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Cullen Speech - Delivering and Transforming

Hon Michael Cullen

21 April 2001
Embargoed until: 11am

Speech to the New Zealand Labour Party Central North Island Conference
Delivering and transforming

We are now almost halfway through our first term of office. Before we know what has happened, we will be preparing for the supreme test of accountability in a democracy - a general election.

The people will speak. As always, they will speak with many and often contradictory voices. And yet out of that mix of messages will emerge a mandate for a government for a three year term.

At the moment it seems very likely that we will be chosen to be the lead party holding that mandate. What we have delivered so far means we deserve that status as the on-course favourite. The opinion polls strongly reflect that fact with Labour running a good five percent or more above our 1999 election level and the centre-left as a whole getting around 60 percent of the vote.

We are, of course, helped in this by the extraordinarily leaderless and directionless image that National has gone to great lengths to create for itself. Seldom has National looked so bereft of talent, ideas, or purpose.

The business community makes little attempt to hide its lack of faith in National's chances for at least the next election. And with National's few promising looking MPs only first elected last time round, the betting is that it will be well beyond the next election before it is able to look like a credible alternative government.

National's weakness and mediocrity is reinforced by Act's repulsiveness. This is a party which has already announced a tax policy which will strip $8 billion out of the government's capacity to spend - more than the total spend of either health or education - while the very wealthy get tens of thousands of dollars a year in tax cuts.

The problem about the relationship between Act and National is simple: a mad dog is bad enough, a mad dog with a weak and incompetent owner is terrifying.

Despite all this, we have the job in front of us to win re-election and earn the right to be regarded as the natural lead party of government. And I say "earn" deliberately. The moment we start to even look as though we think we have some right to be in government is the moment we begin to undermine our claim to be there.

Labour in large part exists because we do not believe in the natural right of any group to rule over the rest. We need to carry on, as we are, walking the talk ourselves in that respect despite the weakness of our opponents.

So, what is the case that we need to make to the people to justify our claims to re-election? The answer lies in the twin concepts of delivering and transforming.

We may get a bit bored sometimes reminding ourselves and others that we have delivered what we said we would. But if you are a factory worker struggling to make ends meet, a sole parent trying to give your kids an equal chance in life, a superannuitant worried about the cost of health care, or even a new economy whizz kid no longer quite so sure you're riding history's next wave of success, you don't spend your life thinking about the government and its performance.

We political activists are a rare breed and by no means typical of our fellow New Zealanders.

So we do have to keep repeating that we have delivered. We are all familiar with the commitment card pledges but I want to highlight two broader areas of delivery of even greater importance where we have delivered with knobs on.

The first is stability in government. This is not just a matter of Helen Clark's leadership, crucial and central though that is. It is about the way the coalition has operated to provide a high level of certainty about the ongoing effectiveness and reliability of the government as a whole.

There have simply not been the shenanigans we saw with the National/New Zealand First coalition. Nor has there been the air of a jerry-built and bought government of the odds and sods coalition that succeeded it. Instead the government has got on with its business and, when any threat to stability or certainty has arisen, it has been swiftly dealt with.

In a sense that very effectiveness got us into some trouble last year when some people and interest groups had difficulty coping with the idea that the government could not be turned on its head. Now, our purpose and cohesion is seen as one of the government's greatest strengths.

A great deal of the credit for this fact has to go to Jim Anderton and his Alliance colleagues. That requires on our part a reciprocal responsibility to respect their identity and to pay due heed to the initiatives that they propose. Labour is the clear majority partner of this government, not the only partner.

The second area of successful delivery I want to highlight is in terms of managing the government's accounts and the economy. For reasons which, whatever they are, bear no relationship to the facts of the historical record, we always have to pass a stiffer test in that regard.

Well, we have done so. Before the election we said our intention was to show fiscal surpluses rising over the three year term, with net debt falling to just under 20 percent of GDP during the 2001-02 fiscal year.

We will deliver on that promise, not allowing for the one-off effects of revaluations. Net debt will be below 20 percent of GDP during the coming fiscal year and will fall very slowly thereafter as surpluses are built up in the Superannuation Fund.

Our forecast operating surpluses are likely to be a little higher than we projected before the election with both revenue and spending a fraction of a percent within our pre-election forecasts.

Our combined net new spending for the current fiscal year and next year looks like being within one percent of what we stated in last year's budget.

These are major fiscal achievements - especially against the background of National Party plans to tear the guts out of spending in areas such as police, biosecurity and children and young persons which we had to reverse and accommodate within our own plans.

No New Zealand government in our history has specified its fiscal objectives precisely in Opposition and then proceeded to deliver on them in government. But, despite that fiscal prudence, we have also delivered on our key commitment card pledges. All seven of them, less than halfway through our first term of office.

