Today we are announcing the framework that will guide our approach to managing the economy if we are given the honour of leading a government after the September election. These rules give a clear direction to New Zealanders that we will balance our commitment to investing in critical areas with responsible stewardship of the economy on their behalf.
Before taking you through the detail of the rules, it is worth putting them in the context of Labour’s approach to the economy.
My and Labour's goal for the New Zealand economy can best be summed up in two words – “shared prosperity”. A focus on the high level indicators Andrew mentioned earlier not only gives a false impression of the state of the economy. It falls into a trap of seeing the economy as an end in itself. It is not - it is in fact the means by which we deliver a high quality of life to our people. Losing sight of this can have significant consequences. Brexit and the rise of Donald Trump are only possible when people's fear and belief that they do not matter in the economy take hold. Democracies rely on people believing that they have a fair shot at success. If we leave people behind we fail ourselves socially and economically. If we fail to reduce inequality we sell our whole country short.
Shared prosperity means focusing our economic approach on giving every New Zealander opportunity and security. We will be relentless in getting the basics right - secure and healthy housing, a world class education system that is preparing young people for an uncertain and changing world. A health system that not only is there for us when we are sick, but keeps us well.
It also means being an active partner in the economy. Our Future of Work Commission report has highlighted that we need the government alongside business and workers creating a sustainable and adaptable economy. We need to be looking to a just transition to a low carbon economy. To build investment in new research, technology, and innovation to add value. To supporting decent work all across New Zealand. To continually build the skills and knowledge of our workforce, to improve our labour productivity that is seeing the gap in ways between Australia and New Zealand continue to grow.
Alongside all of this, as an alternative government we must give New Zealanders certainty and confidence about our approach. New Zealanders want us to be ambitious for them, their children and grandchildren's future. They also want us to be responsible and careful with the overall economy. That is our commitment and that is what drives today's announcement.
Labour has the track record to back up our commitment to these rules. Sometimes when I hear people talk about fiscal responsibility it is as if it was invented by the current government. The last Labour government delivered to New Zealand nine surpluses in a row. We reduced net debt to close to zero, while having the second lowest unemployment in the OECD. And we did that while delivering flagship social programmes such as Working For Families, 20 hours free early childhood education and Kiwisaver.
Today we seek to build on that record. The circumstances that we will inherit in September are different, but the principles remain the same. We can deliver to New Zealand both a clear programme for shared prosperity, and the responsible fiscal management to go with it.
In fact the two are interdependent. If we fail to reduce debt, put money aside for our long term Investments such as the Super Fund, or control government expenditure, it is the most vulnerable in our community who will suffer the most.
So, to the rules themselves. They are designed to be read together – and no one rule should be cherry picked so that it becomes more important than another. Both parties have agreed to deliver all of the parts of this framework in office.
The rules together to form the fiscal policy parameters that we will operate within. They are not detailed policy positions. Each party has their own policy positions, and will campaign hard on them. That is the reality of an MMP environment. If we are in a position to form a government there will be discussions between partner parties about the detail of policy priorities. What we can say with confidence is that both the rules themselves and the process we have used to develop them show the strength of our working relationship. This relationship will stand us in good stead in any negotiations.
Let me know work through each of the rules in turn.
1. The Government will deliver a sustainable operating surplus across an economic cycle.
An operating, or to use the technical phrase OBEGAL, surplus indicates the government is financially disciplined and building resilience to withstand and adapt to unforeseen events.
National have presided over large OBEGAL deficits whilst in office – and in recent years they have created surpluses by running down expenditure in key areas. That is not a sustainable surplus.
As with the last time Labour was in government, our expectation is to be in surplus every year. However as the current government has discovered a significant natural event or a major economic shock or crisis can derail that. Our commitment is that across an economic cycle we will generate a sustainable surplus. The independent body that we will establish to monitor and assess the rules will help define what constitutes an economic cycle.
By a sustainable surplus we mean that our surpluses will exist once our policy objectives have been met, and we will not be artificially generated by underfunding key public services. There is no point in crowing about a multi-billion dollar surplus when people are living in cars and garages. It is possible, however, to balance the books and put aside something for a rainy day.
2. The Government will reduce the level of Net Core Crown Debt to 20% of GDP within five years of taking office.
To give future generations more options, reducing government debt has to be a priority. By setting a target, we will be able to make responsible debt reductions and invest in housing and infrastructure that strengthen our country and prepare us for future challenges.
In office, National have delivered the largest increase in public debt ever. Core Crown Debt has now reached $65bn – its highest dollar figure ever. As a percentage of GDP it now sits at 24.3%. No one denies that in the face of the Canterbury earthquakes and the Global Financial Crisis that there was a need to increase borrowing, but debt has kept growing and having a clear plan to reduce it is essential.
We will ensure that the government controls its investment and its expenditure to make sure that we control our debt. We will deliver a lower level of debt over a pragmatic timetable, to balance the need to deal with the infrastructure deficit of the country, and the need to make sure that we do not leave future generations with a bigger debt. In short, we will build for the future without leaving the future the bill.
