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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ECONOMY CONTINUES RECOVERY

GDP data issued this week shows the economy grew by 0.6 per cent in the March quarter - taking annual real GDP growth to 1.9 per cent. The continuing recovery is good news, as a growing economy is the only way to create new jobs and raise New Zealanders' living standards. However more work is needed to ensure the rebound in jobs and growth is sustainable. You can read my statement here.

The economy still faces serious challenges. While the global outlook has strengthened, it remains fragile, as we can see from the sovereign debt crisis in Europe. This reinforces the need for continuing restraint in government spending and curbing the significant increase in New Zealand's debt to the rest of the world. We also need to continue tilting the economy towards savings, exports and productive industries. Budget 2010 took concrete steps in this direction.

REBALANCING THE ECONOMY

I'm pleased to see that some recent data suggests some of the imbalances that have hampered growth are starting to unwind. Data out this week shows the current account deficit for the year to March 31 has narrowed to $4.5 billion - or 2.4 per cent of GDP, its lowest level in more than 20 years. This compares with deficits that averaged more than 8 percent of GDP between 2005 and 2008. Most forecasts show the deficit widening again as some temporary factors unwind, though not to previous extreme levels.

Other positive early signs are that despite improving consumer confidence, retail spending data for April fell 0.3 per cent and REINZ house sales data for May was flat. This reinforces anecdotal evidence that despite increasing confidence, people are choosing to pay down debt and save rather than spend on housing or consumer goods. This is encouraging, but needs to be sustained for a long period if we are correct or even hold New Zealand's levels of external debt.  

HELPING NEW ZEALANDERS GET AHEAD

There has been a lot of debate in recent weeks about potential increases in the cost of living over the next year as the economy recovers. Some people have suggested the benefits of tax cuts will be outweighed by these and other forecast changes. On that point they are categorically wrong.

Even when the rise in GST, the Emissions Trading Scheme, a small rise in rents and other forecast inflation is taken into account, the benefits of tax cuts increase over time. That is because after-tax incomes are forecast to grow more quickly than price increases in the four years to 2014.

For example a two-child family on the average household income will see their overall benefit from tax changes grow from an initial $25 a week to $41 a week by 2014. The benefit to a typical average wage worker will grow from about $15 a week to about $23 a week over the period, while the benefit to a superannuitant couple on a fixed income will rise from $11 to $15. You can find out how tax changes affect you at www.taxguide.govt.nz.

GETTING OUT AND ABOUT

National list MP Hekia Parata, myself and a few of the attendees at a Porirua Chamber of Commerce post-Budget function.

Since May 20 I've given 26 speeches around the country explaining Budget 2010. It's been great having an opportunity to answer the questions of businesspeople and others and listen to some feedback. The reaction has been overwhelmingly positive. People are supportive of the changes we've put in place and seem to genuinely understand the reasons we are trying to rebalance the economy towards savings, exports and growth.

THINGS TO LOOK OUT FOR

• 1 July: Speech to the New Zealand Herald's annual Mood of the Boardroom breakfast event.
• 1 July: Speech to Auckland Manufacturers and Exporters Association luncheon.
• 16 July: Statistics New Zealand release Consumer Price Index data for the year to March 31.
• 29 July: Reserve Bank Governor Alan Bollard announces the bank's latest Official Cash Rate (OCR) decision.

Regards,

Bill English
Finance Minister

CLICK HERE TO WATCH MY VIDEO ON THE BUDGET

Last week I delivered my second Budget. Whereas the focus of Budget 2009 was dealing with the immediate effects of the global recession, Budget 2010 is about positioning New Zealand for faster, sustainable economic growth.

Only through lifting long-run economic growth can we create jobs, raise incomes, close the gap with our trading partners and improve the living standards of New Zealand families.  

Budget 2010 delivers on that score by:

• Reforming the tax system to put the right incentives into the economy and rebalance it towards savings, investment and exports.
• Investing in New Zealand's future through a significant boost to scientific innovation and substantial new spending on infrastructure.
• Continuing to get debt and deficits under control.
• Investing record sums in priority public services such as health and education.

You can read my main Budget media statement as well as view all Budget ministerial statements on the Beehive website. You can view the Budget documents themselves on the Treasury website.

