What the Minister said...

Press, 28 July 1989, Page 2

What the Minister said...

This is an abridged version of the Budget speech given by the Minister of Finance, Mr Caygill, in Parliament last evening.

In the last five years the New Zealand economy has been through a period of profound change — greater than that of any period since at least the Second World War.

The benefits of these changes are now beginning to be felt. It is time to reaffirm our direction. It is also time to remember that economic change is not an end in itself. The importance of economic changes often lies in their ability to assist other social or cultural or environmental objectives. Tonight I want to reaffirm the Government’s economic goals as well as our social ones and to comment on their inter-relationship.

Economic targets Now that the economy is recovering it is time to refocus our objectives. The Government has not attempted to impose on the country an over all economic plan. Rather we have sought to foster initiative and enterprise by allowing the market place to determine where people see the most profitable investments and returns.

But the Government plays a key role in shaping the business environment And the country is entitled to know the targets or objectives the Government is working to and expects to attain. To that end the previous Minister of Finance announced in April last year the objective of achieving 0-2 per cent inflation by the early 19905. In December, 1987, New Zealand’s public debt stood at around 75 per cent of G.D.P. At that time the Government announced its intention of repaying a third of the outstanding public debt by 1992, in part through a programme of business or asset sales. Tonight I want to reaffirm both these objectives and to add two further specific goals. By December 31, 1992, the Government expects to have achieved: • An inflation rate between 0 and 2 per cent • The reduction of public debt, from a combination of business sales, S.O.E. loan repayments and fiscal surpluses, to below 50 per cent of G.D.P.

• As a result of sustained low inflation and reduced public debt, first mortgage interest rates between 7 and 10 per cent

• The reduction in the number of people unemployed to below 100,000.

The whole thrust of the Government’s economic policies has been towards achieving lasting growth. Without that we cannot hope to achieve permanent reductions in unemployment Fiscal Policy Over the past five years the Government has had to put its own financial house in order. In 1984 we inherited a set of Governmeent accounts that were hopelessly unbalanced and poorly managed. They were not even maintained in ways that gave a clear indication of the money that was being spent Many serious financial problems, such as the cost of poor and expensive energy investments, were hidden. I explained on March 21 why it is crucial to reduce the financial deficit An increased deficit this year would have put pressure on interest rates and choked off the recovery. The decisions I announced in March avoided that possibility. They retained last year’s reductions in personal income tax whilst reducing the deficit those reductions would have caused by $1.5 billion. The decisions in March represented a balance between expenditure reductions and increased revenue. The same balance is reflected in the Estimates I am presenting tonight As a result of the Government’s disciplined approach to fiscal management the financial deficit will fall this year to $729 million or 1.06 per cent of estimated Gross Domestic Product Next year it is our intention to achieve the target of a fiscal surplus. Education This year total expenditure on Education will be in excess of $3.8 billion — an increase on the money voted last year of 12 per cent Particular attention is being devoted to two main areas. The first is that required to implement the reforms in educational administration. Although devolution of greater authority to school trustees and tertiary institutions is expected to yield increased efficiencies, there are a

number of upfront costs which must be met this year. The second area of growth in education spending this year is that of pre-school education. This is a crucial aspect of education. The Government has considered carefully the recommendations of the Working Group on Early Childhood Care and Education, chaired by Dr Anne Meade. Tonight the Minister of Education will be releasing details of the new funding formulae to be applied in this area. This will involve increased and more equitable funding, and there will also be improvements in administration. An additional $43 million is being provided in 1989/90, with further increases in subsequent years. Social Welfare Reforms By far the largest vote is that of Social Welfare. Accordingly the Cabinet’s review of expenditure has focused intensively on this area. Our objectives have been: • To achieve equity within a climate of fiscal restraint. • To provide security without destroying the incentive to return to work when that is available. An important breakthrough was achieved with the introduction of Family Care and its successor, Family Support. These have provided assistance to low income families without requiring or producing total dependence on the State. Tonight two changes are being made to Family Support: • As from October, 1989, the threshold of Family Support will be increased from $16,000 to $17,500. This effectively means that most people in receipt of Family Support will be better off by $5 per week. The cost of this change is estimated at $23 million in 1989/90 and $36 million in a full year. • As from April 1, 1990 Family Support will be paid in full to the principal carer for the children. This represents a change from the present system where payments are split between both partners for couples with children. The change wil improve the effectiveness of payments

for children and increase an indepdendent source of income for many women.

It is also proposed to increase the Guaranteed Minimum Family Income by $lO per week with effect from April 1, 1989. This will bring the level of G.M.F.I. to $3lO per week for a one child family, at a cost of approximately $2 million. These measures will go some way towards compensating many of the low paid for the recent increase in GST.

As I have indicated, the Government is mindful of the need to reduce dependence on social welfare. In particular there is a need to avoid incentives to obtain or stay on a benefit rather than seek productive employment, where that is available, or further training. More work needs to be done in this area. But as a first step the Government has decided to increase the stand-down period for school-leavers under 18 years of age, before they are entitled to apply for an unemployment benefit, to six months. Accident Compensation The most obvious failure of equity in the field of social security has been the gulf between accident compensation and assistance for disability from illness. We have given careful consideration to the recommendations of the Law Commission on Social Policy. In particular, we have paid a great deal of attention to the need to ensure that the cost of any new arrangement is kept within the current over-all bounds. We have concluded that it is possible to move forward to a general scheme of assistance for incapacity which would provide an equal benefit regardless of cause to all adults aged under 60 who are affected by illness or injury. The scheme will operate from April 1 1991 and will have the following basic structure:

• An initial waiting period from commencement of incapacity; followed by • An finite period on a short-term

flat-rate benefit, but with benefits differentiated for earners and nonearners; followed by • A higher level of long-term benefit for people whose incapacity continues byond a certain time, comprising: — in the case of earners, earnings-related compensation — in the case of non-eamers, an incapacity benefit

• A disability allowance for serious impairment in recognition of the special costs incurred by seriously incapacitated people. This scheme will be an historic step forward in our social welfare system: • Physically incapacitated people will be treated equally regardless of the cause of their incapacity. • People affected by serious longterm incapacity will receive the greatest assistance, in accord with the original concept of accident compensation proposed in the Woodhouse Report • For the first time married people forced to cease work for reasons other than injury will have a period of assistance which is not dependent upon their spouses’ income. This will particularly advantage women.

Benefit Reform In parallel with the Government’s review of accident and disability compensation we have examined the over all structure of Social Welfare benefits. The Government has decided that a reformed and rationalised system of social security benefits is possible and can come into force from April 1 1991 simultaneously with the new incapacity scheme. The necessary legislation will be introduced and enacted as part of an omnibus Social Welfare Bill. The new system will be based upon the concept of a generic benefit — to be known as the Universal Benefit The rate of payment for a couple will be set at the same level as the present Sickness and Invalids Benefits. Future adjustments wil be made to keep the rate within the range of 65 — 72.5 per cent of the net average ordinary weekly wage. The single rate will be half this level. Further consideration will be given to the best means of reflecting the additional costs of living alone.