Cullen Speech To Business New Zealand Conference
Speech To Business New Zealand Conference
Hon Dr Michael Cullen, Minister of Finance
4.05pm, 17 July 2002
Hotel Intercontinental, Wellington
One of the unusual, almost eerie things about the election campaign we are engaged in is that there is very little discussion about the economy and economic policy. In some ways I suppose I should take that as a compliment. The economy is one area that our opponents seem unwilling or unable to challenge us on.
Certainly, on any objective reading of the facts, the economy is in good heart. Growth is steady. It is well spread by region and by sector. Real incomes are rising, not by inflationary wage growth but because more people are working longer hours in better paid jobs. The labour force participation rate is the highest on record. Despite that, unemployment is at thirteen year lows. Our perennial problem with our current account deficit seems to be in remission; the deficit is also the smallest it has been in thirteen years.
This is not an economic expansion bought with borrowed public money. We are running strong operating surpluses, and both gross and net public debt have fallen in relation to our ability to service that debt ¡V the level of GDP. That is in spite of a relatively ambitious programme of public sector investment.
I have often said that the record is good, but not good enough. We need to lift our game, not in the short term, but in a sustainable way.
That is easy to say, but we do need a dose of realism. We are a small economy, and face all the associated disadvantages of scale. We are also a distant economy: unlike an Ireland or a Netherlands we are not on the doorstep of a large and rich market.
We may not be world leaders in output per head, but we are a developed market economy. We do not have the option of lifting productivity growth by shifting resources out of low productivity, traditional agriculture. Our primary sector is high skill, high tech and high productivity.
Getting growth means that we have to develop comprehensive, realistic and plausible programmes that focus on the sources of growth.
There are no magic bullets. Bumper sticker slogans will not cover over reality. As always, we have to ignore the extremes, but there is absolutely no evidence that makes the case for small government and low taxes. It is possible to find examples of successful economies with active governments and with passive governments, with low tax rates and burdens and with relatively high tax burdens, with low levels of public spending and with high levels of spending.
In all cases, quality matters. Tax systems must be as efficient and non-distorting as possible. Spending programmes must give value for money.
If we are aiming at growth, we need to start with the basic arithmetic of growth.
I have seen
all sorts of implausible growth targets bandied about. An
economy will grow if it uses a greater quantity of capital,
and/or a greater quantity of labour and/or increases total
If we start to unscramble the arithmetic, the growth equation looks a little like this:
ƒæ Achieving a long-run potential growth rate of 4 per cent requires the total factor productivity growth rate to rise from an historical level of just over one per cent to two per cent.
ƒæ 4 per cent growth would be achieved if the rate of growth of the capital stock increased from an historical 2.7 per cent per annum to around 6.5 per cent. This would require a very large increase in the rate of growth of investment.
ƒæ In a mixed scenario, a small increase in total factor productivity ¡V from 1.1 to 1.4 per cent per annum, an increase in the rate of labour force growth from 1 to 1.5 per cent and investment increasing the capital stock by 4.5 per cent per year would also combine to generate 4 per cent growth.
The broad conclusion is that the target is achievable, but gets harder and harder if there is too much emphasis on any one contributor to growth. This is why Labour puts the focus on a balanced growth strategy.
The broad front approach means that we get growth by a focus on labour supply, investment, and improving productivity, not on only one, and certainly not by magic bullets to hit any one target.
thinking on how to improve growth was articulated in the
growth and innovation framework that was released earlier in
the year. This framework outlined the various policy
settings that we feel are important for increasing New
Zealand¡¦s growth rate. These elements are well attested in
theory and in econometric analysis as contributing to
The first element of the framework consists of a set of ¡¥policy foundations¡¦, important institutional and infrastructural building blocks. In this regard, we have identified a stable macroeconomic framework, an open, competitive micro-economy, a modern cohesive society, a healthy population, sound environmental management, an educated population, a globally connected economy, and a solid research and development framework.
Successive governments have made significant investments in policy foundations over the past two decades, and this has had a positive effect on economic performance. This government has made further advances since 1999, and we continue to receive favourable comment from the IMF and OECD on these policy settings, which in turn has a positive flow on effect for our international credit rating.
However, a sound set of foundational policies is unlikely to be sufficient to generate high growth. Indeed, other countries, with what are from an orthodox perspective less transparent foundational policies, have generated higher rates of growth than New Zealand.