We have delivered on jobs and government activity in support of job growth. Unemployment is at its lowest level for over twelve years. Industry New Zealand is up and running. The first successes are already moving towards production.

There is a new spirit of enterprise and enthusiasm out there, especially a new spirit of government and business working together for growth and jobs and prosperity.

We have restored the level of the pension. We will have a Superannuation Fund up and running from 1 July to give a real sense of security about the future delivery of New Zealand Superannuation.

We have increased funding to fight crime and the proof of that came a couple of weeks ago with the release of figures showing a big drop in recorded crime, especially burglary.

We have restored income-related rentals for state houses and tens of thousands of families are better off as a result. We have put more money into surgery.

We have made the student loans scheme fairer and reduced costs for 80 percent of all graduates. We have paid for these promises in part by a modest increase in income tax on those earning over $60,000 a year while the rates have remained unchanged for those earning less than that.

We have repealed the Employment Contracts Act and replaced it with fair industrial relations legislation which even employer organisations are having to admit has exceeded their expectations.

But all of this is now, already, in the past. And the fact is that people vote less according to the principle of rewarding you for what you have done than on the basis of what they expect you to do.

Of course, it is also true to say that governments usually lose because of what they have done - punishment and rewards are not symmetric in that respect.

So we have delivered and will not, therefore, be punished for failure to deliver.

We are now moving, as we have to, from the delivery to the transforming stage. What a Labour-led government has to be about is building a stronger, inclusive economy which enables all New Zealanders to contribute to and participate in growing prosperity.

We are about building both that stronger economy and a better society, one in which success for some is not bought at the expense of failure for others.

We have a clear idea of where we want to end up. We want an economy that is less vulnerable to the vagaries and long term decline of commodity-based production and trade. We want to compete in the markets we occupy with the best in the world. We want to reward our citizens with well-paid and interesting jobs.

That sort of economy is in the top half of the developed nations of the world.

We will have to play ourselves back into the first division at a time when the pace of change has never been faster. We have to adapt by innovating. We have the brains, the talent, and the institutional structures. We must now turn the great ideas they generate into great ventures.

In this, education is pivotal. It enables a fusion of technological and financial systems around a more sustainable, adaptable and higher yielding economic system.

That is the ¡§what¡¨ of the economic transformation. Now to the ¡§how¡¨ and the ¡§when¡¨.

In these areas there is less definition of the specific results that need to be achieved; the key drivers of the transformation, and the time scale over which the transformation is to take place.

The economy is not just underperforming, it is also unbalanced. It relies too much on the savings of others, and until recently has relied too heavily on private consumption.

The result has been that we have spent before we have earned, and sold assets or borrowed abroad to bridge the gap.

Bringing the current account deficit back into a sustainable range remains one of the key challenges of the economic transformation, even if it is currently declining very rapidly.

Apart from that, we need to realise that while foreign investment is welcome, foreign investors do take a share of the output it helps to produce, and that share is no longer available to lift the living standards of New Zealanders.

The last work done by the late Bryan Philpott stressed this point. He calculates that between 1984 and 1999, GDP ¡V the total value of output from within our national boundaries ¡V increased by 1.8 percent a year in real terms. However, because of our very poor savings record and our reliance on the savings of others, the net income paid overseas ¡V to the overseas owners of capital used in production here ¡V rose from $1.6 billion a year in 1984 to $7.4 billion in comparable dollars in 1999.

The result is that national income ¡V the total value of output accruing to New Zealand nationals ¡V only grew by 1.4 percent a year. When population growth is taken into account, national income per head grew by 0.2 percent a year. And this, ultimately, is what drives living standards ¡V the amount of output per person that New Zealanders can lay claim to.

So we have had a lot of change and a lot of pain, big new technological advances and over some decades even a lot of growth in total ¡V and we are virtually in the same place as we started out from.

That is why lifting the savings rate and the quality of investment ¡V not very sexy, headline grabbing targets ¡V have to be seen as central to the economic transformation project.

The external deficit also reflects an imbalance between what we earn from foreigners and what we buy from them. That is why a key part of the transformation also involves rebuilding the earnings base, especially earnings of foreign currency. For some very considerable time, and contrary to the doctrines of classical economic theory, there will be a premium on growing the export industries.

With any transformation, a small percentage increase on a large base produces bigger results than even large increases on small bases. There is a need to get away from analysis by anecdote, and to see particular novel developments as being the answer to our economic woes.

The fact is that 18 percent of our export income is earned from dairy products, 13 percent from meat, and 11 percent from forest products. Resource based industries will continue to provide the core of foreign exchange earnings, and any economic transformation must protect and enhance that core.

