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New Zealand in the Global Economy - Cullen Speech


Speech for the Asia Society Luncheon,
Hong Kong, April 12, 12.30 pm

Hon Dr Michael Cullen
Minister of Finance
Minister of Revenue

New Zealand in the Global Economy.

This occasion marks a first for me. This is my first international trip since the change of government, Hong Kong in the first stop on my itinerary, and this is my first formal overseas speech as New Zealand's new Finance Minister and Treasurer.

So for all those reasons, I am delighted to be here addressing you today.

What better place to start than Hong Kong - one of the world's great commercial and financial hubs and a significant source of investment capital. And what more appropriate subject for a Hong Kong audience than New Zealand in the global economy.

First a little bit about the new government. The election result which brought the Labour-Alliance coalition to power was emphatically a vote for change. But it was not a vote for radicalism. Our mandate from the electorate is a mandate for evolutionary rather than revolutionary change - for marking out the direction in which we want to take the country and moving steadily in that direction.

And while there is change, there will also be continuity because although the government has changed, the circumstances which create the New Zealand context have not. We are still a small population, geographically distant from the major markets of the world and dependent on exports. Exports are the lifeblood of the New Zealand economy.

That makes us free traders. Mike Moore, the director general of the World Trade Organisation, is a former cabinet and caucus colleague and a life member of the New Zealand Labour Party. Mike is a persuasive advocate and hard-headed. I know we can rely on him to advance the free trade agenda within the WTO with a blend of enthusiasm and strategic savvy.

New Zealand has formed a single market with Australia and is now engaged in discussions to form a free trade agreement with Singapore. We are also pursuing similar arrangements with Chile. Our Prime Minister, Helen Clark, attended the inauguration of the Chilean President, Ricardo Lagos, last month and secured from him a promise to take a fresh look at entering free trade negotiations with New Zealand.

As an agricultural nation, New Zealand is committed to the elimination of agricultural subsidies. As an exporting nation, we are committed to lowering trade barriers around the world because they inhibit our ability to compete.

As much as we need to export, we also need to attract foreign investment to New Zealand. We are particularly interested in attracting greenfields investment which brings with it new jobs and sophisticated technologies. We have been working quite deliberately toward developing a high technology and knowledge-based economy built around our highly skilled and computer literate labour force.

We will strengthen the foreign direct investment division within Trade New Zealand to identify potential investors and investment opportunities and to provide brokerage and consultancy services.

And we will put more resources into developing our educational services. We expect that will increase the numbers and quality of graduates available for high tech research and development in New Zealand and enhance New Zealand’s international reputation as a provider of high quality educational services.

At the same time, we will move to make New Zealand a more attractive investment destination by strengthening our competition and securities law. We intend to introduce a takeovers code, to improve the effectiveness of our insider trading laws, to lower the anti-competitive threshold and to impose tougher disclosure and penalties regimes. We have already sent a clear signal of our intentions in the competition area by announcing a Ministerial Inquiry into the telecommunications market in New Zealand.

The announcement alone was sufficient to persuade two telecommunication companies - Telstra and Saturn - to form a joint venture which will invest more than NZ $1 billion in New Zealand over the next five years. So the importance to investors of a strong pro-competitive framework is well-established.

The New Zealand economy is going through a growth surge and our export sector is looking forward to a bright year. World demand is picking up and commodity prices have rallied in key export markets.

Monetary conditions have tightened - as they have in all the major economies. But the New Zealand dollar is still competitive and interest rates are still relatively low. Both central forecasting agencies - the Treasury and the Reserve Bank - are forecasting growth of between 3.6 percent and 3.7 percent in the year to next March.

All this is reflected in high levels of business confidence and - among the general public - in a renewed optimism that the country is headed in the right direction.

We were sworn into office on December 10. In the intervening four months we have:
 Raised the adult minimum wage to $7.55 an hour.
 Restored the base rate for the universal State pension from 60 percent to 65 percent of the average, ordinary time, after tax weekly wage.
 Brought in legislation to protect the proportionality of our MMP system by requiring MPs to resign if they leave the party which brought them into Parliament.
 Eased access to tertiary education by reducing the interest costs on student loans.
 Introduced a new 39 cent tax step on incomes over $60,000. This compares with a top rate in Australia of 47 percent, Ireland, 46 percent, Britain, 40 percent and the United States 39.6 percent.
 The 39 cent rate will not affect foreign investors in New Zealand as we have kept the company tax rate at 33 cents. We would like to reduce it as fiscal conditions permit although we do not anticipate that will be possible within this parliamentary term.
 The new Government has returned workplace accident compensation to a State-owned provider. We believe this is the best and most cost efficient way to provide certainty of entitlement to workers and to protect employers from the litigation lottery and the risk of huge damages awards. The average risk-weighted premium charged by the insurance companies was $1.23 per $100 payroll. The average employers' levy under the new scheme, to come fully into effect on June 1, will be $1.16 per $100 payroll.

We are also introducing a new industrial relations framework to replace the Employment Contracts Act. The ECA never delivered the productivity improvements its architects said it would.

However I want to be frank with you. Our primary reasons for repealing the Act are not economic. We repealed it because it did not conform to basic ILO conventions and because it failed to reflect the intrinsic imbalance in the worker-employer relationship.

The Employment Relations Bill, now going through Parliament, is designed to bring New Zealand into conformity with the ILO and to restore fairness to the workplace by promoting collective bargaining and requiring that both parties bargain in good faith.

It is not radical legislation. The New Zealand labour market will still be lightly regulated by world standards. In fact the North American model provides the nearest comparison to the system we are introducing in terms of its projected effects.

