Cullen Speech To Remuera Probus Club
Speech To Remuera Probus Club
Hon Dr Michael Cullen, Minister of Finance
11 am, 13 March 2001
Remuera Golf Club
It is my pleasure to be with you here today. I would like to thank Frank Muller for taking the initiative in 'shooting for the top' as he so kindly puts it, to invite me to meet and speak with you.
This morning I would like to share with you my thoughts on the year ahead in terms of the government's intentions, focussing particularly on the economic transformation and the sustainability of New Zealand superannuation.
One of the lessons of our first year in office, and a lesson that others, perhaps, have yet to learn, was to determine what is within the government's control and what is not. Often times I hear that the business and financial sector 'look to government' to provide certainty in their environment. A government can only provide certainty in terms of its own intentions and actions. And no government can provide certainty in areas such as weather conditions, business confidence or international trends and events.
We make our living as a trader in a global market. It is beyond the capacity of this government or indeed any other, to offer absolute certainty in the modern world. Just think, if that is true of the USA, the world's mightiest economy, it must be even more so of New Zealand.
In recent times we have seen a great deal of volatility, both in subjective measures like business confidence and the actual environment in which we live and business operates.
We endured the Asian crisis, lived through the hype of Y2K and weathered concerns over policy changes. We swelled with the tide on the America's Cup and Auckland's boom and questioned whether the Japanese economy will ever again lead the world.
New Zealand is uniquely placed in terms of how we react to events in the rest of the world. On the one hand, of course, changes in the world economy influence our economic prospects. On the other hand, we are such a small part of the world economy, less than 1 percent, that even very small improvements in our world market share can see us grow very strongly indeed.
Given this, our potential to thrive on relatively modest improvement, it is source of national chagrin that over many decades we have failed to keep pace with the rest of the developed world. Our GDP per capita growth rate over the last decade is a mere 1.2 percent. Compare that to countries of a similar size, like Ireland at 6.4 percent or Finland at 4 percent, and you can see that we have not done very well.
New Zealand has been on a roller coaster ride of different policy agendas over the past 20 years and yet we have fared worse than countries with both lower and higher tax rates, more and less rigid labour markets, lower and higher social spending and less and more regulated economies.
We have a tendency to throw the baby out with the bath water with successive changes in leadership, policy and changing business fashions. Yet, successive governments have consistently failed to address the underlying causes of the problems that keep surfacing year after year: our low skills and technology base, our low savings and the lack of any clear government/business partnership.
All of these problems require sensible long term solutions. Beware the politician or the economist with a quick fix! There is no magic bullet but there are many things that a government can do.
We believe in the power of New Zealanders and this administration is unashamedly working to realise the enormous potential we hold as a nation. To that end we are:
- Reducing compliance costs for business
- Providing support for our exporters
- Attracting quality foreign investment to create jobs and opportunities for New Zealanders
- Creating active business development polices in partnership with regions and private industry
- Promoting our own human capital, and
- Lifting our savings performance
No doubt you have heard (and possibly wondered over) expressions like 'transforming the economy' and becoming a 'knowledge society'. Let me try and shed a little light on the concepts behind these terms – concepts that are vital to our success as a nation.
For many decades unfettered access to Britain allowed us to thrive on a few basic agricultural commodity exports: wood, butter, meat. Unprocessed, unadorned and highly subsidised.
We were forced into a painful transition by Britain's decision in 1973 to join the EC. Since then we have had to slowly develop new markets and new products. We talk about value added now. Timber and manufactured joinery, highly processed dairy products and chilled gourmet lamb and beef cuts.
In 1997 New Zealand imported some $12 billion worth of manufactured goods but only exported $4.9 billion, mostly at the low technology end of the spectrum.
That is changing. Last year overall exports rose by 25 percent and manufactured exports, not counting meat or dairy products, pushed past $12 billion in value, up an amazing 29 percent. Importantly $8 billion of these were value added products.
But still, the fact remains that 18 percent of our export income is earned from dairy products, 13 percent from meat and 11 percent for forest products. Clearly primary sector industries will continue to provide the core of foreign exchange earnings and any economic transformation must protect and enhance that core.
