Michael Cullen Luncheon Address In New York
Address to AAA/US/New Zealand Council Luncheon
12 noon, April 17
Hon Dr Michael
Minister of Finance
Minister of Revenue
Stability and Growth
The United States is New Zealand's number one source of foreign direct investment and our second largest export market so I am delighted to have the opportunity to speak to you today and to introduce myself as New Zealand's new finance minister and treasurer. I am proud of the progress the new Government has made since taking office in December last year and would like to share some of that with you.
I also want to talk about how we see ourselves on the world stage, as trading partners and as an investment destination.
But first let me talk to you briefly about my role in the Government. My responsibilities do not end with the finance portfolio. I am also Minister of Revenue, Minister for Accident Insurance and Leader of the House.
It keeps me busy and makes for a very bulky business card. But it also keeps me focused on the big picture.
This is a good time to be a New Zealander. This summer we became the only country outside the United States to successfully defend the America's Cup. 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.
All this is reflected in high levels of business confidence. Among the general public too, there is a new optimism that the country is headed in the right direction. A lot of that can be put down to the "honeymoon period" which often accompanies a change of Government. But the sense of momentum in the country is exciting and alive with opportunity.
The election result which brought in the Labour-led coalition was emphatically a vote for change. But it was not a vote for radicalism. We know that to win a second term we need to hold the middle income voters in the political centre.
That is a recipe for evolutionary rather than revolutionary change - for marking out the direction in which we want to take the country and moving slowly and steadily in that direction.
It is also a recipe for fiscal conservatism. New Zealand has been in budget surplus since 1993 and this Government is determined to remain well in surplus across the economic cycle. That should not present too great a difficulty on current forecasts.
Treasury is forecasting a pattern of rising surpluses over the next four years - from $1 billion in 2000-2001 to $2.6 billion in 2003-2004.
The Government's fiscal objectives were laid out in the Budget Policy Statement delivered last month. The purpose of the BPS is to set out the broad parameters in which the June Budget will be prepared.
Our fiscal objectives are:
To keep net public debt below 20 percent of gdp on average.
To make a down payment on the fiscal impact of the demographic bulge by partially pre-funding the costs of supporting the baby boomers in their retirement. The ratio of retired to those in the working age population is projected to more than double by 2051.
Sound fiscal policy requires that we make forward provision for the spending pressures these demographics imply long before they hit. We plan to do this by establishing a dedicated New Zealand Superannuation Fund for the accumulation of assets to assist the country over the cost bubble.
Another fiscal objective is to keep revenues and expenditures in broad balance on average and at around current rates of about 35 percent of gross domestic product.
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.
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 new Government is determined to restore public faith in the political process. To do this, we are committed to honouring the promises we made to the electorate. We have got off to a strong start in that regard.
Since taking office, we have raised the minimum wage, restored the based rate for the State pension to 65 percent of the average ordinary time net weekly wage, eased access to tertiary education by reducing the interest costs on student loans, and initiated inquiries into electricity pricing and into whether the New Zealand telecommunication market is sufficiently open to competition.
We have 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.
We have introduced a new 39 cent tax step on incomes over $60,000. This compares to a top rate in Australia of 47 percent, Ireland 46 percent and Britain at 40 percent. I would also point out that the new rate will not affect foreign investors because we have held the corporate tax rate at 33 percent.
We have raised the top personal tax rate to support our spending programme. Again, the change is not radical. Our higher expenditure and revenue policies represent less than one percent of GDP on both sides of the ledger. We are not about to reinvent the wheel. What we are embarked on is a re-balancing exercise to produce greater social inclusion and social and economic stability.
Our decision to freeze tariffs at current levels for the next five years, unless reciprocal cuts can be negotiated with our trading partners, should be viewed in this same stabilising context. We want to protect what little negotiating leverage remains to us, and to give our remaining few tariff protected industries time to adapt.
The tariff pause is fully consistent with our WTO obligations and can in no way be characterised as a leap back to protectionism. New Zealand remains a very liberal market.
Ninety five percent of our imports by value are
tariff free, and the average weighted applied tariff in New
Zealand now is only 0.66 percent.
The new Government has returned workplace accident compensation to a State-owned provider. We believe this is the best and most cost efficient way both 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 of the centre-left. They are moderate 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 Government, not only because we will need to build structural surpluses if we are to pre-fund the fiscal costs associated with the ageing population but also because we are mindful of the constraints imposed by New Zealand's large current account deficit.
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 well outside my comfort zone as finance minister.
To fix the problems implicit in the bop deficit, we need a strategy to assist the export sector and to engender a savings culture among New Zealanders.
things will take a little time but I am confident we will
get there. We are putting in place a multi-faceted approach
built around three big themes:
To expand the export base, and to reduce our reliance on commodity production.
To encourage the transition to a "knowledge" economy.
And to raise national savings.
We have a tranche of measures planned to make it more attractive for people to save for their retirement. We have used the new 39 cent tax rate to create an incentive for high wage and salary earners to save. Employer contributions to company superannuation schemes will be taxed at the old 33 cent rate provided the savings are locked in.
I am also looking at ways to make private pension funds more attractive as a savings product. An easy first step is to reduce compliance costs by relaxing some of the reporting criteria.
More complicated, but also under active consideration, is whether the private superannuation industry should be offered the option of a taxed- taxed-exempt [TTE] rather than a taxed-exempt-taxed [TET] regime.
The two systems would have to be run in parallel to ensure no one was disadvantaged. But the benefit of a TET system is that allows the Funds to reinvest all their capital gains. This means the returns available to savers are higher - and that people are more inclined to keep their savings in for longer to make best use of the tax advantage.
New Zealand also needs and welcomes foreign investment, particularly greenfields investment which brings with it new jobs and sophisticated technologies. 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.
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, improve the effectiveness of our insider trading laws, 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 $1 billion in New Zealand over the next five years. So the importance to investors of a strong pro-competitive framework is well-established.
New Zealand was forced into a painful economic 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. And we have a number of small engineering firms 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 speed the transition to a knowledge economy, we will announce in this year's budget moves 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 trend.
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 and, in Team New Zealand's case, on the water 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.
This is by no means a complete list of the new Government's initiatives. That would not be possible in the time available.
But I hope it gives you the flavour of what we are doing as we seek to provide economic leadership and practical support to business and to add value to the New Zealand economy so that we can raise the living standards and life prospects of our citizens.