Cullen To Ladies’ Probus Club of Cornwall Park
Minister of Finance
Address to the Ladies’ Probus Club of Cornwall Park, Auckland
Baptist Church, 114 Symond St, Royal Oak
It is my pleasure to be here with you today. Generally as Minister of Finance, people expect me to talk about the economy and I’m happy to do that because the government has a good story to tell in terms of our economic and fiscal management.
But first I want to talk about our achievements in social policy, particularly in superannuation and in our policies for the elderly New Zealander because we have a very strong record in these areas.
Labour went into the last elections with a seven point commitment card. We did this because we were aware that, after years of broken promises, public confidence in the political process was dangerously low. It was important to the health of our democracy that it be restored – and quickly.
The obvious and only way to achieve this was to be a government which limited its promises to what it knew it could achieve, and then delivered on those promises.
We promised to create jobs through the promotion of New Zealand industries and through better support for exporters and small business. We set up Industry New Zealand in our first year in government and allocated it a budget of almost $332 million over four years. Industry New Zealand has developed a menu of programmes to assist talented individuals turn a good idea into a good business, and to assist new businesses to become established and established businesses to grow.
But the government’s commitment to economic growth and to the entrepreneurial spirit does not stop with Industry New Zealand. We have introduced a raft of initiatives outside Industry New Zealand to cut business compliance costs, reduce the international barriers to our exports, provide specific assistance to exporters, and to improve the quality and availability of occupational skills and training.
The goal we have set ourselves is to restore New Zealand’s per capita income to the top half of the OECD league table. The policy framework we have developed to achieve this was outlined by the Prime Minister last week in her statement to the House and in the Growing an Innovative New Zealand strategy. I will return to this theme later.
In health, we promised to focus on patients not profit and to cut waiting times for surgery. Health is a huge portfolio and there seems often not to be a direct relationship between the dollars put in and the returns in terms of improved health outcomes.
However, we have been able to make real progress. The latest reliable figures we have for waiting times are for the 2000-01 year and show that 82 percent of new patients received a specialist assessment within the six month standard the government has set.
Just before Christmas, we announced a $2.4 billion increase for health spending over the next three years. This is the largest growth package for health in New Zealand history and will give the health boards a firm funding basis on which to plan.
We promised to cut the cost to students of tertiary education, starting with a fairer loans scheme. I am aware that there are still problems in this area but we have had to take a gradual approach. We do not have unlimited funds and there are many calls on the funds we do have.
Much however has been achieved. One of our first moves as a government was to stop charging interest on student loans while students were still studying. And since we took office, we have held the interest rate on loans steady at 7 percent. We have also frozen student fees through the last two academic years.
And we are engaged on a comprehensive reform of the tertiary sector to reduce wasteful duplication of resources, to improve course quality and to align courses more neatly to the country’s economic requirements.
We promised to restore income related rents for state housing so that low income tenants paid no more than 25 percent of their income in rent. The market rentals introduced by the previous government were a major source of poverty and misery and of the resurgence in New Zealand of third world diseases associated with overcrowding.
Income related rents were restored in December, 2000. Since then those who work with the most vulnerable New Zealanders have noticed a decline in the numbers needing food parcels.
We said we would crack down on burglary and youth crime. Youth arrests are up but that is to be expected when police start taking a tougher line on youth offenders. And I am delighted to report that the number of recorded burglaries has dropped by around 200 per week on average since the Labour Alliance government took office.
To help pay for our policy commitments, we increased by 6 cents the top tax rate for those on incomes of $60,000 plus a year. But we promised that we would not raise income tax for those earning less than $60,000, and that we would not raise either GST or the company tax rate. We have been true to our word.
So we have kept faith with the electorate. We have done what we said we would do, and much more besides and I think we can be proud of what we have managed to achieve. But the achievements I am proudest of and which have involved me most directly are in the area of superannuation.
We promised to reverse the 1999 cuts to New Zealand super and we have done that. We have restored the floor for the married rate to 65 percent of the average wage. We have also undertaken to deal with another source of anxiety for older New Zealanders by introducing legislation to remove asset testing from long-stay elderly care. We will not however pass the measure into law until our second term as we do not have room to finance it in this year’s budget.