We need to debunk the myth that these resource based, primary industries are old economy using crude technologies. This simply is not true. Most of New Zealand's technological advances have concentrated in farming, silviculture, mining and fisheries. All are highly knowledge intensive.
Technology and the capital to back it are critical to the transformation of the economy. As I have said, that doesn't mean giving up on primary production, those areas where we have a natural advantage over the rest of the world. It means enhancing and renewing our primary products. It means trading in expertise, intellectual property and technology. It means applying our skills and innovations to the emerging industries: luxury yachts, film making, adventure tourism.
I like the way my cabinet colleague Pete Hodgson puts it, making more money out of 'stuff' by adding knowledge to it, and making knowledge itself into 'stuff' we can sell.
New Zealanders are by nature inventive. Our number eight fencing wire reputation is well deserved. We have not been so talented though, at taking our good ideas and making good businesses out of them.
We need to do everything we can to make sure that New Zealand has the systems in place that allow good ideas and inventions - be they from crown research institutes, universities or garden sheds - to be turned into successful businesses or new industries.
That means having an education and training system that encourages and rewards at every level, enthusiastic public and private sector research and development, the technological infrastructure, venture capital and development finances, intellectual property protection, and most importantly having the people with the good ideas and the ability to commercialise them.
The government is concentrating on making the system work better than it has and as well as it possibly can. There is no single measure that will achieve that. We have to tune up the whole by paying constant attention to each part. What we do first is to work out if it is something government can help with. Then we look for the best way to get a result.
For instance, Industry New Zealand was set up to help business and government work together at very practical levels like:
- Promoting local industry and monitoring industrial
- Working with businesses with high growth potential
- Supporting a number of strategic projects
- Advising entrepreneurs on finding investors and how to pitch to them
In a stark move away from the hands-off policies of the past; this government will become actively involved in New Zealand's venture capital market, specifically at the very early stage called the seed capital stage. We will be doing this in partnership - not in competition - with the private sector. Our goal is to speed up the development of new business formation and then get out when we are no longer needed.
Similarly, the government gave a $43.6 million boost for research and development including a record $20.3 million package for the private sector. I have signalled a clarification of the tax laws to encourage private companies to spend more on new research and development.
While Industry New Zealand is working with local firms to attract foreign backers we are very much aware that we have not always been well served in the past by the quality of some foreign investment. International companies came, saw, bought and sold. New Zealand lacked a culture and ability to actually grow a business; instead asset stripping and cost cutting were the shortcuts to short term profits.
I am keen to attract more quality investment into greenfields enterprises. The recent approval for Nissui's participation in Sealords is a good example of business specific investment. The value adding strategy that Nissui intends to bring to the company helped win the approval.
In order to attract and keep quality foreign investment we have an obligation to clean up our act for those people willing to invest in New Zealand. Our sharemarket rules need to be transparent and fair. We are putting an end to the sort of practice that led to the Montana takeover. Come 1 July, a new takeovers code will introduce some much needed discipline into our stockmarket, making sure that all shareholders, large and small, are treated equally in a company takeover.
Complementary to the Takeovers Code, we are delivering on our promise to strengthen the insider trading regime and give more teeth to the Commerce Commission.
Restoring the balance and treating people equally are important principles of this government.
We are bringing back accountability to government. We made some basic promises to New Zealanders and I am proud that we have kept them:
- We promised to put people before profit
in our health systems and we have. Here in Auckland we
expect that 48,500 patients will receive surgery this
financial year - about 5,000 more operations than last
- We promised to make tertiary education more affordable. A fairer loans system and frozen student fees honour that promise. Average repayment times have dropped by two and a half years. And a $6 million project within the Department of Work and Income has cleared up the loans processing and allowance problems of the past.
- Auckland's five tertiary education institutions will receive over $8 million extra this year.
- Our new Modern Apprenticeships programme is proving extremely popular with employers and employees alike. In the December quarter over $300,000 had been put into Modern Apprentices in the Auckland region, funding 79 young people into apprenticeships. We want to have 3000 young people signed up by the end of the year.
- We brought back income related rents for low income state house tenants and as at this month there are 51,000 low income families nation-wide who are better off. This means there is an extra $47 million circulating through the Auckland economy per annum.
