Core Crown tax revenue was about $500 million below forecast in the five months ending 30 November, reinforcing the need for ongoing spending restraint and responsible fiscal management, Finance Minister Bill English says.

“The Government is committed to reducing its deficits over the next two years and returning to surplus in 2014/15,” he says. “This won’t be easy, particularly with ongoing debt problems in Europe reducing forecasts for global growth.

“However, returning to surplus and repaying debt are among the most important things the Government can do to ensure New Zealand can withstand future shocks and build a more competitive economy based on exports and new jobs.”

The Government’s operating deficit before gains and losses was $4.48 billion in the five months to 30 November. This was $252 million larger than forecast in the pre-election update in November – reflecting lower than forecast tax revenue, which was partly offset by lower than forecast core Crown expenses.

Costs from the latest Canterbury earthquake on 23 December will be included in the Crown accounts when the Earthquake Commission has measured the financial impact.

Mr English says the Budget Policy Statement, to be issued on 16 February, will confirm the Government remains on track to post a budget surplus in 2014/15.

“Not surprisingly, given the more subdued global economic outlook, that surplus now looks like being smaller than the $1.5 billion forecast in the pre-election update – at somewhere between $300 million and $500 million.

“As the Prime Minister said yesterday, returning to surplus is important to our plan to limit debt and take pressure off interest rates and the exchange rate,” Mr English says.

The Government has announced a series of hui to consult with Maori on legislative changes it considers are necessary for the float of minority shareholdings in four State Owned Enterprises to New Zealanders.

Finance Minister Bill English and State Owned Enterprises Minister Tony Ryall will lead the February consultation process with iwi around the country, which will be facilitated by Sir Wira Gardiner.

The Government is also seeking written submissions through a consultation document on its proposal to remove Genesis Energy, Meridian Energy, Mighty River Power and Solid Energy from the SOE Act and put them under new legislation that ensures the Government retains at least 51 per cent ownership and other individual shareholdings are limited to 10 per cent, Mr English said.

"We promised to talk with iwi when we originally announced plans to partially sell the four energy companies and Air New Zealand last year,” Mr English said. “We want to understand Maori views before we take final decisions.”

Mr Ryall said the consultation will not cover specific investment opportunities, but iwi investment on a commercial basis will be welcomed.

"The Government has promised all New Zealand investors they will be at the front of the queue for shares."

Mr English said the five partial share floats will free up billions of dollars for investment in schools, hospitals and public infrastructure – and help ensure New Zealand avoids the kind of debt crisis faced by Europe.

The consultation document, together with information on how to make written submissions, will be available from 1 February 2012 at: www.treasury.govt.nz/mixed-ownership-consultation

The deadline for receipt of submissions is 5pm on 22 February 2012.

The schedule for hui is:

8 February	10.00am	Distinction Rotorua	Rotorua
8 February	3.00pm	Waikato Stadium	Hamilton
9 February	3.00pm	Whanganui Racecourse	Whanganui
10 February	9.30am	Toll Stadium	Whangarei
10 February	3.30pm	Novotel Auckland Airport	Auckland
14 February	10.00am	Waihopai Runaka Murihiku Marae	Invercargill
14 February	4.00pm	Chateau on the Park	Christchurch
15 February	10.00am	Emerald Hotel	Gisborne
15 February	3.30pm	Te Puni Kokiri	Wellington

22 December. Finance Minister Bill English looks back over developments in 2011 - particularly events in Christchurch - and talks a bit about the agenda for 2012. He says that New Zealand's is a "fundamentally resilient economy" regardless of what happens elsewhere in the world.

In this final edition of Focus on Finance for 2011, I talk about the major events of the year - and what's coming up for the new Government in 2012.

Continue reading "Focus on Finance: December 2011"

The economy posted solid growth in the September quarter, despite considerable global uncertainty, Finance Minister Bill English says.

Statistics New Zealand today confirmed gross domestic product (GDP) grew by 0.8 per cent in the September quarter. The economy has grown in nine out of the past 10 quarters. GDP grew by 1.9 per cent over the last year.

"It’s pleasing to see growth picking up again, after a relatively flat second quarter, on the back of an increase in manufacturing and a boost to tourism and spending from the Rugby World Cup," Mr English says.

"This result was achieved against a backdrop of global uncertainty. Since then the global outlook has worsened as Europe seeks solutions to its sovereign debt problems.

"We face challenges from increasingly volatile global financial markets, reduced demand for our products in some markets and a high Kiwi dollar.

"But, the outlook for New Zealand's exports remains positive and rebuilding in Canterbury will have a positive impact as it picks up next year.

"The rebuild, along with high export prices and interest rates at 40-year lows, gives us confidence the economy will continue to experience moderate growth next year.

"We’re also confident this recovery will be built on a sound platform of higher savings, exports and productive investment, rather than the excessive borrowing, consumption and government spending of much of the past decade.

"Returning to Budget surplus in 2014/15, lifting savings and exports and increasing the competitiveness of the economy will remain the focus of the Government’s programme," Mr English says.

IAG's agreement to purchase AMI Insurance, announced today, will strengthen the Canterbury insurance market and reduce the Crown's liability, Finance Minister Bill English says.

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 customers' earthquake claims," Mr English says.

"This will ensure those claims are managed effectively and with the minimum of disruption.

"IAG has also agreed that it will 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.

"For earthquake affected AMI policyholders, this means their existing earthquake claims will be managed by the new Crown company, while the IAG group will manage their ongoing insurance cover. For AMI policyholders around New Zealand, the IAG group will manage their insurance cover."

The agreement is subject to regulatory approval, including from the Commerce Commission.

"In April the Government said it would provide back up financial support for AMI to give policyholders certainty and to ensure an orderly rebuild of Christchurch while AMI sought a market solution to its challenges," Mr English says.

“Now that AMI Insurance has found a new source of long-term capital, the Government will take over ownership of AMI's estimated $1.8 billion of earthquake related claims, consistent with the AMI support deal."

This claims liability of $1.8 billion is offset by about $1.3 billion in reinsurance and further reduced by the $380 million purchase price agreed by IAG.

As a result Treasury estimates that the Crown's liability will drop from $335 million, in the last published set of full-year Crown accounts, to about $120 million.

The Government has appointed Nelson-based company director Ross Butler to chair the new Crown company. Mr Butler has a background in finance and insurance-related companies and is currently chairman of Nelson Marlborough Institute of Technology and deputy chairman of GNS Science.

"The Government has made it clear that helping to rebuild Christchurch is one of its most important priorities. Today's announcements will help meet that goal," Mr English says.

Questions and answers

1. How is the Government involved in this transaction?
The primary transaction is between AMI and IAG. The Government became involved when it agreed to support AMI policy holders to avoid possible significant disruption to rebuilding Christchurch. The support agreement and other relevant documents are available at:
www.treasury.govt.nz/publications/informationreleases/canterburyearthquakes/insurance

2. What will it cost in the long term?
The Government has previously said in its financial statements for the year ended 30 June 2011 that the support arrangement that protects AMI Insurance’s customers would cost taxpayers $335 million.

The final cost to taxpayers is still uncertain, but Treasury's best estimate is the remaining liability will be about $120 million. This is figure is based on AMI's estimated $1.8 billion in earthquake liabilities, reduced by $1.3 billion reinsurance and the $380 million purchase price. When the transactions are paid for, an updated estimate of cost will be disclosed in the monthly Financial Statements of the Government.

3. Will AMI customers still be able to insure their houses after IAG takes over, or will they be insured by the Government?
IAG has also agreed that it will 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. This undertaking will ensure ongoing insurance cover for 60 per cent of the Canterbury market.

The Government is acquiring only AMI's Canterbury earthquake claims and associated reinsurance. Its purpose will be to settle those claims and it won’t be offering new insurance policies.

4. Who will run the business that the Government is buying? Will it be part of CERA, the Treasury, or some other government department?
The business the Government is acquiring will be a Crown company listed in schedule 4 of the Public Finance Act. It will have its own board of directors and Nelson-based company director Ross Butler has agreed to chair the company.

Mr Butler has experience in finance and insurance-related companies.  He was chief executive of GIO Building Society and GIO Finance in Australia. He managed GIO through its privatisation, and subsequent establishment of banks and insurance companies throughout Australia, Asia and New Zealand. Mr Butler has extensive governance experience across multiple sectors. He is currently chairman of Nelson Marlborough Institute of Technology and deputy chairman of GNS Science.

5. How can the Government be sure that this is the best deal?
The Government’s role in this has been to provide support so that AMI’s customers in Canterbury are properly looked after and the rebuild process can continue.

The AMI Insurance board appointed investment bank Goldman Sachs to help it find more capital. The process of finding a long term investor has led to the offer by IAG. The offer has been recommended by Goldman Sachs and considered and approved by AMI Insurance’s directors.

The Government’s interests have been protected by getting independent advice from investment bank Deutsche Bank and law firm Chapman Tripp, and having Treasury observers at AMI Insurance Board meetings.

6. If someone has an AMI house policy today, and their house is either a substantial repair or a rebuild, who will they be dealing with once the purchase is completed?
The new Crown company, which will be taking over the management and settlement of earthquake claims.

7. Will today's decision slow the process of getting post-quake results for AMI customers?
No, the claims department established by AMI following the earthquakes will transfer to the new Crown company.

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, Finance Minister Bill English and State Owned Enterprises Minister Tony Ryall said today.

“Cabinet has taken initial decisions to proceed with the mixed ownership programme, as we promised New Zealanders before the election,” they said.

“The Government has previously set a number of tests – including retaining majority Government control and significant participation by New Zealand investors who will be at the front of the queue for shares. The Treasury confirms these tests can be met.

“The programme is likely to involve a number of IPOs spread over the next three years or so. Their timing will depend on market conditions and company circumstances.

“Ministers’ initial decisions will allow Treasury to proceed with preparing the mixed ownership programme. More detailed decisions about the precise structure and timing of the programme, including the Mighty River IPO, will be made early in 2012.”

