MERRY CHRISTMAS
Click here to watch my latest briefing on YouTube

As we head into the summer break, it feels like it's been another long year - and a hard one for many families and businesses, particularly in Canterbury.
While it's been tough, it's been heartening to see the resilience New Zealanders have shown in the face of big challenges. People have pulled together and they've rolled up their sleeves and got on with the job at hand.

On a brighter note, the All Blacks won the World Cup and the economy has continued to improve, despite ongoing global uncertainty. Looking around the corner, there is more work to do to get the economy growing faster and the Government is firmly focused on that task. You'll see more of that next year, but in the meantime, I'd like to wish all the readers of this newsletter a Merry Christmas and a Happy New Year.

THE ECONOMY CONTINUES TO GROW

It was pleasing to see the economy posted solid growth of 0.8 per cent in the September quarter on the back of an increase in manufacturing output and a boost to tourism and spending from the Rugby World Cup. The result took GDP growth to 1.9 per cent in the past year. For more information read my media statement.

Despite the challenges of volatile global markets and a high Kiwi dollar the outlook for New Zealand's exports remains positive and rebuilding in Canterbury will contribute to growth as it picks up next year.

NEW GOVERNMENT KICKS INTO GEAR AFTER THE ELECTION

The Government has kicked back into gear, with support agreements signed with ACT, United Future and the Maori Party within two weeks of the election. Ministers have been sworn in, Cabinet has met and taken decisions on a number of issues - including the two outlined below around AMI and the mixed ownership model - and the Government has outlined its programme for the next three years in the speech from the throne. Ministers will be busy in the New Year working on that programme and implementing the Government's post-election action plan.

AMI SALE GIVES PROVIDES GREATER INSURANCE CERTAINTY

IAG's agreement to purchase AMI Insurance is good news for the Canterbury insurance market and the Government's liability in relation to its back stop support deal for AMI policyholders. As part of the deal, IAG has given an undertaking to continue to offer insurance to AMI's customers, as well as all of its existing customers, on renewal and transfers in Canterbury and throughout New Zealand. We welcome this assurance, which will ensure ongoing insurance cover for 60 per cent of the Canterbury market.

As part of the deal, the Crown will take over ownership of AMI Insurance's Canterbury earthquake related claims. The part of AMI dealing with earthquake claims - along with its reinsurance for those events - will be retained as a new Crown company and will continue to manage AMI's earthquake claims, ensuring continuity for customers. Treasury estimates the Crown's liability will drop from $335 million, in the last published set of full-year Crown accounts, to about $120 million, as a result of the deal. For more information, read my media statement.

EXTENDING THE MIXED OWNERSHIP MODEL

The Government has confirmed the next steps in its mixed ownership programme to offer New Zealanders minority shareholdings in four state-owned energy companies and Air New Zealand. Cabinet has agreed that Mighty River Power should be the first company prepared for an initial public offering (IPO), most likely in the third quarter of 2012, subject to market conditions. The programme is likely to involve a number of IPOs spread over the next three years or so, depending on market conditions and company circumstances.

Mixed ownership is a win-win. It's an opportunity for New Zealanders to invest in something other than housing or finance companies. And it will free up taxpayers' money so the Future Investment Fund can invest in priority new assets like schools, hospitals and irrigation, without having to borrow from overseas lenders. For more information about the Government's decisions read my media statement. For further information, read Treasury's background paper.

THINGS TO LOOK OUT FOR

• 19 January - Statistics New Zealand will release the Consumer Price Index for the December quarter.
• 26 January - The Reserve Bank will issue its latest Official Cash Rate review.

Regards,

Hon Bill English
Finance Minister

www.billenglish.co.nz

GOVERNMENT MAKING PROGRESS DESPITE CHALLENGES 

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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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MIXED OWNERSHIP MODEL - KIWIS AT FRONT OF QUEUE

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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

ECONOMIC GROWTH PICKING UP PACE

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It's pleasing to see the economy grew by 0.8 per cent in the March quarter, despite the devastating Canterbury earthquake on 22 February. This better than expected result shows the economic recovery is picking up pace. It also shows the resilience of Cantabrians and the wider New Zealand economy.

