Taking Stock
Michael Cullen to The Admirals' Breakfast Club

We are now 17 days to Christmas. We can get this season's asparagus, new potatoes and strawberries in the shops. The weather is still fitful but there is beginning to be some real heat in the sun. And New Zealanders' thoughts are turning towards the beach, the barbeque and the summer holidays.

As they do, their mood is mellowing. The long winter of discontent is over. Three surveys released in the last three weeks show that a new spirit of optimism is beginning to permeate the national consciousness.

The latest National Bank business outlook shows confidence is rebounding, especially as firms' look at their own prospects over the next 12 months. On this measure, optimists are now leading pessimists by a margin of 17 percent.

The Morgan and Banks Job Index Survey, released on the same day as the National Bank outlook, showed almost half of the 1200 employers surveyed were intending to take on more permanent staff - the highest level in the survey's history.

The TV One/Colmar Brunton poll, released late last month, told a similar story. It showed that a majority of New Zealanders now believe the economy is on the upturn - up from 41 percent in October.

So the country, the economy and the Government are heading into the summer break in good heart.

I would like to use my speech to you today to do a stock take of the Government's relationship with the business community, our progress in implementing our economic and business policy programme and the immediate economic and fiscal outlook. In doing so, I will briefly discuss the likely contents of the Budget Policy Statement and December Economic and Fiscal Update, to be delivered on Tuesday, December 19.

But first, our relationship with the business community. We have had our rocky moments. No Minister knows that better than I do. And I think both sides have to take some responsibility for it. I do not think the Government was given a fair go by some of the peak business organisations. On the other hand, I freely acknowledge that we could have communicated some of our policies better.

We were taking seriously the genuine concerns of business, but I can see in retrospect that this may not always have been clear. In Auckland, the mood was particularly sour as the Auckland economy was coming off a mini-high generated by the confluence of the millennium celebrations and the America's Cup defence.

But - even in Auckland - attitudes are softening. Auckland was host city for the first Business - Government Forum, an event which was so successful that we will be repeating it in the New Year with forums already planned for Christchurch in February and for Waikato in March.

The business confidence surveys became in the dark days of winter an opportunity for business to thumb its nose at the government. More recent survey results show that instinct has now all but disappeared.

I put its disappearance down to the fact that the policies which most antagonised business - I refer to the ACC reforms and the Employment Relations Act - have proved much more benign than some in business had been led to believe.

The average risk weighted premium paid by employers for workplace accident cover under private insurance companies was $1.21 per $100 payroll. The average levy from April 1 will be 90 cents per $100. That is a reduction of more than 25 percent.

And I hope to be able to announce a further round of reductions next year.

If the debate around the ACC changes was heated, the debate around the ERA was white hot. But none of the alarmist prophecies peddled about it by our political opponents has come true.

So much so that Morgan and Banks was able to report that the Act had actually had little impact and that overall businesses were far happier with it than they had initially anticipated.

Some of the credit for that must go to the leadership of the union movement for the responsible and far-sighted attitude they are taking to wage negotiations. This won them praise just last week from the Northern branch of the Employers and Manufacturers Association.

The EMA said there was no evidence overall that pay rises were feeding through
into general inflation. Instead, it said its information was that unions were being restrained in their pay claims and settlements, which were averaging around two per cent a year.

But more significant in terms of business - government relations is that, as the static around these issues has died down, the focus has moved to the rest of the Government's policy programme.

I think there is considerable commonality between business and the Government in terms of the direction in which we need to take the New Zealand economy.

We must use the new sciences and the new technologies to overcome our traditional disadvantages of size and distance. We must produce much higher levels of human capital and retain and invest that capital in the generation of wealth.

We must therefore lift our performance in skills development, science and technology, research and development, design and marketing to international best practice standards.

And we will need to attract new greenfields development to New Zealand, build new businesses in New Zealand, support rapid growth and reward excellence and enterprise while protecting New Zealand's unique environmental heritage, our multicultural society, and our innate sense of fairness.

That is the vision we took into the election campaign. It was the vision I articulated in my first budget and will articulate again in the 19 December Budget Policy Statement. And it was the vision which emerged out of the Auckland Business - Government Forum.

As I said before, there is significant consensus over what sort of economy we want. There is also considerable support within business for many of the initiatives the Government is taking to get there.

