Thank you for the invitation to speak to you today, and to share with you some of the Government’s thinking leading into this year’s budget.
This will be my fourth time delivering the annual Budget for the Government, though the events of the past year have thrown out that calculation. As we grappled with COVID 19 last year the government produced what amounted to three Budgets, so by my count I am now up to six.
What strikes me though in terms of being here to speak to you about Budget 2021 is not that the routine is growing old, but rather the fact that is it an achievement for us to have returned to the traditional landmarks of the political year.
In many places around the world, budgets and other government announcements are taking place online, in socially distanced Parliaments or in environments of third or fourth wave of COVID outbreaks. In that sense, a degree of normality is something that we have fought hard for. I do understand most people are excited by things other than the Budget. But it wasn’t that long ago that “the things that we normally do at this time of year” was more of a nostalgic statement, rather than a statement of what we are actually doing.
Budget 2021 will still very much be a ‘COVID’ budget, both in the sense that we are still dealing with the ongoing effects of COVID-19, and that the pandemic still looms large over the global environment in which New Zealand operates.
Our three core goals for this term of government are continuing to keep New Zealanders safe from COVID-19, accelerating our recovery and taking on the foundational challenges in our economy and society, in particular housing affordability, climate change and child wellbeing.
Without doubt the Government’s first and foremost role is to protect the health our people. Our investments in keeping our border secure and in rolling out the vaccine programme are both substantial and necessary. Our goal is to have every New Zealander over the age of 16 vaccinated before the end of the year. For free. This will in turn open up more opportunities to connect with the world, building on the opening of the trans-Tasman bubble and travel with the Cook Islands. We will continue to do this in a planned and careful manner, always putting the safety of our people first.
We also recognise that the economic impacts of COVID-19 are still being felt. As third and fourth waves move around the world every forecast includes the words “uncertainty” and “volatility”. Supply chain issues are affecting businesses here and across the world, and are likely to continue for some time to come.
We also know that particular sectors and regions in New Zealand remain especially exposed. Last week Minister Stuart Nash announced the next phase in our support for the Tourism sector with a further $200 million dedicated to our hardest hit regions and to rebuilding the industry overall to find a sustainable future.
But as well as being a COVID Budget, Budget 2021 will also be a recovery and wellbeing budget. I heard someone say the other day that the Government talks less about wellbeing than it once did. I disagree. What I actually think is happening is that the wellbeing approach is going from something that is quite novel, to something that is firmly embedded within the day-to-day decision-making of the Government.
One of the changes that we have already made to the Public Finance Act is that the Minister of Finance must set out the wellbeing objectives that will guide the Government’s Budget decisions. For Budget 2021, those objectives are:
Securing a Just Transition as we shift to a low-emissions economy
Lifting productivity and enabling all New Zealanders to benefit from the Future of Work
Lifting Māori and Pacific incomes, skills and opportunities,
Reducing child poverty and improving child wellbeing, and
Supporting Physical and Mental Wellbeing for all New Zealanders and keeping COVID-19 out of our communities.
I would like to mention one of those objectives in particular – improving economic and social outcomes within the Māori and Pacific communities. As detailed in Te Ohanga Māori, the report recently released by the Reserve Bank and BERL, the Māori economy has seen some remarkable developments in the last few years. In 2018 the Māori asset base totalled $68.7b, up from $42.6b in 2013. The Māori population grew by 180,000 in the same period. The inclusion of Māori and Pacific outcomes as one of the wellbeing outcomes, and the creation of entities such as the Maori Health Authority are a clear sign that the Government is committed to ensuring that we have a partnership with Māori and Pacific peoples that maximises the opportunity to lead and benefit from the economic recovery.
I also want to note a couple of ways in which we are further embedding wellbeing into our Budget process. For this Budget there are three criteria that were considered when assessing initiatives: the contribution of the initiatives to the budget priorities; the implementation readiness of the initiative and its value for money. Value for money assessments require that initiatives contribute to the Living Standards Framework wellbeing domains, as well as the wellbeing objectives that are set out in the Budget Policy Statement.