Our programme has been focused on rebalancing the economy towards savings and exports, so it's good to see exports in the March quarter up almost 1 per cent and imports down 2.4 per cent. Looking forward, I'm confident that growth will continue to pick up as the benefits of the Canterbury rebuild, near record commodity export prices, low interest rates and improving levels of savings and confidence begin to flow through to the economy. For more information read my media statement.

IMPROVING NEW ZEALAND'S INFRASTRUCTURE

This month I released the Government's National Infrastructure Plan. Since becoming Government we've increased funding, cut red tape to ensure major projects get built faster and taken steps to improve how we manage our existing infrastructure and plan new projects.

The National Infrastructure Plan is the next step in ensuring we get the most out of our infrastructure programme. It shows the large investment we have in the pipeline - about $17 billion over the next four years, even before counting the $5.5 billion set aside for rebuilding Canterbury, or investment by SOEs like Transpower. Looking ahead, it sets out a 20-year strategic vision for New Zealand's infrastructure, identifies challenges, outlines the Government's priorities and puts in place an action plan to help improve planning and co-ordination. For more information read my media statement.

CLOSER TRANS-TASMAN TIES


Minister Swan and I exchange an All Black tie and a Wallaby beanie ahead of the Rugby World Cup.

Last week I met Australian Deputy Prime Minister and Treasurer Wayne Swan to further strengthen trans-Tasman economic and regulatory co-operation. New Zealand and Australia are committed to a Single Economic Market to stimulate business activity, drive job creation and improve the environment for doing business on both sides of the Tasman.

After the meeting Minister Swan and I released a stocktake showing the steps taken towards the creation of a Single Economic Market between the two countries since an outcome framework was announced in August 2009.

For more information you can read our media statement and stocktake.

EARLY SIGNS OF PROGRESS IN REINING IN THE DEFICIT

The latest Government financial statements show some early signs of progress in getting the deficit under control. The operating deficit before gains and losses for the 11 months to 31 May was $1.3 billion below forecast due to higher than expected tax revenue and lower expenses. This means the deficit
could come closer to $16 billion for the year to 30 June rather than the forecast $16.7 billion.

This is still extremely large and needs to be reduced. That's why the Government has set out a credible and faster path back to budget surplus by 2014/15, when we will start repaying debt. If possible, we would like to do even better than that by continuing to manage our costs and building a faster-growing economy. For more information read my media statement.

THINGS TO LOOK OUT FOR

• 28 July. The Reserve Bank will issue its latest Official Cash Rate review.
• 4 August. Statistics New Zealand will issue the Household Labour Force Survey, which contains official unemployment figures.

Regards,

Bill English
Finance Minister

www.billenglish.co.nz
www.facebook.com/billenglishmp

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BUDGET 2011 – FASTER SURPLUS, PLATFORM FOR GROWTH

Click here to watch the video about Budget 2011 I made with the Prime Minister

Budget 2011 marks the next step in this Government’s programme to tilt the economy towards exports, savings and investment and away from borrowing and consumption. It helps to lift national savings by returning the Government's books to surplus sooner, increasing the level of private savings in KiwiSaver and providing quality investment opportunities for New Zealanders.

It does this while funding the Government's $5.5 billion share of the costs of rebuilding Christchurch, investing more in frontline services in health and education and continuing to protect the most vulnerable. This is a responsible and balanced budget for the times. It ensures New Zealand will build faster growth based on savings and exports, so New Zealanders have the jobs and higher incomes they deserve.

For more information read my main Budget media statement.

BUDGET 2011 – AT A GLANCE       

• Returns the budget to surplus in 2014/15 – a year sooner than forecast in December – reducing the need for Government borrowing and lifting national savings.
• Forecast economic growth of 4 per cent in 2012, with 170,000 new jobs being created by 2015.
• Creates the $5.5 billion Canterbury Earthquake Recovery Fund for infrastructure and schools; temporary housing; trades training; welfare and business support; and CBD demolition costs.
• Invests $4 billion in frontline public services in areas such as health, education and supporting young people into jobs.
• Makes changes to KiwiSaver, Working for Families and Student Loans to make the schemes sustainable into the future and reduce the need for Government borrowing.
• Creates investment opportunities for New Zealanders by extending the mixed ownership model to four state-owned energy companies and reducing the Government’s majority stake in Air New Zealand.

