The Government remains committed to halving the budget deficit this year – and again next year – before returning to surplus in 2014/15, Finance Minister Bill English says.

The Crown’s accounts for the year to 30 June 2011 show net expenses of $9.1 billion for the Canterbury earthquake last year made up almost half of the Government’s $18.4 billion operating deficit before gains and losses.

“This is an unusually large deficit, but it includes the significant costs of the Canterbury Earthquake Recovery Fund and the updated assessment of Earthquake Commission costs,” Mr English says.

“Setting aside the earthquakes, we’ve made good progress compared to estimates five months ago in the Budget. A combination of higher than forecast revenue and lower than forecast spending has reduced the underlying deficit by about $2.8 billion.

“However, this was more than overshadowed by the higher earthquake costs.”

Despite the Canterbury earthquakes, Treasury notes economic growth was better than expected in the first half of 2011, driven by a recovery in domestic demand and higher export prices.

“This flowed through to tax revenue, which rose for the first time in three years due to higher income, private consumption and business profits,” Mr English says. “And despite the earthquakes, management of public sector finances continues to improve.

“In the current uncertain global environment, it’s important the Government remains focused on its plan to return to surplus faster and building a competitive economy so we can sell more to the world. This is certainly not a time to be promising to borrow more, spend more and tax more.”

Mr English confirmed today that the Treasury will issue the Pre-Election Fiscal and Economic Update (Prefu) on Tuesday 25 October. Prefu lockup details are available at http://www.treasury.govt.nz/budget/forecasts/lockup

Credit ratings news today reflects global concern about foreign debt in the current world economic environment, Finance Minister Bill English says.

Ratings agencies Fitch and Standard and Poor’s today confirmed they had downgraded New Zealand’s long-term foreign currency rating to AA with a stable outlook from AA+ with a negative outlook.

New Zealand retains the highest possible AAA rating, with a stable outlook, with Moody’s.

The agencies acknowledge that the Government has made progress in getting its own deficits and debt under control, despite the global financial crisis and substantial extra cost of the Canterbury earthquakes, Mr English says.

“Since we were elected nearly three years ago, this Government has focused on managing New Zealand through the Global Financial Crisis and starting to reduce our single biggest economic vulnerability – namely, our longstanding reliance on foreign debt.

“Having inherited forecasts of permanent deficits and debt spiralling out of control, we’ve set a path back to surplus when most countries will still be in deficit and borrowing.

“New Zealand’s private savings have started to increase and as a result we have started to reduce our total external debt. But it still remains high.

“Figures out yesterday show New Zealand’s net international liabilities were 70% of GDP in the year to June – down from a peak of almost 86% two years ago and Budget 2009 forecasts of more than 100%.

“Compared to other countries, New Zealand has come through the recession reasonably well. We’re one of only 19 countries still rated AAA by Moody’s and we’re now the only highly-rated country with a two notch gap between our ratings with Moody’s and Standard and Poor’s.

“This reflects our unusual position of having relatively low public debt, but large private sector external debt, built up over several decades.”

Recent volatility on global financial markets highlights how the international environment has changed, Mr English says.

“We are not immune to the global backdrop. In particular, investors are now reassessing their appetite for debt and credit ratings agencies are taking a tougher stance. When it comes to debt, the global market goalposts have changed.

“The ratings news today reinforces the need for the Government to continue with its clear and balanced plan to get on top of that debt,” Mr English says. “That involves returning to surplus and exporting more to the rest of the world.

“By comparison, our political opponents to the left, who wanted a big expensive fiscal expansion during the recession, are still promising to borrow more, spend more and tax more. In the current environment, that’s irresponsible and would make a challenging situation even worse.

“And those to the right of us are calling for radical spending cuts that would disproportionately affect the most vulnerable New Zealanders, cut growth and cost jobs.

“We are following a balanced economic plan that is right for New Zealand.”

