Cullen Speech: Canterbury Manufacturers
Speech To Canterbury Manufacturers’ Association
Hon Dr Michael Cullen, Minister of Finance
Tuesday 7 May 2002
Chateau on the Park, 189 Deans Ave, Christchurch
Thank you for your welcome. On the 23rd of May I will be delivering the third and last Budget of the current parliamentary term. So it is probably an appropriate time for us to be standing back and asking ourselves what has been achieved in the last three years, and what challenges can we see ahead of us.
In saying this I am not suggesting that the New Zealand economy hangs off the three-year electoral cycle in the way that it did during some periods of the last century. However, I do have in mind the change in philosophy that the current government has introduced which has recognised the benefit of government and business working in partnership towards shared goals, especially the all important goal of economic transformation.
So from this vantage point, I would like to cover two important themes:
ƒæ First, we have an economy that is very robust relative to where it was three years ago, and relative to where it has been for the last 30 years. We need to acknowledge this; but we must not take it for granted or ignore the ways in which we are still vulnerable and need to improve our game.
ƒæ Second, I want to argue - as I have many times in the past - that whether or not we secure a higher growth path depends upon how successful we are in transforming our economy. That in turn depends upon our ability to create a path of economic and social change which is stable and well coordinated.
The current economic indicators demonstrate the robustness in the economy. We now have a stronger, more balanced economy than we have had since the mid 1960s. And the underlying strength in the economy has been demonstrated in how well we have weathered the impact of the 11 September terrorist attacks and their unsettling aftermath for the global economy.
Immediately after the attacks, the economy was bracing itself for a sharp downturn in global demand. We feared for our tourism sector in particular, and also anticipated a potentially sharp fall in commodity prices, which were at record highs. Accordingly, investor and consumer confidence surveys towards the end of last year showed significant pessimism.
In the event, none of these effects proved as severe or as persistent as was feared. The GDP figures for the December quarter - in which much of the impact of the 11 September attack was felt - show quarterly growth of 0.6 percent, producing an annual rate for the December year of 2.4 percent.
Certainly the contraction in tourism was a big driver in the December figures, contributing to a 7.3 percent decline in exported services. However, it is clear now that tourist numbers have bounced back, largely because the composition of tourists has changed. The Canterbury tourism industry has had one of its best seasons ever.
There were export price falls, but these have not been universal, so the net effect on the tradeables sector has not been as negative as was feared. Immigration numbers have turned around dramatically, and this has lifted the construction sector.
The Canterbury economy followed this pattern, with the second largest decline in economic activity of any region in New Zealand in the final quarter of 2001. Even so, economic activity in the region rose by 4.2% in the year to December. This result was spread across a broad base, including of course the primary sector, benefiting from good growing weather and a low New Zealand dollar.
As a result, unemployment in the region is below the national average at 4.9 percent in December last year, and business confidence has bounced back strongly after a difficult final quarter of 2001, with businesses expressing positive expectations in terms of staffing, investment and anticipated sales and profits.
Indeed, the picture that is emerging is of a strong bounce back in business confidence. The risk we saw of firms retreating into their shells and stopping hiring or investing does not seem to be occurring. Indeed, the December GDP figures showed that business investment grew by 8.5 percent over the quarter. And a recent National Bank Business Outlook recorded a 41 percent positive response to the “own activity” survey.
In another recent poll, 52 percent of New Zealanders identified themselves as being optimistic about the economy. That poll also recorded a drop in pessimists to 25 percent. Consumer confidence is holding up and retail spending is ahead of market expectations.
All of this suggests that steady growth will be maintained through the next few quarters. The economy is estimated to have grown by around 3 percent in the March year just past, and according to the latest consensus forecasts is likely to post growth of 2.8 percent in the year just started, but there are uncertainties about how strong the stimulus from construction, immigration and domestic consumption will prove to be. Forecasts have growth lifting back to something like three percent in the out years.
These predictions are confirmed by a new OECD report published last Friday, which picked that the economy will grow 2.7 percent this year and 3.5 percent next year. That is a solid performance, especially given the uncertain global outlook.
The balance of payments deficit has fallen to about 3.5 percent of GDP. Inflation is at 2.6 percent. Unemployment, at 5.4 percent, is 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.
In short, today’s numbers reveal a picture of steady growth, 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.
