Cullen Speech To Remuera Men’s Probus Club
Speech To Remuera Men’s Probus Club
Hon Dr Michael Cullen, Minister of Finance
1200, Thursday, 21 March 2002
Remuera Golf Club
It is a great pleasure for me to return to Remuera for the second year in a row, and to address the Remuera Men’s Probus Club on the state of the economy.
Your President, Frank Muller, has suggested to me that this might become an annual event, in the same way that a former Minister of Finance delivered an annual state of the economy address to the Orewa Rotary Club. I can only say that this sounds to me like a terrific idea. Of course, the best way to make sure it happens is for you all to get out on the streets of Remuera and work to win the seat for Labour for the first time in its history. But I Recognise that would be, as the sports commentators say, a big ask!
There are - at least - two ways to talk about the state of the economy. One way, favoured by most economists and almost no-one else, is to present an array of statistical measures of such things as inflation, unemployment, trade, investment, government spending, debt and so on. Having amassed a sufficient pile of these statistics, one can stand back and assess whether the pile presents a picture that is good, bad or merely confusing.
I don’t mean to decry the use of statistics, and I will shortly update you on the important indicators. However, as a former expert in the history of statistical methods I can assure you that statistics can be honestly interpreted in completely different ways. They do not necessarily provide as much insight into the economy as they promise. The great Cambridge economist, Bill Phillips - who, by the way, was a New Zealander - built an elaborate teaching aide consisting of pipes and valves and meters, in order to explain the economy to his students. He would pour coloured water into various parts of the model, and it would flow through the maze of tubes as he turned taps off and on to show, in a rudimentary way, the complicated inner workings of the economy.
The contraption still exists. It has been brought back to Wellington and sits in the foyer of the NZ Institutue of Economic Research. Recently, I suspect their computers have crashed and they have been forced to crank up Professor Phillips’ machine to prepare their economic forecasts.
My point is that, just as we would not think it sufficient to talk about our blood pressure and cholesterol level to someone who asked us how we were, so we need to go beyond the statistics to talk meaningfully about the state of the economy. The current government works hard to take a broader view of what the New Zealand economy is. In particular, we refuse to separate social development and environmental health from our view of the economy. These are not luxuries that we will allow ourselves once our economic statistics match some ideal. They are part and parcel of making a sustainable future.
So today I want to begin by surveying the economic indicators, but then move on to talk about the government’s strategies and the partnerships between government, business and communities that will shape our broader economic future.
The New Zealand economy awoke to the new millenium with a more than slight hangover from the 1990s. During that decade, the growth rate improved, but it was heavily dependent on expanding private domestic consumption. That in turn was underpinned by a dramatic increase in private foreign borrowing, and to some extent by rounds of tax cuts. A strong - some would say overvalued - currency put a lot of pressure on export industries.
The end result was that we closed out the century with high private foreign debt, a balance of payments deficit of around seven percent of GDP, and an export sector that was both demoralised and operating with weakened balance sheets.
Two years into this century, the picture is a lot brighter. The hangover is a memory. The Aspro is back in the medicine cabinet. The economic indicators are stronger, and more balanced, than they have been since the mid 1960s.
- The economy grew by 2.6 percent in the 2001 March year, and is forecast to grow by 3.1 percent in the current year. It is likely to taper in the next year to around 2 percent before lifting again to something like a three percent rate in the out years.
- Inflation is at 1.8 percent.
- The balance of payments deficit has fallen to about 3.5 percent of GDP.
- Unemployment, at 5.4 percent, is at close to thirteen year lows. Employment growth is strong, but it has been accompanied by an increase in immigration and a sharp rise in the participation rate which, at 66.4 percent, is the highest it has been in fifteen years.
The government for its part is living within its means. We have held government spending as a percentage of GDP, and it is fractionally lower than it was two years ago. We are operating with a fiscal surplus averaging around one percent of GDP, and forecast to rise to nearer 2.5 percent over the next three years. Net crown debt has fallen from just under 22 percent of GDP in 1999 to around 18 percent now.