This week, Cabinet has:

• Agreed in principle to proceed with the mixed ownership model.
• Agreed that Mighty River Power should be the first company prepared for an IPO, most likely in the third quarter of 2012, subject to market conditions.
• Agreed that decisions about share allocations will be made early next year during the design phase of the IPO.
• Agreed to consult with Maori in early 2012.
• Agreed that legislation will be required to support the mixed ownership programme – including removing the four mixed ownership energy companies – Mighty River Power, Genesis, Meridian and Solid Energy - from the State Owned Enterprises Act.

“Our advice is that Mighty River Power is ready to go to the market.

“We will provide more detailed information on this IPO – including how widespread New Zealand ownership will be achieved - when detailed decisions have been made in early 2012,” Mr English and Mr Ryall said.

“This will include releasing supporting documents when this no longer prejudices the commercial position of the IPO.”

The ministers reiterated the Government has made three clear promises to New Zealanders about mixed ownership companies:

• The Government will retain at least 51 per cent control.
• New Zealanders will be at the front of the queue for shares and ministers expect New Zealand ownership will be around 85-90 per cent.
• No shareholder other than the Government will be able to own more than about 10 per cent.

“The mixed ownership programme involves less than 3 per cent of taxpayers’ total assets of $245 billion, which will grow by another $22 billion over the next four years,” Mr English and Mr Ryall said. “So this is about how we pay for increasing those assets – it’s not about reducing them.

“The alternative is a lot more debt, which would need to be borrowed on nervous global financial markets at a time when many other countries are struggling with too much debt.

“Mixed ownership is a win-win. With about $100 billion sitting in term deposits, along with many billions of dollars more in KiwiSaver funds, other investment funds and iwi investments, New Zealanders are placed strongly to invest in the mixed ownership companies.

“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.

“It will also improve the efficiency of the mixed ownership companies, while the Government retains majority control.”

Treasury background document available at:
www.comu.govt.nz/publications/information-releases/mixed-ownership-model/

MIXED OWNERSHIP PROGRAMME – Qs AND As

Why is Mighty River Power the first Initial Public Offering?
Mighty River Power is well positioned to take to market. It is also big enough to offer a significant volume of shares to the investing public, while the Government retains a majority stake of at least 51 per cent.

What will happen next?
Cabinet has made several decisions that will kick off the process. It has agreed in principle to implement legislation to allow the mixed ownership programme to proceed, and Treasury has been given the go ahead to start advertising for advisors to run the IPO process. Cabinet has also announced the Government will consult with Maori early in 2012. We will make final decisions on timing and other details regarding the Mighty River Power offer early next year.

What legislation will be needed to implement the programme?
Legislation will ensure the Government retains a minimum holding of 51 per cent in all mixed ownership companies and that no other shareholder will be allowed to hold more than around 10 per cent of each company. The four energy companies, Mighty River Power, Genesis, Meridian and Solid Energy will be removed from the State Owned Enterprises Act, and there will be other amendments to implement the mixed ownership programme.

What restrictions have been placed on foreign investors owning these companies?
The Government will always retain at least 51 per cent of the mixed ownership companies on behalf of all New Zealanders. In addition, no other shareholder will be able to buy more than 10 per cent in all cases. No further decisions have been made at this stage, but ministers expect around 85-90 per cent New Zealand ownership of the mixed ownership companies.

What guarantees can you give that foreign investors won’t buy large stakes in these companies after the IPOs?
Firstly, no shareholder – other than the Government – can hold more than 10 per cent of any mixed ownership company. There will be some foreign ownership of these companies, but all the evidence points to the vast bulk of the shares remaining in New Zealand hands. Experience from previous initial public offerings by the Government - including Contact Energy and Auckland International Airport - suggests that widespread and substantial New Zealand ownership can be achieved and maintained across the SOEs. KiwiSaver funds, other investment funds and iwi are all traditionally longer-term investors.

How will you ensure that New Zealanders are at the front of the queue for shares?
The Government will control the allocation of shares and decisions supporting that will be considered early next year.

How confident are you that small New Zealand shareholders will buy shares?
We want small New Zealand investors to buy the vast bulk of the shares and ministers expect that around 85-90 per cent of the mixed ownership shares – including the Government’s controlling stake – will be held by New Zealanders. Many investors lost money in collapsed finance companies and this will be an opportunity to invest in this country's future. Scoping studies show a significant proportion of experienced shareholders are keen to buy.
With about $100 billion sitting in cash deposits, along with many billions of dollars more in KiwiSaver funds, other investment funds and iwi investments, New Zealanders are strongly placed to invest in the mixed ownership companies. Selling shares through IPOs will enable all New Zealanders to apply for shares.

Why are you announcing the next steps before Christmas?
Officials need to appoint advisors and lead managers to start the due diligence process now so they can meet timeframes for the sales programme. The Treasury will be using open, competitive appointment processes which can take some time to complete.

Why are you pressing ahead with the mixed ownership programme when a number of New Zealanders have voiced reservations about it?
The National-led Government has been open and transparent about its proposal to extend the mixed ownership model – used successfully for Air New Zealand for almost a decade – to four state-owned energy companies. We’ve been talking about this issue since January and we said we would put this and other policies to voters at the election, before proceeding if we were re-elected. That’s precisely what we’re now doing.

We believe the mixed ownership programme, which is quite different to the state asset sales of the 1980s and 1990s, will be popular among New Zealand investors, who will be at the front of the queue for shares.

What will you be consulting with Maori about and how long will the process take?
The Government intends to consult with Maori on the mixed ownership model policy early next year - before introducing legislation and the first IPO. It will take place at a series of meetings across the country. Consultation will not cover specific investment opportunities.

Will Maori enjoy any special treatment in the sales process?
The Government has promised New Zealand investors will be at the front of the queue by providing them with priority share allocations. That promise applies to all New Zealand investors – including Maori.

When will New Zealanders be able to buy shares?
The Mighty River Power IPO is most likely to happen in the third quarter of 2012, subject to market conditions. Cabinet will consider that and other details around the structure and timing of the mixed ownership programme in early 2012.

How much do you expect from the Mighty River Power share sale?
We’ve said we expect between $5 billion and $7 billion over three to five years across the whole mixed ownership programme. In terms of Mighty River Power, we want to get a good deal for New Zealand investors – and for New Zealand taxpayers – and that depends on advisors completing work in the New Year, once they are appointed.

Given, the turbulent situation on overseas financial markets, why go ahead with a mixed ownership programme?
The precise timing of individual IPOs will depend on market conditions. More broadly, mixed ownership will help lift New Zealand’s economic performance by increasing the incentive for the SOEs to perform well. It will also reduce the amount of extra debt the Government will need to borrow from foreign lenders to pay for new assets, at a time when global markets are increasingly worried about lending to heavily indebted countries.

Are there examples where mixed ownership already applies?
Yes, there are many examples overseas and several in New Zealand.

• Air New Zealand - the Government owns a majority 74 per cent in Air New Zealand and other investors own the remaining 26 per cent.

• Port of Tauranga - 55 per cent is owned by Environment Bay of Plenty on behalf of the people of the Bay of Plenty, and the rest by other investors. New Zealand investors own more than half of the free-trading shares and their equity is increasing.

• Horizon Energy - 77.3 per cent is owned by the Eastern Bay Energy Trust on behalf of people in the Bay of Plenty, with 13 per cent owned by South Island-based Marlborough Lines and the rest by other investors.

• Vector - 75.1 per cent is owned by the Auckland Energy Consumer Trust on behalf of the company’s electricity customers in Auckland, Manukau and parts of Papakura. The remaining 24.9 per cent is owned by individual shareholders and institutions.

Ongoing spending discipline and higher than expected corporate tax revenue have helped keep the Government's finances on track at a time of heightened global uncertainty, Finance Minister Bill English says.

Government spending, tax revenue and net debt were all slightly lower than expected in the Crown accounts for the four months to 31 October issued today, contributing to a operating deficit before gains and losses of $3.36 billion. The variances - due to timing issues - are expected to reduce in coming months.

"Balancing the books and returning to surplus is one of the most important things the Government can do to build a stronger and more competitive economy," Mr English says.

"The Government is keeping a tight lid on spending and that will need to continue into the foreseeable future so we can return to surplus as quickly as possible in a highly uncertain global environment.

"We are tracking towards the forecast $10.8 billion deficit for the year to 30 June, 2012 – down from over $18 billion last year. This is forecast to more than halve to $4.4 billion next year, before returning to surplus in 2014/15.

"While the outlook for Europe has deteriorated since the Pre-Election Economic and Fiscal Update, the local economy is continuing to grow, with higher than forecast corporate tax revenue.

"But getting back to surplus won't be easy. In many ways, restraint in the public sector has only just started.

"The Government is committed to meeting this challenge. We've taken steps to control spending and get on top of debt, while putting in place policies that build a more competitive economy and more real jobs.

"We will continue with that plan over the next three years," Mr English says.

Agreement on the broad outlines of the Trans-Pacific Partnership (TPP) is an important step towards a high-quality free-trade deal that will benefit New Zealand exporters, Deputy Prime Minister Bill English and Trade Minister Tim Groser say.

Leaders of the nine countries in the Trans-Pacific Partnership (TPP) today agreed on the broad outlines of the free trade agreement, at a meeting hosted by US President Barack Obama in Honolulu on the fringes of the APEC summit. Mr English represented New Zealand on behalf of Prime Minister John Key.

“New Zealand’s trade with the Asia-Pacific region has been growing rapidly in recent years, with Australia and Asia now taking over 60 per cent of our exports,” Mr English says.

“However, our exporters still face barriers in many markets. Reducing those barriers and increasing access for our exports is one of the most important ways we can sell more of our goods to the rest of the world and build a faster growing economy.

“Today’s announcement is an important milestone. It signals the broad outlines of the agreement – including progressive tariff elimination and an end point of full market access – and a strong political commitment from leaders.