Five new agreements signed today show the growing relationship between China and New Zealand, Deputy Prime Minister Bill English says.

Mr English and China’s Vice Premier Hui Liangyu witnessed the signings at Premier House this morning.

The governments concluded two bilateral arrangements - one to improve market access for apples into China and one to boost scientific cooperation on fresh water management and protection.

"The protocol on New Zealand’s apple exports into China clarifies pest management conditions and will give greater certainly for New Zealand apple exporters," Mr English says.

"On fresh water, we will both benefit from encouraging knowledge and expertise to be shared between New Zealand's and China's scientists."

Three commercial deals were also signed. A clean energy joint venture between China’s steel producers Shaogang and New Zealand company LanzaTech, which develops technology to convert waste gas to ethanol, will help reduce greenhouse gas emissions of steel making in China.

"This is an extremely exciting cleantech agreement linking New Zealand technology with Chinese capital. Using waste gases commercially promises major economic and environmental benefits," Mr English says.

A memorandum of understanding between PwC (formerly Pricewaterhouse Coopers) and the China Development Bank, could result in greater co-operation on major development projects, including in Canterbury.

A cultural agreement between China Radio International and World TV Limited, provides new Chinese language content and editorial resources to the station, which broadcasts in New Zealand.

Mr English will hold bilateral talks later today with Vice Premier Liangyu.

Deputy Prime Minister Bill English will host China’s Vice Premier Hui Liangyu when he visits New Zealand on 27 and 28 September.

The Vice Premier, the second-ranked of China’s four Vice Premiers and a member of China’s Politburo, will be the most senior Chinese official visitor to New Zealand this year.

“China is one of New Zealand’s most important trade and economic partners,” Mr English says. “Our bilateral relationship is in very good shape and regular high-level engagement is critical to maintaining that.

“I made a very productive visit to China in April this year and I’m pleased to host the Vice Premier here in New Zealand.

“Talking directly with one of China’s senior leaders is valuable in understanding the views of China over a range of regional and global issues. That is important to New Zealand as we plan our future strategies in Asia.”

While in New Zealand, the Vice Premier will meet Prime Minister John Key and other senior ministers. Several Chinese Vice Ministers will accompany the Vice Premier, who will preside over the signing of several bilateral arrangements with the Deputy Prime Minister, as well as commercial deals during his visit.

China is now the world’s second largest economy and New Zealand’s second largest export market. Exports to China have tripled in the past five years.

New Zealand and China signed a Free Trade Agreement in 2008. It remains the only comprehensive Free Trade Agreement China has concluded with a developed country.
 

The economy grew faster than forecast in the first half of 2011, but lower than expected growth in the June quarter shows the recovery remains patchy across different sectors, Finance Minister Bill English says.

Statistics New Zealand today confirmed Gross Domestic Product increased 0.1 per cent in the June quarter, following a revised 0.9 per cent rise in the March quarter. This took annual growth to 1.5 per cent in the year to June 30.

“It’s important to remember that in the current environment the figures will jump around from quarter to quarter,” Mr English says. “The Government’s focus is on building faster and more sustainable growth in the long-term.

“The economy has now grown in eight of the past nine quarters and economic growth in the first six months of this year has totalled 1.0 per cent – ahead of Treasury’s Budget forecasts of 0.5 per cent growth for the six months.

“As the Reserve Bank noted in its Monetary Policy Statement last week, New Zealand’s domestic economy is performing relatively well on the back of strong export commodity prices, stabilising household debt and rising business and consumer confidence.

“However, we still face challenges. The global financial markets, from which we borrow, are increasingly volatile and New Zealand exporters face a headwind from the high Kiwi dollar.

“These challenges reinforce the need for New Zealand to get on top of its longstanding reliance on foreign debt and to build faster, more durable growth based on higher domestic savings and productive investment.

“These features will remain the core focus of the Government’s economic programme,” Mr English says.