REDUCING BORROWING, LIFTING NATIONAL SAVINGS

The Government has supported the economy through the recession, but with growth forecast to reach 4 per cent next year – its highest level since 2004 - and the economy expected to create 170,000 new jobs over the next four years, it is appropriate to speed up the Government’s return to surplus.

Achieving a surplus in 2014/15 – a year earlier than previously forecast - reduces the need for Government borrowing and supports jobs and growth by reducing pressure on interest rates. It will also put the public finances in a stronger position to cope with future shocks.

Budget 2011 changes mean the Government will borrow over $10 billion less over the next four years. 

BETTER VALUE FROM PUBLIC SPENDING   

Budget 2011 identifies savings of $5.2 billion over five years from existing spending. This includes savings from the back office of the public service and changes to large schemes that put them on a more sustainable and enduring footing.

Almost $4 billion of Budget 2011 savings are redirected to new initiatives –most of it on frontline services in health and education. This leaves a net saving of $1.2 billion over four years. We were previously planning to spend $4.4 billion over that period – so that's $5.6 billion we won't have to borrow over those four years from operating spending alone. 

We also intend to extend the Mixed Ownership Model to the four State-owned energy companies and reduce our shareholding in Air New Zealand – while retaining a majority stake. This is expected to free up over $5 billion.

Together that's over $10 billion we won't need to borrow over the next four years. These savings combined with forecast economic growth, mean net debt will remain below 30 per cent of GDP – a significant achievement in the current circumstances.

MAKING LARGE PROGRAMMES MORE SUSTAINABLE

Changes aimed at making KiwiSaver, Working for Families and student loans more sustainable will take place after the election – giving voters a clear opportunity to choose whether they support the Government's approach.

Changes to KiwiSaver reduce the amount the Government is borrowing to pay in subsidies and encourage a higher level of real savings through slightly higher member and employer contributions. The changes will maintain strong inflows into KiwiSaver, with total funds projected to rise from around $8 billion currently, to almost $60 billion in 10 years.

This is expected to result in a modest improvement in the rate of national savings and reduce New Zealand’s net international liabilities – the amount the country owes to foreign lenders – by an estimated two per cent of GDP over the next decade.

Changes to Working for Families will better target the scheme to low income earners, saving $448 million over four years – about 4 per cent of the scheme's current annual cost of $2.8 billion. The changes will take place in four steps – over about eight years – minimising the impact on affected families. Student loans remain interest free but a number of changes restrict eligibility, encourage greater personal responsibility and put tighter obligations on borrowers.

IMPROVING FRONTLINE SERVICES

Budget 2011 provides record funding for health – an extra $2.2 billion over the next four years, including an additional $585 million next year.

In education, the Government has allocated an extra $1.4 billion for schools and early childhood education over the next four years. Education and Tertiary Education spending will rise to a record $12.2 billion next year - a massive total in difficult economic times.

Budget 2011 also provides another $1.6 billion of infrastructure funding with the lion's share invested in schools, ultra-fast broadband and rail. This investment sits alongside the over $1 billion a year we put into improving the State Highway network and the $3.8 billion we are spending over five years to upgrade the national grid.

BOOSTING SAVINGS AND INVESTMENT

Extending the mixed ownership model is expected to free up $5 billion to $7 billion, which will fund much of the Government's capital investment in social assets like schools and hospitals over the next few years, as well as reduce Government borrowing.

As we have said, we will ensure Kiwi investors are at the front of the queue to buy a stake in these companies. Extending the mixed ownership model will also broaden the pool of investments available to New Zealanders, contribute to deeper capital markets and bring sharper commercial disciplines, more transparency and greater external oversight for the companies involved.

In addition, Budget 2011 creates an Earthquake Kiwi Bond, establishes a new local government funding agency and resources government agencies to support New Zealanders in making informed investment decisions.

