A GOVERNMENT FOR ALL NEW ZEALANDERS.

This is the third speech in my pre-Budget trilogy. When I started out on this programme I said that I felt that in the past Budget processes have been excessively secretive. Of course there are issues of commercial secrecy and financial market sensitivity that need to be respected. The problem is that under the guise of commercial confidence, too much had been concealed for maximum public relations impact of release. What I wanted to establish was a practice of as much and as early a release as is consistent with the genuine requirements of commercial confidentiality.

At times in the last fortnight I have wondered if that openness has been worth it. I remain convinced that the principle is worth promoting. I do need, though, to go back and restate the basic messages of my first two speeches because some aspects of those messages have been distorted in the transmission.

My first speech looked at the financial dimensions of the Budget. I indicated that there were a number of nasty surprises in the baselines on which pre-election fiscal projections were based. That, and other considerations meant that the spending profile outlined in the Budget Policy Statement has altered. There was more of a front-end loading within the overall spending cap, but the three year projected spend was as outlined, and operating balances seemed secure. If anything, projections were for slight increases in surpluses compared with BPS preliminaries.

I made particular mention of the discipline and constraint that my Cabinet colleagues had exercised, individually and collectively. The message transmitted as something like “Cullen a fiscal conservative but can he tame the spending impulses of his Cabinet colleagues”! I stress again that the Budget was a collegial not a Ministerial exercise and that there is collegial buy-in to robust operating surpluses.

My second speech ranged over the economic landscape to set the economic context within which the Budget would be presented. The key theme there was that we are not on a roller coaster cycle like that of the 1990s. The growth we are experiencing is broader based, with stronger contributions from investment and exporting, and is less dependent on debt funded private consumption. It is less inflationary because the wider geographical and sectoral composition is putting less pressure on scarce resources. Finally, the rapid growth of the second half of 1999 does not reflect a boom-bust pattern. There were abnormal aspects of the December quarter growth pattern that will not be repeated: America’s Cup, Y2K provisioning, millennium partying, election advertising and so on - all coinciding.

Having put my earlier two speeches back in perspective, let me now move on to the theme of today’s speech: the policy context in which the Budget is being prepared.

Budget priorities, legislative proposals and the process of monitoring progress in major policy areas are all related to the benchmark key goals that the government set early in this term of office. They were printed in full in the Budget Policy Statement and I do not intend to read them out again.

The point I want to make is that Budget priorities are neither random nor idiosyncratic. The government’s policy agenda is broad. It is broad in terms of the things that matter, and broad in terms of who benefits.

It is useful to look at the recently announced arts package to illustrate these points. I think that there is a general feeling out there that over recent years we have lost something of the essence of being New Zealanders. There has been a type of economic reductionism at work. Values have been reduced to the single measure of money. Life has narrowed to material consumption. Culture has been universalised and commercialised.

A broader set of values celebrates our identity in the world as a people who support and defend freedom and fairness, who enjoy both the arts and sports, and who take pride in our cultural heritage.

Those values have been victims of policy neglect and financial scrimping. A restoration of the arts and culture did depend on substantial financial reconstruction. The cry I hear is that this is luxury spending: we are funding the elite when there is more need elsewhere.

I reject that. The government has to build its credibility on being relevant to all New Zealanders in all dimensions of their interests. Relief of poverty, concern about excessive inequality and creation of opportunity are basic obligations of a modern democratic state. They are not the only obligations, though.

A more expansive policy agenda does, however, have to be paid for. This means that the government needs to be fiscally responsible. It also means that a richer policy target complements but does not displace other dimensions of social and economic life. Being pro-people does not mean being anti-business.

The Budget therefore has to be concerned with cementing in an economic environment that welcomes, encourages and rewards business. I have been saddened by the tone of some recent commentaries that suggest that the government is anti-business, or at least indifferent to business concerns.

