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Dr Michael Cullen's First Speech As Treasurer

Speech to an Ericsson's product Launch
Dr Michael Cullen
Treasurer and Minister of Finance

Thank you Goran Olssen and Stephen Crombie for inviting me to launch Ericsson's new Mobile Applications Service Provider. Your decision locate this centre in Wellington will put New Zealand on the crest of the next wave of technological innovation.

That is an important opportunity I don't know much about surfing, having moved only recently to the Hawkes Bay. But I do know that to get the best ride out of a wave you have to catch it just before it breaks. That is basically the opportunity Ericsson is offering us today.

Ericsson is a good corporate citizen. Today's announcement that it will establish a chair of communications at Victoria University is further evidence of that. So is Goran Olssen 's plan to set up a think tank of private sector telecommunications experts to work with government to ensure New Zealand cam maximise the opportunities created by this third generation technology.

I welcome that offer. It fits in well with the new Government's partnership concept. We know we need the co-operation of business to govern effectively and we are not arrogant enough to believe we have all the answers, or even most of them. But we do believe the Government has an active leadership role to play in the economy.

Ericsson also fits in the Labour economic vision in that it is a participant, even - you could argue - a pioneer of the knowledge economy. Labour believe fervently that New Zealand's prosperity lies in the knowledge intensive industries of the future, and in companies like Ericsson.

That is why I was pleased to accept the invitation to be here today for my first formal speech as Minister of Finance. In the age of the sound bite and of instant information, symbolism is important and the symbolism of this occasion fits well with the new Government's economic strategy.

This is a sweet moment for me. I have served a long apprenticeship preparing for this job - eight years as finance spokesperson in Opposition, nine if you include the year I spent in the last Labour Government as associate finance minister. That has given me plenty of time to think - and has persuaded me that perhaps the game is easier to follow from the sidelines.

It is easy in government to become buried in the detail of decisions and in the minutiae of daily political and economic management and to lose sight of the big picture. When that happens a government loses its sense of direction and mission.

I recognise that danger and believe that if it is recognised and remembered, it can be avoided. Let me assure you today, I recognise the risk and will remember it.

So let me share with you now how I interpret the election results, my view of the economy Labour has inherited and our agenda for change. I don't think there can be any doubt that New Zealand has voted for a change of economic direction. The general public has never been comfortable with the values of the new Right and recognised well before the economic establishment that the radical free market reform process have all but exhausted its potential.

The lateness if the election has squeezed the budget timetable but I am still considering whether I will be able to deliver my first budget before the end of May. That budget will reflect the high importance both Labour and the Alliance put on encouraging industry, business and regional development.

Our commitment over time is to make all research and development expenditure eligible for full expensing in the year of investment and to accelerate the depreciation regime for new capital investment in technology.

It is important that the taxation system keeps up with, or even anticipates, the speed of technological change.

A further initiative will be to ensure that foreign direct investors have access to specific support from Technology New Zealand for the establishment of R&D capacity in this country.

It is no accident that the first pledge Labour listed on its pledge card to voters was 'to create jobs through promoting New Zealand industries and better support for exporters and small business.-

That will be our top priority in government. We are committed to doubling spending in this area - from $100 million a year to $200 million - by the end of our first term. And that is a minimum commitment. We would like to do a lot more if finances and economic conditions permit.

But - again - our hope is to make slow, steady, solid progress.

The fiscal position is improving but we won't be able to use all the improvements for expenditure because we need a growing operating balance to set-off the current account deficit.

We-re also aware that Labour took a lot of votes in the last week of the campaign from middle voters who wanted to strengthen our hand in the coalition. We will lose those people if we start taking unnecessary risks or trying to go too fast and we know that - to cement in a real change - we need to be in office for at least two terms.

There is also cause for caution in the economy we are inheriting. True, it is picking up. But we are not yet sure of the strength or sustainability of the recovery, our external accounts remain weak, and export growth is still sluggish. And we need to maintain the confidence of foreign investors. Let me say in that regard that it is very likely that Standard and Poors will play catch-up with Moodys in the next little while and give New Zealand a credit downgrade. The two ratings agencies are out of synch at the present time, and Standard and Poors has had New Zealand on a negative credit watch since September.

The downgrade would have happened regardless of the election result and reinforces the need to start turning around the economic fundamentals. The speed with which in do will determine how long it will be before we can enjoy credit upgrades. The structural weaknesses in the economy as I see them can be briefly summarised, in no particular order, as: The highest national debt for decades A large current account deficit. Poor export performance, especially over the last five years. Amongst the poorest average per capita growth rates in the developed world. Over - dependence on commodity production. Poor labour productivity growth rates, particularly since the passage of the ECA. Inappropriate skills product. Low savings rates. Wild swings in business and consumer confidence reflecting an underlying fragility about our future prospects. A hollowing out of our manufacturing base as business or parts of businesses relocate overseas A growing income disparity and the social distress and fragmentation that implies.

The net effect of the policy prescription pursued in recent years has been basically to transfer the problems which afflicted the state sector in the 1970s and 1980s to the private sector. It is a little-commented upon mutation on the privatisation theme.

As Peter Harris has observed, New Zealand 's achievement in 15 years of economic restructuring has been to replace a large and unsustainable internal or fiscal deficit and resulting high public debt with a large and unsustainable external or balance of payments deficit and resulting high private net debt.

Peter will be on my staff. He has been a consistent advocate of the value of strategic industry planning and of partnership between the public and private sectors and I believe he has a valuable contribution to make. I also want him to provide contestable advice to the Treasury because - like the Treasury - I am a strong believer in the virtue of contestability.