- We increased funding to fight crime, especially burglary and youth crime – it's paying off. Burglary offences are at an 18 year low and we now have the best resolution rate in 12 years. In Auckland we have provided for extra Law Enforcement Teams to crack down on the criminal element. We take your safety seriously and with my first Budget, we took action. We provided Police with $86 million more for this current financial year. New legislation and programmes are coming on stream this year to make our streets safer.
- We promised to reverse the cuts the previous government had made to New Zealand Superannuation and to provide long term funding for the scheme and we did. On 1 April last year superannuation for married couples increased by $21.42 cents a week and for single superannuitants by more than twelve dollars. On 1 April this year, NZ Superannuation will increase again.
As well as restoring the wage floor for a married couple to 65 percent of the average net wage, we promise to maintain entitlement at age 65 on a universal, non-means tested basis. A decent society looks after its elderly.
My proposed New Zealand Superannuation Fund is one of the coalition Government's most significant initiatives but we cannot make it a reality without strong support from people like you.
Some commentators have tried to generate alarm about the scheme by describing it as a 'monster'. In fact, its scope is rather modest. We need it to sustain the pension at current levels through the cost bubble created by the baby boomer generation as they retire.
Today the net cost of NZSuper is 4 percent of GDP. By 2050, it will be 9 percent. You can see the looming cash flow problem.
What I propose is to smooth these costs by building up a capital fund for investment. A dollar saved now, earning net interest at 6 percent a year, will be worth $4.30 in 25 year's time. Unless we build this nest egg, the choices open to future governments and future generations will be stark; cut the value of the pension, means-test, raise the qualifying age, raise taxes on the working population, cut health and education spending or some sort of combination of inequities.
None of these options are politically or economically sustainable. The electorate has shown that it punishes governments that meddle with NZS. The National Party admits its decision in 1998 to cut Super cost it a lot of support in the last election.
At the moment 16 percent of voters are 65 or older. In a quarter of a century that will have risen to one voter in four. This will be a hugely influential voting bloc that no political party can afford to ignore.
So any decision to reduce the value or availability of the pension would be reversed at the ballot box. At the same time, if the cost burden were borne completely by the workforce through higher taxes, workers would vote with their feet and leave New Zealand for more forgiving tax regimes overseas. Both scenarios are unacceptable to me.
Some have wondered about whether the Fund can be sustained fiscally and whether the surpluses it relies upon can be achieved. Some of this scepticism dates back from the end of the Muldoon era to the early nineties when the country ran persistent deficits.
This was the exception rather than the norm. For most of our history, New Zealand governments have run surpluses.
Let me turn to some specifics. The highest anticipated annual contribution is $2.4 billion in 2010. As a proportion of projected GDP this becomes a much more manageable 1.7 percent.
By 2016, the annual contribution is less than $2 billion in today's dollars. By 2019 it is less than the equivalent of one percent of GDP and by 2026 there will be no further need for any new injections into the Fund.
So, what we are looking at then, is a tight period form 2005 to 2010 during which something like 1.7 to 1.8 percent of GDP has to be put into the Fund. We can loosen the belt gradually over the next 15 years. I like to think of it as a useful fiscal discipline.
The last test is whether it is economically sustainable and –again – I am satisfied it is.
The bald advice from Treasury is that the Fund will not have significant macroeconomic effects. I go a little further and predict that in fact it will produce positive effects.
The most obvious effect is that it will build New Zealand's national savings rates, reducing our reliance upon overseas borrowing and taking pressure off the current account.
It will also create a source of investment capital for the sharemarket and the productive sector in general. The Fund will be managed on an arms length, commercially prudent basis. The government will not be directing investments into ventures that do not stack up commercially. This is no soft loan facility. But it will generate a better flow of funds through both bond and equity markets which can only be good for growth and for jobs.
The elderly deserve to live with dignity and security and until someone or another political party comes up with a better solution - and no one has yet risen to the challenge – I believe that only through partial prefunding can we protect the value of New Zealand Super through the inexorable cost pressures created by an ageing population without imposing an unfair tax burden on our workers of the future.