“Following Japan’s decision to seek to join the TPP, this creates a real sense of momentum around negotiations. Our message to our negotiators is that we want to convert that momentum into results,” Mr English says.

Leaders endorsed a report from TPP Trade Ministers setting out details of results of the negotiation to date and the next steps.

“The report from trade ministers - endorsed today - represents a great outcome for New Zealand’s interests,” Mr Groser says.

“The bottom line is that leaders are committed to a high-quality agreement – this negotiation is genuinely about free trade and getting trade rules that work for exporters.

“Today’s statements establish an excellent platform to propel the TPP negotiations towards our goal of a high-quality 21st century trade agreement,” Mr Groser says.

The next step will be more detailed negotiations on each of the areas set out in today’s statements. Negotiators will meet again in early December and have been instructed to schedule further negotiating rounds for 2012.

The three documents released today are attached:

• · A statement by the Leaders of the nine TPP countries.
• · A report on the negotiation from TPP Trade Ministers, which Leaders today endorsed.
• · A background paper with additional detail on key features of TPP and content of main chapters or subject areas.

Related documents:

The Government remains committed to sound management of its finances and returning to surplus in 2014/15 as the economy continues to grow, Finance Minister Bill English says.

Tax revenue, Government spending and net debt were all slightly lower than expected in the Crown accounts for the three months to 30 September issued today, but these variances are expected to reduce over coming months.

The lower than forecast tax revenue contributed to a slightly larger than expected operating deficit before gains and losses of $2.48 billion for the three months.

"While the deficit is tracking towards the forecast $10.8 billion for the year to 30 June, 2012 – down from $18 billion last year – this is still too high for comfort, especially in the face of ongoing global economic uncertainty," Mr English says.

"As the Reserve Bank Governor reiterated this morning, many countries remain under stress due to an overhang of private and public debt. He noted New Zealand households and businesses have been helping to reduce our external liabilities, but this has been partially offset by rising public debt.

"That is why the Government is focused on getting back to surplus and keeping net core Crown debt below 30 per cent of GDP.

"The deficit is forecast to more than halve to $4.4 billion next year and the Government is forecast to return to surplus in 2014/15.

"But getting there won't be easy. In many ways restraint in the public sector has only just started and getting back to surplus will require ongoing spending discipline for many years.

"The Government is committed to meeting this challenge. We've taken steps to control spending and get on top of debt, while putting in place policies that build a more competitive economy and more real jobs," Mr English says.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cabinet has approved a package of changes including:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

http://www.national.org.nz/files/2011/Finance_policy.pdf

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Visit the policy at:

http://national.org.nz/PDF_General/Future_Investment_Fund_policy.pdf

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Economic and fiscal data at a glance

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FACT FILE

What is changing?

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

Why wait until 2014?

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

What is the expected cost to the Government?

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

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

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

Why increase voluntary membership?

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

What else is the Government doing to increase national savings?

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

Why have some people not joined KiwiSaver?

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

Why not make KiwiSaver compulsory?

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

What are the next steps?

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

In addition to my video briefing on the economy and the credit rating downgrades, this issue of Focus on Finance covers the Crown's accounts, falling public debt, the rise in the EQC levy,  and my trip to the World Bank board of governors' annual meeting in Washington DC. As always, your comments are welcome.

Continue reading "Focus on Finance No.21"

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Questions and Answers

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

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

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

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

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

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

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

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

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

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

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

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

In this issue of Focus on Finance, I talk about the mixed ownership model the Government is proposing to use in the sale of four energy companies, developments surrounding the cost of the earthquake recovery, the global outlook for finances, releasing Government data to the public - and a few important events coming up this month.

 

Continue reading "Focus on Finance No.20"

The Government today issued more information about its Better Public Services programme, which is focused on delivering better frontline services in areas that matter most to New Zealanders.

The information includes officials’ papers canvassing the need to reduce decision points and clutter in the public service; better sourcing of goods and services; and opportunities to rationalise Crown entities, Finance Minister Bill English and State Services Minister Tony Ryall say.

These topics are being considered by the Better Public Services Advisory Group appointed by the Government earlier this year. This group is releasing further issues papers to generate discussion, starting with best-sourcing and the public sector model.

“As part of its wider programme to build faster economic growth, the Government has made it clear that the public sector – which represents about a quarter of the real economy – needs to play its part,” Mr English says.

“This is not just about considering the structure of individual Crown entities. The Government’s top priority is providing better public services using less money and more innovation. I’m pleased that public servants across New Zealand are working hard to deliver that.”

Mr Ryall says the Government’s public sector programme has three objectives.

“First, we want to set clear priorities, so the public sector is focused on the things that matter most to New Zealanders, including providing high quality, cost-effective and customer-focused frontline services.

“Second, we want high quality services that are modern, responsive, business like, and provide good value for money.

“And finally, we want to reduce waste, ensuring that government administration is as efficient, streamlined and well organised as it can be.”

The first two issues papers and other information on the Government’s public sector programme are available at:

http://www.dpmc.govt.nz/better_public_services

Delivered by Hon Tony Ryall, Minister for State Owned Enterprises, on behalf of Hon Bill English

Good morning.

Recent events on world financial markets make this a particularly interesting time to be addressing you.

I believe we should all get used to the regular outbursts of uncertainty we have seen in recent weeks and months – this is how the world will be, on and off, over the next decade.

Today I’ll cover the world as we see it, how New Zealand is placed in this environment, the challenges we still face and how the Government’s economic plan is addressing them.

I’ll also cover how the Government’s mixed ownership model fits into the Government’s plan to build a more competitive, faster-growing, export-based economy.

The global outlook

The last few weeks have seen a stream of bad economic news from Europe and the United States, as well as Japan and the UK, where they’re suffering from high debt and low growth.

This is a combination of governments having spent more than they earned, particularly over the last decade, and in some cases the bailouts of the financial sector that occurred in 2008.

The only way to deal with excessive debt is to pay it off or write it off. But in these countries debt is growing and shifting around. So the problems will get worse before they get better.

Because it's government debt, finding solutions to stop the growth of this debt is in the hands of the politicians and there are no easy political solutions.

It's not easy to cut pensions, benefits and public services, or to lift taxes.

And it’s not easy to inflate debt away when consumers are so sensitive to price increases. We shouldn’t be surprised that the politicians of Europe and the US are struggling with these giant problems.

We had our own milder version of excessive debt in New Zealand through the 1980s and 1990s. Solving that problem was a long painful process requiring a restructuring of most of the economy.

In fact, it took until 2006 to get net debt back to where it was in 1972 as a proportion of GDP.

So markets are grappling with this new situation and sending us some interesting signals.

World sharemarkets are signalling lower growth, and have mostly fallen 15 to 25 per cent since their highs earlier in the year. But considering how much they had risen, this is not especially unusual.

What is unusual is the plummet in long-term interest rates for those countries still deemed credit worthy. Long-term yields on government bonds in the United States, the UK and most Eurozone countries are below two and a half per cent.

At the same time as interest rates have been dropping sharply, the default premiums built into sovereign interest rates have been widening, to the point where sovereign default risk appears to account for up to half the yield of many stronger nations - and around three-quarters for countries such as Italy and Spain.

So the risk-free rate has dropped significantly – investors are primarily interested in security, to the point where they will accept zero or even negative real returns in exchange for certainty of being repaid.

That puts every country under the microscope. Are their debt levels acceptable? Are there plans to contain debt and get it down? Do the government's policies help or hinder economic growth?

New Zealand's position

So where does New Zealand fit into this picture in 2011?

If I had to sum it up, it would be fair to say that the New Zealand ship is in better shape, and certainly more seaworthy, than it was even three years ago. But at the same time, the global waters have become rougher.

Compared to other countries, New Zealand has come through the recession in reasonably good shape. We did not have a banking collapse, household incomes have continued to grow moderately and unemployment peaked at 7 per cent and is coming down.

Looking ahead we have many opportunities, but also some risks.

Many of our opportunities revolve around our increasing trade with the fast-growing Asia-Pacific region, near record-high commodity prices and our strong fiscal position.

The Government is focused in the longer term on lifting incomes and creating jobs in New Zealand by selling more of our goods and services to our Asia-Pacific neighbours.

We are strongly motivated by this opportunity. It is limited only by our ability to organise our domestic resources to support a stronger export performance.

At the same time, we face two main risks - demand risk and financial market risk.

Both internal and external demand will fluctuate. New Zealand consumers have got the message on debt. The latest credit aggregates show bank lending is barely growing and consumption is flat.

In 2007, New Zealanders spent $1.11 for early dollar they earned. This year will see the first positive household savings rate in 11 years, helped by the lowest interest rates in 45 years.

If consumers stick to a new pattern of saving, the domestic economy will take longer to pick up, but when it does it will have stronger foundations.

And we are affected by the growth prospects of our trading partners

Global uncertainty doesn’t help. If the large Western economies grow more slowly than expected, then demand and prices for our exports could fall.

But we should remember that export prices are the highest they’ve been for 50 years. And this risk may be offset by a declining exchange rate, since there is historically a close relationship between commodity prices and the NZ-US exchange rate.

The second risk for New Zealand is financial market risk. We remain a highly indebted economy. Both the Government and banks need to go to the global financial market regularly to refinance our existing stock of debt, and in the Government’s case, finance still growing debt.

The Government has moved to reduce our vulnerability to these volatile markets, but the job has only just begun.

In late 2008, we were handed a set of forecasts showing deficits in perpetuity, resulting in net Crown debt rising to over 60 per cent of GDP within the projection period and still climbing.

As a result of decisions across our three Budgets, we now expect to be one of only a handful of developed countries back into surplus by 2014/15. Net core Crown debt is expected to peak at below 30 percent of GDP. This is well below western world averages.

Earthquake costs

We’ve also had to absorb costs of the Canterbury earthquakes along the way.

Yesterday we made public estimates from EQC that the cost of its claims will be higher than initially forecast. This simply reflects better estimates of the cost of damage as EQC assesses and processes more claims.

It new estimates made headlines, but they should be put in perspective.

