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Cullen's Speech to the NZ Investment Conference


Salomon Smith Barney
NZ Investment Conference
23 February 2000
Sky City Hotel
Auckland


Hon Dr Michael Cullen's Speech to the NZ Investment Conference, 23 February 2000

Thank you for inviting me to speak to you today. It is important to me to be able to talk directly to the people who contribute and influence, on a daily basis, the economic wellbeing of our country.

Today I want to talk about the Government’s broad fiscal goals. And to talk also about what I see as our strengths and some of the challenges we face in building and maintaining what we might call, a stronger economy, capable of holding our own in the global market.

I have served a long apprenticeship for this: eighteen years in Parliament, eight years as finance spokesman in Opposition. That is a lot of time to think about where New Zealand has come from and the road ahead.

At the second MMP election, New Zealanders voted for more than a change of government. They voted for a change of economic and social direction.

The general public recognised well before the economists that radical free market and cost cutting reforms had pretty much provided all of the gains that were there to be made. More of the same would be unlikely to produce economic miracles or even to fuel common or garden improvements. The public instinctively knew, like Einstein, that “Not everything that can be counted counts, and not everything that counts can be counted.”

Indeed, there is a growing consensus that neither heavy-handed regulations nor a complete hands-off are appropriate to managing a modern economy. This, then, is the middle ground where the Government has pitched its tent.

We have begun moving on the promises we were elected to deliver. The Prime Minister has set a cracking pace. In fact, the biggest surprise to most commentators is that we intend delivering on our promises. They are struck by the fact that our pledges are there to be kept. We must be the first government for many a year that is being roundly criticised by a few for keeping our word to voters.

I also need to note that the government is operating smoothly and efficiently. The two coalition parties have a clear understanding with each other.

Personal relationships are developing in a very positive fashion. This has meant that where Labour and the Alliance have different policy positions we have been able to work through to common solutions without any acrimony.

This, of itself, should give markets cause for confidence. This is a stable government with a clear sense of direction which is within the mainstream of the developed world.

The Government's cracking pace and sense of purpose should not be confused with some lurch to extremism. It should by now be clear that I am a fiscal conservative. I do not believe in spending money we do not have or in building up debt for future generations to deal with. We have to save for a rainy day and I will talk a little later about that.

Let us first look at the books. In round numbers, in November last year the government owed some $37,650 million. Of that, 80 percent was denominated in New Zealand dollars. Half of the 20 percent foreign currency debt - $7,400 million, was in U.S. dollars and 30 percent in Japanese yen.

On the other side of the ledger the government owned $11,800 million of marketable securities denominated in foreign currencies. The point here is there is no net foreign public debt. The government itself has no exposure to any currency risk, although the whole country has an indirect exposure to any external imbalance.

The government has another $3,800 million in New Zealand dollar denominated advances, although the bulk of that is student loans and I make no comment on the quality or marketability of that paper.

So, overall net public debt is $22,000 million, within which there is a net foreign currency asset of around $1,400 million.

It is important to put this into some sort of perspective. The conventional approach is to measure public debt as a percentage of the gross domestic product. My advisers tell me that the main advantage of this measure is that it is the most commonly used international comparison. It may be a commonly used comparison but it is largely a pointless one. It doesn't say much at all about the burden of debt or its serviceability.

The level of debt is not the real problem – it is the cost of servicing debt. It is the structure of debt – interest rates, repayments and refinancing.

$23,500 million worth of government bonds are outstanding. They mature in reasonably even amounts each year between now and 2009, with a small parcel maturing in 2011. Again, the point here is that the profile of the debt portfolio is benign.

Net debt is about 62 percent of government revenue. In the current financial year the financing costs of this debt are about 6.4 percent of total government revenue.

These are better indicators of the burden of debt than as a percentage of GDP. The problem with using GDP as the comparator is that much as Revenue Ministers might like it, it is not possible to tax 100 per cent of GDP!
GDP is not available as a resource from which to service debt – only government revenue can be used for that purpose.

The government will continue to monitor its debt as a percentage of GDP. This is because we do need to benchmark our performance against that of other countries and to make historical comparisons. But I also intend to develop other companion indicators of the burden of debt to allow both financial analysts and the general public to get a better feel for how public debt sits as a charge on their taxes.


So what now? We must avoid building into baseline and recurring expenditure revenue flows that are better than average simply because they are coming out of the upswing of the business cycle.

Economies do still go through cycles of faster and slower growth. Over the past seven or eight years New Zealand has been on the bumpy road of pro-cyclical fiscal policy. Budgets have been viewed through the rear view window.

When surpluses emerged during an upswing the government dished out tax cuts or spent a bit more on health or education – stoking the upswing and overheating the economy.

When the brakes were applied – internally by the Reserve Bank or externally, like the Asian crisis – the government cut back services and increased charges which in turn pushed the economy further into deeper recession than it needed to go.

We have learnt from the mistakes of others the importance of maintaining a sound financial base. I will be taking a cautious approach to future trends in government revenue and expenditure. It is important that fiscal policy changes should moderate rather than exaggerate cyclical movements.

This week Cabinet signed off on the broad fiscal parameters of the Budget Policy Statement and in a few weeks time I will be releasing this Government's first Budget Policy Statement - a preview of our first Budget.

