Cullen Speech- Trans-Tasman Business Circle
Trans-Tasman Business Circle
DR MICHAEL CULLEN SPEECH TO THE TRANS-TASMAN
BUSINESS CIRCLE LUNCHEON
ANA HOTEL SYDNEY
Thank you for the invitation to speak to you today. Because Australia and New Zealand are so close, share a common market and have such similar institutions, we often think we know a lot about each other.
When my itinerary for this visit was being put together, I was sent a list of issues that finance market people in Australia wanted to discuss with me. The questions that were identified made me very aware of the gaps in understanding that persist in spite of our closeness.
I therefore intend to restate material that some of you will be familiar with, but it is necessary to get the economic, fiscal and policy record straight.
I will start with the state of the economy.
In the year to March 2000, the economy grew by 4.4 percent.
There has been a fair degree of movement between the different contributors to growth, quarter by quarter. In the second half of 1999, we went through Y2K provisioning and millennial parties, and hosted the America’s Cup challenge. Not surprisingly we saw strong stock-building and a high level of activity in the retailing and hospitality sectors.
In the early part of this year, there was a surge in construction activity as a host of inner city gentrification projects neared completion.
This means that it is not all that easy to get a clear fix on the growth path, and certainly not appropriate to project future growth from the patterns of the recent past.
As a general rule, I think that we are seeing a reorientation of economic activity. There is a steady improvement in exporting, and the export base is widening. Tourism is looking particularly healthy. Stocks are returning to more normal levels. There seems to be a pause in construction. Consumption is growing at a less heady pace, and is strongest in the secondary cities. There is a renewal of some public sector activity that had been badly run down. Investment levels are encouraging.
This year’s Budget contained growth forecasts from the New Zealand Treasury that saw economic activity increasing by 8.6 percent over the three years to March 2003. Since then, the New Zealand Institute of Economic Research has issued its forecast which is for 9.1 percent growth over the same period, and Westpac has forecast a 9.3 percent three year total.
Overall, the picture that the forecasters are painting is for an economy growing at about 3 percent a year, with growth somewhat stronger in the near term and tapering a little further out. It is dominated by continued healthy growth in exporting and tourism, driven partly by robust world economic activity and a somewhat favourable exchange rate.
That is a fairly comfortable outlook, although the government does recognise the structural weaknesses in the economy that need to be addressed. These are the large deficit in the current account of the balance of payments, a low national savings rate and poor labour productivity growth. They are, of course, interlinked.
I will turn now to the fiscal outlook.
The Budget confirmed that the incoming government is fiscally conservative.
We expect to report an operating surplus of around 0.7 percent of GDP for the year that has just ended. This will rise to 0.9 percent of GDP in the current financial year, 1.8 percent in 2002, and 2.2 percent in 2003.
Beyond that the forecasts become more hazardous. The government does, though, publish a progress outlook, which contains a ten year fiscal projection.
This Budget introduced a new concept in fiscal reporting in New Zealand. It was termed the “fiscal allowance”. The fiscal allowance works like this.
The government has set itself long-term fiscal targets. These are to keep government spending at around current levels of 35 percent of GDP, to keep net debt at below 20 percent of GDP and to maintain an operating surplus across the economic cycle. The question we asked is what degrees of tolerance do we have in meeting those objectives. There could be fiscal slippage for any one of a number of reasons: lower than projected growth, erosion of the tax base, tax cuts, more spending, extra injections into funds to meet the costs of an ageing population to mention a few. The allowance is the extra amount that can be tolerated without compromising the long-term objectives.
In total, an allowance of $1.2 billion a year each year from 2003/04 is consistent with meeting the fiscal targets.
That is a very strong medium term and ten year outlook.
claim three things:
that the forecasts depend on an overly optimistic economic outlook;
spending pressures will derail the near term surpluses and
the fiscal record of the government has more to do with the economy it inherited than with its own efforts – that it was more good luck than good management if you prefer.
I will deal with each of them. Firstly, the forecasts that have come out since the Budget are more optimistic than those on which the Budget was based.
Secondly, while it is true that the spending in the first year is much larger than that left for the out years, the demands on later year spending will not be the same. We implemented the core election pledges early in our term of office. There will not be the same volume of new initiatives to be faced in the next two years. In fact the amounts allocated for 2002 and 2003 are roughly the same as the government lived with in the discretionary spending areas of the 2001 financial year.