APRIL 1 CHANGES BOOST BUSINESSES AND SUPERANNUITANTS

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On 1 April businesses got a boost from the Government cutting the company tax rate to 28c in the dollar, down from 30c. This will make New Zealand more competitive and increase incentives for businesses to reinvest earnings into growth and jobs. A number of other 1 April tax changes will encourage sound investment decisions, increase fairness and ensure the tax changes are broadly fiscally neutral. You can read more in my media statement.

Another major 1 April change was the annual increase in benefits and NZ Super. For superannuitants the news is particularly good. Tax cuts, alongside the normal adjustment, have pushed the married rate of NZ Super 6.8 per cent higher than a year ago, easily beating inflation of 4 per cent. Three rounds of tax cuts have resulted in the married rate of NZ Super increasing by about 19 per cent since October 2008. For more information you can read the Social Development Minister Paula Bennett's media release. 

BUILDING BETTER FRONTLINE PUBLIC SERVICES

The public service has made good progress in delivering better value for money in the past two years. However last week, in a speech to senior public servants, I outlined my view that change needs to pick up momentum to meet our goals of high-quality public services for little extra money.

The longer we are in office the more it is clear the costs of running government are too high, there is too much duplication and the organisation is too cluttered. We are confident that over time we can continue to improve services and get better value for money in the public sector. This will help us get on top of debt and rebalance our economy towards greater savings and exports. You can read my media statement summing up my speech or view State Services Minister Tony Ryall's media release for more about increases in frontline public service job numbers.

EARTHQUAKE TAX RELIEF

Last week Revenue Minister Peter Dunne and I announced several tax relief measures to help Christchurch residents and businesses get back on their feet after the February earthquake. These measures, which you can read more about in my media statement, will make it easier for Christchurch businesses to comply with their tax obligations, recognising the disruption caused by the earthquakes. It is one of several initiatives to help Christchurch businesses and employees including the extended earthquake assistance package and an initial economic recovery package.

RECOVERY TO PICK UP PACE LATER THIS YEAR

The latest GDP figures - showing growth of 0.2 per cent for the three months to December 31 - confirm the economy was subdued in the second half of 2010, as New Zealanders paid down debt and the economy took a hit from the first Canterbury earthquake. The second earthquake is expected to have a significant impact on growth in the early part of this year.

However looking ahead, I'm optimistic about our economic outlook. New Zealand's commodity export prices are around record levels, interest rates and inflation are relatively low, the rebuilding of Christchurch will provide a boost to the economy, and the Rugby World Cup will attract tens of thousands of visitors. The Reserve Bank is forecasting these factors to lift growth to over 5 per cent next year as the economy picks up momentum. You can read more in my media statement.

PRODUCTIVITY COMMISSION

Lifting New Zealand's productivity, both in the public and private sectors, is critical to lifting New Zealand's long-term economic growth, so I was pleased to see the new Productivity Commission begin work on 1 April. It has been given a wide-ranging brief to inquire into productivity-related matters. Its first two topics will be housing affordability and international freight transport services. Both these issues are important to our economic performance and housing affordability also has strong social implications. You can read more about these inquiries in my media statement.

THINGS TO LOOK OUT FOR

• 12 April, speech to the Wellington Employers' Chamber of Commerce.
• 18 April, Statistics New Zealand will issue Consumer Price Index (CPI) figures for the three months to March 31.
• 28 April, the Reserve Bank will issue its latest decision on the Official Cash Rate.

Regards,

Hon Bill English
Finance Minister

www.billenglish.co.nz

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REMEMBERING THE CHRISTCHURCH EARTHQUAKE



No words come close to conveying the horrendous scale and impact of the disaster that hit Christchurch last week. The earthquake will have a significant economic impact, but first it's important we take the time to remember those who lost their lives and the suffering of all those left behind. We can rebuild Christchurch and as a country we can absorb the economic damage of the earthquake, but we can't reverse the human toll. Read my Christchurch Earthquake Vigil speech here.