The Government is standing behind its support agreement for AMI Insurance policyholders, as Treasury continues to work closely with the company on recapitalisation options, Finance Minister Bill English says.

Commenting on AMI’s annual results announced this morning, he says the Government has not been called on to pay any money under the support agreement.

“AMI is using its own capital reserves and reinsurance to pay claims from the Canterbury earthquakes as they come due,” Mr English says.

“When we put the AMI policyholder support agreement in place back in April, AMI started a programme to raise fresh capital.

“The Treasury has been working closely with the AMI board on securing new private capital for the company.”

In April, the Government announced a backup financial support package to give AMI policyholders certainty and to ensure an orderly rebuild of Christchurch in the aftermath of devastating earthquakes in September and February.

The support package will be called on only as a last resort if AMI’s own reserves have been exhausted – unless the Government believes it is in the public interest to take control sooner.

If called on, the package would involve the Government investing up to $500 million of equity in AMI, with the right to take ownership and assume control of the company if needed.

The ultimate cost to the Government will depend on the final cost of AMI’s claims, which remain uncertain, and the outcome of AMI’s recapitalisation process, which is still underway.

However, based on the $705 million annual loss reported by AMI today, the best current estimate of the likely cost of the Government’s support package is $337 million.

This will be reflected as an impairment for that amount in the Government’s annual accounts for the year to 30 June, to be published next month.

“AMI Insurance has set aside a large amount of money in anticipation of future claims from the Canterbury earthquakes, which is the prudent thing to do,” Mr English says. “In addition, reinsurers continue to support AMI, with $1.4 billion of reinsurance in place to cover any further disasters in the 2011/12 year.

“The company’s underlying business and earnings - without the impact of the earthquakes and the need to provision for them - remain strong.”

AMI Insurance’s annual result is available at www.ami.co.nz

Finance Minister Bill English leaves tomorrow for New York and Washington DC, where he will visit the World Bank and International Monetary Fund, and meet Federal Reserve chairman Ben Bernanke.

During the visit, Mr English will attend the annual meeting of the World Bank board of governors. He will also hold discussions with a range of business, financial market and government representatives.

“This visit is timely, in light of economic and financial market events around the world in recent months,” Mr English says.

“In particular, ongoing concern about debt in Europe and the United States reinforces the need for New Zealand to press on with its programme of building faster growth around savings and investment, with less reliance on borrowing from foreign lenders.

“I’m looking forward to meeting a number of other finance ministers at the World Bank – including the Chinese Finance Minister Xie Xuren.

“Given the economic uncertainty and volatility we’ve seen in Europe and the United States this year, it’s important that New Zealand continues to engage with its trading partners and share ideas on managing common challenges.”

Mr English returns to New Zealand on 27 September.

Government measures to cut red tape are on track to cut compliance costs for businesses and consumers by around $200 million a year, Finance Minister Bill English and Regulatory Reform Minister Rodney Hide say.

The estimate is included in a new Ministry of Economic Development report, Regulatory Reform: Changes Affecting Compliance Costs for Business and Citizens. The report, which will be produced annually, measures progress towards the Government’s goals of better and less regulation.

"Good quality regulation helps protect the environment, the rights of consumers and the lives of citizens, while ensuring an efficient economy. But poor quality regulation can slow economic growth by imposing unnecessary compliance costs," Mr English says.

"Removing unnecessary regulation is an important part of the Government’s economic programme, so businesses have more time to focus on how to increase their productivity and expand.

"The report shows the Government is on track to cut compliance costs by a net $200 million a year. But there is more to do to improve regulation, with further changes to the Building, Resource Management and Securities Acts underway, as well as work to identify barriers to export growth," Mr English says.

Mr Hide says the report shows progress across a wide range of areas.

"We are reducing compliance costs by abolishing gift duty, streamlining resource management processes, easing financial reporting requirements for small business and reducing air passenger waiting times at Customs by introducing SmartGate passport control," Mr Hide says.