Finally, I reject absolutely that I spent the surpluses I inherited from the outgoing government.
Changes in the projected operating balance have two elements: policy changes and forecasting changes. The former are deliberate and the latter come about because of a changed economic outlook.
In the four years 1999/2000 to 2002/03 there is a net $168 million increase in the operating balance as a result of policy changes. In other words, this government was more, not less, fiscally prudent that the outgoing government had intended to be.
The main changes were that the new government allocated the amounts the previous government had provided but not allocated to specific projects, it reversed a tax cut that had been planned, and it increased the tax rate on high incomes.
This does raise the issue of whether we are a fiscally prudent but high tax government. Again, perspective has to triumph over rhetoric.
The net effect of various tax and other revenue initiatives was about $900 million a year. This is less than one percent of GDP and less than 2.5 percent of total revenue.
A rising operating balance, particularly because it is associated with a rising structural surplus, is likely to increase national savings and take some pressure off monetary policy. The macroeconomic settings should therefore assist with reducing the current account deficit, although the new government does not accept that all a government can do to correct an external imbalance is to run higher surpluses.
It has therefore developed a more active business development programme, with an export development emphasis. The core features of that programme are skills enhancement, promotion of research and development, and strategic partnerships between the government and the private sector.
The government firmly believes that the new environment will prove attractive to foreign investment. In the past, too much inward investment has been directed at buying existing assets and enterprises.
There are some benefits in that, typically associated with technology transfer, access to export markets and better integration of global production and marketing.
The national benefits are, however, greater if the same volume of inward investment is on greenfields ventures or directed to expanding existing enterprises.
I have been disturbed by some comments that have filtered back to New Zealand that the government has changed its attitude to foreign investment. It hasn't. Let me put the record straight.
As a general rule, foreign investment needs no authorisation.
Where the amount involved is over $50 million, and the overseas person is going to control 25 percent or more of the asset, it does. However, there is only an “investor” test applied: does the applicant have business experience and acumen, demonstrate financial commitment and is of good character.
The exception is where land and the offshore fishery are involved. These are seen to be sensitive and strategic resources. Consent is required to own land over 5 hectares and/or worth more than $10 million, land on most offshore islands, and sensitive land over 0.4 hectares, such as land next to historic or heritage sites. For the purposes of these exceptions, the North and South Islands are not regarded as offshore of Australia. Consent is also require to own fish quota.
In these land and fishery areas, a national interest test is applied in addition to the investor test. There is nothing new in this. It has applied, largely unchanged, since the mid 1970s.
The legal regime is not very tidy.
Firstly, in 1998, the then National/ New Zealand First Coalition amended the law to apply a smaller screen to the size of sensitive land needing clearance. It also imposed a requirement that land to be sold to foreigners be offered first on the domestic market. For some funny reason the law has never been activated. The new government has to remove that law from constitutional limbo.
Secondly, the authorities implementing the law were operating under an instruction from the previous government that applications should be approved unless there was good reason to decline them. My legal advice is that this instruction could itself be ultra vires the law that requires a neutral or even handed evaluation of all applications.
I also have some discomfort that a regulatory agency has an instruction to advocate a particular attitude to the subject it is supposed to regulate. We pay other agencies to promote and attract foreign investment – it seems silly to have the regulator doing it as well, or even doing it at all. On the other hand, we have increased the funding available for attracting overseas investment.
So there is a long-overdue tidying up going on. But it is just that: a tidying up. There has been no anti-investment policy switch, and if anything the new government is spending more, not less, to attract foreign investment.
There was one decision – on the ownership of fish quota – that has been used to attack the government on its attitude to foreign investment. The notable thing about that decision was that it was notable. Almost all the four hundred or so applications that are received are approved.
The issue in question was ownership of a particularly large amount of fish quota, in a particularly valuable species. On many occasions I have said that on that particular application the decision would have been the same regardless of who was in government. The opposition has not challenged that.
I want to turn finally to the legislation that is proposed for modernising our industrial relations legislation.
At present we have one of the most extremely deregulated labour markets in the world. The Court of Appeal describes it as a regime of take it or leave it contracting. In employment terms that regime means that employers define the offer and workers take it or leave it.
The regime hasn’t delivered the labour productivity gains that were claimed for it. It is not consistent with basic International Labour Organisation and OECD standards. It is industrially, morally and politically unsustainable.