It is heartening that amongst all the loss and destruction there has been a remarkable level of resilience and a real outpouring of community spirit - neighbours have been helping neighbours and strangers have been rolling up their sleeves to help the needy. It is these acts of kindness that lift spirits and reassure us Christchurch has a bright future.

THE ECONOMIC IMPACTS 

Click here to watch my statement on YouTube



Based on the limited information available at this early stage, the Treasury has provided a preliminary assessment of the earthquake's cost and economic impact. According to that assessment, the total cost of the damage is likely to be two or three times the $5 billion estimated cost of the quake on 4 September last year, including private insurance and government costs.

In addition, there will be economic impacts, including:

• A loss of output from the Canterbury region and a delay in the reconstruction effort from the previous earthquake.
• Economic growth in the first half of 2011 will be lower than forecast.
• Government tax revenue will be lower than expected.
• The Government will bear extra costs to rebuild Christchurch.

You can read more about this in my media statement.

GOVERNMENT COMMITTED TO REBUILD

The earthquake has dealt a considerable blow to both the people of Canterbury and the national economy, but both are resilient. The Government is committed to providing the financial resources needed to rebuild Christchurch in both the short and longer term. Supporting and rebuilding Christchurch will be the most important thing the Government does this year and into the future. We won't be cutting corners.

Financially, New Zealand is well covered for disasters - through the Earthquake Commission and through insurance companies and their own global reinsurance. In addition we will pay for essential infrastructure, such as roads, water and sewerage systems, along with other necessary support by prioritising spending on Canterbury above other areas of government spending, and by taking on a bit more debt in the short term. We'll work through those issues over the coming weeks as we prepare for the Budget on 19 May.

IMMEDIATE ASSISTANCE FOR BUSINESSES AND WORKERS

Over the coming weeks and months the Government will be working to support the Christchurch economy. The Prime Minister has announced the first step - an initial six-week support package for businesses and workers. It is made up of two parts:

• An Earthquake Support Subsidy of $500 per week (gross) per full-time worker for businesses that have been disrupted to keep paying wages.
• Earthquake Job Loss Cover of $400 net per week for employees whose employer believes their business is no longer viable.

We have made the support package as simple and pragmatic as possible, so that it can be delivered quickly and reach the people who urgently need it. Over the next few weeks the Government will consider what measures will be needed in the medium-term.

THINGS TO LOOK OUT FOR

• 10 March, The Reserve Bank will issue its latest Official Cash Rate review and Monetary Policy Statement.
• 23 March, Statistics New Zealand will issue balance of payments data for the December quarter.
• 24 March, Statistics New Zealand will issue gross domestic product data for the December quarter.

Regards,
Hon Bill English
Finance Minister
www.billenglish.co.nz

HAPPY NEW YEAR

Firstly I'd like to wish everyone a happy New Year. 2010 was extremely busy and I hope you had the opportunity get away for a bit of a break and spend some time with loved ones. While it was nice to have a holiday, the 2011 political year has started with a bang. We're getting on with implementing our economic programme and the pace is unlikely to let up between now and the election.

LIFTING OUR NATIONAL SAVINGS

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This week I received the report of the Government's Savings Working Group. Increasing national savings and reducing our reliance on foreign debt are critical if we want to build a faster growing economy. As we have seen in Europe, high foreign debt can lead to a credit ratings downgrade and higher interest costs for everyone. On the other hand, building national savings can reduce pressure on interest rates and the dollar - helping exporters - while providing businesses with the investment funds they need to grow.

The Budget 2010 tax package took steps in this direction, but there is more work to do. We have an open mind as to what might be required to lift national savings and we'll take our time to consider the group's report. Any policy decisions are likely to be included in the Budget. You can read more about this in my media statement.

LIFTING GOVERNMENT SAVINGS

To lift national savings, households, businesses and the Government all need to play their part. On the Government side, the Prime Minister has already signalled we intend to lift the Government's savings this year by spending less and borrowing less. We will be looking to get back to a meaningful operating surplus by 2014/15 - a year earlier than previously planned.

