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Michael Cullen Speech To Christchurch Forum

It is a pleasure to participate in this forum which I hope will lead to further increasing the level of understanding between government and business. The primary issue that we face is in many ways quite a simple one: how to lift our economic game so that we can look forward to moving back into the top half of developed nations.

That means growing faster than the average.

Sadly, the opposite has been the case for much of the last forty years. Had we even kept pace with the rest of the developed world we would now be a far wealthier country than we are. Which also serves to remind us that some of the explanations for our relatively poor performance are, at the least, less than completely convincing.

For we have done worse than countries with both lower and higher tax rates, more and less rigid labour markets, lower and higher social spending as a proportion of GDP, and less and more regulated economies. Focussing on these issues to the exclusion of all else is rather like the daily media game of describing the changing value of the New Zealand dollar without reference to what is happening to other currencies such as the Australian dollar and the Euro. The real explanation of what is going on is thus left out as people try to explain movements in purely New Zealand terms.

In the same way, the government is convinced that the major challenges that we face as a nation in terms of improving economic performance lie in different areas of need than those which have often dominated public policy in the last decade.

Last year we had some difficulty for much of the year in conveying that message as clearly as we would have liked. Arguments over policy changes in accident compensation and industrial relations dominated relations with the business community for the first three quarters of the year in a way which led to a sense of frustration on both sides.

But by the end of the year the seeming stand off had been replaced thanks to a great deal of effort and goodwill on both sides. As a result we have seen strongly rising business confidence which is reflected in a stronger outlook for this year. The main threats we face are external – pre-eminently a Japanese economy which continues to struggle to recapture its past strength and the uncertainty over the extent of the slowdown in the US economy.

Whatever the short-term impacts of these two external factors - which, in my view, will not be as serious as a few commentators think – it is crucial we do not take our eye off the ball as far as the real issues we have to deal with are concerned. Indeed, whether we are looking at the short, medium, or long term requirements we end up specifying the same core issues which need to be addressed to improve our performance. Thus while external circumstances and the uncertainty surrounding them will impact rather unpredictably on us in the short term, that fact should not have any significant impact on the agenda the government should be following.

The agenda which will be pursued this year will, amongst other things, include the following:

- reducing compliance costs for business
- support for exporters
- attraction of investment for growth
- active business development policies
- the promotion of human capital and
- lifting our savings performance.

The attack on business compliance costs has both a general and a specific focus. The general focus is reflected in the work now begun by the panel under Alan Dunn. But from my perspective there is a special interest in a focus on the taxation side of compliance costs. A discussion paper on the compliance and penalties regime will be issued in a couple of months time. But other work will extend well beyond that discussion paper and I have asked Paul Swain as Associate Minister of Revenue to take special responsibility for these matters.

Particular attention is going to be paid to simplifying business taxation for small businesses.

Also on the agenda as far as taxation is concerned is progress on the so called triangular tax issue with Australia. I am sure we will make some progress, but whether as much as we would like we shall have to wait and see.

Finally, in terms of taxation, is the vexed question of research and development. There still seems to be some misunderstanding of the proposal in the discussion document issued last year, particularly a failure to recognise that the present arrangements will remain available for those who want them.

The Australians have just decided to make their system even more complicated and targeted. This will benefit some companies and especially those with an overwhelming scientific bent – but will be much less helpful for small to medium sized companies with an innovation emphasis. We should certainly not emulate the Australian model but find simpler and more broadly based solutions to encouraging research and development.

It is also important to put in perspective the size of the latest Australian package. Translated to the scale of our economy the research and development taxation pack equals about $5m a year. That is a little more than a tenth of the extra we put into last year’s budget package and will certainly be less than we will forego in changes to the New Zealand taxation regime.

The government will certainly remain keen to attract new companies into New Zealand, especially where that involves value-added or high level production. Already there has been a shift towards more business-specific investment attraction and I expect this to continue. The recent approval for the Nissui participation in Sealords, for example, was very much influenced by the value-adding strategy that was an explicit part of the application for approval.

In that respect it should be noted we have established an Inwards Investment Fund to lower barriers for potential investors. Already we have runs on the board from this kind of approval.

More generally, we will maintain an open and receptive environment towards foreign inwards investment, including a willingness to enter pragmatic negotiations with potential greenfield investors.

