English Speech: Cullen's Bridge to Nowhere
Hon Bill English National Finance Spokesperson Pre-Budget
Cullen's Bridge to Nowhere
Beehive Theatrette 5.45pm, Wednesday 7 June 2000
Next week the Government will set the tone of this term in office in its first Budget. Dr Cullen is preparing that Budget against the background of a growing economy, yet there is a good deal of apprehension in the wider community about where the economy is headed.
There are two tests the Budget must pass.
The first is an economic test. New Zealand needs a budget which turns around confidence and builds bridges to the business community because the cost of confusion and lack of confidence falls on real people with real jobs and real aspirations.
The second is a political test. The social sectors - health, education and welfare - will be looking for the fiscal dividends Labour says they were denied in the last decade - just as the art and culture sector already have pocketed theirs. They will be looking for the substance to the Government's rhetoric on closing the gaps.
The 1990s saw real GDP growth of 24 percent and 300,000 new jobs. As boring as it seemed then, New Zealand developed a consistent, predictable economic framework. National left strong government finances, dropping unemployment and a recovery better balanced between the export and the household sectors. Savings and investment have been responding to long-term low inflation, and people can see better skills mean higher incomes.
If you listened to the Government you'd think this had just turned up in the last month. What was, according to Dr Cullen before the election, a weak, unbalanced recovery after a decade of low growth, has in the last month become a strong, sustainable, well-balanced recovery.
But it's the slump in confidence which dominates the run-up to the budget. I want to take a larger view of why it matters for New Zealand. The Opposition has focused on the ERB, but the ERB is just part of a wider project.
The common thread behind Helen Clark's policy on ACC, ERB, taxes, tariffs, OIC, bulk funding and the like is a move back towards centralised control and decision-making. Each policy is the result of a political deal with some part of the community at the expense of others. Added together, these policies amount to a direction opposite to where the world is going.
Western countries are going through a period of unusual prosperity. This has been fueled by a combination of a technology wave and the accumulated benefits of a shift to lower tax and liberal regulation policies.
Macro-economic conditions are largely stable -- inflation is low everywhere, and budget balances generally back towards the black after 10-25 years of worrying deficits. Growth has been consistently higher and inflation consistently lower than expected, prompting a debate about whether we are in a new paradigm.
Wherever there is stronger economic growth, its ingredients are high skill levels, lots of capital and strong incentives.
We share some of our problems with most countries; long term dependency, crime, and widening income distributions. Popular unease about these trends has seen the election of Left-leaning administrations around the world. But even these economies - the United States, Britain and Germany - have pursued orthodox economic policies.
New Zealand has been warming up on the sideline, waiting to get into the game. Our uptake of e-commerce is picking up. We have worked to add commercial skills to our State-dominated R & D capacity and a venture capital market is taking off. There have been anguished efforts to unlock the capital still locked away in our traditional export sector.
We have been economically vulnerable. The current account deficit shows we need net capital flows of $5000 - $8000 million per year to balance the books. This is a large financing requirement by international standards. This has been sustainable under favourable world economic conditions, a path to improvement in the deficit, and confidence in the direction of economic policy.
Along came the election, the Government changed, policy changed and now most observers do not have confidence in the policy direction. These observers range from Standard and Poor's through to sole traders operating in small provincial towns.
The currency and business confidence are barometers of collective judgement on economic policy. All sorts of people are responding to the evidence at hand.
Overseas investors are important, and they are losing confidence, but domestic investors are every bit as important. We are witnessing outflows of capital owned by New Zealanders. Institutions are shifting assets abroad, while retail investment flows into foreign stocks and bank accounts appear to have accelerated sharply. New Zealand savers and savers in other countries have reached the same verdict.
What is the Government doing about this? It's developing an unhelpful trait of shooting the messenger. The principle offender is the Minister of Finance followed closely by the Prime Minister. Local economists are termed "not very bright," global commentators such as Standard and Poor's are "extremists." The Government's critics are "political enemies". The Opposition is "unpatriotic."
This slump in confidence is not, as the Labour government fondly believes, ideologically driven. It is the conclusion of practical people who have seen all shades of policy tried here in New Zealand and around the world.
The problem isn't just Jim Anderton. Helen Clark and Michael Cullen have a particular zeal to change New Zealand that shows their political roots in the Left-wing thinking of the 70s.
Here's an incomplete list. The ERB and nationalising ACC are just the start. Ahead of us are legislation for pay equity, paid maternity leave, a new ACC bill widening entitlements and a raft of complex tax bills plugging the hole in the top tax rate. There's legislation unpicking the education system from pre-school to tertiary, a reform almost as big as the wholesale health reform also due this year. We have yet to see what the Government does with its review of the telecommunication and electricity sectors.
Then there is the review of the whole tax system, and Dr Cullen's proposal for a superannuation fund designed to last 60 years, accumulating $50-80 billion and affecting every New Zealander. Housing policy is going back to the 70s. Add to these social measures covering marijuana, a rewrite of the law affecting every relationship in New Zealand and the prickly issue of abortion law. And I almost forgot - Steve Maharey tells us he will "reinvent the welfare state." And of course there's the "peoples bank."
No other country in the world is enacting these policies now. Nowhere else is a Government hanging its economic destiny on these the policies.
Did the Government really have mandate for all this? Don't people have a right to draw their own conclusions about such a wide-ranging radical reform of New Zealand? The business community is just first out of the blocks.
The alleged benefits of all this are short-lived, and the export sector knows it. A lower currency helps their incomes but fertilizer is going up 5% this week. No-one got rich on a weak currency.
The government has decided to take the high-risk option. They have bet this is a political rather than a policy problem, so Helen Clark's solution is a few more meetings with the business community and slagging the Alliance.
I say to the Government - stay home in the interests of the nation. The more the business community sees of the prejudice against enterprise and business at the heart of "the Clark project" - to borrow a Blairism - the less they will like it.
Why does confidence matter so much? Because it underpins future growth - jobs and opportunities. The debate about the Government's economic direction is about real differences for real people.
Under the ERB people less able to compete for jobs just won't get them. When things go wrong in the economy, unemployment will be more persistent. The ERB will open gaps, rather than close them.
Opportunities come from investment. New Zealand invested relatively small amounts of capital for each new job through the 90s. Higher-paid, better skilled jobs will need investors to put up more capital for each new job.
Instead we see an outflow of capital and skills. We are losing more skilled people at a time when economic growth should be stemming the flow.
We will pay a high price for the Government's strong tendency to isolation from mainstream world thinking.
Are these just lessons from the well-off, well-trained, globalised section of the community? No. The Government will over the next few years feel the political pressure from a much wider range of New Zealanders. Households face increased income and excise taxes, rising interest rates, rising prices because of a lower dollar, and flat house prices.
This will be the first Budget for half a decade which does not include a significant boost for the incomes of low and middle-income working households in New Zealand. Instead, families are paying.
Tomorrow, National will release
results of a study of the increased costs ordinary New
Zealand households face since the election.