3. The Government will prioritise investments to address the long-term financial and sustainability challenges facing New Zealand.
The government will prioritise responsible investments that enhance the long term wellbeing of New Zealanders - such as restarting contributions to the Super Fund. In addition we will invest in infrastructure to support our growing population, and reduce the long term fiscal and economic risks of climate change.
National have ensured that it will be future taxpayers who are facing the costs of the infrastructure deficit that they have left behind. The New Zealand Super fund is now more than $20bn behind where it would be if contributions had been continued by this government. We are committed to re-starting contributions immediately. We will announce the level of our first contribution once we have seen the Budget numbers in May.
This rule signals that the first priority for our investment will be in those areas that will promote long term fiscal sustainability. The first use of any new discretionary expenditure is to focus on programmes that will reduce liabilities that the Crown faces in future. This makes sense. Spending on primary health saves spending on emergency health. Spending on social housing saves spending on emergency housing in motels and hostels. Sensible investments actually save money for taxpayers.
4. The Government will take a prudent approach to ensure expenditure is phased, controlled, and directed to maximise its benefits. The government will maintain its expenditure to within the recent historical range of spending to GDP ratio.
There has been some variation in government spending as a percentage of GDP. During the global financial crisis under the current National government, core crown spending rose to 34% of GDP. Under the last Labour government it fell as low as 28.6%. Today it sits at 29.3%.
On average for the last 20 years, Core Crown spending has been around 30% of GDP and we will manage our expenditure carefully to continue this trend.
We do not shy away from the importance of quality spending by the government to improve the lives of New Zealanders. We are setting out transformative policies in areas such as housing, health and education. This requires investment and is what progressive government should and will do.
We are proposing a responsible and balanced approach to the implementation of our policies. For example Labour has committed to three years free post-secondary school education and training. We will phase this in over several years in order to manage the investment responsibly alongside other priorities.
We will be looking closely at all current government expenditure to ensure that it is best directed to improving security and opportunity. There are examples, such as spending on charter schools and unfocused Defence procurement that will be revisited and reshaped.
5. The Government will ensure a progressive taxation system that is fair, balanced, and promotes the long-term sustainability and productivity of the economy.
Taxation is an important tool for rebalancing the economy and setting our country on a path to an environmentally and economically sustainable future. This rule establishes the principles that our government will follow in setting tax policy. We believe that we need a better balance in our tax system to support the productive sector and ensure all taxpayers are paying their fair share.
National have reduced the level of taxation for those who have the most, and at the same time increased the levels for those who have the least. Raising the level of GST was a regressive tax move that harmed those on low incomes. National have also stood by while property speculators have use the taxation system to make a quick buck – both through negative gearing and through flipping housing.
We recognise that the best taxation systems have three key characteristics – they are fair, simple, and collected. The current taxation system fails this test and needs reform. In government we propose to establish a tax working group of experts to examine how best to deliver tax changes that are positive for the economy and New Zealand taxpayers.
From Labour’s perspective we are confident we can afford to deliver on the policy promises we have made using existing revenue. We will of course have to see what the government does with tax changes in the Budget before finalising our tax policy.
In the meantime we have proposed an extension of the government’s bright line test that means if an investment property is sold within five years of purchase the seller will be taxed at their marginal rate of tax.
Finally, in government we will establish an independent body to assess that the rules are being adhered to.
The credibility of our Budget Responsibility Rules means there needs to be a mechanism that makes the government accountable. Independent oversight will provide the public with confidence that the government is sticking to these rules.
We will establish a body independent of Ministers of the Crown who will be responsible for determining exactly this. The body will also provide an independent assessment of government forecasts to the public, and will cost policies of opposition parties.
We are still finalising the operation of this body, but it will be a modest sized agency, independent of Ministers, with access to resources and advice to enable it to rigorously monitor whether these rules are being adhered to.
Ladies and gentlemen, these rules represent a framework that Labour and the Greens believe balances delivering our vision for a better and fairer New Zealand with a responsible and disciplined approach to managing the country’s finances.
It is a pleasure to present these rules today along with the Green Party. As part of the Memorandum of Understanding we signed last year James Shaw and myself have been discussing our approaches to the economy. Out of those discussions emerged a shared desire to produce these rules. We want New Zealanders to be absolutely clear that we understand their desire for a balance between ambition, inclusion, certainty, and responsibility. We appreciate that they need to know how we will manage the economy and that we will be open and transparent in being held to account for our approach.
Of course we do not know what result the people of New Zealand will deliver in September, but what these rules and the process of developing them has shown is that we have strong working relationship and a shared set of principles that will deliver stable and progressive government if we are given that opportunity.
I want to thank James and the Green Party for their constructive and pragmatic approach to producing these rules, and it is my pleasure to introduce to you James Shaw, the Co-Leader of the Green Party.