The additional costs to the National Disaster Fund will be around $4 billion. But the Government has a $220 billion balance sheet, and about $70 billion of income a year.

Economic vulnerabilities

As I said before, in today’s economic and fiscal environment, we should get used to ups and downs. Importantly, we are still on track to return to budget surplus in 2014/15 and to keep net Crown debt below 30 per cent of GDP.

The best protection against world shocks is to rebuild capacity within our finances to absorb them. Both government and households have much more to do in this respect.

Our biggest vulnerability remains that we still have high foreign debt, a legacy of excessive household and government consumption and a debt-fuelled property boom.

Indeed, this is the main reason New Zealand remains on negative credit outlook with two of the three major credit rating agencies.

We’ve stressed for some time that problems built up over a long period will take some time to fix. We will remain vulnerable until we reduce this long-term reliance on foreign debt.

As we build a more competitive, export-focused economy, we will need to use our capital as efficiently as possible. In particular, New Zealand needs to reduce its longstanding reliance on foreign debt.

It’s fairly clear what we need to do:

• The Government needs to return to surplus and stabilise its debt at a reasonable level.
• Households need to continue lifting savings, repaying debt and diversifying their investments away from housing.
• The Government also needs to ensure that the $220 billion of assets it holds on behalf of taxpayers are used as efficiently as possible, reducing the need to borrow.

The Government has taken several steps to help achieve this - including the largest tax reform in 25 years, investing heavily in infrastructure, setting a faster path back to budget surplus and making the public sector more efficient.

Extending the mixed ownership model

Another contribution the Government can make to build a more competitive economy is extending the mixed ownership model to four energy SOEs and reducing its shareholding in Air New Zealand, while keeping a majority stake.

I want to talk a little more about that today – and explain why it will be positive for both taxpayers and New Zealand investors if a National-led Government is re-elected in November.

The mixed ownership model is a win-win. New Zealand savers get to invest in good Kiwi companies.

And the Government frees up $5 to $7 billion – about 3 per cent of its current assets – over three to five years to buy new assets like schools, hospitals and ultra-fast broadband, without having to borrow from overseas lenders and increase our debt.

The Government will retain at least 51 per cent control of these five SOEs on behalf of all New Zealanders – the same model used successfully for Air New Zealand for nearly 10 years. And Kiwi investors will be at the front of the queue for shares.

The Government manages $220 billion of assets owned by taxpayers – everything from hospitals, state houses, roads and schools to the NZ Super Fund, electricity companies and shares in Air New Zealand.

And these assets are growing rapidly. Over the next five years, we will increase taxpayers’ assets by about $35 billion - or 16 percent.

This figure is net of depreciation - in gross terms, the Government will acquire around $78 billion of extra assets in the next five years.

So any suggestion the Government is selling the family silver is rubbish.

This is a very large commitment to public investment. It’s more than the entire value of the NZX, and about as much as all of the managed funds owned by New Zealanders.

The $78 billion of new assets will be funded from a wide range of sources. Some, like roads, come from dedicated taxes, and some come from returns on commercial investments. But over a quarter - some $21 billion - will be funded from the Crown through extra borrowing.

We think both the Government and the New Zealand private sector will be better off by having local investment in these assets.

The mixed ownership model will improve the balance sheets of both taxpayers and investors, bring better commercial discipline to the companies concerned, and provide them with easier access to capital to grow.

In fact, the $5 billion to $7 billion mixed ownership programme is pretty modest. As I say, it’s about 3 per cent of all current assets owned by taxpayers, and about one-sixth of all the net new assets the Government will accumulate over the next five years.

New Zealanders at the front of the queue

We have promised that New Zealanders will be at the front of the queue for shares. We would rather pay dividends to New Zealanders than interest on rising debt to foreigners.

Overseas investors will play a role in helping to get a good price for taxpayers. They will also help deliver a robust and liquid market for New Zealanders.

But it's important to remember that these companies will remain firmly - and overwhelmingly - in New Zealand control.

In total, we expect that across the programme New Zealanders will own at least 85 to 90 per cent of these companies - including the Government's cornerstone shareholding.

There are solid reasons for expecting such strong domestic support for these shares. For example:

• New Zealand retail investors currently have $105 billion sitting on the sidelines in term deposits, $108 billion in financial assets and between $100 billion and $150 billion of investment property. This adds up to total investments of over $300 billion, excluding their own homes.
• The 34 registered KiwiSaver providers have about $9 billion invested and will double in size over the next four years.
• New Zealand institutions (excluding KiwiSaver funds) have $59 billion under management.
• Government CFIs (including the NZ Super Fund, ACC and GSF) have almost $40 billion under management.
• Iwi are estimated to have over $10 billion of assets.

So the mixed ownership programme is small compared with the size of the local capital pool.

New Zealanders are also telling us they are hungry for other investment options, particularly with the shine having come off the investment property and finance company sectors.

This has been apparent in the strong domestic demand for corporate bonds. More than $11 billion of non-government debt has been issued over the past two years alone. Many INFINZ members will have participated.

What’s more, lower wholesale interest rates and a reduced demand for highly-geared property reinforce this appetite.

Final arrangements for the Government’s mixed ownership programme will be made next year – after we have taken the policy to the election in November and after scoping studies have been completed. But there are some aspects I can confirm today:

As I’ve mentioned, the Government has already made two important commitments: That it will retain a shareholding of at least 51 per cent in each company, and that New Zealanders will be at the front of the queue for shares.

It’s our clear intention to prioritise New Zealand investors so they will have the first opportunity to buy shares.

We will invite participation from all New Zealand investors. They will include retail investors, Kiwisaver funds, other managed funds, Crown financial institutions such as ACC and the NZ Super Fund, Iwi, community trusts and all others.

We expect most will be long-term shareholders.

In addition, we will ensure the widest possible spread of shareholders. To achieve that, it’s the Government’s intention to impose a maximum shareholding cap on the mixed ownership companies. That cap is most likely to be 10 per cent.

For the reasons I’ve outlined, the Government expects a strong and ongoing demand for shares from New Zealand investors.

Let me repeat, we expect New Zealanders will own at least 85 to 90 per cent of the shares – and quite possibly more, with most being long-term holders.

This is an opportunity for them to diversify their investments away from housing and finance companies and help lift their savings rates.

At the same time, it will free up money for the Government to invest in important assets like hospitals, schools and broadband – without borrowing from foreign lenders.

That has got to be good for the economy.

Conclusion

This is just one policy we will take to New Zealanders at the election to help build a more competitive, faster-growing economy supported by higher savings and less debt.

We’re confident we can build on the good progress we’ve made over the past three years. We’ve come through a number of significant challenges in pretty good shape.

Over the next three years, New Zealand has the opportunity to grow solidly, create more jobs and increase wages. The Government wants to take advantage of that opportunity.

Thank you.

A large and growing pool of New Zealand investment funds will ensure strong local demand for the Government's $5 billion to $7 billion mixed ownership programme, Finance Minister Bill English says.

As a result, ministers expect New Zealanders to own at least 85 to 90 per cent of the companies in the mixed ownership programme, including the Government’s majority shareholding, he said in a speech prepared for delivery at the Institute of Financial Professionals of New Zealand conference in Wellington.

At the same time, the Government will acquire around $78 billion of other assets over the next five years, on top of the $220 billion of assets it currently owns on behalf of taxpayers.

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

“We would rather pay dividends to New Zealanders than interest on rising debt to foreigners.”

The Government will retain at least 51 per cent control of the five SOEs on behalf of all New Zealanders - the same model used successfully for Air New Zealand for nearly 10 years.

“We have also promised that New Zealanders will be at the front of the queue for shares.

“In total, we expect New Zealanders will own at least 85 to 90 per cent of these companies – including the Government’s cornerstone shareholding.”
There are strong reasons for expecting a high New Zealand shareholding, Mr English says:

• New Zealand investors currently have more than $300 billion of investments excluding their own homes, ranging from money sitting in term deposits to financial assets and investment housing.
• The 34 registered KiwiSaver providers have about $9 billion invested and will double in size over the next four years.
• New Zealand institutions (excluding KiwiSaver) have about $59 billion under management.
• Crown financial institutions (including the NZ Super Fund, ACC and GSF) have almost $40 billion under management.
• Iwi are estimated to have over $10 billion of assets.

“So the mixed ownership model, spread over three to five years, is small compared with the size of the local capital pool,” Mr English says.

“New Zealanders are also telling us that they are hungry for other investment options, particularly with the shine having come off the investment property and finance company sectors.”

Final arrangements for the mixed ownership programme will be made next year, after the Government takes the policy to voters in the election.

“But it’s the Government’s intention to impose a maximum shareholding cap on the mixed ownership companies. That cap is most likely to be 10 per cent.”

The Earthquake Commission (EQC) has increased its estimated Canterbury earthquakes liability by about $4 billion to $7.1 billion, Finance Minister Bill English says.

The new estimate follows an actuarial valuation of EQC's liability, based on available field assessments of damage claims. It includes an increase of $2.17 billion from the 22 February earthquake and $1.42 billion from the 13 June earthquakes and other aftershocks, which were not previously included.

"The Government is committed to rebuilding Christchurch and supporting the people of Canterbury," Mr English says. "Today's announcement will not affect homeowners' claims, which EQC will continue to pay in full. And it will not delay rebuilding in Christchurch.

"EQC can meet most of these costs through the Natural Disaster Fund, which held about $6 billion before the first earthquake. The Government, through its guarantee under the Earthquake Commission Act, will meet any shortfall. EQC also has reinsurance in place to help meet the cost of any future events.

"Despite the increased liability, which will have a one-off impact on the Government's operating balance for the 2010/11 year, the Government remains on track to meet Budget forecasts of a return to surplus in 2014/15 and to keep net debt below 30 per cent of GDP," Mr English says.

EQC's initial liability estimates were based on international models for calculating damage from single events. While these hold for the 4 September earthquake, they were not designed to calculate the effects of multiple events.