We know the destination we want to get to. We want to transform New Zealand into a high value, high skill, high quality, high income economy. We know New Zealanders have the imagination, drive, creativity and sense of enterprise this transformation demands.

The only question is, how are we going to get there- Not, I would argue, be going back to the past, either distant or recent. Both heavy regulation and extreme hands off are proven failures in transforming our economic base.

What we need is a drive for eQuality - with a little -e- as in electronic and excellence and a big -Q- for quality.

We have to excite young and enterprising New Zealanders that we can create a dynamic, small but world-leading economy this country which provides real opportunities for personal advancement and community development. Too many of our bet and brightest are going overseas - attracted not just be higher salaries but by confidence in long term opportunities for increasing prosperity, personal fulfilment, and a better life for themselves and their families.

We are now ,in fact, more a source of emigrants than a destination for immigrants. We will not turn this around by taking our hands even further off.

The drive for eQuality must have two main components. The first is the drive to create the new knowledge economy. The second has to be an equally vigorous drive to equip all our citizens to participate in that economy so as to be beneficiaries of it. One without the other will be at best a travesty and at worst a tragedy.

The task we face is to stimulate world-class innovation, infrastructure, and skills development capable of sustaining New Zealand as a leading knowledge-based economy. We have to focus on adding value in industries with long term potential. And we must use the most efficient and effective policies to align the market with the long term interests of the whole community.

We will set up a new private sector-orientated organisation called Industry New Zealand. It will be responsible for overall co-ordination and the delivery of the specific programmes for business development. It will be a lean, mean fighting machine, fighting for New Zealand's future as a knowledge economy.

But our most precious and most important resource is our people. Education is key It is an integral part of our economic policy.

New Zealand skill levels by developed world standards are low. We need a co-ordinated strategy which lifts skill levels in the workforce, and encourages skills that benefit the New Zealand economy as a whole as well as particular individuals.

The task of ensuring New Zealand has the most skilled workforce in the world will be led by an expanded Skill New Zealand organisation. Plans and strategies will link to our industry development policy.

We believe it is vital that stakeholders in industry as well as stakeholders in the tertiary education system combine to support the New Zealand - wide strategy to enhance and improve the nation's skills. Employers and industry associations, unions and educator representatives will all have an important part to play in developing and implementing our strategy for skills development.

We understand social investment in tertiary education is a means by which government can contribute to building the nation. Investment in education is essential not only to enhance that lives of individuals but also to develop the knowledge and skills needed in a growing economy and changing society. Learning throughout life is essential because of the dynamic nature of modern life.

A key issue on which we will take action is the need for more graduates from courses teaching knowledge and skills needed by the new knowledge economy. We will undertake research into the likely demand for workforce skills and knowledge and will develop.

Mechanisms to encourage students and institutions into areas of education which can be identified as of national significance. In particular, the per student funding formula will be adapted to ensure there are incentives to increase enrolments in the sciences, engineering, technical, and technological subjects.

Success in a open economy demands that the new Government takes a strong pro-competitive stance. New Zealand businesses cannot compete successfully in the globalised economy if they are hampered and restricted by lack of competition and excessive costs at home.

The principal legislative vehicle for promoting competition within New Zealand is the Commerce Act. The Current Commerce Act has not been sufficient to prevent anti-competitive, anti-consumer behaviour in New Zealand.

The primary principle of the Commerce Act of establishing broad principles to promote competition remains valid. However, it is clear that the Act and its related structures need to be reviewed in the light of the results that have occurred.

Firm action will be taken in this regard by tightening provision against anti-competitive behaviour. The threshold will be lowered for testing anti-competitive behaviour to bring us into line with that used in Australia. The same convergence will apply with respect to changing the threshold for mergers and acquisitions.

At the specific level, we will convene an inquiry into the telecommunications industry as we are concerned that a lack of true competition is stifling development and denying customers the best deal. Because a strong telecommunications market is vital to the knowledge economy, we consider this an urgent issue and will convene the inquiry within the next three months.

The government itself needs to become much more of a model for constructive change than it is at present. The .core public sector has been too casually balkanised into a series of little independent states with little co-ordination and strategic overview.

It is time to reconsider how we got into this state. We need an effective, independent public service. I believe there are real gains in efficiency to be made getting back to some fundamentals about the nature of the public service and its organisation.

In the end, leadership has to come from the government itself. If the government is vital, forward-looking, energetic and capable then there is a much greater prospect of generating enthusiasm and commitment.

Our commitment over time is to make all research and development expenditure eligible for full expensing in the year of investment and to accelerate the depreciation regime for new capital investment in technology.

It is important that the taxation system keeps up with, or even anticipates, the speed of technological change.

A further initiative will be to ensure that foreign direct investors have access to specific support from Technology New Zealand for the establishment of R&D capacity in this country.

The Government looks forward therefore, to new areas of co-operation with Ericsson and similar business.

In particular, we look to input and partnership on how best to maximise the opportunities in the new technology offers us.

A glance at any map quickly reveals what has been our largest comparative disadvantage for all of our history as a modern nation; geographical isolation.

And our great traditional of being the bet grass grower in the Southern Hemisphere is no longer with very much. But the new technology and the new economy do give us the chance to overcome the tyranny of distance.

Third generation cellular technology offers particular opportunities. The mobile Internet gives us the chance, literally to avoid being plugged into the past. To maximise the opportunities this presents us will require us to seize them without undue delay. I offer my best endeavours to ensure that is possible and wish Ericsson's well with their plan.

ENDS

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