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Cullen To the Northland Chamber of Commerce

Speech To the Northland Chamber of Commerce

Hon Dr Michael Cullen, Minister of Finance

Thursday 30 May 2002


Thank you for your welcome. Almost exactly a week ago I was heading towards the parliamentary debating chamber to deliver the budget speech for 2002. It has been an interesting week.

As expected, the budget has received a mixture of brickbats and bouquets, although I have say that so far I have more bunches of flowers in my office than I do bumps on the back of my head. In other words, most people realise that the budget was exactly the kind of strategy the country needs at this stage of its development.

It is fiscally conservative (that’s conservative with a small “c”). At the beginning of the current term of office, in the March 2000 Budget Policy Statement, I forecast that government spending would be 33.5 percent of GDP in the 2002/03 year. As of last week, the actual estimate of spending for 2002/03 is 33 percent of GDP. Similarly, gross debt was forecast to be 30 percent of GDP and net debt 18.9 percent. We have now succeeded in getting gross debt down to an estimated at 28.6 percent and net debt to16.8 percent.

We have managed government expenditure well, and this has been done within sound parameters, rather than the kind of slash and burn that some governments have favoured as a substitute for competent management of spending programmes. The Government is on track to meet the operating balance and debt goals that we set for the term. Indeed the most meaningful measure, the Operating Balance Excluding Revaluations and Accounting Changes, is estimated for 2001/02 at $2.3 billion.

This is the surplus, which secondary school teachers and numerous other lobby groups sought to have diverted in their direction. The government is adamant, however, that the priorities for the surplus are to relieve future fiscal pressures by building up the Superannuation Fund and further strengthening the Crown’s balance sheet. The prudent approach is to invest in the future.

But despite being conservative on spending, the budget continues to provide the level of social services that New Zealanders want, and to make significant additional resources available in high priority areas. By far the single largest item of increased expenditure is Vote Health, where in each of the next three years, $400 million is being added cumulatively to health expenditure. This is in addition to baseline adjustments for demographic change, which average around $100 million a year. It is also in addition to special funding of $149 million spread over the next three years to provide for meningococcal vaccination to deal with the scourge which has afflicted so many young New Zealanders – and many young Northlanders – in recent years.

The budget included an additional $1,220 million over the next three years for district health boards; but the expenditure we regard as most significant is the $410 million that has been set aside for the progressive implementation of our Primary Health Care Strategy.

Northland exemplifies the challenges we face in health expenditure. We have increasing expectations that the latest surgical and pharmaceutical treatments will be available to us, and find it difficult to accept that reasons of cost mean that these cannot be made available in every region. (The challenge is the same in the Hawkes Bay, where I live.)

However, it is in primary health care that the more important campaign is waged, in terms of the long-term impact on health status, and all that means for building productive, energetic, entrepreneurial communities.

Total health expenditure has risen from 5.2 percent of GDP in 1989/90 to 6.4 percent in 1999/2000 and is expected to be 6.8 percent in 2004/05. As a proportion of government spending it is forecast to have gone from 13.9 percent to 21 percent over the same period. Primary health care expenditure is an important investment in a healthier population overall. That is why we have given it the prominence we have.

Similarly in the area of housing, the budget seeks to further improve access to quality housing, especially for low-income New Zealanders. The restoration of income-related rents which was implemented early in this parliamentary term has been by far the largest cost item in that respect. However, over the next three years $54 million has been allocated for the expansion of the rental housing acquisition programme, resulting in a total investment of $262 million for adding to the state rental stock over the period.

Also, new spending includes $36 million capital expenditure plus associated operating costs over the next three years to address substandard housing in Northland and the East Coast/Bay of Plenty regions. Improving housing conditions has many positive spin-offs, including improved health and greater community pride.

So the budget is both fiscally conservative and responsive to the collective wishes of New Zealanders for good social services. It is also focused on spending which constitutes a sound investment in the future.

Our spending on tertiary education and research is a long-term investment in growth. We are looking to generate a positive net present value in terms of skilled New Zealanders who are equipped for the new economy, and world leadership in specific areas of scientific innovation in which New Zealand has a natural advantage.

Our investment is not haphazard, nor is it driven by wishful thinking, or by the kind of single Big Idea that was the Holy Grail of governments of the past. Instead it is driven by an explicit set of policies aimed at increasing our sustainable growth rate with a heavy emphasis on partnerships between the public and private sectors.

Budget 2002 forecasts solid, sustained growth over the current year and the two following, averaging 3 percent. This will put New Zealand growth rates in the top half of the OECD over this period.

There is a broad consensus that we need to lift our sustainable growth rate, in the first instance to somewhere around the 4 percent mark, if we are to see a long-term rise in our standard of living relative to the rest of the developed world. There is far less consensus about the best means to achieve that lift in performance.

In this regard, it is important that we are not dazzled by the promise of magic bullets. There is a complex set of reasons why our growth rate, while positive, has lagged behind that of other countries over the past quarter of a century. It is tempting to think that there are simple answers to these complex issues; but that is at best a naïve belief, and at worst a dangerous delusion.

Clearly the answers lie in the direction of changing economic fundamentals such as:

 the productivity of our labour force;

 the role that technology plays in creating and exploiting niches in world markets;

 the level and role of foreign direct investment in New Zealand, and

 the cost of doing business, including the compliance costs that New Zealand businesses face.

Budget 2002 has a strategy on each of these fronts. We may find over time that some of them do not work, in which case they will be modified. The important point to note is that gone are the days when the government sat on its hands wishing and hoping for the economy to transform itself. We certainly believe in the need to leave business to do what it does best: invest in specific business ventures, service its customers, and follow the most profitable activities.