There is a myth that resource based industries are old economy and use crude technologies. That is not true. Most of New Zealand¡¦s knowledge based advances have been concentrated in the life sciences and applied to resource based industries. They are highly knowledge intensive.

That knowledge intensity needs to shift up a gear, be refocussed on the new scientific frontiers, and move further down the value chain.

There will always be the unexplained exceptions. But even the newer type of industry expansions ¡V jetboats, luxury launches, adventure tourism, and even film making ¡V tend to emerge from our adaptation to our natural environment.

A second target of transformation is the employment base. About half of the workforce is employed in the retail trade, in education, in the health sector and in other services. More than half of those who will be in the labour market in twenty years time have already left the formal education system.

Workplace training, second chance education and lifelong learning can help, but despite that the skill set and industrial distribution of the labour force is largely set and will change very slowly.

We therefore cannot embark on an economic project that ignores the employment base of the traditional economy.

Indeed, given the training flows that are already apparent, especially internationally, it is not unreasonable to anticipate that in a decade or so, New Zealand will be able to draw from a large global pool of people with high levels of technical proficiency in information technology, and face skill shortages in agricultural production and processing.

The very fact that the stock of skill only changes at the margin ¡V newly trained workers exiting the educational system form only 2 to 3 percent of the total workforce each year ¡V makes the quality of our education system absolutely central to effective economic transformation.

The existing structures in tertiary education are largely demand-driven bulk funding systems, with little opportunity, and few powers, for the exercise of discretion in the allocation of funding. To be blunt, the government gets the elephant¡¦s share of the pay, for a mouse¡¦s share of the say.

The result is that we have certainly increased levels of participation. Along with that has come financial difficulty for some providers; intense competition and duplication in the provision of high volume, low cost courses and programmes; and a lack of coordination and integration of the tertiary system as a whole.

Specifically, there is need to steer funding of tertiary education to reflect both national and local priorities, and to promote focus and specialisation among tertiary providers.

Economic transformation ideally involves a process of ¡§creative destruction¡¨. It builds the new, more secure, higher earning base out of, not instead of, the old. New Zealand will never replace its resource base, not should it try to. That resource base ¡V in agriculture, fishing, forestry and tourism ¡V in fact creates the source of long term competitive advantage. Gains in science, education, health and the like both flow out of and complement knowledge intensive resource based industries.

Other bases of advantage, such as stable institutions of government, a functioning democracy, respect for human rights and attractive lifestyle are important, but not sufficient. Other parts of the world have equal endowments in these areas, are closer to large markets and have advantages of economies of scale and deeper capital markets.

The task, then, is to foster a climate of innovation, to leverage off ¡V largely, but certainly not exclusively ¡V that long term advantage.

Innovation is a slippery concept.

The process involves a number of steps, some of which are:

„h researching product and market opportunities;

„h developing product or production processes;

„h ¡§seeding¡¨ the new venture with the appropriate mix of technological, managerial and promotional input;

„h ¡§incubating¡¨ the project until it reaches a critical commercial stage of development so that it is self-sufficient;

„h growing the business so that it makes a substantial contribution to economic wellbeing;

„h adapting it to constant changes in its operating environment.

The strength of the innovation process will be determined by the strength of the weakest link in this chain.

Comment from the business community indicates that historically there have been a number of weak links in this innovation chain, not just one. Hence traditional industries have languished and have not been renewed around more sophisticated technological or commercial processes.

The government is moving on a broad front to address the underlying issues in this respect. It is important to avoid concentrating too heavily on only one aspect of any problem, and to avoid ¡§fads¡¨ whereby the latest trend or policy fashion distorts the innovation policy package and merely creates uncertainty.

And all of this takes time. I see economic transformation as urgent. That does not mean that we can afford impatience. We need to be cynical about magic bullets and quick fixes. They do not exist. It is a broadly based, coordinated, careful and long-term project that is being implemented.

Inside this project, there is a limited amount that a government of a small, open economy can do. We are pushed and pulled by global investment flows, by international economic cycles, by new technological developments and by changing trade alliances.

What we can do is important, though. It is doubly important in a small economy precisely because there is a level of intimacy that is absent in large, faceless economic machines. Government and business can talk and there is an openness ¡V both ways ¡V that has to be a major source, not just of competitive advantage, but also of speed of response to changing circumstances.

In the past we have done opposite things wrong. We either relied too much on governments ¡V especially to protect and subsidise ¡V or too little. We are now moving from an invisible hand to a helping hand.

There is, I suspect, a new consensus emerging around the virtues of this kind of constructive engagement.

That is how we will earn the right to be seen as the natural lead party of government. By delivering on the transformation of the economy, by working in partnership with both business and organised labour, by building a stronger economy and a fairer society we will not only express our historic purpose as a party but simultaneously lead a government in tune with the natural and just instincts of most New Zealanders.


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