In addition, we are considering reducing borrowing further by raising money for some new capital investments. One option is introducing a mixed ownership model to four state-owned enterprises and reducing the Government's shareholding in Air New Zealand (while still maintaining a majority stake on behalf of all New Zealanders). You can read more about this in the Prime Minister's speech and media statement. However the Government will proceed with a mixed-ownership model for these companies only if they meet the following tests:

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

NO ELECTION-YEAR LOLLY SCRAMBLE

As I've said before - the Government's challenging fiscal position means there can be no election-year lolly scramble. Any party that promises extra spending must be able clearly explain to the public where the money is going to come from, otherwise it's reasonable to assume it will have to come from extra borrowing. I note Labour has announced plans to spend another $1.3 billion on a new tax-free zone without detailing how it will pay for it. This kind of loose spending would risk a credit ratings downgrade as well as put upward pressure on interest rates and the dollar. The Government, by contrast, is committed to sensible financial management. You can read more about this in my media statement.

THINGS TO LOOK OUT FOR

• 3 February: Statistics NZ will release the latest unemployment figures as part of the Household Labour Force Survey.
• 9 February: Finance and Expenditure Select Committee hearing on the Budget Policy Statement and Half Year Economic and Fiscal Update.
• 17 February: Speech to a joint Auckland Chamber of Commerce and Massey University luncheon.
• 23 February: Speech to the Institute of Public Administration New Zealand.

Regards,

Bill English
Finance Minister

MERRY CHRISTMAS

As we head into the summer break, it feels like it's been another long year - and, although better than last year, a hard one for many families and businesses. Looking around the corner, there is more work to do to get our economy growing faster, but I'm pleased the economy has grown for five consecutive quarters, unemployment is falling and things look set to steadily improve next year. With those slightly better tidings I'd like to wish all the readers of this newsletter a Merry Christmas and a Happy New Year.

BUDGET POLICY STATEMENT


(Click here to watch this policy briefing on YouTube.)

This week I released the Budget Policy Statement, which previews the issues the Government intends to tackle in Budget 2011. A key focus will be improving New Zealand's poor rate of national savings, which would reduce our reliance on foreign debt and take pressure off interest rates and the exchange rate - helping our exporters. You can read my statement on this here.

The Government has a role to play in this by keeping its own debt under control through tight limits on spending increases and ensuring we get back to surplus as soon as practical. The Savings Working Group is due to report back early in the New Year. The Government will consider its recommendations carefully and I would expect any policy responses to be included in Budget 2011.

Several other substantial reviews will also feed into the Government's economic programme in 2011. They include reports from the Welfare Working Group, the review of spending on policy advice and the Government's responses to the Housing Shareholders Advisory Group report.

TREASURY'S UPDATED FORECASTS



Alongside the Budget Policy Statement, Treasury released their updated forecasts for the economy and the Government's books. The half-year update shows growth has been a bit lower than expected in the current year and the Government's deficit is higher. That comes as no surprise - we know that New Zealanders have been spending less and saving more, which alongside one-off events like the Canterbury earthquake has had a negative impact on the Government's books. The good news is that economic growth, unemployment and the Government's deficit are all expected to improve next year and in the following years.

THE GOVERNMENT'S INVESTMENT STATEMENT

This week I also released the Government's first annual Investment Statement. It clearly shows the Government's assets, liabilities and future investment intentions. It forecasts Crown assets to grow by $33 billion over the next five years to $256 billion - about five times the size of the share market. You can read my statement on this here.

At a time when we are borrowing for all new capital investment, we need to get the most out of our existing asset base and ensure new investment goes into areas where it can provide the largest improvements in public services. We believe this level of transparent information allows the public to demand a much greater level of accountability from the Government and will lead to sharpened incentives and significantly better public sector decision-making.

FAIRER TAX RULES

Last week the Government legislated new tax rules that will close loopholes and help ensure everyone pays their fair share of tax. The changes were outlined in Budget 2010, but required more work and consultation before they could be finalised and put into legislation. The changes will:

• Broaden the definition of income for Working for Families, Student Allowance and the Community Services Card to help prevent people structuring their income to inflate their entitlements.
• Close loopholes in the tax treatment of loss attributing qualifying companies (LAQCs) so shareholders can no longer claim losses against their personal income.
• Ensure people can still claim accelerated depreciation on the fit-out of commercial and industrial buildings. They will also be able to claim the depreciation loading on assets where investment decisions were made before 20 May 2010, but not completed until sometime after.   

