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Cullen Addresses UBS Warburg Investor Luncheon

Address To UBS Warburg Investor Luncheon London


Dr Cullen's speech to UBS Warburg Investor Luncheon, London

Good afternoon. It is a pleasure to be here with you today. This is my first visit to London as New Zealand's Finance Minister and I welcome this valuable opportunity to be able to speak directly with such an influential group of international investors.

Today I want to talk about a number of issues:
 The way forward for the New Zealand economy
 The regulatory and structural reviews currently underway
 New Zealand as an investment location

Let me start by giving you an overview of the New Zealand economy.

At the time of this year's Budget, the New Zealand Treasury was forecasting growth of a little under 3 percent per annum, on average, over the next four years. A lot has happened since then, and in particular domestic economic activity has slowed and the exchange rate has depreciated, especially against the US dollar.

The Treasury will be updating its forecasts in December. In the meantime, I can report that the New Zealand Institute of Economic Research – the country's largest independent forecasting agency – issued its updated economic forecasts a few days before I left New Zealand. They forecast a slightly lower growth rate in the 2001 financial year but higher growth in the out years. Overall the average forecast growth rate is 3 percent – fractionally up on the forecasts in use at Budget time.

The economic outlook is therefore good.

So too is the fiscal outlook. New Zealand has been running fiscal surpluses for some years now.

The 2000 Crown Financial Statements were recently released. They show a larger than forecast operating surplus for the year to June. We are on track for fiscal surpluses, a falling debt burden and a gradually reducing level of Government spending as a percent of GDP.

Looking forward, the Government remains committed to its prudent fiscal policy, by staying within the three year spending cap we set at the start of our term of office, and focusing on ensuring we get value from the money we spend at the moment.

We are encouraging a reorientation of economic activity towards exporting and tourism. This is driven by strong world demand and a competitive exchange rate.

The effect of that switch will be to take some pressure off the weak external accounts this government inherited.
The current account deficit is now hovering slightly over 7% of GDP and we have a legacy of over dependence on domestic consumption as the engine of economic growth. Based on a series of multifaceted and interlocking policies, Treasury’s Budget forecast is that deficit will reduce to around 5% of GDP over the next two years.

The long term fiscal targets we have set ourselves are: to keep government spending at around current levels of 35% of GDP, to keep net debt at below 20% of GDP and to maintain an operating surplus across the economic cycle.

We need a pattern of structural surpluses over the foreseeable future if we are to ease both our economy and our society through cost pressures of an ageing population.

New Zealand has one of the most open economies in the world – the result of years of economic and structural reform. However this has not resulted in one of the best performing economies in the world.

We are not returning to an overly regulated market but neither do we accept that a completely free market will deliver the living standards we demand for our citizens.

At the macroeconomic level, the government is continuing with a programme of fiscal conservatism and monetary policy orthodoxy.

The Budget projected an operating surplus of around 0.9 percent of GDP in the current financial year, 1.8 percent in 2002, and 2.2 percent in 2003.

There are a number of other features of the economic policy framework that have been retained or reinforced. Among them are:

 A commitment to an open and facilitative inward investment regime.

 A determination to forge wider trading partnerships, especially in the East Asian and South American theatres. We have finalised negotiations for a Closer Economic Partnership with Singapore and we have recently opened a new embassy in Brasilia.

 Expanding Closer Economic Relations with Australia

 Ongoing efforts to reduce business compliance costs.

I know there is no quick fix to the current account deficit but the Government is confident we can make significant progress over time.
We are actively supporting the move to what we call the 'knowledge economy' or 'info-tech' as it is known in the U.S. The health of the export sector is a top priority and we recognise that we need to put in place policies to help lift our national savings rate.
We are encouraging New Zealand industry to become more involved in export activities and we want to attract high quality foreign investment capital and know-how for productive export oriented industries.

New Zealand's regulations governing foreign investment are liberal by international standards.

There are no rules on the maximum level of equity interest a foreign investor may take in a New Zealand enterprise, except with respect to ownership of certain lands, domestic fishing quotas, Telecom and Air New Zealand (in accordance with international aviation conventions).

There are no restrictions on the movement of funds in or out of New Zealand, or on repatriation of profits. No additional performance measures are imposed on foreign owned enterprises.

Investors need the certainty of level playing fields. We have instigated a number of regulatory reviews to shore up the competitive environment and to make sure small investors and consumers are adequately protected under New Zealand laws.

The Government's objective is to encourage growth in the productive sector via investment in the stock market.