The initiatives I have identified are all in the social democratic tradition. They are not extreme, and they are affordable. The spending programme we have put together is deliberately modest. We will not spend money we do not have and we will not borrow to pay for our promises.

Ours is a fiscally conservative administration. New Zealand has been running budget surpluses since 1993 and this Government is determined to remain well in surplus across the economic cycle.

Treasury forecasts are for a pattern of rising surpluses over the four-year forecast period - from $1 billion NZ in 2000-2001 to $2.6 billion NZ by 2003-2004.

But while New Zealand's fiscal position is strong by international standards, our external accounts are weak. We are currently running a balance of payments deficit of around eight percent of GDP. That is way outside my comfort zone as finance minister.

There is no silver bullet solution to the current accounts problem. We have to raise national savings and grow the export sector.

The export strategy consists in two parts:
 To expand the export base.
 And to reduce New Zealand's reliance on commodity production by encouraging the shift to a knowledge economy.

New Zealand was forced into a painful transition by Britain's decision in 1973 to join the EC. Unfettered access to the large British market had allowed us to build our wealth on the export of three or four staple commodities. Things will never be that uncomplicated again.

Our future, as I see it, is much more in niche markets, across a wide range of goods and services. New Zealand already has a vibrant software design industry and could do a lot more.

I was interested to note, through our Consulate-General here, that the South China Morning Post recently carried an article on a wireless securities system for stock market trading which was developed in New Zealand and is being piloted now by the New Zealand stock market. The newspaper reports that there is interest in applying a similar technology here in Hong Kong.

Inbound investment in New Zealand over the last five years has been concentrated in the forestry, property, agriculture, services and manufacturing sectors. This Government is particularly interested in building up the country's advanced technology and manufacturing base.

New Zealand has a number of small engineering firms, employing 10 to 12 people, and specialising in short-run jobs. They can compete precisely because they are small-scale, adaptive and nimble and can seize opportunities as they arise.

Our industry development policies are focused on the small to medium-sized firm. We have set up a new Ministry of Economic Development to provide the policy advice, but the policies will be delivered through a separate agency - Industry New Zealand.

Industry New Zealand will not be a bureaucracy either in structure or in culture. It will have a strong private sector orientation and will be led by a board which will contain strong representation from the private sector.

We will provide direct assistance to exporters seeking to open new export markets through the provision of export guarantees and credit financing. We are also developing a range of financing options, including a venture capital fund, to assist small and medium-sized businesses with good ideas to get established.

To accelerate the transition to a knowledge economy, we will announce moves in this year's budget to encourage companies to invest more on research and development. A recent manufacturing survey found almost a third of New Zealand manufacturers had increased R&D spending in the last three years and we want to build on this momentum.

But the real action is in improving our intellectual capital by investing more in the skills and creativity of our people. It is they who give us our competitive edge. New Zealanders are well-educated and resourceful. The resourcefulness reflects our pioneer experience. But it is just as valuable in industry as it was on the land.

The Government is determined to remove - or at least lower - the cost barriers to tertiary education. We have already trebled the subsidy to students in the student loans scheme and will move to reduce student fees as fiscal conditions permit. And we are putting in place a modern apprenticeship scheme to encourage more young people to go into the trades.

I know the importance Hong Kong also attaches to top-quality education. There are now over 1300 Hong Kong secondary and tertiary students in New Zealand and we would welcome more. Education, along with tourism, is one of our largest and fastest growing service export industries.

An issue confronting many governments now is how to handle the cost pressures of an ageing population. The ratio of retired people to those of working age in New Zealand is projected to more than double in the next 50 years

Sound fiscal policy requires that we make forward provision for the fiscal impact these demographics imply long before they hit. That means raising national savings. We plan to do this by putting aside a portion of either revenue or GDP into a dedicated account for the accumulation of assets to assist the country over the cost bubble.

We nominated partial pre-funding of superannuation as one of our fiscal objectives in the Budget Policy Statement delivered last month. The purpose of the BPS is to set out the broad parameters within which the June Budget will be prepared.

We also want to use fiscal policy to soften the impact of the business cycle on the lives of New Zealanders and on the economy. We will not raise spending or cut taxes during an economic upturn. Instead we will bank the growth "dividend" created through higher tax takes and lower welfare spending to draw on in the down times.

Maintaining spending and tax at even levels through good times and bad will moderate the effects of the economic cycle, taking some of the pressure off monetary policy. This should in turn reduce the likelihood of disruptive swings in interest rates and the exchange rate.

The Government is anxious to avoid a repetition of the mid-1990s when the export sector was placed under immense pressure by a sharp increase in the value of the dollar. We have negotiated with the Governor of the Reserve Bank a new clause into the Policy Targets Agreement to reflect this concern and are in the process of commissioning a review into the conduct of monetary policy.

But the terms of the review are strictly limited. We are strongly committed to maintaining the operational independence of the Reserve Bank, to the 0 to 3 percent inflation target and to the maintenance of price stability as the objective of monetary policy.

These areas have been fenced off from the review.

The other fiscal objectives we have set ourselves are:

 To keep net public debt below 20 percent of GDP on average.

 And to keep revenues and expenditures in broad balance on average at around 35 percent of GDP. This is roughly where they are now.

We believe those levels of spending and tax are necessary to maintain quality public health and education services and to support our social and economic development objectives.

This is not an exhaustive list of what we are doing. But I hope I have been able to give you a flavour of what the new Government stands for. We want to improve the living standards and life prospects of our people. We can only do this on a sustainable basis if we maintain a fiscally conservative stance and if we have a well-functioning and balanced economy.


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