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Michael Cullen Speech To Wellington Chamber

16 June 2000
Speech Notes


WELLINGTON CHAMBER OF COMMERCE


DR MICHAEL CULLEN SPEECH TO WELLINGTON CHAMBER OF COMMERCE

The Budget is now nearly twenty fours hours old. It is time for me to absorb the comments that I have heard on the Budget and to respond to them.

The first general comment I want to respond to is the comment that there was not enough in the Budget for business.

Let me start with the easy ones first. There have been comments that there was no “big idea” for business, no “circuit breaker”. Of course there wasn’t. The big idea these days is that there is no big idea. A business friendly environment is a combination of a lot of co-ordinated sensible ideas.

A Budget is but one part of that combination. The first and foremost contribution that a Budget can make to a stable commercial environment is to assure the community as a whole that the government is financially sound.

This Budget gave a very clear indication of the fiscal prudence of the government.

The general picture that the Budget paints is one in which the projected operating surpluses are larger than those projected by the previous government in its pre-election fiscal update. Over the three years from the 2001 to the 2003 financial years, those surpluses are, on average, $320 million a year better than the pre-election numbers.

There has been some niggle about whether these numbers stack up, or whether they depend on overly optimistic economic forecasts. The forecasts are cautiously sensible. Indeed, the more recent forecasts from the NZIER – an organisation that has been generally more gloomy than many in the economic community – show slightly better overall economic growth over the next three years than the growth forecasts that underpin Budget numbers.

I do not think that the Budget can be seriously questioned on the basis of its fiscal probity. Commentators cannot have it both ways. Those who say there should have been more in it for business cannot then argue that the government is not being sufficiently prudent.

Those surpluses have not been constructed on the back of a raft of new user charges. This is particularly important for some sections of the business community. It must be remembered that the baseline spending plans I inherited included an expectation that $29 million a year would have been recovered from the tourist industry as user charges for border control: customs and agriculture inspection services at airports and the like. By meeting those costs out of the fiscal cap that the government imposed on itself, the government gave direct support to an exchange earning part of the business mix.

I think that the business community sometimes forgets all the bits that go to make up its support network.

The Budget is also strong on upgrading the infrastructure. Economic studies indicate a close link between the adequacy of the infrastructure and the rate of growth of productivity. This is common sense. Your businesses are not going to extract value from a new rig and a driver stuck in a traffic jam. Transfund has announced a raft of new initiatives to upgrade the transport system.

There are new programmes to partner and leverage business activity. The industry assistance, regional development and research and development packages are three of them.

I should comment on the R&D initiative, because it has attracted some of the most negative comment. The general comment is that there should have been tax deductibility of R&D, instead of or in addition to the grants.

Deductibility was the method that the Labour Party favoured as the best means of stimulating more private sector R&D. I stress method, because it was only ever a means to an end not an end in itself.

The strong advice that the government received was that grants would be more effective in stimulating private R&D.

There were a number of reasons for this. Firstly, R&D is, in general terms, tax deductible now.
Much of it is immediately deductible and a lot of the rest is treated as a capital item and depreciated over time. Deductibility changes the timing of the tax deduction, and with few exceptions not the amount of the deduction, and hence is only marginally supportive of more spending.

Secondly, deductibility can have what my colleague Pete Hodgson calls magnetic effects. It attracts all sorts of dubious classifications, and stimulates imaginative accounting rather than imaginative science. It can have open ended and unpredictable fiscal impacts. In order to stop that very complex rules have to be constructed – best illustrated by the 46 pages of legislation needed in Australia to define and control the tax treatment.

The tax route has high compliance costs and complications.


We would hope that a lot of innovation will take place in fledgling or start-up companies: they will not have the profit flow to deduct the expense, so they have almost no support. Grants can give or match real dollars and deliver material benefits.

We will keep the programme under review, both as to amount allocated and the method by which it is allocated.

I also think that there is a tendency in business to regard human capital as a free resource, or at least one that is developed at someone else’s expense. The Budget made large investments in human capital and this is directly resourcing both the quality and the quantity of inputs to business.

The revised student loan scheme will encourage more young people to obtain tertiary qualifications and the pilot modern apprenticeship scheme will hopefully establish a workable basis for a major initiative to upgrade technical skills relevant to the modern economy.

If there was a general criticism from the business sector it was that the Budget was more of a social Budget, and was more about sharing the cake than growing it. The government makes no apology for its equity goals. It is a defining difference between the parties that make up this government.

My point today, though, is that it is very short-sighted to see spending that attacks the social deficit as spending that crowds out business. One of the new strands of thinking about the global economy is that economic success is now less related to the size of a country than to its social cohesiveness. A country at war with itself is not a productive and efficient one. We will not have a sound economy if thirty percent of the citizens are marginalised within it.

Finally, there is the question of tax. Some business groups have argued that there should have been a cut in the company tax rate. That is not a live prospect at this point in time.
Be very clear about this: there would have been no cut in the company tax rate had National been in government. There is simply not the fiscal head room to allow that.

Any fiscally irresponsible cut in the tax rate would almost certainly have been negated by a compensating increasing in interest rates as the Reserve Bank moved to counter the loosening that would be associated with such a move.

I would add that the raft of business assistance measures I have summarised today would not have been possible without the changes to the top marginal tax rate that the government made.

There is, then, a need for consistency. It isn’t possible to have more R&D spending, tax deductibility of R&D, more money spent on training, a lower corporate tax rate and larger budget surpluses. Yet that sort of fantasy Budget is precisely the sort of unreality that is being constructed by some of the Budget’s critics.

I mentioned at the start of this speech that the Budget was but one part of the mix that established the business environment. The government cannot do everything to create the other parts, but it can do some things. In that respect, there are some off-Budget policies that need to be clarified.

Firstly, the government is committed to maintaining sound money. The independence of the Reserve Bank and its primary focus on price stability has been entrenched. The review of the operation of monetary policy should improve the way the bank operates within that framework.

The rules on overseas investment are being tidied up so that administrative practice is consistent with the intentions of Parliament. We will maintain one of the most open and investor friendly overseas investment regimes in the world.

Industrial relations legislation will be rebalanced around the concept of promoting good faith in employment whilst retaining choice on employment status. I am confident that when the final changes are made to the Employment Relations Bill, we will have an equitable and efficient labour market.

The Budget is now behind us. The challenge that lies ahead is to use the opportunities that exist. Some of those exist independently of anything the government has done or can do. The challenge is also to manage the threats. Again, some of those arise independently of anything the government has done.

Contrary to what some commentators would have us believe, every piece of good news is not necessarily the result of benign market intervention, and every piece of bad news is not necessarily the result of malevolent government intrusion.

We need to start to recognise those vital distinctions. More importantly, we need to talk about them. There is now time and space to talk to, not at, and certainly not past, each other. New Zealand demands that we both do that.


ENDS

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