In short, today’s numbers reveal an economy that is growing steadily, with low inflation, rising employment, moderate unemployment, and a current account deficit that is very low by recent standards. Real wages and share prices have both risen. Government spending is at prudent levels, with healthy fiscal surpluses, and manageable public debt.
All of this at a time when confidence in the world economy has been badly knocked by the events of September 11 last year.
After September 11, all optimism must be cautious. However, when the government published its economic and fiscal updates a week before Christmas there was some comment that the central forecasts were overly optimistic. Commentators pointed to a number of short term risks:
- commodity prices were at record highs, and so if there were a global downturn there could be a long way for them to fall;
- investor and consumer confidence surveys showed significant pessimism;
- there was a risk of an emerging drought, which would not only impact on agriculture but risk a repeat of, or even a worsening of, last year’s power crisis;
- the September 11 attacks meant that tourism was particularly exposed, and this was a key component of good recent economic performance.
In the event, these concerns have largely evaporated, and if anything the very short-term outlook is more positive than it was in December. Immigration numbers have turned around dramatically, and this has lifted the construction sector. Consumer confidence is holding up and retail spending is ahead of market expectations. Tourist numbers have bounced back, largely because the composition of tourists has changed. It is raining - so much that we are all lamenting the summer that never was. Tax returns are even slightly ahead of forecast. And there has been no real meltdown in the global marketplace.
I am happy to concede an element of good luck in these results. One could speculate that there some relationship between economic stewardship by a “wet” finance minister and increased rainfall. But, I cannot claim to have engineered the coincidence of good weather and good prices with a rather large drop in the value of our currency, meaning that we had a competitive exchange rate that allowed other exporters, and the tourism industry in particular, to join in the good times.
Good economic management is nevertheless an important part of the picture. One of the first things that the new government did was to renegotiate the Policy Targets Agreement with the Governor of the Reserve Bank. It confirmed that the primary objective of the Bank was to control inflation, and that was good for confidence. But it also required the Bank to be more sensitive to the impacts of its monetary management on output in the real economy. The objective is to keep inflation within the target range, but to seek to smooth monetary policy changes where feasible so that they do not create unnecessary turbulence for New Zealand businesses and households. Part of this is recognising that there will be brief periods where headline inflation moves outside the band for good reason, and this should not be stamped on in the interests of maintaining a perfect track record. The basic framework - a focus on price stability and the independence of the Governor in making decisions on monetary settings - remained unchanged.
The government’s approach to its own spending has supported monetary policy. Wherever this government has agreed to extra spending on social and economic development programmes, it has raised the extra money required, rather than borrowing it. And it has introduced a scheme to partially pre-fund tax-funded pensions, so that when our demographic structure acquires the inevitable older age profile, there is a cushion to assist in the transition.
This Superannuation Fund will also have three important macroeconomic effects. Firstly, it will require governments to be disciplined in their tax or spending plans, and to avoid spending commitments or tax cuts that are impossible to sustain, but painful to reverse. Secondly, it will increase the level of national savings. And finally, it is likely to provide a more stable setting in which New Zealand firms can seek long-term capital investment.
The government has also moved away from a passive role in the economy. The late 80s and 90s was the era of the “neutral referee” model of government. Government moved around the field - which was always scrupulously level - enforcing the rules of fair play, but avoiding like the plague any suggestion that it was truly involved in the game. This was preferable to the crude attempts to rig economic results that preceded it; but as a neutral referee government increasingly found itself presiding over a series of tepid nil-all draws. The playing fields were level, but the stands were emptying.
This government is developing an “active promoter” approach, characterised by smarter activism. To continue the sporting analogy, what will ultimately fill the stands again is fitter players, systems for developing young talent, good teamwork, clever strategy and better promotion. Neutral referees are still essential; but that is not the only way that government can be usefully involved in the economy.
