I have entitled my address today “A Budget for All Generations”. That is because Budget 2005 has as its goal the long term security of all New Zealanders, be they young people at school, families caring for children, business people or those in retirement.
Security is not something we can simply legislate for ourselves. As you are well aware, it is hard won and involves careful planning and a habit of making sacrifices in the short term in order to achieve longer term goals. Making good choices early on can make us more independent and give us more choices when it counts.
That is true whether we are thinking about retirement savings, or home ownership or education. It is also true of decisions about the government’s finances. Excessive spending or tax cuts may be popular in the here and now, but they simply weaken the economy in the long term.
That’s why the major initiatives in this budget have been around encouraging New Zealanders to save more. I appreciate that this is a message that does not directly impact upon you, since most of you have moved beyond the saving stage. However, your children and grandchildren are no doubt in the period of life when they need to be investing for the future as well as surviving in the present.
During the 1970s we in New Zealand lost the plot with respect to retirement incomes, both the state pension and private provision. Your generation has had to prepare for retirement during a period of uncertainty over what the state would provide and uncertainty in private provision through the decline of workplace savings schemes and unsettling experiences such as the 1987 stock market crash.
How much of that turmoil was strictly necessary is a matter of debate. It began with Roger Douglas’s compulsory workplace super scheme which, while it had its merits, was tied to an expectation of long stable careers that was fast changing in the 1970s. It was also burdened by a centralised approach to funds management which Sir Robert Muldoon effectively lampooned through his dancing Cossack advertisements in the lead up to the 1975 election.
Of course, he replaced the scheme with a tax-funded state pension so generous that it contributed to the rapid deterioration of the nation’s finances and led to the economic and financial crises of the early 1980s.
That was about the time I was starting out on my political career, and over the course of the following 25 years I have been both an observer and a participant in a struggle to find a solution than is both fiscally responsible and politically sustainable, and also fits into the changes in work patterns and lifestyle that we have seen in recent decades.
With the savings package in Budget 2005 I can now proudly say that the Labour-led government has delivered on long term stability for retirement, both in terms of the basic safety net and in terms of a sensible regime to encourage private retirement savings.
The first task was to secure the state pension, both in terms of its relativity with wages and in terms of the security of its funding.
We reversed National’s cut in the link to wages, and set about establishing the New Zealand Superannuation Fund to provide long term security for the state scheme. In so doing we addressed head on the unavoidable reality that we have a bulge in the age profile of our population, caused by those now in their 40s and 50s, and that this places in jeopardy a state pension scheme funded entirely from current taxation.
There would be only three ways of dealing with it: higher taxes, cuts to the pension, or putting aside funds now to meet a portion of the costs in the decades to come. What is more, a problem of this magnitude requires action well in advance. If we as a nation want fiscal stability in the future we have to start working towards it now.
The Super Fund now stands at around $6.3 billion. It will need to increase to several times that amount over the next couple of decades.
The need to build up the Superannuation Fund is an important reason why I have resisted calls to cut taxes. It is true that the government is running surpluses. But it is also true that we have been using those resources to reduce our debt, and to build up the Super Fund and to invest in essential infrastructure such as major roading projects and upgrading electricity and water supply systems. There is no sense in which the surplus I announced last week will stay in my bottom drawer for a rainy day.
We are fully committing our resources to grow our economy, build up our infrastructure, care for health and education needs, maintain law and order and put something aside for managing future costs. Significant tax cuts would mean something has to give, and what their proponents are very coy about is what would be sacrificed. Would they cut health? Would they cut pensions? Would they reverse the rates rebate? Or would they allow our national debt to move back up, thereby incurring greater debt servicing costs and placing our economic future in jeopardy?
You will remember the last year of a National government. Indeed, they legislated for a tax cut. And, of course, they also legislated to cut New Zealand Superannuation.
One thing is already clear. Borrowing to fund tax cuts before Christmas as Dr Brash has promised would lead to higher interest rates.
That’s what he would do if he was still Governor of the Reserve Bank and I, as Minister of Finance, promised such a policy.
So the Superannuation Fund, alongside a tight fiscal policy and lower debt, is one of the pillars of a stable superannuation policy. The other is the savings package that I announced on Thursday.
The Securing Your Future package will make it easier for people to develop a long-term savings habit. At an estimated cost of $588 million over the next four years, components include:
- KiwiSaver, a government-sponsored work-based savings scheme, including features to assist first home purchase;
- a substantial expansion of the Mortgage Insurance Scheme and;
- education programmes for financial literacy and first home buyers.
KiwiSaver will be a voluntary scheme, enabling people to put 4% or 8% of their gross salary automatically into a managed savings fund. However, to make participation easy, new employees will be automatically enrolled in KiwiSaver and have three weeks to decide whether to remain members. Existing employees, the self-employed and beneficiaries will be able to opt in.
Savers will have personalised accounts they can take with them as they shift jobs.
There will be no tax incentives for saving per se; however, the government will contribute directly with a contribution of $1000 to each new account. It will also pay part of the fund management fees, increasing the return that people get on their investment.
