Cullen speech, in response to IMF report
Cullen speech, in response to IMF report
This year’s round of regional conferences takes place against the most uncertain and disturbed international environment for many years. In this situation New Zealand is profoundly fortunate to have a Helen Clark led Labour Government in power.
We have much to celebrate after nearly 3 and a half years in government. We continue to implement our key policies and programmes in an exercise of good faith government not seen since the 1970s. The result has been a significant restoration of faith in the process of government itself.
On the economic front we have succeeded in many ways beyond and over our own expectations. We have maintained tight fiscal discipline over those 3 and a half years so that at each stage we have exceeded our fiscal forecasts. Net government debt is below 15 per cent of GDP and we are placed to weather an economic downturn better than nearly all other developed countries, with sufficient fiscal and monetary headroom to be able to respond appropriately and effectively.
Last year, of course, we grew faster than any other OECD country with growth running at 4.4 per cent. Unemployed and employed beneficiary numbers are at their lowest levels for 15 years, in effect since the first effects of the 1987 sharemarket crash. This has meant strong growth in household incomes despite, on the whole, modest non-inflationary wage growth.
At the same time we have changed the framework of economic debate in New Zealand. The right wing mantra of tax cuts, state asset sales, and mindless deregulation no longer carries any great credence outside the increasingly weird pages of the National Business Review.
Our fiscal and economic programme has been built around three key principles:
Stable and certain fiscal policy
Rebalancing and moving to the mainstream previously unbalanced policies And a more active role for government in facilitating economic growth.
Let me begin with stable and certain fiscal policy as that is particularly to the fore at the present with the Budget due in just under two weeks.
The fundamental philosophy underlying my approach to fiscal management has been a simple but strict form of Keynesianism. Keynes’s essential insight into fiscal management which has remained of lasting relevance is his notion of the automatic stabiliser. That is, as an economy picks up speed in the upturn of an economic cycle government revenue will increase above trend and expenditure moves below trend so that fiscal settings automatically tighten, slowing growth.
On the other hand, as the economy enters the downside of the cycle, revenue tends to fall (or its rate of growth slows), expenditure increases, fiscal settings loosen and become stimulatory thus offsetting the decline.
Keynesian management got a bad reputation by the 1980’s for two reasons. The first was that governments had tried to be more proactive, in particular deliberately stimulating the economy on the downside by increasing spending. The problem was that it was difficult to recognise turning points, the expenditure taps could be too slow to turn on, and often the increases in spending were not temporary but structural.
The second problem was that while governments were happy to spend more on the downside, and so stimulate the economy, they were less willing to moderate their spending on the upside. Thus structural imbalances leading to rising debt and inflation became characteristic of many countries.
That is why on the upside over the last couple of years I have insisted on rigorous fiscal discipline which has led to significant reductions in the debt to GDP ratio. Not only did National fail to meet its second net debt to GDP ratio target of 15%, it failed to meet its first target of 20%. We have beaten both.
This places us in a position where we will be able to ride out any downturn over the next year without any fiscal tightening. That is a clear contrast with National who, following the Asian financial crisis, tightened fiscal policy after poorly designed and unsustainable tax cuts.
Of course, this leaves us open to the charge that our surpluses are too high. Many are forecasting an operating surplus of $4 billion this current year ending 30 June or about 3 per cent of GDP. That’s probably not far from the mark if we look at what is called the operating balance exclusive of revaluations and accounting changes (or OBERAC).
Act has said we should blow the lot in a tax cut. Had we done so we would have had a significant rise in the debt to GDP ratio in a year when the economy was steaming full ahead. Over the coming year, when growth will slacken considerably, it would spell a disastrous rise in debt such as to threaten with certainty our credit ratings. (And let’s remember it is this Labour government which has restored our AAA rating for long term foreign currency debt).
Now how can that be if we had a $4 billion surplus which you might think could all be spent and leave us all square?
Well, that is where Mr Prebble is being phenomenally dishonest even by his well-practised standards. Because Mr Prebble does understand the nature of the accounting procedures used for the New Zealand Government accounts.
Those procedures are called GAAP – Generally Accepted Accounting Practice. More simply the Government uses accrual accounting, the same as businesses do, and follows GAAP principles. The OBERAC is the government’s operating balance, its revenue less expenses, adjusted for revaluation and accounting policy changes.
So this year the OBERAC of somewhere in the region of $4 billion will have to wear the very substantial impact of three very large items before the fiscal operating balance is calculated. These include the impact of falling interest rates which changes the discount rates applied to, for example, the long term liabilities of the Accident Compensation Corporation and the Government Superannuation Fund. In the case of the latter this then raises the amount of money over the long term the Government will have to fund out of tax. Under accruals accounting the full life cost of that change in today’s terms comes to charge this year.
Similarly for the ACC fund, with the added twist that even though the great bulk of any actual increase in cost will be met out of levies, that future income flow cannot be brought to charge.
The other thing about these changes is that they are based at a point in time when the underlying drivers are cyclical. They can reverse out over time as interest rates and exchange rates move through cycles. That is why the OBERAC measure was derived, in order to give a better picture of the government’s underlying surplus if you like.
Two other factors will come into play this year. With respect to ACC, a more accurate calculation of the costs of the very long term claimants largely based on a new and longer estimate of the average length of time spent in the system again brings into this year’s accounts the full onward extra estimated costs of all existing cases.