REFORMING THE TAX SYSTEM

The over-riding aim of Budget 2010 is to lift growth by rebalancing the economy towards savings, investment and exports - and away from borrowing, property speculation and excessive government spending. The reason we have gone for a once-in-a-generation reform of the tax system is that tax is one of the few levers we can pull which has a pervasive effect throughout the economy.

The tax package delivers on four objectives:

• It rewards effort and helps families get ahead.
• It helps us attract and retain skilled people in New Zealand.
• It encourages savings and productive investment - and discourages excessive borrowing, consumption and property speculation.
• And it makes the tax system fairer, strengthens the rules around property investment and gives Inland Revenue extra resources to enforce the current law.

At all taxable income levels, the across-the-board personal income tax cuts more than offset the rise in GST. This is fair and leaves the vast majority of New Zealanders better off. You can read more about the tax package and calculate your own tax cut at www.taxguide.govt.nz

THE GROWTH DIVIDEND

These tax reforms along with other growth-focused Budget measures, such as substantial investments in research, science and technology and infrastructure, contribute to stronger growth than previously forecast.

The Treasury is now forecasting real GDP growth of 3.2 per cent in the year to March 2011 - a significant improvement on the 1.8 per cent forecast in the Budget last year. The projections now show fairly steady growth at about 3 per cent over the next four years. This includes expected extra growth from the Budget tax package, which Treasury conservatively forecasts to add about 1 per cent to the size of the economy by 2017.

CONTINUING TO GET DEBT AND DEFICITS UNDER CONTROL 

The Budget shows an improved fiscal outlook over the forecast period, with both Crown debt and Budget deficits better than forecast in Budget 2009. We now expect the deficit to peak at just over 4 per cent of GDP next year, before returning to surplus in 2016 - three years sooner than forecast in the Budget last year.

That is quite a turnaround and as a result the Crown debt forecasts have also improved. Net debt is now expected to peak at 27 per cent of GDP in 2014/15 - falling to 14 per cent by 2023/24 - reducing our vulnerability to volatile sovereign debt markets. A big part of the improvement is the Government remaining within its $1.1 billion allocation for new operating spending. We've managed this by shifting another $1.8 billion of low priority spending into higher priority public services in areas like health and education

GETTING OUT AND ABOUT

In the last week I've been getting out and about to explain the Budget, hear what people think and answer their questions. There has been an overwhelmingly positive response with large audiences throughout New Zealand. So far I have spoken in Wellington, Lower Hutt, Porirua, Christchurch, Oamaru, Hamilton, Rotorua, Tauranga, Gisborne. Over the next week I'll be speaking in Auckland, Kerikeri, Dunedin, Christchurch and Queenstown.

THINGS TO LOOK OUT FOR

• 10 June: RBNZ's next Monetary Policy Statement, including the Official Cash Rate announcement.
• 23 June: March quarter balance of payments (includes current account and net international investment position).
• 24 June: March quarter GDP.

Regards,
Bill English, Finance Minister

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ASK ME A QUESTION


Watch my latest video on YouTube - click here.

Recently I've been inviting readers of my newsletter and website to ask me a question. Many have done so and in this newsletter I answer a reader's question about the rate of the New Zealand dollar. Last week I answered a question on GST. Please continue to send me your questions and watch the website for my answers.

ECONOMY CONTINUES GRADUAL IMPROVEMENT

Economic growth is continuing to pick up pace, but there is more work to do to ensure we get the kind of sustainable recovery that creates jobs and lifts the incomes of New Zealand families. GDP grew by 0.8 per cent in the final quarter of last year - it's third successive quarter of growth - driven primarily by a strong rebound in manufacturing.

This is good news, but the recovery remains weaker than what you would expect to see following a recession. This underlines the fragile nature of the global recovery and the imbalances that remain in our own economy. That is why the Government is focused on tilting the playing field towards savings and investment and away from borrowing, government spending and investment in housing. You can read my statement on the GDP figures here.

Another sign of improving economic conditions is banks being able to raise funds in the wholesale market without using the Government's wholesale funding guarantee. That is why, after consultation with banks, the Government has decided to end the wholesale funding guarantee on April 30. The retail guarantee will continue until the end of next year.