"Quite clearly the scale of residential damage from the 22 February earthquake has been worse than initially thought, with more claims, more damage on a house-by-house basis and greater land damage than expected.

"For example, it was initially thought 12,000 houses would have more than $100,000 in damage. As EQC has completed more detailed assessments, this number is now estimated to be about 30,000 houses.

"Damage to land was initially estimated at between $300 million and $600 million. This has increased to $1.8 billion."

The increased estimate breaks down as follows:

Budget 2011 – estimated net claims cost	$3.05 b
Inclusion of 13 June earthquakes and other aftershocks	+$1.42 b
22 February earthquake increase	+$2.17 b
Post-earthquakes re-evaluation of ongoing costs	+$0.35 b
4 September earthquake increase	+$0.02 b
Other	+$0.06 b
Mean estimate of net EQC claims cost	$7.07 b

The new estimated liability will be reflected in the 2010/11 Crown accounts, which will be published in October. Current indications suggest the higher EQC liability will be partially offset by higher than forecast tax revenue and lower than forecast costs in other areas.

Combined, these factors are likely to push the operating deficit before gains and losses up to about $18 billion - $1.3 billion higher than the Budget forecast. However these figures have not yet been finalised or audited.

"We need to remember these are still estimates and EQC and the Treasury will continue to periodically revise the expected liability as more claims are completed and more information becomes available.

"At the time of the Budget, Treasury put the total earthquake damage bill – to all property owners and insurers - at $15 billion, or about 8 per cent of GDP, making it the worst natural disaster in recent memory to hit a developed nation – relative to the size of its economy.

"The Government has asked Treasury to update this estimate based on new information available since the Budget," Mr English says.

Questions & Answers

Q. How much has EQC's liability increased?
EQC’s ultimate net cost of claims (the amount it expects to pay over time) has increased to $7.07 billion from the estimate in Budget 2011 of $3.05 billion. This increase can be broken down into:

Budget 2011 – estimated net claims cost	$3.05 b
Inclusion of 13 June earthquakes and other aftershocks	+$1.42 b
22 February increase	+$2.17 b
Post-earthquakes re-evaluation of ongoing EQC costs	+$0.35 b
4 September increase	+$0.02 b
Other	+$0.06 b
Mean estimate of net EQC claims cost	$7.07 b

 

Q. Will the increased estimate affect EQC's ability to pay its claims?
No. This will not affect homeowners' claims in any way and EQC will continue to pay out claims in full. As at 24 August, EQC had paid out $1.41billion for all claims to date, which is about $4 million per day.

Q. Will this new estimate affect the rebuild?
No. The revised estimate will not delay rebuilding in Christchurch and will not affect homeowners' claims, which EQC will continue to pay in full.

Q. Why was EQC's previous estimate so much lower?
The estimates for the 4 September and 22 February quakes were based on international models for calculating damage from single events and were not designed to calculate the effects of multiple events. As data has become available from actual field assessments, it has become clear residential damage from the 22 February earthquake is worse than initially thought, with more claims, more damage on a house-by-house basis and greater land damage than expected. In addition, the previous estimate did not include the 13 June earthquakes and other aftershocks.

Q. What are the main factors behind the increase?
There are two main reasons for the increase. The first is a $2.17 billion increase in the estimated residential damage of the 22 February earthquake from $3.98 billion to $6.15 billion. Because this increase is above EQC's level of reinsurance for the earthquake, which covers the cost of claims between $1.5 billion and $4 billion, EQC bears all of the increase on its own books.

The second reason is the inclusion of the 13 June 2011 earthquakes and other aftershocks. They were not included in the Budget estimate, published in May. Together they add another $1.42 billion to EQC's estimated liability.

Q. What are the implications for the Crown's finances?
EQC's increased liability will have a one-off impact on the Government's operating balance for the 2010/11 year. Despite the higher EQC liability, the Government still expects to return to surplus in 2014/15 and to keep net debt below 30 per cent of GDP. This is because the higher liability will be fully accounted in the 2010/11 accounts and will not affect operating balances in the years beyond.

The full 2010/11 Crown accounts will be published in October. Current indications suggest the higher EQC liability will be partially offset by higher than forecast tax revenue and lower than forecast costs in other areas. Combined, these factors are likely to push the operating deficit before gains and losses up to about $18 billion - $1.3 billion higher than the Budget forecast. However these figures have not yet been finalised or audited.

Q. Can you rule out the figure changing again?
No. These are still estimates based on available assessments and EQC and the Treasury will continue to periodically re-estimate the expected liability as more claims are completed and more information becomes available. EQC won't know the final cost of all the Canterbury earthquakes until all claims have been assessed and settled. EQC is aiming to complete its assessments of buildings and settle all contents claims by the end of December 2011.

Q. Who pays if the Natural Disaster Fund (NDF) is used up?
The Natural Disaster Fund managed by EQC held about $6 billion before the first earthquake on 4 September 2010. Based on the latest estimate the shortfall is $829 million. However due to the expected timing of claims assessments and payments, the eventual shortfall is not expected to exceed $500 million. Under Section 16 of the Earthquake Commission Act 1993, the Government would honour its guarantee if there is a shortfall, but the final form of this payment, if it is required, has not yet been established. In the meantime, this figure will be reflected in the Crown accounts as a small increase in forecast net Crown debt.

Q. Who pays if there is another event?
EQC has renewed its reinsurance, which means EQC has reinsurance for another two events the size of the 4 September earthquake. If the NDF could not cover EQC’s share of costs from a future event, the Government would honour its guarantee under the Earthquake Commission Act.

Q. What does this mean for the overall earthquake damage bill?
At the time of the Budget, Treasury estimated the total cost of damage – to all property owners and insurers – for the 4 September and 22 February earthquakes at about $15 billion, or about 8 per cent of GDP, including $9 billion for residential property damage. The Government has asked Treasury to update this estimate based on new information available since the Budget.

Q. What does this mean for the Government's share of the earthquake damage bill?
In Budget 2011, a six year $5.5 billion Canterbury Earthquake Recovery Fund (CERF) was established to provide certainty for rebuilding Canterbury.
A further $3.3 billion cost was forecast to meet the Government's share of costs, including EQC and ACC costs (a total of $8.8 billion). With rounding, the increased EQC liability takes the Government's total estimated share of earthquake costs to $12.9 billion.

Q. Will the Canterbury Earthquake Recovery Fund be enough to fund the recovery?
The current Canterbury Earthquake Recovery Fund ($5.5 billion) excludes cost associated with meeting EQC's insurance liabilities. The Government is committed to funding its share of rebuilding Canterbury and the fund is still expected to cover those costs.

Q. What audits/checks have been or will be done on this actuarial estimate?
The actuarial estimate and report has been considered by:
• EQC’s internal risk committee
• External auditors (Deloitte) on behalf of the Office of the Auditor General.

Q. What is the Government doing to allay any concerns reinsurers might have about writing cover in New Zealand?
Canterbury Earthquake Recovery Minister Gerry Brownlee will lead a government delegation to London and to the Rendez-Vous de Septembre in Monte-Carlo, Monaco on 10-15 September. Mr Brownlee will give a presentation on the Canterbury earthquakes and meet several major reinsurers including Swiss Re, Gen Re and Munich Re.

Q. What does the new estimate mean for insurance in Christchurch?
Several major insurers are not currently writing new insurance cover in Christchurch as continued seismic uncertainty makes it difficult for them to accurately price risk. This response follows the pattern seen in other countries following a significant natural disaster. However, as the changes to EQC estimates do not fundamentally affect the risk profile of Christchurch, they are unlikely to significantly affect future insurance.

Q. What is the size of this disaster compared to other disasters?
This is New Zealand’s largest natural disaster. EQC has received more than 388,000 claims for the earthquakes since 4 September. The previous biggest event for EQC was the Gisborne earthquake in 2007 with 6224 claims.

The Canterbury earthquakes are likely to rank as the fourth most costly global event for insurers since 1970 after the Northridge earthquake in California in 1994, the 9.0 earthquake and tsunami disaster in Japan in March this year, and the Kobe earthquake in Japan in 1995.

At the time of Budget 2011, Treasury estimated the combined cost of 4 September and 22 February earthquakes to be equivalent to about 8 per cent of New Zealand’s GDP. Damage from the 1995 Kobe earthquake in Japan was just over 2 per cent of Japan’s GDP. Hurricane Katrina in 2005 cost about 1 per cent of US GDP, and March’s Japanese earthquake and tsunami disaster was an estimated 3-5 per cent of Japan’s GDP.
Q. What progress has been made in the earthquake recovery process? Progress so far includes:

• EQC has paid out $1.41 billion on claims to date and completed about 52,000 full assessments since 22 February. It is on track to complete all its full assessments by December 2011. EQC is working towards completing all contents claims by the same deadline.
• A new government department – the Canterbury Earthquake Recovery Authority - has been set up to lead and co-ordinate the recovery.
• A Royal Commission of Inquiry has been established to find answers to why so many people lost their lives on 22 February and is due to provide an interim report in the next few months.
• More than 23,000 emergency repairs have been completed by contractors employed by Fletcher Construction to make homes damaged by the earthquakes safe, sanitary and weather tight.
• More than 10,000 heat pumps or solid fuel burners have been installed or repaired in homes whose primary heating source were damaged by the earthquakes.
• A total of 363 buildings have been demolished in the CBD since 22 February, with 600 demolition contractors working in the CBD each day to bring down the rest of the 1000 estimated buildings that need to be partially or fully demolished.
• A draft recovery plan for the Christchurch central business district has been developed and released for public consultation, and will be submitted to the Government in December 2011 for consideration and approval.

In this edition of Plain English I talk about the effect weather has been having on Southland, my post-Budget survey, what I've been doing in the electorate - and what the Government has been doing on a wide range of fronts since my last update to you.
Continue reading "Plain English: August 2011"

@NZJon Jon Pawley asked:

>>Tell me @HonBillEnglish, how does a low interest rate help savings? #nzpol (Actually, I wont hold me breathe for a response from Mr English)<<

@honbillenglish responds:

They don't. But they are low because NZers are borrowing less, consuming less and saving more, which economy needs. http://bit.ly/mQoPa1

Ask your question! Follow @honbillenglish on Twitter.