I don’t see much point in going through each of the negatives that have been aired, although each can be firmly and convincingly rebutted. Instead, I want to accentuate the positives.

I want to give some indication of the sort of business environment that the Budget is contributing to. It is always necessary to keep a sense of perspective with this. Budgets themselves tweak the business environment rather than shape it. The bigger picture issues like the state of world demand, the level of interest rates, and the value of the dollar are the first order contributors to the framework within which business is done, and the government has little or no influence over these areas.

Remember also that the Budget itself is only one part of the wider policy and regulatory framework that government policy constucts.

Before I look at the specifics of the Budget let me put my Finance Minister’s hat on and look at the state of business from the perspective of wider economic policy.

I must stress that I am not talking about massive change. The days of radical and continuous restructuring are over. The benefits that theory suggested were to be had from restructuring always tended to be overstated, the time required for them to appear was underestimated and the costs of transition tended to be discounted or ignored.

I am talking about revisiting those parts of the business environment that contributed to an overall pattern of performance that was not sustainable – financially and politically.

I don’t want to overstate things, but I do think that for clarity of the message there is at times a need to sharpen the issues of concern.

A lot of what happens in business is a rational and logical use of our natural endowment, our history and the imperatives of new technologies and new world economic conditions. There, is though, a trend within that that is of concern.

The trend is to focus more on commodity extraction and simple transformation, and less on added value production: de-industrialisation if that is not too simplistic a description.

At the other end of the spectrum, there has been a trend to rely too much on speculation and anticipated inflation of asset values and not enough on building up the use value of economic endeavour.

The pattern of extract, borrow, speculate and consume has not dominated the business landscape - but it has put a blot on it.

As we have moved to greater reliance on the extractive economy, too much of the focus of policy has gone on cost reduction, and not enough onto value enhancement. Business can make profits by cutting costs or adding value. The problem is that one business’s cost is another person’s income. Cost reduction can cut corners, and have a very short-term focus.

Of course we need to be conscious of costs. The problem arises when cost-consciousness displaces other values, including business values.

Cost-obsessive policy does not pay sufficient regard to the human dimensions of production and consumption. The Employment Contracts Act is an example of excessive emphasis on lowering labour costs. It wasn’t fair, its lack of balance made it politically unsustainable, and it did allow some elements of the business community a cheap labour option for staying competitive.

The problem is that we all know that there is no future for our country in a race to the bottom on the wages front. The Employment Relations Act will reconfigure one dimension of the business framework. It will reconfigure that around notions of dialogue and fair dealing.

The government is determined to make sure that the detail is consistent with that basic intention. It is prepared to listen to concerns over whether particular provisions in the Bill have unintended and unwelcome side effects. It accepts that it has a duty to minimise uncertainty over the sorts of risks that employers and, for that matter, employees, may face.

The fine print is being worked over in the Select Committee process, and the time given to the Committee to deliberate on submissions has been extended. The end result will reflect the policy intentions behind industrial law reform. That intention is that the law will not load the dice in favour of the unions, or load inappropriate risk or compliance costs onto business. It is directed at constructing sensible industrial relations legislation for a civilised and progressive society.

Similarly with the environment. The long term future of our country lies in co-existing with and profiting from our unique environmental heritage, not using it as a source of short term material supply.

There will always be a transition to take into account. This government is much more attuned to the need to allow time to make that transition. It is also a government that recognises that the new sunrise industries and activities do not simply spring up out of barren ground. They have to be nurtured, and the government does not back away from its responsibilities in that regard.

I say this because there has been some casting of government policy on West Coast issues and on the ownership of fishing quota as reflecting an anti-business attitude in general and a hostility to foreign investment in particular.

Nothing could be further from the truth. We have one of the most open foreign investment regulatory regimes in the world. Very few investment proposals even require government consent. Those that do have to meet a national interest test. Most pass it. Our fish resource is a national asset and no government could or should be indifferent to who has rights to use it. The government has done no more than apply the national interest test enshrined in pre-existing legislation to the applications by foreigners to own a large part of the fish quota. This in no possible way signals hostility to foreign investment.