The introduction of a takeovers code, the demutualisation of the New Zealand Stock Exchange, and improvements to securities legislation should also assist in creating a better inwards investment environment.

Industry New Zealand is now tasked with the role of support for general business development in New Zealand and by the end of next year will have a budget of over $100m a year, not including any existing programmes which may be transferred into it.

The area where we have made only limited public progress so far but where behind the scenes work must lead to real action in 2001 is skills development. The Modern Apprenticeship programme is up and running. But the government will soon be moving into a decision phase on much broader issues of post-compulsory education and training. The present system is a muddle, the problems with which I would not describe better than Jim Donovan did on Television New Zealand on Wednesday night.

To realise the vision of moving us back into the top half of the developed world must involve solving those problems.

This year will also be decisive in terms of superannuation and savings.

The basic intention of the government’s scheme with respect to New Zealand Superannuation is to provide a sensible and secure basis for the long term provision of the first tier of retirement income. It is not designed to be an answer to all retirement income needs.

The state’s responsibility is to ensure a basic adequate standard of living in retirement. It is clear that the state cannot, and perhaps should not, do more than that. But neither can it, or should it, do less.

Often the claim is heard that the government should send the message that future retirees will have to rely upon themselves, that the state will not be able to afford any sort of adequate pension.

Against this two points need to be made. The first is a simple economic one. That is, if we collectively cannot afford an adequate pension then most of us will not be able to afford it individually either.

The second is that, on present projections, the long term future cost of public pension provision is no more than some European countries pay right now. It is important not to terrify ourselves and, instead, to maintain a sense of proportion.

Our proposed scheme preserves a flat-rate structure. It also preserves universality which means it does not act as a disincentive to private pensions.

What is needed is certainty over the future level of New Zealand Superannuation so people have clear and achievable targets for private savings.

The government’s proposal goes further in meeting that objective than any other proposal in the public arena. Certainly its major alternative: compulsory private savings on some defined contribution basis does not and cannot do any such thing.

I believe that once the provision of the public pension is put on to a secure footing and people know what they can expect from the state, they will be more motivated to increase their private retirement savings.

But to encourage that happy development, we may have to address a taxation system which has never been very savings friendly and has become less so over time.

Changing the present regime is not going to be easy. I would be less than honest if I claimed that either Treasury or IRD is keen to change the present taxed-taxed-exempt regime for private superannuation. It is possible to frighten oneself very severely with the likely fiscal cost of a change which would see all savings at present in the TTE regime moved into an alternative such as TEt (taxed-exempt-partially taxed).

But no-one, not myself and not the savings industry, is planning to do that. Discussions are occurring about how and what sort of changes can be made. But let me be blunt – the present system is broken and does need fixing.

Our savings record is very poor, and our long term savings record even poorer. It is pointless to bemoan the loss of New Zealand ownership of New Zealand assets unless we are prepared to generate more of our own investment needs.

But therein lies the third problem, perhaps the hardest of all. For, even if we lift our savings record, more of those savings will be invested in New Zealand only if we lift our overall economic performance and therefore offer comparable returns on savings.

This is not just a matter, however, of stronger growth. The taxation and compliance costs regimes with respect to superannuation do themselves influence the returns to savings.

Thus I come back to the central importance of an informed debate on taxation and savings this year. That has to be conducted within the constraints of fiscal reality and responsibility – including the government's plans for partial prefunding of New Zealand Superannuation.

For let me re-emphasise that one of the key areas of certainty that the government can offer is in terms of fiscal policy. We have laid out a conservative fiscal programme for this term of Parliament which I am determined to meet. That means saying no to all sort of people who in one way or another want to spend a lot more money. I need your help and support on that because in terms of international financial confidence in New Zealand it is crucial.

Finally let me say a few words about what the first President Bush famously called the vision thing. The government’s vision is clear: it is about lifting our economic game so that we become a high value-added, high skills, high technology economy that New Zealanders want to stay and contribute to. It is about getting us back into the top half of the economic first division.

But vision has to be translated into reality, into doable programmes and policies. And democracies do not, in that respect work like businesses – things are slower, boardroom coups are more dramatic, the accountability mechanisms are quite different, and everything, absolutely everything is under constant media scrutiny and special interest concern. But let’s make sure we are singing from the same song sheet about were we want to go.

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