The government’s method is pragmatic and case-by-case, as evidenced by the consolidation of the dairy industry on the one hand, and the deregulation of the apple industry on the other. There is no hard and fast ideology here, Each was a considered response to the global marketplace.
Another example of this “smart active” style is the government’s reform of the tertiary education system. During the 1990s, participation in tertiary education rose, but increases in quantity were not accompanied by improvements in quality and focus. The reforms are designed to ensure that, instead of competing with each other to attract enrolments, our institutions of higher learning develop close links with business and with their communities to guide the way that they teach skills - both to young adults and increasing to people in mid-career - and the way they undertake research.
There are obvious links between our tertiary education strategy and our innovation strategy. The recently released report on Growing an Innovative New Zealand sets out a comprehensive programme aimed at lifting our game, and raising our sustainable growth rate through innovation.
The growth and innovation framework blends what I would call the vertical and horizontal dimensions of innovation. The vertical dimension is about addressing missing or weak links in the “chain” of innovation. Hence we improve our scientific and product development capacity. We nurture ideas through appropriate support systems, so that the full range of business disciplines - legal, accounting, financial, logistical and so on - are brought together to convert good ideas into profitable enterprises.
We recognise that there are advantages of environment and national aptitude and attitude that need special attention if we are to deepen our business activity. There is no point in a focus on an area of advantage unless it is also an area where the potential of the global market coincides with the potential of New Zealand to sell into it.
We have identified three areas where there is a good fit: biotechnology, information and communications technology, and creative industries. It is important to stress that we are not trying to pick individual industries as winners. Instead, innovative advances in these areas have the potential to complement each other and to thicken value added in a number of industries that use or could use these technologies. In other words, they are sectoral competencies that have multi-industry applications. One part the strategy is about clearing the path for young plants to grow; the other is about creating that essential “hybrid vigour” by applying new technologies and ways of thinking across both old and new industries.
The report is a “what” document. A lot of the “how” is already being rolled out or is in an advanced stage of development; but more of the how will unfold as work that has been commissioned by the government is completed.
The way ahead clearly requires good economic management and a business culture that rewards innovation; but there are some other realities that will always impact on our economic well-being. Chief among these, I believe, is our relationship with Australia. Given the inescapable influence of distance from global markets, New Zealand and Australia have a strong mutual interest in extracting the most from our common market.
This came through quite strongly in my recent discussions with political and business leaders in Australia, who are also becoming aware of the untapped value in our combined economy.
The increased awareness of this in Australia is partly a response to September 11; but also to the acquisition of some major Australian companies by foreign interests. The prospect of becoming a branch economy of the United States is something both Australia and New Zealand now share. Part of the answer is to build a web of Trans-Tasman companies with a firm base in our common market, and the continuing task of making CER work is a part of making that happen.
CER is not scintillating stuff to the average New Zealander, or, for that matter, to the average New Zealand Cabinet Minister. We have done a lot to open up trade, labour and investment flows, but there is more to be done. The government is working with the Australians on a number of key areas where better coordination will benefit ordinary New Zealand companies and investors. These include:
- Cross recognition of companies;
- Mutual recognition of share markets;
- Resolving a number of taxation issues;
- Aligning our Takeovers Codes;
- Recognition of intellectual property rights;
- Consumer issues; and
- Competition law.
From my point of view the important thing is to recognise that there is still significant unrealised potential to be gained from better trans-Tasman coordination. In global terms, Australia is a very small player while we are Lilliputian. When we work together, two things happen: we become more visible as a closely integrated economic unit, and we become more able to sustain growth and weather the normal - and not so normal - variations in global economic conditions.
One part of my job - and it is an enjoyable part, by and large - is to be an incurable optimist when it comes to looking at our future economic prospects. I was very pleased therefore to read in the latest Colmar-Brunton poll that economic confidence was up to 52%, with pessimism down to 25%. It is very heartening to find that I am not alone. The news is getting through to ordinary New Zealanders: business people, professionals, workers, investors and the community at large. And the news is good.