I am saying that longer-term considerations of interaction with the environment will form a part of the new business framework. That should be welcomed because it creates a more, not less secure foundation for businesses that are there for the long haul.

The regulatory environment that has emerged in recent years has also not been helpful. It has tended to help bulk buyers rather than niche innovators. The electricity review, and the telecommunications review should help to rebalance that part of the business framework.

If we look at our business mix, there is an inescapable conclusion that during the 1990s, levels of business activity were propped up by rapidly rising private debt. Household debt doubled, from about 50 percent of annual disposable income to nearer 100 percent. A lot of that debt was sourced offshore and intermediated by the banks through to local borrowers.

It is not possible to keep an economy growing by relying on an ever-expanding level of private debt, particularly if that is associated with a persistent current account deficit.

The business mix therefore needs to alter so that there is a more consistent element of export growth and investment growth, relative to private consumption.

That sort of mix is consistent with more stable growth and with less damaging monetary policy tightenings. In the course of that there will be examples of enterprises that are not experiencing the same sales volumes as they did during the heady days of America’s Cup and millennium partying. They will make good copy. Overall, though, for each bad news story we should expect two good news stories.

There is a good flow of income into the export industries in particular and into the provincial economies in general. On top of that there will be some hiccups. Volatile petrol prices is one that comes to mind. It doesn’t help, though, if everything is presented with a negative gloss on it.

Let me give you two examples. Last week, the preliminary April trade figures were released. They painted a reasonably optimistic picture, with the rate of export growth rising and the rate of import growth falling. There were distortions created by the petrol price increases and some recent lumpy imports of aircraft, but overall there was a marked improvement in the trend balance. Unfortunately, the focus was on the negatives in the headline numbers, not the positives in the trend.

I also read an article in the Timaru Herald about the “tripple whammy” farmers were facing with a falling dollar, rising petrol prices and rising transport costs. Now rising petrol prices and rising transport costs are one and the same whammy. But the extraordinary aspect of that report was the price change that had the one biggest single impact on improving farm incomes – a lower exchange rate – was portrayed, almost instinctively, and certainly unthinkingly as a negative.

There is a need to get out of this funk. There is a new configuration of the business environment. It is fairer, environmentally sustainable and more sensitive to the tradeable sector. It is not radically different from the old one. It is still open, and transparent. The government does not direct or stifle. Our regulatory environment remains one of the lightest in the world.

I can now get back to how the Budget could help redirect the momentum of business along this more desirable and sustainable path. I am not going to give you the line by line detail and the precise dollars attached to each element.

There are, though, four big picture features of the Budget that contribute to creating and sustaining this more balanced business environment.

The first is the emphasis on encouraging and supporting young people to acquire skills. This seems to be increasingly central to our social and economic fortunes. A regime under which students watched helplessly while debt compounded under the weight of interest charges in the years before they could hope to earn incomes does not encourage young people to be confident and aggressive in lifting their skills.

The apprenticeship system has been languishing, and while it could not be rebuilt on the approach of the past, training policies lacked vision. The modern apprenticeship programme is designed to upgrade the technical skills capacity available for deployment.

The second main initiative is that set of programmes that fall under the heading of industry development. It is hard to develop new industries, particularly those with an export focus. Governments should not protect and subsidise, but they can lower barriers and help new industries over those that remain. The mix of policies to provide that support will be an important feature of the Budget.

Thirdly, the government is determined to maintain operating surpluses over the business cycle. On current indications these will at least match those foreshadowed in the Budget Policy Statement. This takes pressure off the need to raise interest rates and, all other things being equal, contributes to a set of monetary conditions that are kinder to businesses and are particularly exporter friendly.

