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Address to Campaign Luncheon - Michael Cullen

Address to Campaign Luncheon

Hon Dr Michael Cullen, Deputy Leader of the Labour Party

Embargoed to 1345

Wednesday 3 July 2002

Refinery Cafe, 162 Mokoia Rd, Auckland

As the Prime Minister said in her campaign launch on the weekend, the Labour-led government is seeking a fresh mandate. We want a fresh mandate from the people of New Zealand to do two important things.

We want a mandate to continue our careful stewardship of the economy, which has brought us through some turbulent times.

And we want a mandate to invest in New Zealand’s future, through education, business development and social services.

When we were elected in 1999 New Zealand’s economy was out of balance. Economic growth was forecast at around 2.3 percent in the year to March 2000, and employment growth was expected to be a modest 1.1 percent. Unemployment was forecast to remain at an uncomfortable 7 percent, inflation at 2.7 percent, and the Balance of Payments a very unhealthy 8.3 percent of GDP.

Our task was to work with the business community to turn this situation around, and we have largely achieved this. The budget this year forecast growth to March 2003 at a much healthier 3.1 percent, employment growth nearly doubled compared with 1999 at 2 percent, and the unemployment rate a more respectable 5.4 percent. Forecast inflation is largely unchanged at 2.5 percent, and the Balance of Payments deficit for the March year – announced last week – is dramatically lower at 2.2 percent of GDP; the lowest annual deficit as a proportion of GDP since June, 1989.

This is more than just numbers, however. It is particularly pleasing to see that 100,000 new jobs have been created, the bulk of them full time. The unemployment rate has fallen, and the better prospects for finding jobs have meant that more and more people are looking for them. As a result, the participation rate – the proportion of people looking for work out of the working age population – is now at its highest level since this survey started. In other words, there are many New Zealand families who are back in work, and back on track to achieve the future they want for their families.

It is particularly gratifying for me as a Labour finance minister to see that this growth has been achieved alongside better protections for workers through increases in the minimum wage and the passage of the Employment Relations Act.

Our opponents on the right argued that higher wages and better protections would simply fuel inflation and decrease employment. We said their arguments were wrong, and they were. What we now see is more people working their hours of choice in better paid jobs. And the effect has been a lift in the total value of wages by more than ten percent above the rate of inflation.

A lift in the real incomes of working New Zealand families of this order has not been seen in many decades.

Through this period the government’s own fiscal situation has been prudently managed. We have embarked upon some major spending initiatives, such as raising the floor for New Zealand Superannuation, reintroducing income related rents for low-income state house tenants and easing the student loan burden of students. But we have done these without weakening the government’s finances.

Compared to 1999, the government’s finances are in a very strong position. In 1999 the forecast was for a balanced budget in the year to June 2000, alongside net debt of 22.4 percent of GDP. By the year to June 2003, the operating surplus is forecast at 1.8 percent of GDP and net debt is scheduled to fall to 16.8 percent of GDP.

In other words, we are living comfortably within our means, and we have been able to spend more on the things that matter to New Zealanders, while reducing the amount of our taxes that have to go to service debt.

Thus we have materially improved the public accounts, and in addition have put aside money to protect the future of New Zealand Superannuation: by 30 June next year there will be $1,890 million in the New Zealand Superannuation Fund.

Of course, our critics and opponents have been quick to label this government as “lucky”. This claim is without justification. It is true that the New Zealand economy has benefited from high commodity prices, good growing conditions and a low dollar. But in fact just as much of the luck has been running the other way.

The events of 11 September jolted confidence and disrupted tourism. But even before that the world economy was in one of its longest and most broadly based stagnations since the oil crises of the 1970s. We also suffered a winter drought that reduced electricity-generating capacity. And the rapid decline in the New Zealand dollar led to accusations that investors had lost confidence in New Zealand.

We knew we had to go onto the front foot to prevent a severe loss of confidence:

 We amended the Policy Targets Agreement with the Reserve Bank Governor to require the Bank to be more sensitive to output volatility.

