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Government's Fiscal Management To Pay Dividends

Tuesday 18th December 2007

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Under the Labour-led government the New Zealand economy has enjoyed the longest period of sustained growth in more than a generation, finance minister Michael Cullen said today.

Commenting on the release of Treasury's Half Year Economic and Fiscal Update (HYEFU), Cullen said the government's responsible fiscal management has prepared the country for our future challenges and will pay dividends in the years ahead.

The HYEFU includes a substantial upward revision to revenue forecasts, which will enable personal tax cuts to be delivered in Budget 2008.

"Over the past eight years the New Zealand economy has grown faster than the EU, the UK, the US, the OECD average, and slightly faster than Australia," Cullen said. "Over that time we have seen average household incomes rise by 25% in real terms, our unemployment rate more than halve, over 350,000 jobs created, and child poverty fall dramatically.

"But the government has been focused on making sure these good times are not one-offs. We have implemented a responsible fiscal policy focused on debt reduction and making investments that will prepare New Zealand for future challenges.

"Treasury's update today confirms just how successful we have been. Gross Sovereign Issued Debt (excluding settlement cash) now stands at less than 20% of GDP, down from 35% eight years ago. When the New Zealand Superannuation Fund is included, the government is in a positive net debt position.

"The economy, which has grown by 29% in real terms since 1999, is expected to grow by 3% this financial year, with growth of between 2-3% projected for the years ahead.

"However, uncertainties do exist. The long-term effects of the global credit crunch are still unknown, the value of the New Zealand Dollar remains volatile, and inflationary pressures are still of concern. This means that now is not the time for a change in fiscal policy that would see us take on more debt, leaving New Zealand less in charge of its economic direction and more vulnerable to economic shocks.

"As signalled by the Prime Minister and myself last month, Treasury has significantly changed their ongoing revenue forecasts. With Budget allocations unchanged, we would be forecasting ongoing and structural cash surpluses. This is out of line with our fiscal strategy and would lead to unnecessarily high operating balances.

"The government has responded to this revision by increasing the Budget 2008 Capital Allowance and introducing a contingency for a personal tax revenue reduction initiative of $1.5 billion. This figure is very soft as no decisions have been taken on the timing, size, shape, or scope of our personal tax cuts.

"I can say, however, that the Labour-led government's personal tax cuts will meet the four tests that I have previously outlined.

"We will cut personal taxes:

* Without borrowing to do so
* Without cutting services
* Without exacerbating inflationary pressures
* Without creating greater inequalities in our society

"The Labour-led government has focused on building an economy that is not only stronger, but is fairer as well. Our personal tax initiative will be an extension of this work and will be a dividend to New Zealanders who have driven the longest sustained period of economic growth in generations.

"But what today's update shows is that the government's strategy of responsible fiscal management coupled with strong investments in infrastructure and public services, has been the right mix for a strong and fair New Zealand economy.

"We are now positioned for a significant phase of economic transformation, centred on making the most of sustainability and seizing the opportunities presented by globalisation.

"This is not a time to cash-out on our economic success. It is a time to build on our achievements and raise our sights yet again."

For more of the week's top news stories for financial advisers. Visit www.goodreturns.co.nz


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