Finally, there is the proposed fund to meet part of the future pension entitlements of retired New Zealanders. The main purpose behind that fund is to improve the confidence of New Zealanders that when they retire, New Zealand Superannuation will be there for them. It will, though, have a very positive effect on capital markets. For many years now our own capital markets have suffered from a lack of liquidity. This mainly reflects the low level of private savings. The creation of an investable fund of substantial proportions will inject new life into equity markets, and free up funds for investment in new ventures and the expansion of existing ventures.

Each of these elements would make a sizeable contribution to the health of the business sector. They are, however, complementary and I envisage substantial synergies flowing from them.

A part of governing for all New Zealanders does of course mean restoring those basic elements of the traditional welfare state: the right to education, to decent and affordable housing, to health treatments and to an income in retirement.

The changes that have already been announced restore New Zealand Superannuation to its Accord levels, and reintroduce income related rents for low income state house tenants. The market rents policy that the last government introduced was one of the most destructive of its many misguided initiatives – both socially and economically.

You can also expect the Budget to attend to the needs of the education and health sectors.

There is, however, a bigger picture out there. This Budget will rehabilitate many features of our economic and social infrastructure. It is, though, not a final document. It creates a platform on which we build the sort of government programme that is relevant to the modern state.

In looking forward, I would like to share some thoughts with you on where the next policy challenge might lie.

Later this month, Treasury will be releasing a discussion paper on changes in income distribution in New Zealand. It was prepared by the very well respected economic analyst and statistician Des O’Dea.

I don’t want to compromise the launch by pre-releasing the details of the findings, but they are very important in establishing a platform on which to construct the next phase of social policy, so I do think the study rates a mention in the context of Budget policy.

As you will know, there are different concepts of inequality and different ways of measuring it. The O’Dea study covers the topic from all angles, looking at the different concepts and using different measurements. They all paint the same picture.

The picture is that during the last fifteen years, inequality increased. This is not unusual – it has been a trend observed in almost every country, and certainly every developed country, in recent times. The significant thing about New Zealand is that the increase in inequality here was relatively large compared with other countries and we now have one of the most unequal income distributions in the developed world.

The increase in inequality came about through a squeeze on middle income households. They moved both up to the higher end of the income spectrum and down to the lower end. A lot of the change was driven by a structural fracture in the earnings profile of men: away from regular and reasonably well paid full time employment to more intermittent employment, with pockets of shorter time and less well paid jobs. And of course the reverse – others moving into long hours and high paid jobs.

There is significant “churn” in the income distribution: people moving up and down the earnings ladder. By way of example, over two thirds of all men who were in the bottom fifth of earners will not be there four years later.

About half of the increase in poverty cannot be explained by easily identifiable and measurable factors, but that still leaves the other half that has identifiable causes. The two main causes are the increase in the number of sole parent households and the change in the age and qualification mix of family members.

There is poverty - defined as households earning less than sixty percent of the median income - but also quite a lot of movement in and out of poverty. Persistent poverty - families never out of poverty for a year or more - is relatively limited, but still worryingly large and hopefully avoidable. Indications are that persistent poverty is not likely to be caused by being on welfare benefits. In other words, being on a benefit does not seem to trap people into a position from which it is hard to get off that benefit.

I won’t go on, but do suggest that the O’Dea study will make a very powerful contribution to the debate about where we go from here. It should allow a sign off on the facts.

It does pose, but of course does not every try and answer, some fundamental questions about the policy challenges of the future. Is an increase in inequality a problem, and if so why? Is it inequality or poverty that we should focus on? When we focus on either, is the fact of unequal incomes the target or only persistent disadvantage? Is the target the individual, or the family, or the neighbourhood, or the region? It does seem that skills is the answer almost regardless of what the question is. But how can we penetrate the core problem areas in an effective way?

There is a lot of work still to be done.

This Budget sets a scene. It cleans up some areas of neglect and establishes a new framework. It does not conclude the debate. There is still a lot of innovation left for me to report to you on next year.

ENDS

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