Two issues papers released today for public consultation continue the Government’s focus on ensuring fairness in the tax system, Finance Minister Bill English and Revenue Minister Peter Dunne say.

The issues papers, which were announced in Budget 2011, provide options for making the tax system fairer in two areas:

Livestock valuation - this paper presents options for fairer rules covering livestock valuation elections. Mr Dunne says the current rules appear to be too loose, allowing farmers to switch between valuation methods providing an unfair tax advantage.

Mixed use assets - this paper provides options to address unfairness in the tax treatment of assets such as holiday houses used for both private and income-earning purposes.

Mr Dunne says unfairness arises when some owners claim their house is available for rent during the significant periods of the year the house is empty.

“This provides them with a basis for claiming tax deductions for expenses relating to the period the property is empty. Claiming these deductions could be regarded as unfair, particularly if the owner holds the asset primarily for private enjoyment,” Mr Dunne says.

Officials are also working on a third issues paper focusing on the tax and social assistance treatment of salary traded off for other benefits. This will be released separately once policy analysis is complete.

“Tax dollars are needed for a wide range of government services such as health, education, justice, lowering the road toll, reducing family violence, immunisation programmes and conservation,” Mr Dunne says. “Taxes also pay for work in Christchurch on roads, hospitals, schools and emergency recovery.

Mr English says it’s important that everyone pays their fair share of tax.

“By tightening the rules around property investment, aligning the top personal and the trustee tax rates and by ensuring greater fairness in social assistance programmes, Budget 2010 had a strong focus on fairness and integrity of the tax system.

“Today’s announcement continues that focus,” Mr English says.

The closing date for submissions is 30 September 2011. The two issues papers and fact sheet are available on the Inland Revenue policy website at: http://taxpolicy.ird.govt.nz/publications/year/2011
 

Good Morning.

It’s a pleasure to address you today as part of the John Key-led National Party team. You have sent to Parliament competent motivated ministers and a disciplined hard-working caucus. It’s a steady stable team making sensible decisions.

And don’t we need that in these uncertain times.

In the past week we've seen the world's largest economy downgraded, turmoil on international markets and social unrest spreading to the UK.

John Key's Government has provided for New Zealand what New Zealand knows it needs - responsible economic management, strong leadership and stable government.

New Zealanders know what needs to change in this economy and they trust John Key to change it.

As we approach this year's election voters face a stark choice.

They can choose a sensible pragmatic National Party which will take New Zealand forward, or the Labour Party who will take us backwards with more spending, more tax and more borrowing. Those policies choked our economy in good times and they are downright dangerous in bad times.

The global outlook

The last few weeks have seen a stream of bad economic news from Europe and the United States.

I say, get used to it – this is how the world will be, on and off, over the next decade. That is because the underlying problems driving this week’s events are getting worse not better.

Most of the developed world has very high levels of government debt. This is a combination of the huge bailouts of the financial sector that occurred in 2008, and governments spending more than they earned, particularly over the last decade.

Lenders are starting to get worried about whether they will get all their money back. They used to regard governments as a no-risk customer, but this week they have been jolted by the first ever credit downgrade for the US.

That puts every country under the microscope. Are their debt levels acceptable? Are there plans to contain debt and get it down? Do the government's policies help or hinder economic growth?

There are only two ways to deal with excessive debt – pay it off or write it off. Neither is happening in these countries. No amount of shuffling the debt around can hide the fact that in the US and Europe, and to a lesser extent in the UK, debt continues to grow.

Because it's government debt, finding solutions to stop the growth of this debt is in the hands of the politicians, and there are no easy political solutions.

It's not easy to cut pensions, benefits and public services, or to lift taxes. It's no wonder the politicians are struggling, and financial markets are losing faith in them.

We had our own milder version of this problem through the 1980s and 1990s and it was a long painful process. In fact it took until 2006 to get net debt back to where it was in 1972 as a proportion of GDP.

New Zealand's position

So where does New Zealand fit into this sobering picture in 2011?

In terms of the immediate impact, it’s a mixed picture. On the one hand these large economies may grow more slowly than expected and prices for our exports may come down. That isn’t unexpected given export prices are the highest in 50 years.

On the other hand, indebted countries are being sorted into the strong and the weak. The weak are paying higher interest rates on their debt. New Zealand is among the stronger countries that are paying lower interest rates.

So we are well positioned to remain a stable economy with prospects for higher incomes and more jobs.

We have taken a number of measures to make our economy less vulnerable. 

We are two years into a large long-term infrastructure investment programme that will help lift efficiency and productivity. 

In 2010 we put better incentives into the economy through a tax switch that increased taxes on consumption and property investment and cut tax on income from work, savings, investment and exports.

In 2011 we absorbed the costs of the Christchurch earthquake and still managed to put the Government's books on a track to surplus by 2014/15.

At the same time we've cut red tape, raised education standards and continued to reform the public sector, while improving frontline services.

And we've continued to invest more in science and innovation despite a tight budget.

There are signs the economy has now turned a corner. 

It has grown in seven of the last eight quarters and this year it is likely to grow faster than Australia. 

Our exporters are generally profitable despite a high exchange rate. 

New Zealanders have got the message on debt, which is barely growing. 

In 2007 New Zealanders spent $1.11 for early dollar they earned. This year it could be 99 cents for every dollar earned. That would be the first positive household savings rate in 11 years, helped by the lowest interest rates in 45 years.

We have avoided the harsh choices many governments face, because of the 20-year effort through the 1980s and 1990s to reduce government debt and a series of considered decisions by this Government to bring spending under control.

We have avoided the huge costs of banking collapses. Our housing market has drifted down, unemployment peaked at 7 per cent and is dropping, and 43,000 net new jobs were created in the last year.

So we managed to get through the recession in reasonable shape. 

Of course we face risks from global events as the economy begins to pick up. But we also face the best opportunities in a generation.

We borrowed too much of our increased wealth in the last 10 years, and in the next 10 years we will have to earn every dollar of it. 

So it's good news that the opportunity to earn higher incomes and create more jobs is better than it has been for a long time. We need to take that opportunity.

My predecessor Brian Talboys was the Minister of Trade and Agriculture in the 1960s and 1970s. He spent years travelling to Europe to plead for access for our products to markets that did not want them. 

Today's trade ministers will have secured free trade agreements by the end of next year that cover over half the world's population.

In the next decade we will be selling to fast-growing markets who want our products. While the middle class is static or shrinking in our traditional markets, China, India and the rest of the Asia Pacific have a rapidly growing number of affluent consumers.

More countries are joining the China club, and a number of them are markets we haven't properly explored yet, like Indonesia, or Vietnam.

The Food and Agriculture Organisation at the UN has just produced a study showing the world supply of protein is unlikely to expand as fast as demand, and that means stronger prices for New Zealand products.

So our opportunity to grow our incomes by growing our exports is limited only by our ability to organise ourselves to take advantage of it. 

So it's time to shift our focus.

The Government's economic plan

Up until now we have focussed on getting through the recession, dealing with the earthquake and natural disasters, while laying the platform for future economic growth.

Now it is time to look ahead. A re-elected National Government will focus on growing New Zealand’s tradeable sectors and taking more advantage of our connection to the world's fast growing economies, including Australia, so we can lift incomes and create more jobs at home.

We need to build a competitive economy to lift incomes and support success in our export markets.

It's about doing the basics and doing them well.

If we are re-elected National will lock in and extend the policies we initiated in the last three years.

We will build a tax system that allows workers to keep more of their hard-earned income and encourages savings, and channels investment to productive jobs.

We will build an efficient public sector that delivers better services to the public, value to taxpayers and doesn’t crowd out the internationally-competitive parts of the economy.

We will build the infrastructure New Zealand needs, and manage existing infrastructure better to lift productivity and unclog our economic arteries.

We will build on our successful ambitious free-trade agenda to link us into more of the world's fast-growing economies.

We will reorganise government so that New Zealand Inc can support business better to take the opportunities created by our trade agreements.

We will refocus the regulation-making parts of government to help business to be competitive and efficient.

We will insist on standards in our schools to help produce competent citizens and a skilled workforce.

And we will persist with limiting government debt, to keep our interest rates lower for longer and to reduce our reliance on foreign lenders, and to build a buffer against future economic shocks.

The Government has made significant changes in all of these areas since coming into office.

There are three particular areas where we can achieve significant success for New Zealand in another term in office.

Building momentum on savings and investment

It will be particularly important to build on the momentum of more savings, and more productive investment.

Over the last few years, many New Zealanders lost faith in investing their hard-earned savings in the businesses that will grow our economy.

Investors lost $8.5 billion in the finance company melt down – after taking bad advice to invest in unsound businesses.

By the middle of next year, a re-elected National Government will complete the job of re-regulating financial markets from top to bottom, so investors and KiwiSavers know they won't be ripped off.

But New Zealanders also need better opportunities for investment than in shaky finance companies.

So in keeping with our undertakings in the 2008 election, we've said that if re-elected we'll extend the mixed ownership model to four energy SOEs and reduce the Government's stake in Air New Zealand – while retaining majority stakes.

In every case the Government will ensure New Zealanders are at the front of the queue to buy shares.

If we want to rebalance our economy towards savings and exports, we need dynamic investment markets that offer attractive options for savers and enable local businesses to access the capital they need to expand.

Extending the mixed ownership model will provide attractive investment opportunities for Kiwi mums and dads and capital for the Government to reinvest in social infrastructure like schools and hospitals - reducing our borrowing requirements.

That is just one part of the Government's job we can do better.

We will continue to focus on a more efficient public sector and we will get the results you expect for your contribution to the welfare of all New Zealanders.