You can read my full statement here.

Regards,

Bill English
Finance Miister
www.billenglish.co.nz

1 OCTOBER TAX CHANGES GOOD FOR THE ECONOMY


Click here to watch my policy briefing video on the tax changes.

The Government's tax changes which took effect last Friday will strengthen economic growth and help New Zealand families get ahead. While there has been a lot of talk about how these changes affect people's hip pockets we must remember the important economic reasons behind the changes. As well as improving the incentives to work, the tax package tilts the economy towards savings, investment and exports and away from the unsustainable borrowing, consumption and over-investment in housing of the past decade.

Treasury estimates the tax changes will add about 1 per cent to economic growth over the next few years. The changes are one of many steps in the Government's programme to get the economy growing faster.

At all taxable income levels, the personal tax cuts more than offset the rise in GST - and once the full package is in place low, middle and high income groups broadly receive the same proportionate increase in disposable income. The changes leave an average family about $25 a week better off and an average wage worker $15 a week better off. For more information you can read my statement on the changes, view a table showing how the tax changes affect different wage levels, or calculate how much you will benefit at www.taxguide.govt.nz.

CHANGES TO FOREIGN INVESTMENT RULES STRIKE BALANCE

Last week I announced changes to the foreign investment rules to give Ministers more flexibility to consider a wider range of issues - including large-scale ownership of farmland. At the same time the changes provide extra clarity and certainty for potential investors by identifying areas where the Government will apply a higher degree of scrutiny. For more details you can read my statement or watch the press conference.

They follow changes last year that cut red-tape and almost halved application times. Taken together these changes strike a balance between encouraging overseas investment, where there are tangible benefits, while acknowledging valid concerns about the sale of large tracts of farmland overseas.

CANTERBURY EARTHQUAKE

As Finance Minister and Minister responsible for EQC I've visited Canterbury twice since the earthquake to talk to affected residents and get a sense of the issues on the ground. Alongside people's personal concerns there have been a lot of questions about the fiscal and economic impact of the earthquake.

Treasury has estimated the total cost of earthquake damage could be about $4 billion. Most of this bill will be met by the Earthquake Commission and private insurers. In addition Treasury is predicting the quake will hit economic growth in the next two to three months, before providing a small boost as reconstruction activity kicks into full gear.

The Government has been quick to offer assistance including:

• $15 million for the wage subsidy scheme for employees at quake-affected businesses.
• $5 million for the Mayoral hardship fund.
• $7.5 million for community restoration projects and
• $2.5 million for trauma counselling.

In addition we will have to pick up the tab for damage to central government assets and contribute to the cost of repairing local government assets where they could not be insured. We would expect these costs to eventually run into the hundreds of millions of dollars. While from a fiscal point of view this is not ideal, it is manageable because of the work we've done over the past 18 months to put the Government's books in order.

FIVE QUARTERS OF GROWTH

A fifth successive quarter of economic growth is another sign the recovery is continuing - although it is clear it will be bumpy at times. While the 0.2 per cent growth was below expectation, the data was uneven across different parts of the economy. Total domestic spending fell slightly, while exports had their second strongest quarter on record, with volumes up 7 per cent from their lows of 2008. This trend towards saving and exporting more, and spending and borrowing less, is what New Zealand needs to build stronger long-term growth. You can read my statement here.

Looking ahead, I expect some volatility in the next few quarters of GDP data with the Canterbury earthquake and uncertainties about the global outlook. This reinforces the need for the Government to press on with its comprehensive plan for turning around the economy.

THINGS TO LOOK OUT FOR

• Mid-October: Treasury will release Crown Accounts for the year to 30 June, 2010.
• 18 October: Statistics New Zealand will release CPI data for the June quarter.
•  28 October: The Reserve Bank will issue its latest Official Cash Rate review.

Regards,

Hon Bill English
Minister of Finance

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