The other promise we made on super was to guarantee superannuation into the future by putting aside contributions now to smooth the costs of an ageing population. The New Zealand Superannuation Act was passed last year and the government has been making payments of $23 million a fortnight into the scheme.
The money is now sitting in a special account in the Debt Management Office of the Treasury until the governance and administrative arrangements for the fund are established.
This will be done by the board of guardians. The Act provides for a board of five to seven members, and gives the board responsibility for setting the investment policies of the fund and for appointing the funds managers.
It requires the board to follow best practice portfolio management, maximise returns without undue risk to the fund as a whole, and avoid prejudice to New Zealand’s reputation as a responsible member of the world community.
To protect the board – and the fund – from political meddling, the legislation stipulates that the government must make the appointments from a short list prepared by a special nominating committee.
The committee advertised for nominations last year and received over a hundred expressions of interest. It is now sorting through the candidates and hopes to be able to present the list to the government by early next month.
I would expect to be able to make the appointments before the end of that month, and would hope that the fund was up and operational by around mid year.
The New Zealand Superannuation Fund represents one of the most significant political initiatives in decades. It is often mistakenly presented as a policy of special interest to the currently retired but the real beneficiaries are not today’s superannuitants but the superannuitants of the future - the people who are in their mid fifties now, and younger.
Although the previous government cut super in the late 1990s in response to the Asian crisis, almost all commentators, including National, accept that it will not come under serious cost pressure until the baby boomers – those born between 1946 and 1965 - begin to retire.
That is why National is prepared to guarantee superannuation at current entitlements to people who are now in or near retirement. They cannot with any degree of good faith or credibility extend the guarantee beyond that because they are not prepared to support the government’s partial prefunding scheme and therefore have no funding mechanism.
However – at least at this stage – they are refusing to state where their cut off point would be and what people would miss out. What will they define as “near” retirement – 55, 50? And remember for the purposes of this discussion that a National government would probably comprise Act and that Act is on record as supporting a raise in the qualifying age for super from 65 to 68.
Until National is prepared to come clean on this issue, we cannot have a meaningful or honest debate on super in this country.
Now to the economy. New Zealand is surviving the fallout from the events of September 11 and the global slowdown in surprisingly good heart. Our growth rate is forecast to average 2.9 percent over the next three years, peaking at 3.2 percent in 2004. This compares with an average over the last 15 years of around 2.3 percent.
This resilience reflects good export prices, low interest rates, strong household income growth and – more recently – a turnaround in the immigration figures. We are experiencing a reversal of the brain drain as New Zealanders start returning home and an increase in skilled migration as a consequence of government initiatives including the talent visa.
We are also using campaigns around the Americas Cup and the Lord of the Rings trilogy to promote New Zealand overseas as a sophisticated, technologically advanced and exciting place to live.
Inflation is under control, the current account deficit is coming down, and the fiscal position is healthy. Our target is to reduce gross debt to 30 percent of GDP. We inherited a ratio of 36.8 percent of GDP and have brought this back to 32.2 percent so we are making solid progress toward our goal despite having to increase our borrowings to cover such items as the bailout of Air New Zealand.
But to get back into the top half of the OECD, we are going to have to lift our growth rate above the OECD average and to maintain it at that level over a sustained period. We have not set a deadline to achieve this – not least because there are too many variables at stake to make a meaningful assessment. But I believe a sustainable growth rate of 4 percent within five years is a realistic aim.
That means raising our export performance.
We have made significant progress across a range of areas. Exports of elaborately transformed manufactures have doubled over the last 10 years and many new and vibrant industries have emerged – biotechnology, electronics, marine engineering, wine, education exports and film. Our dairy industry is an international success story and, with the creation of the mega co-op Fonterra, stands at the doorway of an even brighter future.
But there is much work still to be done. Fewer than 4 percent of New Zealand firms export and only a small minority of them become genuinely global. Last year, only 151 companies exported more than $25 million, and only 51 exported more than $75 million. And our exports – at 33 percent of GDP – are lower than for many other small economies.
New Zealand faces a number of significant hurdles as an exporter. Firstly and most obviously there are the trade barriers other countries raise against us.