INCREASING FAIRNESS IN THE TAX SYSTEM

The Government's upcoming Budget tax package continues to be the subject of a lot of speculation. The package is yet to be finalised, but fairness will be a key consideration in those decisions. Under the current system many relatively well-off people can opt for a lower tax rate by restructuring their affairs - through self employment, company ownership or ownership of an investment property. In Parliament I set out an example of how a household earning $100,000 a year could restructure their affairs to reduce their effective tax rate to less than 10 per cent.

To illustrate the point - an IRD survey of New Zealand's rich list found only half were paying the top 38c in the dollar tax rate. This is unfair to wage earners who have no choice but to pay their marginal tax rate. One of our aims with our tax reforms is to lower the top rate so wage earners get to keep more of their pay and to close some of the gaps that currently make this kind of structuring possible.

INCREASING NEW ZEALAND'S PRODUCTIVITY

Raising productivity is one of the key challenges for our economy. To ensure we are on the right path to achieving this we are setting up a Productivity Commission. We expect to have the Commission, which is part of the National-ACT confidence and supply agreement, up and running by April next year.

Its roles and functions will be modelled closely on the Australian Productivity Commission which has been operating for over a decade. It will conduct inquiries into productivity-related matters, review existing regulations and the effectiveness of regulatory agencies and promote public understanding. Its funding will be drawn from the existing baselines of 29 government departments.

GETTING OUT AND ABOUT

Getting into the regions to talk to people, explain what the Government is doing and hear how policies are affecting people on the ground is vital for any Minister. In the past month I was lucky enough to get out to Hawke's Bay, Palmerston North, New Plymouth, Christchurch, Dunedin as well as my own electorate of Clutha-Southland. It's always encouraging to see the optimism and resilience of people and businesses around the country.

On a more personal note, my own resilience was tested when I competed in the annual Motatapu bike race near Lake Wanaka on March 13. The race is a great event in a spectacular part of New Zealand and once again I was impressed by the spirit and skill of many participants.

THINGS TO LOOK OUT FOR

• On April 13 I will be travelling to Christchurch to speak to Grey Power's AGM and to speak at the launch of Deloitte's second South Island Index.
• April 16 I'll open the World Ploughing Championships in Methven.
• April 20 Statistics New Zealand will release the latest CPI figures.
• April 22 I will speak to the Wellington Chamber of Commerce.
• April 29 the Reserve Bank Governor will announce the latest review of the OCR.

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NATIONAL INFRASTRUCTURE PLAN

Click to watch this video briefing on YouTube.

Infrastructure is one of our six drivers of economic growth and we have a major programme underway, including increased investment in our roads, national grid and broadband. We campaigned on putting together a National Infrastructure Plan because we wanted to move away from the ad-hoc approach of the last two decades. Instead we want to take a longer-term view that gives the industry certainty and ensures we are addressing future bottlenecks and investment gaps before they emerge.

The plan notes the Government is spending about $6 billion a year on physical assets and holds $110 billion of these assets. Even a small improvement in management and planning could reap gains worth billions of dollars. As the plan evolves it will be a key tool in achieving this. You can read my media statement here.

TAX PACKAGE

Over the last month there has been a lot of talk about the tax package I'll unveil in the Budget. Because there has been so much noise I thought it is worth giving you an update. To recap, we are considering a package of across the board personal tax cuts, changes in the taxation of property investment and a small rise in GST. Any rise in GST would be matched by increases in NZ Superannuation, benefits and Working for Families.

The package is yet to be finalised, but you can catch up on my thinking on alignment of the top personal, trust and company rates in a speech I gave in Auckland last month. I also confirmed the Government will be keeping the current system of imputation credits. You can read my statement here.

Prime Minister John Key outlined our broader thinking on tax in his opening speech to Parliament. In a speech to Grey Power he detailed how we would compensate superannuitants - if we went ahead with a rise in GST.