I will not try to claim that all is rosy, however. There are challenges ahead, for example, in the form of an emerging El Nino weather pattern later this year. But things could be a lot worse; and most importantly the New Zealand economy - and the Canterbury economy - is showing that it is increasingly better positioned to weather economic storms as we become more diverse, more entrepreneurial and more innovative.
This brings me to the question of the future of the New Zealand economy. The challenge before us is easily stated, but difficult to meet. If we are to achieve the standard of living we want, we need to find our way onto a higher growth path and keep ourselves there. For this government, the concept of standard of living extends beyond a crude calculation of GDP per capita. It also includes careful stewardship of the natural world that we value for its beauty and for the leisure opportunities it provides us. And it includes the way we live as communities and the investment we want to make in building social capital.
To achieve this we need to transform our economy; and what has distinguished this government from its recent predecessors has been the conviction that this requires not only a dynamic and relatively unfettered business community, but also public investment in economic development.
In New Zealand the pendulum has swung wildly over the last 25 years on the attitude towards government intervention in the economy. We went from the ornate - one might say baroque - style of intervention in the Muldoon era, to the spare and elegant minimalism that held sway in New Zealand in the late 1980s and 1990s.
These represented extremes. On the one hand, the tilting of playing fields and biased refereeing decisions that simultaneously molly-coddled businesses and hamstrung them into mediocrity. But on the other hand, we learned from bitter experience that allowing government to wither away by selling assets, withdrawing from state investment in economic growth and cutting social spending, is no magic formula for prosperity.
The obvious point of comparison for us is Australia, which has enjoyed some of its best growth results ever in the last ten years. However, while Australian governments have undertaken reforms similar to New Zealand’s, they have progressed at a slower rate, and in a more moderate form. Moreover, despite what is widely believed, the impact of taxation on businesses in Australia - and that extends beyond the simple question of the nominal tax rate - is comparable to that in New Zealand. The lesson to be learned from the comparison is that there are no guaranteed returns to the kind of economic purity advocated by the new right in the 1990s.
This government has argued - and, dare I say, is now proving - that there is a legitimate role for government in investing in the economic future of the country. The important lesson we have learned from the past is that government intervention must be principled, transparent, pragmatic and - wherever possible - in partnership with the private sector.
We are now, I believe, firmly set upon a course that differs from both of these styles. It stresses stable and transparent economic management by government alongside a stable and transparent strategy for economic transformation undertaken by business and government working in partnership.
In keeping with the first of these requirements, we have been a fiscally conservative government. We set ourselves the target of keeping government spending at around 35 percent of GDP, getting net debt below 20 percent of GDP and maintaining an operating surplus across the economic cycle. We have kept these promises.
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. We have held government spending as a percentage of GDP, and it is fractionally lower than it was two years ago. Moreover, spending is projected to drop below 33 percent of GDP by 2003-2004, putting it at the lowest level since the late 1970s. Net new spending in this year’s budget has been held within the counting limit set last year.
Net crown debt has fallen from just under 22 percent of GDP in 1999 to around 18 percent now.
In addition to transparent economic management, our strategy for economic transformation is also transparent. It is based on extensive research on how sustained growth occurs in economies like ours, and research on the most effective role for governments in contributing to economic growth.
Some of what we have done involves committing resources to new areas of investment and development:
ƒæ We committed $332 million over 4 years to business development funding, with an emphasis on export development and revitalising provincial economies.
ƒæ We established the New Zealand Venture Investment Fund with $100 million of seed capital to accelerate the development of the domestic venture capital market and assist the development of innovative, high added-value businesses.
ƒæ And we have adopted a whole-of-government approach to attracting new businesses to New Zealand, including, for example, the Ericsson-Synergy high-tech mobile internet applications research centres in Wellington and Auckland. We have also established the first dedicated offshore investment team in New York.
Other policies are about doing better with our existing investment programmes. The government’s recent $227 million land transport package includes a major focus on ensuring - literally - a smoother road for our exporters to move goods to market. This includes the large portion of the package that is aimed at reducing traffic congestion in Auckland, which has long been a Gordian Knot, both politically and from a driver’s point of view, and one which it is estimated costs the country around $1 billion a year. A portion of that cost relates to lost productivity, as goods moving to market have to pass through the clogged transport arteries of our major urban area and one of our major ports. This is money well spent, and an investment which, in the final analysis, could only be made by central government.