We can achieve success that’s good for people and good for the economy. For example, in 2008 we took over a dysfunctional and failing ACC. We have turned this performance around and ACC is now proposing cutting levies for households and businesses - keeping half a billion dollars a year in their pockets.

And there is more to come. We've told government chief executives to find $1 billion in savings and we've started looking at which agencies can be merged, or can work more closely together, to reduce costs and improve services.

If we stay on track we can drop ACC levies further, reduce crime rates and prison numbers, lift standards in all schools and give more people better health care – those are results worth fighting an election for.

Finally in a growing economy we will need everyone who can work to be in work. Unemployment among those aged 25 and over is already down to 4.5 per cent, with an ageing population leaving the workforce in increasing numbers.

We've already been busy in the skills area. Youth Guarantee places will rise to 7,500 next year, we have the highest number of core university and polytechnic places ever, we've opened eight trades academies and we are driving better results out of industry training.

We will be working to support as many people as possible into the labour market - skilled migrants, school leavers, and our biggest pool of lost potential, tens of thousands on long term welfare.

The Prime Minister will talk more about those policies tomorrow – better welfare policy is as important for our economy as it is for our community.

Conclusion

In the next few months, in the run-up to the election, we'll release new policies.

They will be policies that press ahead with our well established programme to build faster growth, more jobs and higher incomes.

They will be policies that make our economy and our businesses more competitive.

They will be policies that keep our debt low and support a stable investment environment with relatively low inflation and interest rates.

They will be policies that promote savings and support our exporters to make the most of the opportunities ahead.

And, most of all, they will be policies that give hard-working Kiwis the opportunity to get ahead here in New Zealand.

Thank you.

08 August. Finance Minister Bill English talks about the US economy, the global debt problem, what it means for New Zealand and why our economy is relatively well-placed to weather any shocks in the pipeline.

Deputy Prime Minister Bill English and Maori Affairs Minister Dr Pita Sharples today announced the 12 appointees to the Constitutional Advisory Panel.

The Government confirmed last December that it would conduct a wide-ranging review of New Zealand’s constitutional arrangements – including the size of Parliament, the length of the electoral term, Maori representation, the role of the Treaty of Waitangi and whether New Zealand needs a written constitution.

It was the start of a considered process that would take place over three years.

The Constitutional Advisory Panel is an independent group that will lead public discussion on constitutional issues that are under review and will then report to the Ministers.

The Panel will be co-chaired by Emeritus Professor John Burrows and Sir Tipene O’Regan, of Ngai Tahu. The other members are:

• Peter Chin
• Deborah Coddington
• Hon Dr Michael Cullen
• Hon John Luxton
• Bernice Mene
• Dr Leonie Pihama
• Hinurewa Poutu
• Professor Linda Smith
• Peter Tennent
• Emeritus Professor Ranginui Walker

The Panel will begin work shortly on a plan to inform public debate on New Zealand’s constitutional arrangements.

“The panel has a broad range of skills, including constitutional expertise and experience with community engagement,” Mr English says. “It will lead a forum for New Zealanders to develop and share ideas on constitutional issues, which we expect to be in place in 2012.”

“An important part of the review process will be consultation with Maori, particularly on the place of the Treaty of Waitangi in our constitution,” Dr Sharples says. “The members of this group are well placed to seek out and understand the perspectives of Maori on these important issues.”

The Panel will report to the Ministers in September 2013, identifying areas of broad public consensus and where further work is recommended.

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Biographical information:

Emeritus Professor John Burrows QC (Co-chair): Professor Burrows is currently a Law Commissioner. He has extensive legal expertise and has written a leading text on statute law in New Zealand. He has led or jointly led Law Commission reviews of the Presentation of New Zealand Statute Law, Privacy, the Official Information Act 1982, Tribunals in New Zealand, and Private Schools and the Law.

Sir Tipene O’Regan (Co-chair) (Ngai Tahu): Sir Tipene has extensive academic, governance, Treaty negotiations and Maori leadership experience. From a background in tertiary education he became Ngai Tahu’s chief Treaty claim negotiator. In more recent years he has led debate on developing iwi economic structures and modernising iwi governance models. He is currently the Upoko (traditional head) of one of the 18 constituent regional runanga of Ngai Tahu. Over the past 40 years he has served as a director or trustee of a wide range of commercial and non-profit enterprises in the public, private and Maori sectors.

Deborah Coddington: Ms Coddington is an experienced journalist and author. Ms Coddington was a Member of Parliament from 2002 until 2005.

Peter Chin: Mr Chin is currently a consultant with Webb Farry Lawyers. He has expertise in community engagement and representation (including as a former Mayor of Dunedin), and over 40 years’ legal experience. Mr Chin is a highly respected member of the Chinese community.

Hon Dr Michael Cullen: Dr Cullen is currently the Chairman of NZ Post and Principal Treaty Claims Negotiator for Tuwharetoa iwi. Dr Cullen has experience of machinery of government and Treaty of Waitangi/Crown-Maori relations. Dr Cullen was a long-serving member of Parliament, including as Deputy Prime Minister, Attorney-General, Minister in Charge of Treaty of Waitangi Negotiations, Minister of Finance and Leader of the House.

Hon John Luxton: Mr Luxton is currently an agribusiness entrepreneur, company director and consultant. Mr Luxton has expertise in government, governance, Crown-Maori relations and community connections. He is a former Minister and electorate MP. Mr Luxton has experience in co-management (as co-chair of the Waikato River Authority) and representing farming and other interests alongside Maori interests.

Bernice Mene: Ms Mene is currently a TV presenter on education and netball programmes. She has a strong public profile, project management experience and the ability to connect with the community. Ms Mene has represented New Zealand in netball and is a member of the New Zealand Order of Merit. She is also a qualified teacher and has represented New Zealand at OECD education forums.

Dr Leonie Pihama (Te Atiawa, Nga Mahanga a Tairi, Ngati Mahanga): Dr Pihama is a senior Maori researcher in Maori and Indigenous education with a focus on Kaupapa Maori. She has lectured in policy analysis, Maori women’s issues, and representation of indigenous people, and was the Director of the International Research Institute for Maori and Indigenous Education at the University of Auckland. Dr Pihama is a staunch advocate of Kaupapa Maori, and has also been involved in film and media production, and served on the Maori Television Board during its establishment phase.

Hinurewa Poutu (Ngati Rangi, Te Ati Haunui a Paparangi, Ngati Maniapoto): Ms Poutu is a doctoral student at Massey University and a teacher at Te Kura Kaupapa Maori o Mana Tamariki. She is a graduate of kura kaupapa Maori, with an academic and work record in studying, researching and teaching te reo Maori. Ms Poutu also has journalism experience and has worked as a Maori language media consultant.

Professor Linda Tuhiwai Smith (Ngati Awa, Ngati Porou): Professor Smith is currently Pro Vice-Chancellor (Maori) and a Professor of Education and Maori Development and the University of Waikato. Professor Smith is an internationally renowned author, and authority on Maori and Indigenous research and education. She has worked as a Treaty negotiator for Ngati Porou, and was Deputy Chair of Te Wananga o Awanuiarangi. Professor Smith is also a member of the Marsden Fund Council and the Health Research Council.

Peter Tennent: Mr Tennent is a former Mayor of New Plymouth. He trained as an accountant and spent much of his life as a hotelier and in public life. As Mayor of New Plymouth, he emphasised community involvement and encouraged public engagement. Mr Tennent was nominated for World Mayor in 2010, and judged to be in the top 10 world community leaders.

Emeritus Professor Dr Ranginui Walker (Whakatohea): Dr Walker is a member of the Waitangi Tribunal, and well known Maori author and academic. His groundbreaking book Ka whawhai tonu matou, struggle without end has become a reference text for the history of the modern Maori renaissance. He has organised many Maori leadership conferences on urbanisation, gangs, Maori land, Maori fisheries, Maori educational development and Maori representation in Parliament, and is widely published on Maori anthropology, education and development.

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Frequently asked questions

What constitutional topics will the Constitutional Advisory Panel consider?

Electoral matters:

• The size of Parliament.
• The length of terms of Parliament and whether or not the term should be fixed.
• The size and number of electorates, including the method for calculating size.
• Electoral integrity legislation.
• Cown-Maori relationship matters:
• Maori representation including the Maori Electoral Option, Maori electoral participation and Maori seats in Parliament and local government.
• The role of the Treaty of Waitangi within New Zealand’s constitutional arrangements.
• Other constitutional matters:
• Whether New Zealand should have a written constitution.
• Bill of Rights issues.

How were Constitutional Advisory Panel members selected?
Constitutional Advisory Panel members were selected based on their expertise and specialist skills in areas such as constitutional matters and community relations, and their ability to relate to a wide range of New Zealanders.

When will the public have their say?
The Constitutional Advisory Panel will establish a forum to develop and share ideas on the constitutional topics. It will seek the views of New Zealanders on these topics in 2012 and 2013.

Is the Constitutional Advisory Panel independent of the Government?
Yes, the Constitutional Advisory Panel is an independent group. It will be supported by a Ministry of Justice-led secretariat and will provide regular updates to the responsible Ministers (the Deputy Prime Minister and the Minister of Maori Affairs) and to the Cross-party Reference Group of Members of Parliament.

What will be the outcome of the Constitutional Advisory Panel’s work?
The Constitutional Advisory Panel will deliver a final report to the responsible Ministers (the Deputy Prime Minister and the Minister of Maori Affairs) by the end of September 2013, identifying areas of broad consensus where further work is recommended. Its work should be seen as part of a long conversation about New Zealand’s constitutional arrangements. The responsible Ministers will report to Cabinet by the end of 2013, and the Government will have six months to respond. The Government has acknowledged that constitutional change should not be undertaken lightly and will require either broad cross-party agreement or the majority support of voters at a referendum.

Where can I find more information?
More information on the Consideration of Constitutional Issues, including the Terms of Reference, can be found at: www.beehive.govt.nz and www.justice.govt.nz.

The Government has taken several steps to ensure New Zealand can minimise any fallout from the United States’ ongoing debt problems, Finance Minister Bill English says.