CROWN ACCOUNTS

The latest set of Crown accounts for the seven months to the end of January shows the deficit tracking slightly better than expected. However serious challenges remain. Some of the gains are expected to reverse out in the coming months and we still face six years of deficits. It is essential as we come out of the recession, that the Government shows leadership in managing its finances and getting back into surplus as soon as possible. The Budget, on May 20, will continue to focus on managing the Government's finances in a disciplined and responsible way. You can read my statement on the Crown accounts here.

GETTING OUT AND ABOUT

Last month I gave the Prime Minister a taste of the South - hosting him for a day in my Clutha-Southland electorate. We visited the Croydon Aviation Heritage Trust, the Waimumu Field Days and the opening of Fonterra's new Edendale extension - the largest milk drying plant in the world.

THINGS TO LOOK OUT FOR

• On Wednesday I will be speaking to the New Zealand Australia Investment Forum in Auckland.
• On Thursday Reserve Bank Governor Alan Bollard will release the bank's latest Monetary Policy Statement along with the latest review of the OCR.
• Later in the month I'll be speaking some more about the Government's National Infrastructure Plan to the Local Government Asset Management and Engineering Directors Forum.

Regards,

Hon Bill English
Minister of Finance
Minister for Infrastructure

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GEARING UP FOR 2010


CLICK HERE TO WATCH MY LATEST VIDEO BRIEFING

I hope you all had a good Christmas break. Summer holidays are a chance to spend time with family and reflect on our busy lives. We also get a chance to think about the year ahead and what we want to achieve. I had a great break down south with my family and looking ahead, I'm excited to be back.

As Prime Minister John Key has said - this is the year the Government will start delivering on the faster growth agenda we want. Last year our focus was on jobs, as we weathered the worst global recession since the 1930s. While unemployment is still expected to rise in the first part of this year, our focus has paid off with the jobless rate tracking well below forecasts.

While we were focused on jobs we also set out a comprehensive programme to lift New Zealanders' living standards in the longer term. We set a variety of taskforces the job of investigating specific policy options. Most of these have now come back with findings and over the coming weeks and months the Government will choose the best and most practical options to lift growth.

Outlining a concrete programme to lift growth is the best way to boost consumer confidence and give businesses the confidence to invest and hire more workers. You can read some more about this in an opinion piece I provided to the New Zealand Herald early this month.

TAX WORKING GROUP

Last week I received the report of the Tax Working Group. The report, which identifies problems with our tax system, has generated a lot of discussion and you can expect that to continue over the coming months as the Government considers which options it adopts in the May Budget.

In summary, the report says our tax system is too heavily weighted towards taxes on wage earners and companies. It says these taxes are the most damaging to growth. On the other hand it says tax on consumption is low by international standards and there is a large gap when it comes to investment property. The report suggests changes to the tax mix to create a better tax system.

The working group has made a strong case for change and suggested some practical options. Our focus as we pick through the report will be on options that will boost economic growth. You can read more about the Government's approach to the report in my press release.

BETTER, SMARTER PUBLIC SERVICES

Last week I took a tour of around some Wellington Work and Income sites with Welfare Minister Paula Bennett. These included a call centre and Community Link centre in Lower Hutt and a service centre in Porirua. Jobs has been a major focus for this Government and it was great to see the improvements Work and Income has been making to their frontline services so they can better match up job seekers with jobs.

These include:

• Better use of technology in their call centres so they can handle the far higher volume of job seekers in the last year.
• Bringing together the various government and non-government agencies in a community under one roof in the case of Community Link.
• General process improvements that have cut waiting times for job seekers and meant a high proportion of job seekers are going straight into new jobs within weeks of losing their old one.

It was heartening to see this kind of innovation and improved efficiency getting good results for both taxpayers and job seekers.

THINGS TO LOOK OUT FOR

• On February 4 Statistics NZ will release the Household Labour Force Survey for the December quarter. This is expected to show a rise in the unemployment rate from the current 6.5 percent.
• On February 9 Prime Minister John Key will outline the Government's programme for 2010 in his speech to the opening of Parliament.
• Later in the month I'll also deliver a speech focusing on the economy in 2010.
• Also keep an eye out for the first National Infrastructure Plan, which will be released in coming weeks. You can find out some more about it here.

Regards,

Hon Bill English
Finance Minister

I welcome your comments - please feel free to share your thoughts and reactions using the comments option.

