF), which stood at about $6 billion before the first Canterbury earthquake. Previously this was not a problem as the NDF was generating large amounts of investment income. However with the NDF expected to be exhausted by EQC's updated forecast $7.45 billion Canterbury earthquake liability and higher reinsurance costs, the current levy is insufficient to meet EQC's long-term costs. EQC's Canterbury earthquake liability has been updated to include the $380 million impact of the recent High Court decision.

Increasing the levy will generate enough revenue to pay for EQC's operating costs and to rebuild the NDF to pre-earthquake levels in about 30 years.

How will the increase impact on the Government's fiscal track?
The higher levy will meet some, but not all of EQC's projected costs over and above the amount it holds in the NDF. That shortfall is currently forecast to be about $1.2 billion. The higher levy is expected to reduce that shortfall to about $490 million, reducing the impact on the Government's fiscal track. This cost will show up in the Pre-election Economic and Fiscal Update.

What is the levy increase based on?
This increase was deemed a prudent level to meet EQC's operating costs and replenish the NDF in a reasonable time. However it is not based on an actuarial assessment of future liabilities. That will be carried out as part of a wider review of EQC in the future. It is possible that after that assessment the levy may need to be adjusted again. The Government believes the current increase is a prudent interim step given EQC's increased costs.

When will the Government review EQC?
The Government and EQC's first priority has always been progressing the recovery in Canterbury and that remains the case. However, the Finance Minister expects to take terms of reference for a review of EQC to Cabinet in coming months. The exact timing of the review will depend on getting more issues resolved on the ground in Canterbury.

Why has EQC's expected cash shortfall increased?
On 30 August, EQC's forecast cash shortfall, which the Government is likely to have to pay under EQC's Crown guarantee, was estimated at $500 million. This estimate has now increased to $1.2 billion without a levy increase. This larger estimated shortfall has been driven by the impact of the recent High Court decision, which EQC estimates will increase its liability by about $380 million, and the addition of an allowance for future non-Canterbury claims costs, both of which were not previously included. The levy increase will reduce the estimated cash shortfall to $490 million.

Is the increase necessary to meet EQC's earthquake claims?
EQC's Crown guarantee means it can meet its earthquake claims regardless of whether the levy is raised or not. However raising the levy reduces the amount the Government is likely to have to pay under the guarantee from about $1.2 billion to about $490 million. The Government believes it is better for insured homeowners, who directly benefit from EQC's cover, to pay a levy that reflects EQC's long-term costs, rather than all taxpayers effectively subsidising EQC.

Why not put in place an earthquake tax to pay for these costs?
Because this would mean that all taxpayers, regardless of whether they own a house or have insurance, would be subsidising insured homeowners who benefit from EQC cover. The Government believes it is better for insured homeowners, who directly benefit from EQC's cover, to pay those costs through a levy. In addition, raising income tax would have a negative effect on economic growth.

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