Good foundations are a necessary but not sufficient condition for growth for a country with New Zealand¡¦s characteristics. They are the fulcrum, but we also need effective levers. We see six major levers for growth: sound fiscal and monetary settings, consistent upgrading of skills, sustained investment, - especially new investment in areas of national competitive advantage - a modern and well functioning infrastructure, robust innovation and a persistent expansion of the export base.
One of the big casualties of this election campaign has been fiscal discipline and fiscal credibility. All of the opposition parties have announced tax or spending plans that are both unsustainable and implausible.
By the third year of the next term, National is planning additional spending of close to $2.5 billion over and above any normal pressures. Add to that their clearly stated notion that the government should pay whatever public sector unions ask for and their wobbling on the GE issue and you have a picture of total fiscal indiscipline. New Zealand cannot afford that kind of weak leadership.
Labour¡¦s record is one of fiscal
discipline, and sound financial management.
That sound financial management has not been at the expense of the infrastructure. One of the easiest ways to balance the books in the short term is to cut out maintenance and capital spending. Public sector investment was slashed in the 1990s, and we are having to meet the costs of that now. Outdated and overcrowded infrastructure is a huge drag on private sector productivity and public sector efficiency.
If you look at our budget forecasts, the surpluses that emerge in the out years seem to be rather large. But when you look at the track of gross debt, it is relatively flat at just under our long-run comfort zone of 30 percent of GDP. Operating surpluses are needed to contribute to a part of the capital spend so that debt remains prudent. Those who want to dissipate the surpluses do so at the risk of halting infrastructural investment or blowing out debt. And that is true as much of some who seek to work with us as of those determined to work against us.
This government is
aiming to improve the productivity of our labour force by a
combination of investment in tertiary education and
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.
Our reform of tertiary education is one of the most substantial in our economic history, and will provide a much clearer alignment of the skill needs of the labour market and the education provided by tertiary institutions.
We have backed that up with extra money for industry training because it is a highly effective way of raising skills and improving productivity. It is a partnership approach, with Industry Training Organisations being funded to purchase training in line with the needs of industry.
The strategy for investment focuses on expanded trade agreements, inward investment attraction, business incubation, industry and regional development assistance, venture finance provision, deeper capital markets and science and innovation promotion. It is much better to attract capital by increasing the return on investment, not by pretending that leaving a bigger share of an inadequate return in the enterprise is the answer.
Labour places a lot of emphasis on innovation as the route to lifting the sustainable growth rate. Innovation is not something that simply happens ¡V at least in a sustained way. It has to be nurtured. Innovation involves both the generation of good ideas and the commercialisation of those ideas. It links science, finance, production and marketing and is as strong as the weakest link in that chain.
One of our problems with the innovative framework in the past is that it has been haphazard, resulting in our efforts being spread to thinly, and connected too weakly. We have strengthened the links in the innovative chain, and are now working on thickening the innovation process by concentrating on areas where we have natural aptitudes and advantages. We are not trying to pick winners, but to develop sectoral competencies that have multi-industry application. These sectoral competencies are in the areas of biotechnology, information and communications technology and the creative industries.
Finally, there is exporting. Exporting is important because it is the only way that we can access what is virtually unlimited market opportunities, and grow beyond the limits imposed by the size of our domestic market. Labour has been proactive in forging new trade agreements and economic partnerships and will continue to do that. Our economic development partnerships have a strong export orientation, not least of all because that is where the best opportunities lie, but also because that is the area that faces the highest hurdles to overcome. In the 1990s, New Zealand was the only OECD country that did not have any economic development partnerships operating, and we are moving to fill that gap. It would tragic if they were dismantled to obey the dictates of a failed ideology.
Together these policies expand the quantity of capital, the quantity of labour and increase the rate of growth of productivity, and that underpins the next cycle.
The trite solutions offered by opposition parties have been tried in the past. Not only did they fail, but they failed in other countries that tried them. Labour has settled on realistic and achievable targets, using sensible and integrated programmes. And although it is a long road, requiring patience and hard work, it is the only route to ¡§getting growth¡¨.
What we are seeking on Saturday week is a fresh mandate to provide the strong discipline, leadership and vision that is needed to secure the future that all New Zealanders want.