MERRY CHRISTMAS

As we head into the summer break, it feels like it's been a long year - and a hard one for many families and businesses. Looking around the corner, there is more work to be done to get our economy really growing again, but I'm pleased some of the gloom is lifting and New Zealanders can go into the New Year more confident about their jobs and incomes. With those slightly better tidings I'd like to wish all the readers of this newsletter a Merry Christmas and a Happy New Year.

ECONOMIC OUTLOOK

This week Treasury opened their books for the Half Year Economic and Fiscal Update, which shows how the Government and country are doing economically.

The updated forecasts showed a better economic outlook than Budget 2009. The recession was not as deep as originally feared and growth is expected to be slightly stronger over the next four years.

Supporting jobs has been the Government's focus for most of the year and from my perspective the most heartening news in the update was that 64,000 fewer jobs are now forecast to be lost from the economy than predicted in the Budget. You can read my press statement here.

However reduced business profits and a lower tax take mean the improved outlook does not immediately flow into the Government's accounts. Our fiscal position remains challenging. We face another six years of deficits and the amount we need to borrow in the next four years has only slightly reduced from $250 million a week to $240 million a week.

The best way to improve that position is to lift our economic performance and growth rate. That will be the Government's main focus in 2010.

CAPITAL MARKETS DEVELOPMENT TASKFORCE

The Government is keen to develop New Zealand's capital markets so investors have a better range of options and businesses get the investment they need to help our economy grow. My colleague, Commerce Minister Simon Power, this week released the final report of the Capital Markets Development Taskforce. It includes a range of recommendations including:

• Expanding the range of products available to investors and improving the quality of advice they receive.
• Increasing access to capital for businesses.
• Improvements to securities law.
• Changes to the structure and operations of finance sector regulatory agencies.
• Addressing tax incentives that cause distortions in the local capital market.

The Government will respond to the report next year. The Minister's press release can be read here.

THINGS TO LOOK OUT FOR IN THE NEW YEAR

As well as responding to the Capital Markets Development Taskforce the Government will receive the Tax Working Group report and the first National Infrastructure Plan in the New Year. Both should make interesting reading.

The Tax Working Group report, which we are expecting to receive in January, will look at fiscally neutral ways to improve New Zealand's tax system. The Government will consider the report seriously and signal any changes - if there is a sufficiently compelling case - in Budget 2010.

The Infrastructure Plan will be a stock take of New Zealand's existing infrastructure and planning. Evidence shows that good roads, a reliable electricity grid and faster broadband can improve productivity. The aim of the plan is to identify strategic gaps and start a dialogue with the sector and public about the best way to fill them. It too will be released early in the New Year.

STRONG GOVT SPENDING INCREASES IN LAST FIVE YEARS

On December 15 I'll open the Government's books for the Half-Year Economic and Fiscal Update. This is a chance for the public to get an update on how the Government and the country is doing economically.

(Click here or on the image to watch my latest update.)

One of the things the update will show is the legacy of the previous Government's relentless spending increases. Data compiled by Treasury shows a 45 per cent increase in baseline spending in the past five years. At the same time inflation and the economy grew by only about 15 per cent and revenue by just 10 per cent. That kind of reckless spending growth is clearly unsustainable.

We have already taken steps to rein this in, but these figures show the extent of the spending momentum that built up in the bureaucracy under Labour.

MONETARY POLICY AND THE DOLLAR

Against this backdrop it is rich for Labour to suggest that monetary policy is broken. These large spending increases were a major factor in the peaks in interest rates and the dollar immediately before the global economic slump. In fact Treasury, in a 2006 paper, even warned the previous Government that if it continued to increase spending it would push up interest rates and the currency. It did it anyway.

We believe the large spending increases of recent years provide ample room for savings. If we are to fund new priorities without pushing government debt to unsustainable levels then reprioritising some of the existing spending will be critical. This will be a feature of Budget 2010.

I'm acutely aware of the impact of the high dollar on exporters and that is one of the reasons the Government is reining in spending growth. This will take pressure off interest rates - probably the single most effective thing Government can do to ease the pressure on our dollar.