An innovation for Budget 2021 is the work that Treasury has been doing to incorporate a te ao Māori perspective into the budget process through a framework called He Ara Waiora.
This is an important development. Although the Living Standards Framework draws heavily from leading international efforts such as the OECD’s Better Life Index, we think we can do more to ensure that our approach is distinct to our own place and our own culture.
For Budget 2021 alignment to the He Ara Waiora concepts and principles were considered, not just for the initiatives that are focused on Māori, but at a much broader level. This is a new development, and one that we want to get right before we embed it further in decision-making in the budget process, but it is my intention that future Budgets will see our own Aotearoa New Zealand version of wellbeing take shape.
Though our wellbeing approach continues to shape our approach, Budget 2021 is quite clearly going to be defined by the ongoing challenges that New Zealand and the global economy is still grappling with as a result of COVID-19 and our recovery from it.
We now have enough distance from the most direct economic effects of COVID 19 during 2020 to draw some reasonably firm conclusions. In the face of a 1-in-100 year shock, the New Zealand economy showed itself to be remarkably resilient.
New Zealand’s success has been recognised, not just in how we have handled the virus, but also in our economic response. Standard and Poors gave New Zealand the first ratings upgrade of any economy since the pandemic began and the first for New Zealand since 2003. And in the last couple of weeks Moody’s reported on the New Zealand economy, maintaining our AAA rating and noting our “very strong institutions and policy effectiveness”, along with our “robust fiscal position when compared with its peers”.
I would put the resilience of the New Zealand economy down to a number of measures, including the remarkable effort of New Zealanders to make our public health response one of the most effective in the world.
There were no costless decisions in our response to COVID-19. With hindsight there are many views as to what we could have done differently. But I stand by our approach. We moved swiftly to save lives and livelihoods. Programmes like the wage subsidy scheme saved jobs and businesses and we set ourselves up to build back better. It was expensive, it was not perfect, but it has given us a head start we are determined to follow through on.
Recently released data, while generally confirming that the country is headed in the right direction, have also demonstrated that we should expect ongoing volatility as New Zealand bounces back from the effects of COVID-19.
In two consecutive quarters, the unemployment rate has surprised observers by falling, most recently to 4.7 percent in the March quarter 2021. The health of the labour market compares very favourably to 5.9 percent in Australia, 6.2 percent in the United States and 8.4 percent in Canada. The OECD average is 6.6 percent.
At the same time, we have seen GDP figures move around quite a bit: a strong recovery in the September quarter 2020, follow by a small decline in the December quarter 2020. Many observers are expecting continued turbulence in the economy, even if the overall direction is positive.
Despite the success in avoiding some of the worst predicted outcomes for the economy, COVID-19 has still come at a financial and social cost that has been borne unevenly within society. Sectors such as tourism, hospitality and international education have borne the brunt of the pandemic. And while headline employment outcomes have been relatively positive, there has been a disproportionate impact on women, Maori and Pacific workers and young people within the labour market.
We are still in extremely uncertain times, and we have seen continued volatility in both our own outcomes, and within the global environment.
Recent IMF growth forecasts have largely confirmed what we have known for some time. The global economy is expected to bounce-back more strongly from COVID-19 than initially feared – however that bounce-back is uneven both between countries and between groups within countries. Uncertainty remains high, and though there is greater optimism internationally that countries can see the other side of this crisis, our view is very much one of ongoing caution.
There is a clear scenario in sight for the global economy to bounce back through the rollout of vaccines. However, there are also many ways in which different strands of this story could go wrong. As the Reserve Bank Monetary Policy Committee noted in their most recent Financial Stability Report: “New Zealand’s economic prospects ultimately depend on the global containment of the pandemic and on the recovery of trading-partner economies.”
