Michael Cullen - "The Prosperity Triangle"
Friday 3 March 2000
Chateau on the Park Hotel
Hon Dr Michael
Minister of Finance
Speech to IPENZ Congress 2000 "The Prosperity Triangle"
Thank you for inviting me to speak to you this afternoon. As Finance Minister and Minister of Revenue, you will appreciate that the theme today - whether NZ can recover its standard of living - is critically important to me.
This Government is determined to make New Zealand the sort of country we want to live in and are proud to live in. That means a country that thrives both culturally and economically.
would like to share with you the course we have charted
Our strategy is multi-faceted but is built around three main themes: to diversify and grow the export base, to encourage the transition to a "knowledge economy" and to improve savings.
But first, let me start with a story to illustrate where we have been:
American investor noticed a man with a computer and a
telescope, on the rooftop of the tallest building in
Wellington. He asked him what he was doing.
'Looking for the economic recovery we were promised. Record GDP growth, high productivity, low unemployment and burgeoning overseas reserves and investments.'
Intrigued, the American asked "how can you do that."
"Well, I trained at our top university economics department. Worked for Treasury on the reforms. Did course at a big US university. Came back and went into consultancy for the top merchant bank and wrote reports for the Business Roundtable. Now I'm up here to give an early warning of when the reforms finally work.
"Hey, could you warn me about the next stock market crash before it happens?"
'I'll put you on top of the Empire State Building, you tell me first and I'll go short and make a fortune. I'll pay you a million dollars a year.'
'A million dollars a month?'
'Why not? Don't you want to get rich?'
"Do you think I'm stupid? Looking for the next crash and I could soon be out of a job. Looking for the success of the New Zealand economic reforms and I have a job for life.'
Can we recover our standard of living? Yes, we can.
Will the recovery be led by more of the same endless restructures and reforms that has marked the last decade?
Will it be led by more of the same misguided faith in the so-called "invisible hand" of the market?
I think not. We will not get to our destination by going back to the past, either distant or recent. Most commentators now agree both heavy regulation and extreme hands off are proven failures in transforming our economic base.
Our standard of living fell from 15th of the OECD countries in 1960 down to a lowly 21st in 1997. More of the same will produce just that - more of the same. We must move away from simply processed, resource-based commodities to high value exports.
New Zealanders voted for more than a change of government at the last election. They voted for a change in economic and social direction. New Zealanders were never asked about the destination the last Government was taking them to but we were given a very clear message that it wasn't where they wanted to go.
Next Wednesday I will be releasing this Government's first Budget Policy Statement - the Budget preview.
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.
Prudent fiscal policy requires that we set out long-term sound objectives that reflect the Government' broad fiscal goals:
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, that is, across the business cycle. This gives us an allowance for pre-funding the costs of the aging baby boomers and this, in turn, enables the Government to keep faith with retired New Zealanders without the need for harsh tax increases or social spending cuts.
For the first time the BPS will not contain all of the finalised detail of the programmes to be contained in the Budget. The 2000 BPS focuses more on the restrictions under which those programmes will operate - rather than on projecting the costs of each element in those programmes.
While we are currently enjoying an upturn of the economic cycle, what is called a "sweet spot", with rising consumption, exports, investments and employment, the structural problems in the economy remain.
No country can be complacent when it has a current account deficit running at more than 6 percent of gross domestic product. There is no quick fix to the deficit problem.
Likewise there are no band aid solutions to other long-term structural weaknesses, in particular
· increasing foreign ownership which means that
less and less of what we produce is available to us, as a
· the patchy distribution of unemployment and the deterioration of services and facilities in the provinces,
· the social and economic "gaps", especially between Maori and non-Maori.
The prevailing orthodoxy of the last decade has failed spectacularly to address these issues. This Government has put them at the top of our economic policy agenda.
The prosperity triangle we are developing will encourage the move to a "knowledge economy", will diversify and grow our export base and lift our national savings rates.
In support of the knowledge economy, we are developing initiatives to encourage and assist companies to invest more on research and development. We will also expand the successful Technology New Zealand project by funding it on a demand-driven basis over the next few years.
But the real action is in improving the country's intellectual capital by investing more in developing the skills and creativity of our people. Compared to the rest of the developed word, our skill levels are dismal. To counter this, we are setting up a modern apprenticeship programme.
We have also made it easier for people to enter tertiary education by trebling the subsidy to students in the student loans scheme and we are committed to reducing the burden posed by student fees over time as monetary conditions permit.
Too many of our brightest and best abandon New Zealand to seek better paid work and to escape high levels of student debt. Thirty five thousand people leave every year for a better life in Australia alone. If we pay for their human capital and another country benefits from them, then we are clearly the losers.
We need to tweak the funding formula to universities and polytechnics so we can influence the mix of graduates to reflect the skill mix we require. We need fewer lawyers and accountants and we need a lot more engineers, scientists, secondary school teachers, technicians and computer experts.