INFRASTRUCTURE STIMULUS UPDATE

I'm pleased to say the Government's $480 million infrastructure stimulus package announced in February is progressing well. The initiative which fast-tracks a range of housing, roading and school construction projects is part of the Government's rolling maul of initiatives to take the sharp edges off the recession.

As we emerge from the recession we can see that rolling maul is working well. In the past seven weeks a net 1700 people have moved off the unemployment benefit. A good portion of these are due to the Government's Youth Opportunities package, which will now provide about 19,000 job and training placements.

The infrastructure package has also made a contribution. Housing NZ has built 87 new houses and its upgrades of 10,000 houses are well underway, employing on average about 1000 people since February.

Of the five accelerated State Highway projects announced in the package, work on four is underway, while tenders have been received from the fifth. At their peak the projects will collectively support about 600 jobs.

Construction on two of five new schools included in the package is also underway and over half of the $71 million of fast-tracked classroom refurbishment and maintenance work has been completed. The education component of the package is estimated to support about 700 jobs.

As well as these direct jobs, the projects are helping support work for a range of suppliers around the country.

SUPPORTING EXPORTERS

This month I announced an extra $200 million in trade guarantees to increase opportunities for New Zealand exporters. We've made it clear that one of the best ways to ensure New Zealand grows strongly out of the recession is to increase exports and investment.

Ensuring our exporters have the credit flows to maximise the opportunities that flow out of recent trade developments is crucial. In recent weeks New Zealand has signed a free trade agreement with Malaysia, concluded negotiations with Hong Kong and the Gulf Cooperation Council and made progress with the United States.

To read about the three guarantee and bond products that have been extended click here.

NZ COMES THROUGH FINANCIAL CRISIS IN GOOD SHAPE

I'm pleased to see the Reserve Bank's latest Financial Stability Report shows the banking and finance sector is coming through the global financial and economic crisis in relatively good shape. I believe this will be one of New Zealand's competitive advantages as we emerge from recession.

This stability has been helped by Government and Reserve Bank measures such as deposit guarantees, which have kept the financial system sound and operating in an orderly fashion. The report shows bank margins have broadly stabilised at low levels, compared with margins over the past 10 years. It also shows the credit-fuelled boom of recent years is well and truly over with lending growth continuing to slow. This means an increased focus on saving and investing will be needed if we are to grow strongly again.

VISITING THE REGIONS

As Finance Minister listening to the business people who actually make up the economy is crucial to doing a good job. That is why I try to get out and listen to people's ideas and concerns whenever possible. In the past month I spoke to business people and visited firms in Horowhenua, Marlborough, the Bay of Plenty, Taranaki, Christchurch and Timaru.

I welcome feedback on the Government's policies and am keen to hear people's concerns. One way you can do that is by commenting on this newsletter.

Regards,

Bill English
Finance Minister

LOWER UNEMPLOYMENT PEAK EXPECTED

Unemployment data this week is expected to show a lift in the number of jobless. However there are some glimmers of hope on the horizon.

In the Budget in May, Treasury was predicting unemployment to peak at 8 per cent in the second half of next year. There are strong indications now that it will peak lower - possibly around 7 per cent - and sooner than previously thought.

This is due to a combination of factors - better performance by our trading partner economies, a lift in commodity prices and the Government's continuing focus on protecting jobs. While this is encouraging, I'm concerned about the loss of any job, which has a profound effect on workers and their families. That's why it is critical we get a step change that permanently lifts our economic performance. That will be the focus of Budget 2010. [Click here to watch my latest video briefing on this topic.]

THE DOLLAR

The Government is acutely aware of the impact the high dollar is having on our exporters and our recovery. You can read my blog on the subject here.

Clearly, the dollar is stronger than we would expect at this point in the economic cycle - due mainly to the weakness of the US dollar and the Sterling. The best action Government can take to avoid putting added pressure on the dollar is to keep its own house in order and ensure that others have incentives to do the same.

We have a clear plan to control public spending and debt, reducing pressure on both the exchange rate and interest rates. We are also firmly focused on lifting New Zealand's rates of productivity, which have languished in recent years. This will help exporters become more competitive and give them to confidence to invest and create sustainable jobs.