The government is therefore rebalancing the law around concepts of good faith bargaining co-existing with individual choice. Our labour market will still be less regulated than yours, and there is no attempt to go back to labour market demarcation, exclusive rights of unions to represent categories of workers, or compulsory arbitration of disputes.
That is where things stand on the other side of the Tasman. I should comment briefly on where things might head in a trans-Tasman context.
When we look at the economic performance of the common market partners, there are three things that tend to stand out: differences in the operation of monetary policy, differences in our commercial law, and differences in the performance of share markets.
It would not be appropriate for me to comment on the design and implementation of monetary policy in Australia. There has probably been a degree of convergence between the operations of our respective Reserve Banks during the 1990s.
For our part, we are conducting a review of monetary policy and have commissioned the highly respected Swedish economist Lars Svensson to carry it out. The review does not represent a shift in core principles as they apply to monetary policy. The current regime has been in place for ten years and it is time to review its operations.
There has been a concern that the regime has reduced volatility in inflation but has not been so successful in reducing volatility in real output. There are also issues of governance and transparency that need to be addressed.
The independence of the Bank and its primary focus on price stability are not open for review. We just want to improve operations if that is possible.
At this point I need to explain the way that the New Zealand coalition government is structured. We are in the learning stage with a new proportional system of government. In 1996, the incoming coalition government tried to resolve all differences in advance by way of a detailed Coalition Agreement.
They soon found out that times and circumstances change, and that there are often trade-offs and compromises needed along the way. In my view, the rigidity of the coalition agreement was a factor in the break-up of the coalition.
This coalition has formed around a more generalised statement of common values and an agreement to work constructively on issues of the day. It also has a provision that allows for disagreements between coalition partners. This provides for flexibility while maintaining stable government.
Under the agreement, the minor party may publicly state its position on specific government policies, at the same time respecting that those are the policies of the government and supporting them with appropriate votes and the like.
The Alliance Party has a long-standing and well-known view on the operation of monetary policy. Under the flexibility clause of the coalition agreement it can express concerns and establish its brand differentiation on this issue. The bottom line, though, is that I speak for the government on matters relating to monetary policy, and the Deputy Prime Minister, who leads the Alliance, acknowledges, respects and supports that.
There are a number of regulatory reviews under way. I think it is clear that there has been some concern about our laws on takeovers, the protection of minority shareholders during takeovers, and laws and practices governing insider trading. We are also reviewing the regulatory regime governing the telecommunications and electricity industries.
The regulatory reform is motivated by a desire to see more effective competition.
I have not addressed the need for greater policy harmonisation with Australia, but am mindful of the need to see if this is necessary when I get the time to look at it.
And so to stock markets. We have a common market for goods and services and a common labour market. In this day and age there is growing integration of stock markets globally as well. I know the markets in our two countries are talking to each other about a range of matters including the prospect of eventual amalgamation.
That is not a matter for government intervention, but if amalgamation did need facilitation by the government passing enabling legislation, I have indicated that I would support such a move in placing it before my Cabinet colleagues.
If we do end up with a common goods, service, labour and stock market, why would we need separate currencies, some might ask. A common currency has been raised as an issue back in New Zealand.
I note that there is not the slightest interest in one on this side of the Tasman, and that disinterest coincides exactly with my own sentiment. So we will leave it at that and continue to monitor the cross rate.
What I would wish to emphasise in conclusion is that New Zealand is going through a modest level of rebalancing after many years of rigid adherence to neo-classical economics and its associated theories of governance.
Looked at in Trans-Tasman terms, this means that some of our policy settings are now a little closer to yours. But at both state and commonwealth levels, Australia remains more interventionist, less orthodox, than New Zealand. Far from lurching to the left, we have made a modest move to the centre.
For a few in the New Zealand business community that has come as a bit of a shock. But from outside it is important to filter out the political noise of a few on the extremes and recognise what the new government is setting out to achieve.
That is to assert New Zealand’s right to a place in the premier league of the global economy by a more pragmatic use of the power of the government to transform the base of the New Zealand economy. To do that requires us to address how to improve our performance in research and development, science and technology, savings and investment, skills and infrastructure.
We welcome any and all assistance that is
directed to the same ends.
Inevitably, Australian investors, Australian companies and Australian institutions will be part of that. We welcome that continued co-operation and linkage. And when we succeed, perhaps even the Warriors might start winning.