Let me start with R and D because I have been closely involved with this in my capacity as Minister of Inland Revenue. We have put out a discussion document on bringing the tax treatment of R and D into line with the accounting treatment under Generally Accepted Accounting Practice.

At first, I believe many people under-estimated the extent of this change. Its effect will be to make all research and most development expenditure eligible for immediate tax deduction.

Let me quote Joanna Doolan, a tax partner in Ernst and Young, writing in the Independent. She says that, for the "big picture" people, this change might seem boring - but "for those who have been involved in disputes with the IRD over this issue or live in fear of such a dispute, this is big stuff."

She also describes it as a step in the right direction - an assessment shared by many of the country's top tax practitioners.

The change should be particularly helpful to our large, well-established companies. Those just starting out, and yet to make a profit, may find their needs are better served by the R and D grants scheme announced in the 2000 Budget. This has been well-received and has generated a high level of application among its target audience.

The Government has a very clear idea of the economic direction New Zealand needs to be heading in. We are focussing on adding value – not just cutting costs. We are actively supporting export development, quality investment and business growth.

We have implemented a raft of new initiatives to develop the country's economic potential. The main delivery arm for these is Industry New Zealand. We spent a lot of this year setting the agency up, and designing the business assistance programmes we want it to run.

We opted for quality rather than haste because we knew it was important to get the structure and the personnel on the board right. But Industry New Zealand is now firmly in the saddle and looking forward to funding increases of around $40 million a year in the next two years.

It will get the second $40 million instalment in next year's budget. This is not a huge amount of money, but it is enough to make a measurable difference if well-spent. And we are confident that we have the right structures, the right programmes and the right people in place to get maximum value from the taxpayers' investment.

I have often said that I am fiscally conservative. By that I mean that governments need to raise what they spend, over time. That balance creates a more stable macroeconomic environment and takes pressure off interest rates and the exchange rate as economic stabilisers

There are two dimensions to fiscal balance. One is time. In recent years, governments have started to report fiscal intentions over three, rather than one year time frames. That is an improvement, but falls short of dealing with financial obligations that we know will emerge in twenty, thirty and fifty years time.

This government is extending the time frame over which it makes financial allocations, at least in respect to New Zealand Superannuation, to forty years.

That in itself is going to require a lot of explanation about what the annual accounts of the government mean. For accounting reasons, transfers into the Superannuation Fund are capital items. As the funding regime builds up, the accounts will be showing very large operating surpluses, and it will be necessary to make it clear that those surpluses are not available to fund tax cuts or new spending programmes.

I am looking at presenting the accounts in a way that adjusts the operating balance to take account of abnormal financial items. The adjusted operating balance is the one around which real fiscal discretion exists. The Budget Policy Statement that will be released on 19 December will start the process of reviewing the presentation of the government’s accounts.

That same statement will give an update on how the changed economic growth profile will impact on the financial outlook for the next four years. This brings me back to the second dimension of fiscal balance.

Balance means that governments need to manage the revenue as well as the expenditure side of their finances. Too often fiscal prudence is defined either as controlling or cutting spending, or only in relation to the difference between income and expenditure.

I like to point out that in strictly policy terms, and not allowing for changes in the economic outlook, this government actually increased the projected fiscal surplus. It did increase spending – on superannuation, state house rents, student loans, biosecurity, the arts and so on – but it more than covered that on the revenue side.

The BPS will estimate the impacts of the changed economic growth track on the government’s finances. There is a general consensus among private sector forecasters that the growth path is lower in the first year and higher in the later years. This will impact on revenue, spending and the projected surpluses. There will be the customary noise associated with valuation changes in things like long term ACC and Government Superannuation Fund liabilities.

Overall, though, I don’t think I am giving away any secrets when I say that the lower growth in the current year has had a pleasantly minor impact on total government revenue. The financial statements for the first four months of this year confirm that.

I am also pleased to say that talk of deficits this year will not be substantiated. And finally, the forecast total operating surplus over the four-year horizon is likely to be higher than forecast at the time of the Budget.

So we end our first year in government and go into the Christmas break with our finances in order and with the economy on the upturn.

It has been a turbulent and busy year but we are now entering a quieter period of consolidation and economic growth. Business and Government have established a dialogue and have learned to do business together.

I look forward to building on this platform next year.

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