"Such measures free up time for business and the public, allowing them to get on with their lives without constantly having to deal with government.

"While the costs and savings of many reforms can't yet be fully calculated, future reports will develop this further. They will also ensure the Government is under scrutiny to reduce regulation and improve its quality," Mr Hide says.

The report estimates regulatory changes over the past three years will reduce compliance costs to businesses and consumers by $250 million a year.

This will be partly offset by $50 million a year in new costs related to strengthened regulatory requirements on financial advisors, anti-money laundering measures and farm animal identification and tracing.

The full report can be viewed at www.med.govt.nz/compliancereport

MIXED OWNERSHIP MODEL - KIWIS AT FRONT OF QUEUE

Click here to watch my latest video briefing on YouTube


Last week I announced some more details of the Government's policy to extend the mixed ownership model to the four state-owned energy companies and reduce the Government's shareholding in Air New Zealand - while retaining majority stakes. Based on the large and growing pool of New Zealand investment funds, we expect New Zealanders to own at least 85 to 90 per cent of the companies in the mixed ownership programme.

This is a win-win. New Zealand savers get to invest in good Kiwi companies and the Government frees up $5 to $7 billion to buy new assets like schools, hospitals and ultra-fast broadband, without having to borrow from overseas lenders and increase our debt. In the end we'd rather pay dividends to New Zealanders than interest on rising debt to foreigners. For more information read my media statement.

GOVT SUPPORTING CANTERBURY AS EQC LIABILITY RISES

Recently the cost of the Government's share of the Canterbury rebuild became a little clearer. The Earthquake Commission (EQC) increased its estimated Canterbury earthquakes liability by $4 billion to $7.1 billion. The new estimate followed an actuarial valuation based on actual field assessments of damage. This is a big increase in cost for EQC, but the Government is committed to rebuilding Christchurch and supporting Canterbury people by paying its share.

The increase is driven by estimated damage from the 22 February earthquake being $2.17 billion higher than previously expected and the inclusion of the June earthquakes and other aftershocks, which will cost EQC another $1.4 billion. A High Court decision last week on when EQC's cover renews is likely to increase EQC's liability even further. However, none of this will affect homeowners' claims, which EQC will continue to pay in full. And it will not delay rebuilding in Christchurch. For more info read my media statement.

GLOBAL OUTLOOK?

The last few weeks have seen financial market turbulence in Europe and the United States, where they're suffering from high debt and low growth. I believe we should all get used to these regular outbursts of uncertainty - this is how the world will be, on and off, over the next decade as those countries' governments struggle to reduce their high debt.

This uncertainty presents risks for New Zealand, but we are relatively better placed than many other countries to manage in this new environment. We're getting on top of debt by keeping it below 30 per cent of GDP and we will be back in surplus by 2014/15. So, over the next few years, we have an opportunity to build on solid foundations for faster growth and more jobs.

For more information read my speech to the Institute of Financial Professionals New Zealand.

GOVERNMENT TO OPEN UP MORE DATA

Government agencies hold vast amounts of data - some of it with high potential value to the public and entrepreneurial businesses, who can find another use for it. We're encouraging state sector agencies to release more of their data online. To ensure that happens I've clearly set out my expectation that agencies should release all non-personal and unclassified data with high potential value for re-use.

As well as providing opportunities for businesses to create new services, releasing data increases government accountability and improves policy development by encouraging greater external analysis and community engagement. For more information read my media statement.

THINGS TO LOOK OUT FOR

• 15 September - The Reserve Bank will issue its latest Monetary Policy Statement and Official Cash Rate review.
• 21 September - Statistics New Zealand will release Balance of Payments data for the June quarter.
• 22 September -  Statistics New Zealand will release Gross Domestic Product data for the June quarter.

 Regards,

Hon Bill English MP
Minister of Finance

07 September 2011. The Finance Minister, Bill English, discusses the mixed ownership model The Government is proposing for the partial sale of four electricity companies.