“Despite a compromise deal being reached in Washington, there is no doubt the situation in the United States is serious – both for the US itself and for the global economy,” Mr English says.

“However, New Zealand is relatively better placed than many other countries to manage in what will remain a pretty uncertain global 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.

“Over the next few years, we have an opportunity to build on solid foundations for faster growth and more jobs.

“Our financial system and our economy are both in better shape than a few years ago to manage global market uncertainties. This reflects improvements in market regulations and an economy that is growing, with households, businesses and the Government less dependent on debt.

Since 2008, the Government has:

• Turned back 2008 forecasts of never-ending deficits and soaring debt by setting a path back to budget surplus by 2014/15. As a result, net Crown debt is expected to remain below 30 per cent of GDP.
• Front-loaded its borrowing programme during favourable market conditions, which will cover the Government’s obligations over coming months should markets seize up as they did in late-2008.
• Introduced the biggest reform of the tax system for 25 years, which rewards work and savings, discourages borrowing and consumption and significantly tightens tax rules on property speculation.
• Overhauled capital market regulations and established the Financial Markets Authority, giving investors confidence in market rules and enforcement.
• Brought non–bank deposit takers under Reserve Bank supervision, with minimum capital adequacy and credit rating requirements.

In addition, the Reserve Bank has:

• Introduced new core funding requirements for banks, which require them to have 70 per cent of their funding from stable sources such as retail deposits and long-term wholesale funding.
• Ensured that in another financial crisis, the Bank can supply temporary liquidity to sound institutions.

“Having cushioned New Zealanders from the recession, we have taken responsible decisions to restrict the build up in government debt, get spending under control and put the Government’s finances in order,” Mr English says.

“We are also building solid foundations for faster growth and more jobs based on savings, exports and productive investment. The Treasury forecasts the economy will grow by an average 3 per cent a year over the next four years and create 170,000 new jobs.

“The high Kiwi dollar is undoubtedly a headwind for New Zealand exporters – reflecting weakness in the US dollar as well as a perception in financial markets that New Zealand remains a safe place to invest.

“It means we need to do everything else we can to build on the resilience and higher business confidence we’re seeing. That includes keeping on top of debt and building a faster-growing economy.”

Original question: From Lindsay McClean (@Kobe24888 on Twitter):  Hi Bill Do you intend to reduce the GST rate back to 12.5% or lower when circumstances allow?

Response: Q&A with @Kobe248888 No. We put up GST and cut income tax to encourage NZers to spend less and earn and save more. More info: http://bit.ly/rk32IZ

If you're on Twitter, ask your questions!

Finance Minister Bill English today welcomed a largely positive review of the Government Superannuation Fund Authority (GSFA).

The independent review, which is required every five years, was carried out by JANA Investment Advisers and tabled in Parliament today.

It is the second review since the GSFA was set up in 2001 to administer the Government Superannuation Fund (GSF), which manages superannuation entitlements for about 68,000 current and former civil servants.

"The Government Superannuation Fund has $3.3 billion invested, so it makes up a significant part of the Crown’s balance sheet. It is important those assets are well managed," Mr English says.

"The reviewers found the GSFA meets best practice in all essential areas, has effective board and management oversight, appropriate policies and practices, strong risk management and effective decision making.

"This is reflected in recent GSF results which show it achieved its performance benchmark for five-year returns.

"The review identified some opportunities to improve policies and practices, particularly around the level of information provided to the GSFA board on investments. The review notes these recommendations should be seen in the context of an overall positive report card.

"The Government will discuss these recommendations with the board," Mr English says.

The review is available at:
www.treasury.govt.nz/publications/reviews-consultation/gsfa

The Government is introducing legislation to further tighten the rules for non-bank deposit takers (NBDTs) – another step in lifting investor confidence in our financial institutions, Finance Minister Bill English says.

The Non-Bank Deposit Takers Bill introduces licensing requirements and strengthens the Reserve Bank's powers, completing a new regulatory regime for NBDTs. It will be introduced to Parliament next week.

"From 2006, deposits of about $8.6 billion were put at risk by finance industry failures," Mr English says. "A key focus of this Government has been supporting measures to ensure the right protections are in place to lift investor confidence.

"Last year we implemented the first stage of prudential regulation for non-bank deposit takers – bringing in rules around credit ratings, risk management, governance, capital, related party exposures, and liquidity.  

"This bill completes that regulation. It gives the Reserve Bank the power to remove directors and issue directions in certain circumstances."

The bill will require NBDT directors to notify the Reserve Bank if a director or senior officer triggers new prescribed suitability criteria. The Bank will have the power to remove those individuals.

The bill is expected to become fully effective on 1 June 2013, after a one-year transition period to enable existing NBDTs to meet the new licensing rules.

"This is part of a suite of measures designed to lift investor confidence in our finance sector and capital markets - we've established the Financial Markets Authority, put in place a new regime for financial advisers, required licensing of trustees and auditors and strengthened disclosure requirements.

"We've also outlined our plans to extend the mixed ownership model to some state-owned enterprises to further lift confidence and invigorate our markets by providing fresh opportunities for Kiwi investors," Mr English says.

In this issue of Focus on Finance, I talk about emerging signs of confidence in the economy, gains in the infrastructure build-out, my meeting with Australian Deputy Prime Minister and Treasurer Wayne Swan, and early signs of progress in reining in the deficit.

 

Continue reading "July: Economic Growth Picking Up Pace"

Acting Prime Minister Bill English has condemned the twin attacks that are reported to have killed at least 80 people in Norway and left many more injured.

“I’m shocked and saddened at the news of the bombing and shootings,” Mr English says. “New Zealand joins with other countries in condemning these attacks on innocent people. Our thoughts and condolences are with the people of Norway at this time.”

A bomb blast ripped through the government district of central Oslo earlier today and a gunman later opened fire on young people at a youth camp on a nearby island.

“At this stage, there are no indications that any New Zealanders have been caught up in either incident. There are 61 New Zealanders registered as being in Norway and our embassy in The Hague, which is accredited to Norway, is in the process of making contact with them to confirm their wellbeing.

“In the meantime, we advise them to follow instructions issued by the local authorities and exercise a high degree of security awareness at this time,” Mr English says.

July 2011. Finance Minister Bill English talks about the "lifting sense of confidence" that's developing in the business community, the remarkable growth over the last quarter, and evidence of genuine resilience - particularly in the greater Christchurch region.

Finance Minister Bill English will attend the Pacific Island Forum economic ministers’ meeting next week in Apia, Samoa.

The meeting is expected to focus on how to increase growth and broaden economic activity in the region.

"New Zealand places huge importance on the region's continued growth and development," Mr English says.

"I'm very keen to hear other ministers' views on how we can lift sustainable economic growth in the region, ahead of the Pacific Islands Forum in Auckland in September.

"Stronger growth raises living standards and supports stability. We want to ensure the forum meeting in Auckland helps achieve that.

"I will also be highlighting the opportunity the Rugby World Cup presents for Pacific businesses and for the region to showcase itself to the world," Mr English says.

Ministers are also likely to discuss how to improve public finance management, development co-ordination and revenue collection across the region.

The meeting runs from 19-21 July.

Just as the economy is gaining momentum, the last thing New Zealand needs is more taxes and more debt, Finance Minister Bill English says.

“The economy is really gathering momentum, as we saw in the encouraging GDP data today showing the economy grew significantly faster than expected in the March quarter despite the earthquake,” he says. “More taxes and more debt under Labour would put that at risk.

“New Zealanders have a clear choice: Labour wants to take New Zealand backwards with more taxes, more spending and more debt. National will take the country forward by growing the economy, getting back to surplus by 2014/15 and repaying debt.

“Labour has clearly learned nothing from its failed policies of the past. Having left New Zealand with forecasts of ever-rising debt and permanent deficits when he was kicked out of office in 2008, Phil Goff now wants to go back and do the same all over again.

“After making lavish spending promises over the past two years, it’s had to come up with a hodge-podge tax grab that will be good only for the armies of bureaucrats and tax accountants needed to administer it.

“Even on their numbers - and with no accounting for their spending promises - Labour would borrow more every year until 2018/19.

“It would also have six income tax rates, a GST that applies to some things but not others, a big gap between the company rate and the top tax rate and a capital gains tax on productive industries with a maze of exemptions that raises virtually no revenue in the first few years. All of this would encourage tax avoidance.

“Instead of more taxes, New Zealand needs more taxpayers. Instead of growing the Government, we need to grow the economy,” Mr English says.

Considerable progress has been made in further strengthening trans-Tasman ties, New Zealand Deputy Prime Minister and Finance Minister Bill English and Australian Deputy Prime Minister and Treasurer Wayne Swan said.

After talks in Wellington today, the ministers released a stock take 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.

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.

The stock take shows the important progress made in converging accounting and financial reporting standards, aligning regulatory regimes, and coordinating the enforcement of consumer laws.

Moving towards a seamless trans-Tasman economy will deliver benefits to consumers and businesses in both countries.

The ministers shared updates on their respective economies, focusing on domestic developments and how international trends are impacting on economic growth. 

They also discussed how their respective economies are recovering from recent natural disasters: the Canterbury earthquakes and flooding and cyclones in Queensland.

The ministers met Climate Change Minister Nick Smith to discuss climate change policy and the recent announcement of Australia’s Carbon Pricing Mechanism. This included how the two schemes might be integrated, with ministers noting that a senior officials’ working group on the potential linking of the two mechanisms will progress the issue. 

The ministers updated each other on the progress of implementing arrangements between the two countries on trans-Tasman retirement savings portability. Australia will continue to work towards enacting the legislation necessary for the new regime and will work closely with New Zealand officials to finalise the establishment of the scheme.

The talks concluded with a discussion with a small group of business leaders, where they shared views on the future direction the trans-Tasman relationship. 

To view very large chart outlining: Progress of Single Economic Market Outcomes Proposals announced by the Australian and New Zealand Prime Ministers on 20 August 2009, click here