We are also sharpening up the strategy for investing in skills and research. Our tertiary education reforms are particularly important in this regard, and are beginning to bear fruit. The 1990s saw sustained growth in participation, and some important advances in terms of the number of Maori and Pacific students and the frequency with which those who have spent some time in the workforce are returning to tertiary study in order to improve their skills and launch second or third careers.
What was lacking, however, was a detailed understanding on the part of tertiary institutions of the needs and requirements of the customer, and the right incentives to deliver on those, consistently exceeding expectations. New Zealand business is the major customer of our tertiary institutions. I am not attempting to detract from the autonomy of those institutions; but I do want to make it clear that we do not have the luxury of maintaining an ivory tower mentality where it exists.
So one of the things we are setting out to do is to improve the interaction between the tertiary education system and the world of business and innovation. We are doing this across the spectrum of skill levels. We established the Modern Apprenticeship Programme to provide employment-based training for young people.
Our tertiary reforms are aimed at moving our institutions away from a focus on competing with each other for students and funding, towards collaborating with each other and with businesses to play a pivotal role in driving the so-called “knowledge economy”.
I have recently visited one of the new technology parks being established by one of the universities in partnership with high tech businesses. It was very exciting to hear how much energy is generated from the creative interaction between the worlds of business, research and teaching. And the energy is generated both ways.
Applying business skills to the planning of research and human capital development focuses attention on recognising and seizing opportunities. The technology parks and business incubators are giving the lie to the notion that academics are, by definition, lacking in entrepreneurial flair.
At the same time, there is immense value in businesses being exposed to leading edge thinking which may not yet be bankable, as it were, but will in time be the crucible for new products and services. This applies to the sciences, but also to the humanities, in terms of understanding and anticipating the social trends that influence the direction of global markets and the preferences of future consumers.
This kind of cross fertilisation between business and tertiary institutions creates true “learning organisations”, to use a piece of jargon which originated in the business sector. At present, this kind of partnership occurs at the margins. Our goal is for it to become commonplace, and for our tertiary institutions to be much more closely integrated into the economy in which they function.
The public-private partnerships exemplified by the technology parks and a range of other initiatives indicate that we are in a new phase of economic development, where government and business can work together without either party feeling any urge to acquire ownership of the other’s assets.
As part of its innovation strategy, the government recently released a set of plans for establishing and funding partnerships between government and business. What the research showed us was that as a nation we are well placed to develop in the areas of bio-technology, information and communications technology and the creative industries. In line with this, we are looking for proposals for partnerships in these areas, and we are defining them broadly.
We are particularly interested in developing ideas which apply these disciplines to the primary industries which will remain the backbone of our economy for the foreseeable future. We recognise that one of our key challenges is to find ways of altering the product cycles that are typical of primary industries, through applying technology and marketing expertise to position New Zealand produce in high-value niches in a diverse range of markets.
If we can develop and maintain this kind of mature relationship - and harness the respective strengths of business and government - it will be a great help in creating a stable path of change.
We learned in the late 1980s and early 1990s that rapid, disruptive change often leaves people stunned. Perhaps it is sometimes necessary to shake people out of lethargy; but when business people are struggling to keep up with the pace of change and feel threatened by it, the result can be that they overlook genuine opportunities and merely follow the crowd or the latest fads.
Rapid change is not guaranteed to foster creativity. Nor is it a way of maintaining social cohesion. Some of my predecessors as Minister of Finance believed in the philosophy that you sometimes need to destroy the village in order to save it. My philosophy is to save the village, educate its young, retrain its workers, and build it into a town. Destruction need not enter into the picture.
What is needed is a stable path for change, one which provides the environment in which businesses can learn how to be innovative and individuals can adjust their skills and ambitions in line with new economic realities. This is what my government is committed to doing over the remainder of this term, and the next.
Looking forward, I believe I have very sound reasons for optimism about the New Zealand economy. These include the latest economic results and medium term forecasts; but more broadly I am optimistic because I believe there is now a better understanding in New Zealand of how growth will occur and be sustained within our economy, and of the nature of the partnership between business and government that is needed to give ourselves the best chance of success.