A secondary feature of KiwiSaver is to assist with first home purchase. As you know, home ownership has been declining in New Zealand. This is matter for legitimate concern, since the security of home ownership is linked with better health and educational achievement and a stronger sense of community. Ownership helps people participate in society, giving a sense of control and independence.
So while KiwiSaver's main purpose is to help people save for their retirement, first home buyers will be able to withdraw their funds for a deposit on a house. They will then be able to divert their fund payments into repaying their mortgage.
When people have been KiwiSaver members for at least three years and are ready to buy their first home, the government will help with their deposit. They will receive $1000 for each year's membership in KiwiSaver, up to a maximum of $5000.
Our estimates are that KiwiSaver will enable around 3000 households a year to realise the dream of owning their own home.
At a broader level, what we are aiming to do with these policies is to shift the savings culture so that New Zealanders take a more informed and more disciplined approach to creating and managing their wealth.
That is why we have included in the budget savings package a set of education programmes for financial literacy and first home buyers to be developed over the coming year.
This set of policies is aimed at a generation younger than yours, of course; but that simply means you are in an ideal position to see the wisdom of encouraging more New Zealanders into a regular savings habit. No doubt you see your own children struggling to save.
You know how strong is the temptation to spend any extra money on current consumption rather than to put it aside for retirement. And you know the value of a savings system that quietly, week after week, puts small amounts of money aside and enables them to build up over time into something that can supplement New Zealand Superannuation.
Our policies for older New Zealanders extend well beyond superannuation. We have always recognised that older New Zealanders are usually on fixed incomes and that the periodic adjustments to New Zealand Superannuation do not always cover increases in costs, or take some time to do so.
That is why, for example, the Prime Minister recently announced the new rates rebate threshold. This means that up to 300,000 low income and older New Zealanders will be eligible to have up to $500 deducted from their annual rates bill. $50 million a year is being budgeted to implement this policy.
Thousands of Government Superannuation Fund recipients will have their incomes lifted as a result of proposed amendments to the GSF scheme. $10.2 million is being allocated over three years for this initiative.
We are continuing to put additional resources into improving health care for older New Zealanders. We have greatly reduced doctors’ fees and prescription charges for superannuitants. We are injecting an additional $17.16 million over the next three years to fund 7500 more cataracts operations.
We are spending more on orthopaedic surgery to double the number of hip and knee operations funded by the public health system over the next four years. By 2007-2008 we will be spending up to $70 million on more than 9300 major joint operations. Already in the first five months of this financial year, major joint replacements increased by 33%.
Also, District Health Boards will receive a funding boost of around $71 million to address movements in inflation and population growth, and to ensure they are fully funded for the residential services that they already provide for older people.
Where residential care is needed we continue to work to ensure its quality and affordability, and to ensure that those who require it are not treated unfairly. We have passed comprehensive legislation protecting the interests of older people in retirement villages.
Also, as you know, we are phasing out asset testing on older people in residential care from 1 July.
And from 1 July 2006, an allocation of more than $6 million per year will extend eligibility to the higher Single Rate of New Zealand Superannuation to all married superannuitants with a partner in long-term residential care. The funding will also extend eligibility for the Living Alone Payment to married superannuitants, so long as they meet other criteria. This initiative will result in approximately 2000 superannuitants becoming entitled to the higher Single Rate of NZ Super and, if they qualify, a Living Alone Payment. The partner in long-term residential care will continue to receive the married rate of NZ Super.
Independence in the home remains the preferred option, and we have been working to make sure this is more manageable for longer.
Funding for home based care services provided to older New Zealanders is being increased by $12.4 million for the coming year. This will enable improvements in quality and working conditions, and cover increases in the prices of services funded by District Health Boards or contracted to Ministry of Health.
Further funding is being allocated to increase pay rates for people who deliver home help under the Ministry of Social Development’s Home Help Programme. Under this programme, financial assistance is provided to nearly 6,000 clients annually to purchase temporary part-time assistance to complete tasks around the home.
An additional $3 million over the next four years will bolster programmes to prevent elder abuse and neglect. Responsibility for funding these programmes is being transferred from the Department of Child, Youth and Family Services to the Ministry of Social Development.
We have recently announced that we intend to abolish the mandatory requirement for age-based driving tests for people aged eighty years and over. The current regime is costly on older people, it is stressful, and it is unfair.
We established a Review of Older Driver Licensing Policy, involving a Stakeholder Consultative Group and including representation from Grey Power. We will develop a new older driver licensing regime based on their recommendations, which were:
- No mandatory age-based on-road test;
- Retaining the current GPs "medical fitness to drive" certificate at age 75, 80 and two yearly thereafter;
- The possibility of an optional on-road test in certain circumstances;
- Medical practitioners to make greater use of a range of conditional/restricted licence options; and
- Increased provision of educational materials.
What this demonstrates is our commitment to listening carefully to Greypower and other advocates for older New Zealanders. We may not see eye to eye on everything, but we share a positive view of ageing, one characterised by a high level of security and of participation in the life of the community.
Last week’s budget took some important steps forward to making that the pattern that future generations of New Zealanders will follow as they move into their old age.
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