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Cullen Speech To Taranaki Chamber Of Commerce

Speech To Taranaki Chamber Of Commerce

Hon Dr Michael Cullen, Deputy Leader Of The Labour Party

Embargoed to 0730

Thursday 27 June 2002

Devon Hotel, New Plymouth

Thank you for your warm welcome. It has been very encouraging for me to reacquaint myself with the business community in New Plymouth, which, I have to say, has some of the best reasons for optimism of any regional business community in the country. You do not need the cover story of North and South magazine to tell you that Taranaki has been transformed in recent years, and that the region has experienced solid and, what is more, broadly based growth.

Since I arrived yesterday I have also been keeping an eye out for Tom Cruise, who is rumoured to be here for the filming of The Last Samurai. As much as it is amusing to find that the Taranaki landscape has been chosen to play the Japanese landscape in a Hollywood film, it does indicate the degree of diversification in the region’s economy. There is a great deal of potential, and much of it is still untapped.

The question I would like to address is one that I know many people in New Plymouth are asking: how can the region sustain its recent good performance? You have lived through the fluctuating cycles of boom times, related both to the fossil fuel industry and also to the ups and downs of the dairy industry. While boom times are welcome, they can lead to an air of unreality about the local economy, and this makes it difficult for businesses, social services, communities and families to plan for the long term.

We know we cannot rely upon Tom Cruise to support the Taranaki economy in the long term.

The Labour-led government has been something of a watershed in New Zealand politics and economic management. Contrary to the philosophy that held sway during the late 1980s and 1990s, we do not believe that government’s place is on the sidelines. We see government’s role as an active support, coach, facilitator and investor in talent.

So when I consider the question of how to achieve long term stable growth, the answers that ring true involve three things:

ľ First, a partnership between business and government based upon innovative leadership,

ľ Second, stable economic and fiscal policy, and

ľ Third building workforce productivity through higher average levels of skills.

These are the building blocks which over time will create a solid foundation for growth for the nation as a whole and for regions such as Taranaki.

Clearly the Taranaki region has many innovative business leaders and civic leaders, and in some cases these are the same individuals. It is also well on the way towards a more diversified economy, thanks to the initiative of Venture Taranaki and groups such as the petrochemical engineering cluster, and more latterly clusters focused on ICT and sporting goods manufacture.

For its part, the government has been supporting the development of an education cluster as part of the Industry New Zealand pilot programme, and further resources are being made available in the new cluster development programme announced in last month’s budget.

More broadly, the government is providing leadership in areas such as:

ľ initiatives in dealing with skill shortages;

ľ upgrading the regulatory environment that applies to the electricity and telecommunications sectors;

ľ supporting the development of e-commerce;

ľ improving the funding of research and development; and

ľ simplifying the tax treatment of private sector R&D.

Our method is pragmatic and case-by-case, as evidenced by the consolidation of the dairy industry on the one hand - which should have immense benefits for the Taranaki economy - and the deregulation of the apple industry on the other. Each was a considered response based on a careful analysis of the global marketplace.

We are also providing leadership through our innovation strategy, and one of the key aspects of that was a recognition that New Zealand has advantages of environment and national aptitude that merit special attention if we are to deepen our business activity. We need to acknowledge that we cannot excel in every industry. We cannot be a nation of lone rangers. 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 the creative industries. All of these areas are in evidence in Taranaki. 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.

The second part of the equation is stable economic management. This is a government that has sought to strengthen the country’s economic fundamentals by taking a conservative approach to government expenditure and public debt.

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 month, 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.

We believe that the priority use of this surplus is to invest in the future by building up the Superannuation Fund and further strengthening the Crown’s balance sheet so as to relieve future fiscal pressures. This is the prudent approach. As you are aware, our political opponents see the surplus as a mandate to cut taxes. I believe this is short-sighted.

First of all, our current priorities as a nation are to invest in future capacity, and many of those investments are of the kind that only government can make: investments in education, high level research, and transport infrastructure. As any businessperson knows, investing is not compatible with a policy of paying out any operating surplus as a dividend. Those who are calling for tax cuts are implicitly calling for the government to rein in strategic investments in our economic future.

Second, the evidence suggests that cutting tax will not kick start the economy. For a start, the economy is already humming along. It doesn’t need kicking. The effect of cutting tax would be comparable to letting out the choke. The engine runs at a higher rate for a while, but it doesn’t necessarily produce any more power. The real objective, of course, is to increase the capacity of the engine itself. And that is done by investing in skills, in infrastructure, in technology and international linkages.

A crucial part of economic management is monetary policy. Since this has been in the news recently, let me explain exactly where I stand and why.

First of all, the government is committed to price stability as one of the key conditions for sustainable growth. However, one of the first things we did when taking office was to amend the Policy Targets Agreement with the Governor of the Reserve Bank to make it clear that while the primary objective of the Bank was to control inflation, in setting the Official Cash Rate the Governor needed to have regard to the effects of monetary policy on the exchange rate, interest rates and output volatility. In other words, the task is to keep inflation within the target range, but to seek to smooth monetary policy changes where feasible and to recognise that there will be brief periods where headline inflation moves outside the band for good reason, and that this in itself is no reason to panic.

The Bank took a tough line in the early stages of the new monetary regime in order to make it clear that it meant business and to discipline expectations. That was arguably necessary at the time. But now it is time to ensure that we do follow a more flexible inflation targeting regime utilising the full band rather than taking the hard line that the target should still be anchored to the mid-point of 1.5 percent.

The most enthusiastic supporters of this hard line advocated by the former Reserve Bank Governor are some in the financial markets. That is understandable self-interest on their part, since eliminating uncertainty around inflation allows them to turn their attention to where they make their money. However, this peace of mind for the financial markets is bought at the expense of the profit margins of those involved in the real economy, profit that is needed to fuel the next round of investment and to build confidence in regional economies. Small fluctuations in interest and exchange rates amplify the bottom lines of farmers and exporters.

We accept that an occasional cold shower is necessary to prevent the economy from overheating. But too much time in a cold shower can lead to near permanent shrinking of vital growth potential!

A further area of government management is our programme of reducing the cost of doing business, including the compliance costs that New Zealand businesses face. We recognise that small to medium enterprises are the backbone of the economy, and that economies of scale mean that compliance costs disproportionately affect these business.

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:

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

ľ Simplifying ACC levies and claims processes; and

ľ Improving the quality and implementation of regulations, in particular the Resource Management Act.

The third part of the equation is building up the skills of our workforce. This government is 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. This is not just a matter of producing star performers; we need to raise the average levels of skill, so that each new generation of New Zealanders is progressively more skilled than the last.

We have focused on industry training because it is a highly effective way of doing this. It is a partnership approach, with Industry Training Organisations being funded to purchase training in line with the needs of industry.

In this year’s 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.

A total of 95,263 trainees participated in industry training in 2001 compared with 81,343 in 2000 - an increase of 17 percent. A total of 66,225 trainees were registered with Industry Training Organisations at December 2001 - a 5 percent increase over the course of the year. Trainees achieved a total of 9,498 National Certificates during the year - a 52 percent increase.

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 important to the Taranaki economy, such as engineering 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.

We are also continuing to invest in skills and 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.

To sum up, our vision for New Zealand is based upon strong regional economies, which draw upon a skilled workforce, use the best technology available and are linked to global marketplaces. These are policies we have pursued for the past three years, and I believe they are beginning to bear fruit for the nation as a whole, and for regions such as this one.

Thank you.

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