The Government is also supporting the harmonisation of business law with Australia. The argument for this alignment is made stronger by the prospect that the two stock exchanges may merge - a move the Government stands ready to facilitate should legislation be necessary.

A merger would give New Zealand companies greater access to capital.

We are giving more teeth to our commerce laws and to get a better deal for consumers and small businesses.

We are making a number of changes which will all act as deterrents to companies thinking of acting anti-competitively.

We are implementing a takeovers code to ensure that small investors get fair treatment in takeover situations and to improve overseas perceptions of our market.

The Government is also undertaking a review of the Reserve Bank. We want to investigate ways of enhancing the Bank's ability control inflation without unnecessary volatility to the economy, employment, interest rates and the exchange rate.

There has been a concern that the regime, in place now for ten years, 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.

The Government has commissioned the highly respected Swedish economist Lars Svensson to conduct the review.

Finally, in the tidy up of regulations and reviews, the Government is undertaking is a tax inquiry to examine how the tax structure meets New Zealand’s current and future needs.

A top to bottom review is long overdue. The last one, in 1967, pre-dated the global economy, the deregulation of the financial sector, e-commerce and such important social developments as the rise of the two income household and the single parent family.

The Inquiry will be independent and will report back to the Government by the end of July 2001. Its task is to design a set of principles to guide tax policy, to measure the current system against these principles, and to recommend changes to bring the two into closer alignment.

Officials will then develop concrete policy proposals for reference to the public through the next election campaign.

We recognise the extent to which international direct investment underpins our economic development. It creates new business in New Zealand, which in turn creates jobs and exports. As well as supplementing New Zealand’s limited domestic capital investment, it can also provide market access, technology and management expertise.

We have implemented a number of different programmes: to support regional development, to help get good business ideas up and running and to help entrepreneurs raise finance early on in the life of a new venture.

The government is working in partnership with business to help New Zealand become a leader in e-commerce. We are holding a summit this year to work quickly to improve the competitive environment for the telecommunications industry, to roll out the e-government programmes and to lift education and skills in information technology.

New Zealand is an attractive location for new technology industries. We are one of the most "connected" countries in the world.

The $2 billion Southern Cross Cable, which is expected to go live on November 15, links New Zealand, Australia and the United States and will allow for the huge volume of Internet traffic that Australasia is expected to generate.

New Zealand's widespread and enthusiastic adoption of IT has put us way ahead of many other more tentative countries. It has generated a thriving software industry. We spend 7 percent of GDP on IT – among the highest in the world.

New Zealanders create leading-edge technology. Now positioned as a global supplier of niche solutions, New Zealand software is in demand internationally.

New Zealand gets up first in the world. The dramatic growth of the "follow the sun, open all hours" call centre has seen New Zealand become an attractive option for global companies. We do the “night shift” for a number of markets as our time zone supports the Asian market yet is complementary to European and North American operations.

New Zealand has long been a world leader in agricultural and forestry research and development and continues to be so. Our R&D activities are now spreading across a wider range of industries of electronics, telecommunications, information technology, food and beverages, environmental technology, medicine and pharmaceuticals, biotechnology and energy production and advanced engineering.

The Government strongly supports New Zealand's growing reputation as a centre for excellence in R&D. In the budget we raised public sector funding by 10 percent – the largest increase ever. Recently the Government's new $11.8 million grants scheme to help firms carry out research and development opened for business.

New Zealand offers promising investment opportunities for international companies in the advanced technology fields such as electronics, software and biotechnology. Food and wood fibre industries offer enormous growth potential because of New Zealand's comparative natural advantage.

New Zealand is renowned for being a niche specialist in imaginative "can-do" manufacturing and design. Our ability to solve difficult problems in a cost-effective way offers significant competitive advantages for international manufacturers or investors.


We have made tertiary education more affordable and reduced the burden of student loans. We have revised and modernised apprenticeships.

New Zealand's workforce is stable and adaptive. Our new labour law, which comes into effect next month, is a return to the international mainstream. The law is designed to promote collective bargaining and good faith relationships.

Our labour market is still lightly regulated by world standards, comparable as it is to aspects of industrial legislation in parts of the United States.

Before I conclude I would like 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.

It is important for external observers of New Zealand policies to focus on the formal government programme, not on any qualifications that are registered about aspects of it.

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.

Thank you for the opportunity to speak with you today. I have tried to share some of my enthusiasm for the land we call "god's own" and the government's plans for transforming our economy so we can take our place in the 21st century as active, innovative global traders.

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