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Bell Gully Government Relations - Cullen Speech

Address to Bell Gully Government Relations Thought Leadership Programme 2002

Hon Dr Michael Cullen, Minister of Finance

1800 Monday 10 June 2002

Level 21, Royal and Sun Alliance Centre, 48 Shortland Street, Auckland

The combination of thought and leadership is very important for those of us with a concern about the future of New Zealand.

Thought without leadership can leave us with nothing but catch phrases. This is rhetoric without substance.

Leadership without thought can take us boldly where we do not particularly want to go. We see this in the appeal to Big Idea style solutions; simplistic, and therefore very appealing, formulas, which do not even begin to address the complex issues that we face.

The challenge that faces political leadership in New Zealand is to address the set of complex issues that need to be addressed in respect of our economy, our society and our environment. Inevitably the answers to these issues will themselves be complex and uncertain; and yet there is a need for strong leadership which builds cohesion amongst our businesses, our schools and tertiary institutions and our community. We know that we do not have the opportunity for a rehearsal; we have to make it work as we go along.

It is relatively simple to describe the task we face. As I said in the budget speech, our challenge as a nation is to increase our sustainable growth rate to around 4 percent. In addition, we must ensure that social development and environmental protection are not regarded as optional extras, but instead rank alongside economic growth in our planning, and indeed expand our understanding of what constitutes growth.

This is where the simplicity ends. At least, this is where it should end.

The reasons why we have fallen behind the incomes of the other members of the OECD over the past 25 years 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.

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.

Of course the most common alternative “vision” is the one that holds up tax cuts as a panacea. As I pointed out in the Budget speech, two quite simple pieces of analysis give the lie to this contention.

First, a comparison of the tax rates and structures of different countries – such as the one recently published in The Economist comparing the total cost to business of corporate taxes, social security levies, local body rates, and excise duties – reveals that New Zealand is nowhere near the head of the pack. In the six countries studied the total burden varied from 9.5 percent of GDP (for the USA) to 19 percent of GDP (for France). The comparative figure for New Zealand is about 7 percent of GDP.

One financial advisor claimed in response to the Budget that it is only the headline rate of company tax that matters in terms of the decisions businesses make about investing in New Zealand. Hence, the story goes, a high headline rate of tax scares off investors, regardless of whether there are other components to the tax burden. Whatever the truth of that, we need to convey a more balanced picture.

The other simple piece of analysis is to examine the impact on the New Zealand economy of the significant cuts to personal taxes that took place in 1986, 1988, 1996 and 1998 and the massive cut to the corporate tax rate in 1988. The truth is that all failed to lift the sustainable growth rate.

Undoubtedly one could argue that there were countervailing factors which offset the impact of these tax cuts. But this simply begs the question: how can we be sure that any future tax cut will not similarly fall victim to countervailing factors.

What the evidence shows is simply this: that in and of themselves tax cuts have not sparked a lift in the sustainable growth rate. This is because lowering taxes does not in itself alter the fundamentals of an economy. It does not increase factor productivity, or uptake of technology, or market penetration. At the very least, that means that it would be foolhardy to put all our economic eggs in the lower tax basket.

The Vision in Budget 2002 rests upon a solid underpinning of good fiscal management, quality expenditure on social services and a series of targeted investments aimed at changing those economic fundamentals over time.

It is fiscally conservative (that’s conservative with a small “c”). 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.

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.

One could draw a parallel with a business that needs to grow its productive capacity and strengthen its balance sheet. In such circumstances, it is no time to be using operating surpluses to pay large dividends. Instead surpluses should be retained to make those crucial and prudent investments.

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.

Just to give one example, 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, and the special funding of $149 million to provide for meningococcal vaccination.

However, even in Vote Health we have an eye to making sound investments for the future. This is why, while the budget included an additional $1,220 million over the next three years for district health boards, 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.

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 not only for offsetting future health care needs, but also 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.

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.

There are in fact very few industries which are not becoming more reliant upon an increasing level of skill amongst their staff. It is unfortunate that the imagery of the knowledge economy features people sitting at computer screens designing webpages and computer graphics. Agriculture, horticulture, forestry and the service industries all require that the skills bar be raised, particularly if we are going in pursuit of high value niches.

That is where industry training becomes an essential tool in maintaining and improving our productivity, and winning those export orders. We need to modify the image of the rugged Kiwi individualist to suit the 21st century. The swandri and the ute can stay; but we need to add the laptop computer and a set of broadband internet-based applications.

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.

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 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.

Tax legislation now in front of Parliament includes 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.

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.

The vision demonstrates thought – about what is going to drive economic growth in New Zealand, given our natural resources, skills-base, infrastructure and relationship to world markets. And it also demonstrates leadership – about things that need to change, and areas where we need invest collectively in building our skills base, our research capability and our global linkages.

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. 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.

Both government and business have a role to play in the task of economic transformation. And we are depending upon both to play their part well.

Thank you.

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