 We began a detailed dialogue with business, local government and other stakeholder groups to shore up confidence and develop a shared understanding of the problems confronting the economy;

 We reinforced confidence in the export sector through an ambitious approach to trading partnerships; and

 We moved to a more active immigration policy to address short-term skill gaps.

We were also called upon to make some difficult calls in addressing some issues for the economy:

 We facilitated the Fonterra merger to permit that industry to evolve along the lines sought by its farmer owners.

 We stepped in to recapitalise Air New Zealand and protect the long-term interests of travellers and exporters.

 We ran a save electricity campaign to head off potential power outages.

 We grasped the nettled on Auckland’s traffic congestion problems, and

 We acted to leverage the advantages to be reaped from Lord of the Rings and America’s Cup attention.

If we are to attribute the current state of the economy to luck, then I can only remind you of the old golfer’s adage, that the more skilful players are the ones who attract all the lucky breaks.

So we are moving forward into the next three years with significant economic headroom: unemployment is low by historical standards, the participation rate is high, the budget surpluses are strong and government debt is moderate. Interest rates are above prevailing rates in the rest of the developed world.

The challenge is 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.

In this regard, it is important that we are not dazzled by promises 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 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.

It is here that we come to the second part of the mandate we are seeking. We want to make a series of targeted investments aimed at changing New Zealand’s economic fundamentals over time, and in time creating a high-growth, high-skill, high-income economy to underpin our future.

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 addition, we now have over 2,500 young New Zealanders employed as Modern Apprentices in a wide and growing range of industries. The Budget provided sufficient funding to double the numbers of Modern Apprentices, so that we will have 6,000 in employment by December 2003.

We want to continue 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.

Skills are crucial to our future, but we also need to support innovation, in particular in those areas – such as information technology, bio-technology and the creative industries – where there is a good strategic fit between our natural capabilities and our ability to sell into world markets. This is why we are investing in collaborative research programmes which focus public and private sector resources on areas of specific business opportunity.

We need to attract foreign direct investment to New Zealand, in particular in those areas of strategic fit. And we are merging 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, with an initial budget of $14.5 million.

All of these are long term investments which need to be sustained over time. They are the kind of investments that only government can sustain, but they need to be made in the context of a partnership with business and with local communities.

There is not much that is flashy about this programme of investments. It is about a number of small initiatives having a position cumulative effect over time. Rather like the task of raising children or building up a small business or creating a cohesive local community.

This is the way it should be. We have to beware of the temptation to clutch at Big Ideas that are offered as means of economic salvation. New Zealanders fell into that trap with the Muldoon government with its Think Big projects. The National Party’s grand plan for tax cuts is from the same stable. Tax cuts may sound like a welcome shot in the arm for the economy, but the evidence indicates that they are nothing more than a stimulant, and that their long term impact on growth is unclear.

First, as I have to point out to journalists repeatedly, a comparison of the tax rates and structures of different countries reveals that New Zealand is nowhere near the head of the pack. In the six countries studied the total burden on businesses – including corporate taxes, social security levies, local body rates, and excise duties –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. Whatever distinguishes us from these other countries it is not higher taxes.

Second, we only need 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 of these tax cuts failed to lift the sustainable growth rate. At the most, they created the inflationary growth one would expect from any fiscal loosening. That is like pulling out the clutch on your car. The engine revs faster, but no more power is produced.

So 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 the level of skills in the workforce, it does not increase our uptake of technology, and it does not gain better access to global markets.

Tax cuts would be a bold move in what is clearly the wrong direction. At the very least, that means that it would be foolhardy to put all our economic eggs in the lower tax basket.

So we are looking for a fresh mandate for solid economic management and a balanced programme of making changes in the way the New Zealand economy works.

No doubt we can expect our share of good and bad luck over the next three years. However, compared with the state of the economy in 1999, we are, at the mid point of 2002, now much better prepared to weather economic storms, and – most significantly – much better placed to take advantage of the opportunities in world markets, and secure the prosperity that is our shared goal.

Thank you.

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