CROWN ACCOUNTS

The annual financial statements are a reminder that, while there are some promising signs that the recession is easing, there remain some significant challenges.

The $10.5 billion deficit to the year to June 30, 2009, was larger than forecast in the Budget in May, as tax receipts fell, spending increased sharply to support the economy through the recession and several Crown investment portfolios - like the Super Fund - sustained significant losses.

Faced with expected deficits of $10-12 billion over the next four years, it means we are going to have to borrow about $250 million a week on average over that period. That is why the Government is focused on keeping a tight rein on spending for the foreseeable future.

REVIEWING THE TAX SYSTEM

There has been a lot of interest recently in the Tax Working Group. The group - led by Victoria University's Centre for Accounting, Governance and Taxation Research, is looking at potential improvements to the tax system.

The aim is to see if there are changes that can simplify the system, improve fairness and lift economic growth without increasing the overall level of taxation. The group, which is free to look at any aspect of the tax system, will provide the Government with a report in December.

Last month I gave a speech to the Institute of Chartered Accountants in which I made it clear that any proposed changes would have to meet some crucial tests if they were to be seriously considered by the Government. Equity and fairness will be key considerations alongside benefits for the economy and for households.

REGIONAL EXPORTS



As Minister of Finance, I'm a firm supporter of regional development, so I was very pleased last week to see the conclusion of a major log deal between Canterbury and Southland. The log in question was the Ranfurly Shield. Attending the victory parade in Invercargill last week, it was obvious the victory has given Southland a big lift. Hopefully this boost in confidence will help underpin the recovery in the region.

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THE ECONOMY MOVES ON TO FIRMER FOOTING

This week I've been encouraged by signs the economy is stabilising. Official statistics show New Zealand outperformed expectations in the June quarter and inched back into growth by the barest of margins, following five quarters of contraction. Data also showed the current account deficit – our trade and investment gap with the rest of the world - shrank further than expected to 5.9 per cent of GDP.

These indicators are better than expected, but it will probably be some time before individuals and families feel better off again. That is because unemployment is forecast to continue rising well into next year as growth remains relatively weak. This means there is still a lot of work to do if we are to create a strong recovery that provides sustainable jobs and growth.

A key part of this is avoiding a recovery based on housing inflation and consumer and Government spending, which wouldn't be sustainable in the long-term. That is why we have set out a comprehensive programme to increase productivity, business investment and exports in a bid to rebalance the economy. Click here on or the image to watch a brief video about this.

IMPROVING PUBLIC SECTOR PRODUCTIVITY

This week I gave a speech outlining some of the ways I think the Government and the public service can deliver better, smarter public services.

The public increasingly want better, more responsive services. Our challenge is to deliver that in an environment where there is little new money. To do that we need good ideas and innovation. In the speech I outline some of the ideas I think can make a practical difference.

The public sector makes up about a third of the economy, so improving productivity is a vital part of sharpening New Zealand's overall economic performance. A quick summary of the speech is available in this press release.

A WORKABLE EMISSIONS TRADING SCHEME THAT PROTECTS JOBS

The Government has unveiled proposals for an amended ETS that is fairer to businesses and householders and will not see an exodus of large companies and jobs to other countries.

Environmentalists have criticised the changes, but the reality is they strike a balance between protecting New Zealand jobs, halving the costs for families and households and doing our fair share on climate change. 

Having an ETS that sends emitting industries out of business – only to be replaced by less efficient producers in countries with looser rules - would result in more emissions, not less, as well as put thousands of New Zealanders out of a job.

GETTING OUT AND ABOUT

This month I was lucky enough to get a taste of Hawke's Bay sunshine - visiting local businesses and speaking to the local Chamber of Commerce. The recession has hit most regions and Hawke's Bay is no exception. However most people I met were showing the resilience needed to survive the current tough environment. That is very encouraging, especially when I think back to the last major recession – in the early 1990s – when many people appeared paralysed and were slow to make the changes needed to cope in the new environment.

A highlight of my trip was a visit to Hastings Boys High School, where the students performed a spirited haka that shook the foundations of their assembly hall. It was also interesting to hear the views and ideas of the school's students during a questions forum.