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Address to Bay of Plenty Export Institute - Cullen

Address to Bay of Plenty Export Institute Luncheon

Hon Dr Michael Cullen, Minister of Finance

Tuesday 4 June 2002

Mills Reef Winery, Moffatt Road, Tauranga

Thank you for your welcome. It is good to be back in the Bay of Plenty, and to be speaking in the electorate of a former Treasurer about the current state of the government’s accounts and its economic strategy. I can assure you that the reins of the economy are in good hands, and also that the horse now seems to know which direction to go in.

As was stated in the advertising for this event, I would like to share with you my vision for the country and the Bay of Plenty region.

Some people have labelled the budget as lacking in vision. That accusation is in fact a standard complaint about budgets, where the “vision” that is purportedly lacking turns out to be synonymous with whatever pet theory or grand idea the individual making the complaint favours, be it “tax cuts” or higher teacher salaries or increasing the proportion of gross domestic product that is spent on health care.

Frankly, I think the time of the One Big Idea is well and truly gone. As I said in the Budget speech, our challenge as a nation is to increase our sustainable growth rate from its current 3 percent to something like 4 percent in the first instance, and then beyond. The reasons why we have not achieved this in the past quarter century - and why we have fallen behind the incomes of the other members of the OECD - are many and complex. And as a result the ways in which we might start to get some traction on the task of improving our capacity to grow are also many and complex. Simple, in the area of economic strategy, really means simplisitic.

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, quality expenditure on social services and a series of targeted investments aimed at changing New Zealand’s economic fundamentals over time.

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 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 the Primary Health Care Strategy.

This is because 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. Approximately 200 of these extra houses will be built in the Eastern Bay of Plenty and 100 on the East Coast. 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 a solid programme for progressively 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.

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.

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.

However, 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.

This is the kind of approach that suits the Bay of Plenty economy, with its heavy reliance upon horticulture, forestry, meat and dairy farming, and their associated processing industries. Contrary to what many people in the cities think, these are high tech industries now, and will become more so as time progresses and markets deliver higher returns for innovation in areas such as new breeds and more specialised processing.

The result is that these industries are becoming more reliant upon an increasing level of skill amongst their staff, not just at the high end, but at all levels. That is where industry training becomes an essential tool in maintaining and improving our productivity, and winning those export orders.

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 Bay of Plenty economy, such as forestry and horticulture. 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.

In the area of technology, the Budget continues to invest 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. The kiwifruit industry, for example, has benefited from the development of new strains of fruit. But the benefit is not just about what happens in the laboratory, but how science and commerce work together as a single process to get new products to market.

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.

Over 95 percent of New Zealand employers have fewer than 20 employees, 84 percent have fewer than five. I imagine - although I have no figures to prove it - that most of the businesses represented here today fall into these categories. The government recognises that compliance costs can be a major irritant and impediment to small and medium enterprises who generally do not have access to the economies of scale larger companies have in dealing with regulatory and taxation issues. Hence reducing compliance costs for small businesses is good for economic growth because it releases money and time for growing New Zealand’s companies.

Tax legislation now in front of Parliament includes further major areas of simplification, covering 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.

So the vision of Budget 2002 is a set of strategies aimed at creating a wealthier, more productive, more technologically literate New Zealand. We may find over time that some of these strategies 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.

I would stress 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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