However, we also believe that government has a legitimate – and moreover essential – role to play in the process of economic transformation. Government needs to be proactive in doing the kind of things that it does best; things that the private sector cannot do because it lacks the critical mass or the capacity to bear the level of risk involved.

The Opposition parties have labelled the budget as lacking in vision. As it turns out, when they are pressed to explain what this means, the term “vision” turns out to be synonymous with “tax cuts”. Of course, it is the duty of Her Majesty’s loyal Opposition to challenge the policies and actions of the government. But it is also their duty to put forward reasoned arguments, rather than relying on repetition to get across a message that has little or no basis in fact.

To boldly go down the track of significant cuts to personal and corporate taxes – which was tried in 1986, 1988, 1996 and 1998, and on each occasion failed to lift the sustainable growth rate – is to rely on fantasy, rather than science.

The Vision in Budget 2002 is not intended to be a startling revelation or a work of fantasy. It rests upon a solid underpinning of good fiscal management, and consists of a series of targeted investments aimed at changing New Zealand’s economic fundamentals over time.

We are aiming to improve the productivity of our labour force by a combination of investment in tertiary education and also investment in the skill levels of people already in the labour force. It is not just a matter of producing a number of star performers; we need to raise the average levels of skill.

Industry training is a highly cost effective way of doing this, because it attracts a significant industry contribution – currently 30 percent of the cash cost is met by industry. It is a partnership approach to industry training, with Industry Training Organisations being funded to purchase training in line with the needs of industry.

In this Budget the Government increased the level of the Industry Training Fund by $14 million over the next four years. This is on top of the additional $56 million over four years that I announced in last year’s Budget and represents an unprecedented investment in industry training.

In addition, we now have over 2,500 young New Zealanders employed as Modern Apprentices in a wide and growing range of industries, including some industries that are crucial to the Northland economy, such as forestry and ship-building. The Budget provided sufficient funding to double the numbers of Modern Apprentices, so that we will have 6,000 in employment by December 2003. That represents an additional investment of $41 million over the next four years.

The Budget continues to invest in technology through the funding of research partnerships. The Government is committing more than $100 million of new investment to Vote Research, Science and Technology over the next four years, almost half of which is focused on funding partnerships with industry.

An extra $48 million will be invested in such partnerships over the next four years, mostly through funding of research consortia. These consortia bring industry and public institutions together for research programmes that are jointly funded, with shared decisions about the direction and focus of the research.

The funding available for consortia will increase by $6.3 million in each of the next four years. Such partnerships produce research which is more immediately relevant and more likely to lead to profitable application of the results.

Partnership funding is also delivered through Technology New Zealand’s Technology for Business Growth programme which accelerates business uptake of new technology. Programme funding will be increased by almost $4 million a year for the next four years. One million dollars a year will support a new “one stop shop” service to coordinate the support that Industry New Zealand, Trade New Zealand and the Foundation for Research, Science and Technology provide to business.

The budget also included measures to attract increased levels of foreign direct investment in New Zealand, in particular in the areas of biotechnology; information and communications technology; and the creative industries.

Foreign investment can help New Zealand companies develop their export potential. Linkages established with the parent investor company can lead to greater market access overseas, and also frequently lead to the introduction of significant overseas technology not otherwise available in New Zealand.

We will merge the Investment New Zealand arm of Trade New Zealand and Industry New Zealand’s Major Investment Service into a single world-class investment promotion agency operating under the wing of Industry New Zealand. The budget for the new agency will initially be $14.5 million.

Finally, the budget continues our programme of measures aimed at reducing the cost of doing business, including the compliance costs that New Zealand businesses face. Tax legislation now in front of Parliament includes further major areas of simplification. They include clarification on over- and underpayments, reducing the number of taxpayers exposed to use-of-money interest and allowing the pooling of tax payments.

We will be doing further work on simplifying the tax obligations of small to medium-sized enterprises. We will be examining whether current legal forms available to small business are appropriate, and developing ways of reducing the tax impact on businesses during different phases of their life cycles.

The Government is also reviewing the existing rules to see whether income can be calculated on a cash rather than an accrual basis for small taxpayers.

There will always be a limit to how simple we can make the tax system. However, the government is committed to an ongoing and open process of reviewing tax issues from the perspective of the small and medium sized businesses that make up such a large portion of our economy.

Looking more broadly than taxation, the government is actively considering a range of measures to reduce business compliance costs, including:

 Making the Internet the dominant means of accessing government information, services and processes.

 Simplifying ACC levies and claims processes;

 Improving the quality and implementation of regulations, in particular the Resource Management Act;

 Introducing a new requirement for a business compliance cost statement to be published as part of all new legislation that has compliance cost consequences.

This then is the vision of budget 2002. There are no pyrotechnics; just a solid programme for improving our capacity to grow our economy, in the areas of:

 Increasing the productivity of our labour force;

 Utilising technology throughout the economy to add new value to familiar products, create and exploit new niches in world markets;

 Attracting foreign direct investment to New Zealand with a focus on investments which have positive spin offs in terms of technology uptake and global linkages; and

 Continuing the task of restraining the compliance costs that New Zealand businesses face.

One final point I would stress is that this vision does not artificially separate economic results from social dividends. Our vision is one where social development and environmental protection not only rank alongside economic growth, but become agents of that growth. At the end of the day, the government’s economic vision and its social and environmental vision are different aspects of the same thing.

Thank you.

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