That document will set out formally, as required by the Fiscal Responsibility Act, our broad priorities for the 2000 Budget, together with long-term objectives and short-term intentions for key fiscal variables.

I regard it as the fiscal expression of the change of direction sought by voters.

It will be a document pointing to a different style and role of government. A government committed to quality public services. A government committed to developing constructive working relationships with business and communities.

Let me tell you now about our priorities for the 2000 Budget. Our long-term debt objective will recognise that public debt is now low relative to our recent history and to other OECD countries.

We will set an operating balance that maintains that low debt over the medium term – right across the business cycle. In addition, I want to be able to bank some of the surpluses over the next two years to smooth out the cycle and to smooth out the demographic effects of the ageing of the baby-boomers. The combined effect of these two surpluses will be similar to the operating balance forecast in the PREFU.

The allowance for funding our ageing population will enable us to keep faith with retired New Zealanders and at the same time avoid harsh adjustments in taxes or spending programmes. I have long seen the issues raised by population ageing as the biggest long term challenge to fiscal management facing any government.

In my more optimistic moments I know that a superannuation scheme can attract enough support, both political and communal, to stand the test of time. That is why it is important not to rush things.


Put simply, our broad fiscal goals are:

 a prudent operating balance

 a realistic capital limit, and

 appropriate phasing of new initiatives across budgets

These goals add up to a fiscal stance that supports monetary policy without putting undue pressure on interest and exchange rates. A stance that will sustain current expansion, provides stability, and, critically, encourages jobs and income growth.

Our economy has some strong positive features:

Low public debt, structural surpluses, a transparent public administration, an open economy and price stability. We have a sophisticated consumer economy, a stable democracy, and, our greatest strength, innovative people.

But we must also acknowledge a large current account deficit. Since the early 1990s, fiscal surpluses have meant our current account deficit reflects a growing gap between private sector investment and our low saving rates.

It can be argued that shows a confidence in New Zealand as an investment destination.

But the downside to the current account, of course, is that we are spending more than we earn.

There are no quick “fixes” to this structural problem.

But the Government can help promote sensible decision making within the private sector by providing a stable and sound broad financial environment. This promotes investor confidence and lessens the likelihood of investors running hot then cold.


Investment has been growing in NZ and the share of our output that we invest compares favourably with other OECD countries. We rank in the top third of the OECD for investment.


But there is need for caution:

 there is evidence that the quality of the investment may have left something to be desired – in other words, we have not generated a return on our investment comparable to others.

 the second concern I have is with the actual make up of our savings. Just ten short years ago, 90 percent of our total investment was met by our national saving. Today we cover less than half with our national savings.


Overseas investors have been called upon to meet the rest of our needs, with the consequence that we now have a much larger current account deficit.

A high level of foreign investment is not is not by itself a bad thing. If there are productive opportunities for expanded investment and the accompanying growth of income, employment and tax revenues, then it is better for New Zealand that these are taken up.

Overall, New Zealand has benefited from the adoption of more open capital markets. As well as receiving foreign investment, New Zealand firms have taken advantage of the more open international investment climate to make some substantial investments off-shore which have complemented and added value to our domestic industries. The quality of some of that investment, however, is certainly less that optimal. It concerns me that the purchase of existing capacity is seen as a more attractive option than greenfield development.

I am also mindful that increased reliance on overseas saving carries with it a rightful claim by overseas investors on future output.

Above all, foreign borrowing should not reach a level that threatens the credibility, in world capital markets, of our economic programme. Nor must it reach a level which might create pressures for our domestic economic and fiscal policy to be deviated from other important economic and social goals, in order solely to address the current account deficit.

To do that would be tantamount to returning to the days of a fixed exchange rate system and all the restrictions that that imposed on us.


Our national saving rate has been strongly supported, propped up one might say, by government budget surpluses in recent years.

However, at the same time, saving by the household sector has declined markedly.

Here we are not alone - many OECD countries have seen a comparable fall in their household saving rate.

There is no one single explanation which could account for this decline - we must look beyond the popular but simplistic argument that New Zealanders are myopic and imprudent.

There are important demographic changes taking place and we can expect that as the proportion of retirees in the population continues to rise, aggregate household savings will drop further. Numerous other factors also contribute to our inability to save.


But, let us be clear. There is one overriding factor that, more than anything else, contributes to the steady decline in business and household saving.

People have not got enough money to put away.

New Zealand has failed to achieve a sustainable high growth economy. Real GNP per capita for the working age population has grown by a mere 0.2 percent annually in the fifteen years since 1984.

Over this time 70 percent of households have had no increase in real disposable income. You can not save what you don't have.

Last week I made an announcement that demonstrated the importance we attache to savings. The message I wanted to send out is that genuine superannuation savers, even if they are high-income earners, will be taxed at 33 cents.

The announcement has fuelled debate on both our tax policies and saving rates. I intend to look at other options for encouraging savings.


I've tried today to give you a broad-brush look at our fiscal policy. I wanted to give you a chance to get to know how I look at the world. To share my views on monetary management, savings and investment.

I want you to leave this conference reassured about the fiscal direction this Government is taking and secure in your investment in New Zealand. Whether that investment is in our people, new technology, capital development, primary industries or commerce – your contribution is invaluable and I look forward to working with you all as we enter the twenty first century with confidence.

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