In recent weeks I have had the opportunity to discuss these issues with my counterparts as Finance Minister in the United States, Australia and the United Kingdom. Despite the policy differences between our countries and (for some) the party political differences in terms of who is in power, there was a strong consensus that ongoing fiscal support continues to be necessary and a common focus around the digital table on getting unemployment rates back to or below their pre-crisis levels. Our own Reserve Bank noted last month that short term economic data continues to be highly variable, and that stimulus is still required as we move through our recovery.
So, in light of all of this there is an important balance to be struck in Budget 2021. We need to continue to be careful with our management of the economy, while also providing stimulus to accelerate the recovery and to make investments where they are needed the most.
Approach to Budget 2021
As part of this balanced approach it is important to recognise that not all of our manifesto commitments will be able to be funded within one budget. Similarly, the long standing challenges I mentioned earlier- child poverty, housing and climate change – are all complex issues that require sustained investment to address.
I think it is helpful to view the three Budgets that I will deliver this term as a package to achieve our goals.
As I have indicated, the outlook is highly uncertain, and we will need to continue our approach of providing support to the economy for some time to come.
The way we do so is going to be guided by two principles. The first is that where we provide increased spending, it will be directed toward where the need is greatest.
In this context I want to say something about the guidance issued last week by the Public Service Commission to Chief Executives within the public sector on the next round of pay negotiations. This guidance has a focus on the 25 percent of public sector employees who are on $60,000 a year or less. The guidance breaks down three categories for public sector pay, “lift” (those at $60,000 or below), “adjust” (those between $60 and $100,000) and “hold” (those above $100,000). It is important to note that this is not as has been reported, a pay freeze. Pay for public servants such as teachers, nurses and police officers will continue to increase as they move through the pay bands we have previously agreed, pay equity discussions continue and there is still a collective bargaining negotiation to go through.
In recent weeks we have also proceeded with the planned increase of the minimum wage to $20 per hour, introduced legislation for increased sick leave provisions and we have announced the process for implementation of fair pay agreements to set minimum standards of pay and conditions across industries or occupations.
All of these steps are designed to ensure that we address inequality and so that those on the lowest incomes do not fall further behind those at the top, as we have seen happen in previous economic downturns.
The second principle that will guide our approach to fiscal support is that spending needs to be effective in both securing the economic recovery, and in shaping the type of recovery that we as a country want. Though it is important for us to get back to (or below) pre-COVID levels of unemployment, the pre-COVID economy was not perfect. We don’t want the economic recovery simply to restore aspects of an economy that are unproductive, unsustainable and unfair. This means on-going investment in infrastructure, skills, research and innovation, expanding export markets and building sustainable industries that will grow high paying jobs.
There are, of course, other approaches that Governments could take toward fiscal management.
I have said in the past that this Government will not implement austerity measures in order to try to reduce our levels of debt before the recovery is secure. In my view, the record of such policies is clear. We have seen internationally the toll that cuts to social services take on the most vulnerable in society, and how social capital can be eroded by a country attempting to cut its way to some particular numerical goal that is divorced from the economic realities of that country. Our high levels of social capital are among our most valuable assets, and it is a large part of the reason why we were able to respond to COVID-19 as a country as well as we did.
Our better than expected economic recovery does provide us with more options. There will be a careful balance here too. There is a bit more space in our operating and capital allowances to support the recovery in line with the approach that I have outlined today – focused on the areas of where we can accelerate progress and in tackling our long term challenges.
At the same time there is some more scope to keep a lid on debt and look towards a faster reduction in that debt once the recovery is secure. In our view, an investment-focused recovery that supports all New Zealanders is the way to ensure that our finances remain sustainable. It is also the way in which the Government will continue to tackle the long-standing issues that we were elected to address.
So in conclusion, Budget 2021 will still be a “COVID Budget” but also a recovery and wellbeing Budget. It is exactly that wellbeing approach that has put us in such a strong position compared to many other countries around the world. A balanced approach that will see us build on our head start, secure our recovery and tackle our long standing challenges. I look forward to sharing it with you next week.