Why achieving economic growth matters

BY BILL ENGLISH

OPINION: New Zealand is on the road to recovery. Heading into 2010, economic growth is stronger than expected and unemployment lower, thanks to a more stable global economy and the Government's success in managing New Zealand through the recession.

As we emerge from the downturn, our focus has firmly shifted toward putting in place policies that permanently raise our economic performance.

Economic growth matters because it creates jobs, increases incomes and improves the living standards of New Zealand families. Only through increasing our economic growth can we close the gap with our trading partners.

Significantly improving our economic performance will be the overriding focus of the Budget for 2010.

However, before we look forward, it is important to reflect on the past year.

A year ago global markets were in freefall and many businesses were fighting to keep their doors open as banks stopped lending. The Treasury forecast that unemployment would hit 8 per cent.

Our immediate concern was to ensure that as many New Zealanders as possible retained their jobs. We struck a balance between maintaining spending and controlling debt and we put in place a rolling maul of initiatives to support families and jobs.

This approach has worked. Revised forecasts suggest unemployment will now peak at about 7 per cent - 17,000 lower than Budget projections - and far lower than the devastating scale witnessed in the United States and Europe.

Protecting New Zealanders from the sharp edges of the recession was an urgent focus for us in 2009. However, while we were fighting the recession, we were also busy preparing the economy for recovery.

We have identified six key areas as potential drivers of growth. These are:

* Investment in productive infrastructure.

* Removing red tape and improving regulation.

* Supporting business innovation and trade.

* Improving education and lifting skills.

* Lifting productivity and improving services in the public sector.

* Strengthening the tax system.

* We have done a lot in these areas already.

Over the next five years we will spend an unprecedented $7.5 billion upgrading the country's economic arteries, including our main roading, electricity and broadband networks.

We have completed the first stage of Resource Management Act reforms, we have taken decisive action to sort out the electricity sector and we have put red tape under the microscope, undertaking reviews of 14 major pieces of legislation.

We have moved to get better value out of Government spending - capping the number of bureaucrats, shifting $2b of low priority spending into frontline services and ensuring the Crown's $100b of assets are better managed.

We have also strengthened New Zealand's trade networks - completing or signing trade deals with Malaysia, Hong Kong and the Gulf Co-operation Council in the Middle East. In addition, we have taken the first steps toward entering free-trade negotiations with the United States.

These moves have helped us weather the recession better than expected.

The crisis of the past year has hit most countries worse than New Zealand. Many will be saddled with permanently higher debt and will be forced to raise taxes.

New Zealand has a unique opportunity to emerge from the recession in a stronger position than these countries. Sound finances and low taxes could be a key point of difference in attracting business investment and skilled people to New Zealand.

* * *

However, we still face risks. Global growth may weaken again and there are multiple challenges in our own economy.

Since 2000, the economy has performed below its potential. This reflects growing roadblocks to enterprise and investment within the economy.

Growth has been low and unbalanced in recent years, at a time of very large increases in Government expenditure.

The tradeable side of the economy - exports and those industries that face international competition - has been in recession for five years, with output now about 10 per cent below 2005 levels.

By contrast, the public sector has grown rapidly, but with poor productivity. That has lowered the overall productivity of our economy.

Unless we can turn this around and create the right environment for New Zealand businesses to compete on the world stage, we will not achieve the sustained increase in incomes this Government aspires to.

That is why we are continuing work on each of the six drivers I outlined earlier. You will see initiatives in each of those areas in this year's Budget.

However, as a Government we don't have a monopoly on bright ideas. That's why we have set some of the best minds in the country the task of coming up with ways to increase growth.

Some of these groups have already reported back, such as the Capital Market Development Taskforce and the 2025 Taskforce. Others, such as the National Infrastructure Plan and the report of the Victoria University-led Tax Working Group will be presented to the Government and issued in coming weeks.

These reports will canvass a range of ideas and options. As a Government we will look through them and pick out the best and most practical ideas. They will form part of Budget 2010.

As finance minister, I'm pleased New Zealand has come through a once-in-a- generation world crisis in better shape than most of the countries we compete against.

However, the crisis has left a hole in the Government's books that will take several years to rectify. In addition, it has left many New Zealanders out of work, which has a profound impact on them and their families.

The challenge now is to get the economy growing again at a stronger rate that meets our jobs and income aspirations.

Budget 2009 got us on the road to recovery. Budget 2010 will build on that to ensure we significantly lift our economic performance.

Bill English is the Minister of Finance.