This week the Government launched its 'jobs machine' with the transformation of the Ministry of Commerce to the Ministry of Economic Development. Industry New Zealand will be set up as a model Crown entity. It will work in partnership with private enterprise and local government to breathe life into regional New Zealand and support the development of new high technology industries. We are developing a range of financing options, including a venture capital fund, to assist small and medium-sized businesses to get established.
The business community has responded warmly to the partnership model. The Manufacturers Federation acknowledged past policies have in fact, slowed the decline in New Zealand's comparative wealth and it realises a fresh approach is needed if the decline is to be reversed and real growth achieved.
Although it is almost beggars belief given our need, there is currently no significant programme or team in this country dedicated to attracting appropriate foreign direct investment.
To this end will expand Tradenz and establish a division within it to specifically attract important greenfieds foreign investment. This group will identify potential investors and investment opportunities, and provide brokerage and consultancy assistance. We will also provide direct assistance to exporters seeking to open new export markets through the provision of export guarantees and credit financing.
We are backing our commitment to create jobs and business development, to the tune of an additional $100 million a year by the end of our first term.
The pending Ministerial Inquiry into Telecom's apparent stranglehold on the telecommunications industry has already reaped benefits for the economy with the recently announced Telstra Saturn merger. The new company plans to invest more that $1 billion in New Zealand over the next five years. The Telstra Saturn joint venture represents a huge vote of confidence in this Government and our policies.
We are also launching an inquiry into the electricity market and we intend to back both these inquiries with tougher competition law.
A further critical piece of legislation, central to both improving skills and productivity is the repeal of the Employment Contracts Act.
When the National Party released its industrial relations policy ten years ago, it promised to create an environment that delivered high productivity, high income and high employment. A year later the inequitable Employment Contracts Act was passed into law.
Let us have a look at how the Act has performed using National's own benchmarks:
· Productivity. The results confirm what we all knew anyway. In the five years from 1987 -1991, labour productivity rose by 1.5% each year. In the eight years from 1991-1999, labour productivity rose by only 0.5% each year.
· The second criterion is income. As a general rule, high incomes have risen and low incomes have fallen. It is clear that not only has the ECA failed to lift wages, but it has been instrumental in widening the gap between rich and poor. A fact confirmed last year by Statistics New Zealand.
· So to the last test - employment. Here, the Employment Contracts Act fails twice. The latest Labour Cost Index for the December quarter confirmed that employment growth is mainly in lower-paid sectors and worse, the labour market has become casualised, more brutal and less secure.
We will soon introduce legislation to the House to repeal the Employment Contracts Act and replace it with fair industrial law. Industrial relations law based on unequal bargaining power and bad faith has not and will not produce the high skill, high wage, knowledge economy we are determined to build.
The new Employment Relations Bill is part of an integrated package of measurers aimed a providing greater fairness and opportunity in the workplace. It is not a return to compulsory unionism. It is not anti-business. It is, however, an integral part of building a modern economy based on skill and productivity.
To support our third objective - to lift savings - we plan a series of badly needed measures.
But first, it is worth reiterating that savings is undertaken for investment and in fact is by definition equal to the amount of investment. Thus a satisfactory level of investment implies an equally satisfactory level of saving.
In New Zealand there are some serious problems with the savings/investment balance.
There is evidence that the quality of the investment may have left something to be desired - to be blunt, we have not generated a sufficient return on our investment comparable to others.
The second concern is with the composition of our savings. Ten years ago, 90 percent of our total investment was met by our national saving. The household sector contributed 40 percent of that and the government about 10 percent. The remainder was met by using the savings of foreigners and that foreign component corresponded to our current account balance.
Today we have a very different picture. Our total investment has grown by more than 60 percent. But we now only cover less than half of that with our national savings. Foreigners have "obliged" by meeting the rest of our needs, with the consequence that we now have a much larger current account deficit.
New Zealanders are finding it more and more difficult to put money away for that rainy day.
There is no one single explanation to account for our inability to save. We must look beyond popular but simplistic argument that we are spendthrifts who do not know what is good for us.
I have already announced that we will be offering a tax incentive to high income earners to save for their retirement by allowing genuine superannuation savings to be taxed at the 33 cent rate rather than at the new 39 cent rate. I am also considering reducing the compliance costs on superannuation schemes.
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. Furthermore the myriad hidden taxes and user-pays charges rampant over the recent past have hit hardest on middle income New Zealanders - soaking up potential savings.
Which brings us back full circle to the challenge of recovering our standard of living.
The Prime Minister is sending a new and compelling message to the country. For the first time we have a stable Coalition Government committed to delivering our election promises.
It is no accident that the first promise on Labour's pledge card to voters was to create jobs. More than any other policy, the creation of high skill, high wage jobs, is the key to economic recovery and stability.
I look forward to working with IPENZ and like professional groups over the coming years. Your knowledge, expertise and experience are invaluable to the growth, wealth and recovery of New Zealand's economy.