Successive New Zealand governments have worked tirelessly at both bilateral and multi-lateral levels to dismantle protectionism. This government has negotiated a Closer Economic Partnership Agreement with Singapore and is pursuing a similar arrangement with Hong Kong. We have also taken trade missions to Chile, Argentina, Brazil and Peru as part of the Prime Minister’s Latin American strategy.
We also need to increase our connectedness to the world by attracting more foreign direct investment of the right sort. We experienced a significant inflow in the mid-1990s but it tended to relate to the acquisition of existing companies in the property, finance and communication sectors and did little to expand exports – except of profits and dividends.
We have a lot to offer the foreign direct investor: a clean bureaucracy and legal establishment, an uncluttered tax system with no capital gains tax, a well-educated workforce, a green image, competitive wage rates by the standards of the developed world, the security from litigation that ACC provides, low power costs, a stable political environment and much much more.
But we are aware that we also have to compete on tax as other jurisdictions are using tax rates as a source of competitive advantage. The Tax Review made a number of recommendations on international tax and in the tax treatment of entities which I have incorporated into the government’s work programme.
Given the fiscal pressures facing the Government, I will be looking for changes that involve the highest economic payoff for the lowest fiscal cost.
In the outbound investment area, the Review captured the conundrum perfectly.
“On the one hand, New Zealand does not want to induce our most mobile taxpayers to consider moving from New Zealand. On the other hand, New Zealand does not wish to adopt a built in tax incentive that causes people who remain in New Zealand to see a tax advantage in investing off shore rather than in New Zealand.
“But it is precisely this type of system that produces a tax incentive to invest off shore that is the international standard.”
The Review’s preferred solution is that investment in listed shares and securities be taxed at a standard risk-free rate of return, no matter the country of investment.
I am interested in this idea because it has the potential to make the relevant tax rules simpler, fairer and more effective. I hope to be in a position to set out in some detail the likely direction the government will take on these issues in the upcoming budget.
Our greatest problems as a world trader – and our most intractable - are our size and our distance from our markets.
If I were to draw a circle with a radius of approximately 2000 kilometres around Auckland I would take in one country with 3.8 million people and a hell of a lot of seagulls. A similar circle centered on, for example, Helsinki would capture over 300 million people in 39 countries.
The government’s response to the challenge implicit in this statistic is to add more knowledge to our exports and to develop new areas of excellence to complement and enhance our more traditional strengths. That is the basic thrust of the Innovative New Zealand framework.
It builds on our experience of the first two years in government and on the strong policy platform we have put in place during that time. It brings together recommendations from the Science and Innovation Advisory Council and draws on Treasury’s recent work on how to create an inclusive economy.
Since we took office, we have been embarked on a project to transform the economy in partnership with business, local government and the community at large. The business to government forums, the hui with Maoridom, the regional development initiatives driven by Industry New Zealand and the Knowledge Wave conference have all been expressions of that mission.
New Zealanders are highly creative. In fact the latest Global Entrepreneurship Monitor ranked New Zealand one of the most entrepreneurial countries in the world and the government has already done much to foster this innovative culture.
We have improved the tax treatment of research and development, sharply increased funding for basic research through the Marsden Fund and the Economy Research Fund and are in the process of establishing Centres of Excellence in our universities.
Our trouble is not generating new ideas but converting them into commercial successes. New initiatives now being developed to strengthen this linkage include entrepreneur support strategies, more support for mentoring programmes, incubators and cluster development, improving our intellectual property protections and encouraging the tertiary institutions to get more serious about commercialising their research.
The government has also identified three sectors for particular focus – biotechnology, information and communications technology and the creative industries. All three are horizontal rather than vertical in nature in that they are capable of exerting an influence and a growth impact beyond themselves. All three are characteristic of the innovative, sustainable knowledge-based economy we aspire to. All three were chosen for those reasons.
The consensus of our advice was that a more focused approach would give us the biggest and best return on our investment. But the focus will not be at the expense of existing programmes, and the analysis is not static. An advisory board with strong private sector representation will be appointed to monitor progress and to identify new opportunities as they arise.
Our first task in government was to assert a positive role for government in the economy. We have won that debate. Our next task was to develop a cost effective, meaningful and successful framework for intervention.
We have made a huge amount of progress toward that goal already and will make significantly more progress in future years under the Innovative New Zealand strategy. This is an exciting time to be in government.