Secondly, the losses on equity markets, while not realised losses, must be brought to charge and have been signalled in the actual results to date. Again, in some future years there will be very large positive effects on the operating balance. The National Provident Fund, for example, has averaged a 9.5 per cent rate of return over the last decade or so on equities even though losing on its equity portfolios over each of the last three years.
Now, of course some people say this proves we should not diversify those funds. The fact is that over the long term - and all the funds referred to are long-term funds – equities out perform securities and it would be folly to invest in the latter only. The New Zealand Superannuation Fund has had no such paper losses, as it will only go to market later this year, probably amidst a favourable combination of a reasonably strong dollar and modest equity prices.
The combination of all the above factors will mean that the final operating surplus will be around a third of the OBERAC which is what everybody has been tracking with the publication of the monthly statement of the government accounts. And yet we will still be in essentially the same strong position overall as witnessed by the excellent results we will have on the gross and net debt positions.
As I said before, the economy is expected to slow significantly over the coming year from last year’s hectic pace. War and its associated uncertainty, disease, drought, especially in the hydro lakes catchment areas, late frosts, and the rising dollar combined to produce pretty powerful braking mechanisms. Nevertheless, the chances are our performance will still be reasonable by international standards.
If fiscal certainty and stability are the first principle of our economic management the second has been the rebalancing of previously unbalanced policies.
Some choose to say this is going backwards. How reducing the rights of working people, often lowering their pay and conditions, and deliberately engineering a more unequal society can be seen as going forwards is beyond my understanding.
The Labour government’s mix of principle and pragmatism has, of course, been one of its hallmarks across a whole range of policies.
Far from representing a return to the past the rebalancing we have enjoyed has been about creating a greater sense of shared community of interests and a move away from the notions of inherent conflict and the winner takes all beliefs of the previous regimes.
Hence the central importance of repealing the Employment Contracts Act and its replacement by the Employment Relations Act. The Employment Contracts Act’s underlying philosophy was almost like Marxism in negative. There was no notion implicit in it that in the modern world shareholders, management, and workers have an overriding common interest in the success of the business. Instead relations were to be based simply on a cold cash nexus with the rules weighted heavily against the employee.
The Employment Relations Act’s underlying philosophy is that every effort should be made to establish good faith relations in order to assist a drive towards prosperity for all. It is not, however, a matter of resting on our laurels. There are other hard issues still to be addressed, including those relating to contracting out and the transfer of a business. Hence, as with the ERA, we must come out with solutions that all reasonable people can live with and which provide sufficient flexibility to promote growth in a modern environment. I have no doubt that under Margaret Wilson’s guidance we can achieve this.
We have seen other rebalancing exercises in competition law, securities law, housing policy, tertiary education, and superannuation, to name just a few. The essential thread connecting all of these is that of a sensible social democratic perspective expressing the underlying needs and values of New Zealanders.
One other area is, I believe, worth a mention. That is international relations and international trade.
We favour broad-based trade liberalisation, including in the area of services. Unlike the previous government, which gave away our ability to ensure New Zealand content in our electronic media, we have insisted that our public services, such as health and education, will remain under our control and that nothing will affect the government’s capacity to carry out its Treaty of Waitangi obligations.
Broadbased trade liberalisation - which best marries the concepts of free and fair trade – promises big economic gains for New Zealand but also for many developing countries. It is a thing which is good in itself and should be promoted by all who support it as such, not as a means to some other end.
In that respect let me say that nothing in recent New Zealand politics has been more sickening than the enthusiastic advocacy by Mr Prebble, and the shamefaced one by Mr English, that we should send troops to Iraq in order to buy a free trade deal with the United States.
It was your government’s clear views that we should not be sending New Zealanders to die – or to kill others – in a war we did not support in order to gain some trade advantage. That is where pragmatism ends up being an absence of principle and we will not have a bar of it. This government followed a clear and principled line over Iraq. New Zealand will contribute humanitarian aid and do what we can to help rebuild Iraq. We have already indicated substantial support and more will come later.
New Zealand’s profound and deep interests in the world are in a rules–based system which offers security and justice to all – rich or poor, big or small. That is what Peter Fraser stood for at the United Nations in 1945. That is what Helen Clark and the rest of us stand for in 2003. It is the same approach that we apply to both foreign policy and international trade, which is why we also support matters of labour and environmental standards being part of such international rules-based systems.
Further rebalancing is likely to occur in the electricity market. In the short term we face a major challenge unless there is significant rain in the next few weeks. But there are underlying issues of security of supply and excessive volatility in prices for those exposed to the spot market which also need to be addressed. Indeed, I suspect progress on these will encourage greater buy-in to the short term savings we need to make.
Pete Hodgson and I along with other ministers are working on this right now. I think we are getting close to a package of proposals we can take to our Cabinet colleagues which will preserve the virtues of a market with the need for greater oversight of the system and effective action to give us a greater margin of security.
The increase in the top tax rate was also part of a rebalancing exercise. It was part of a signal that the philosophy that the purpose of fiscal management was to keep lowering tax rates – especially for the better off – had come to an end. We are not a party wedded to high taxes but we do believe that the state has clear duties which cannot be met without a reasonable level of income. And we know very well who suffers most if these duties are not fulfilled.
In the meantime we have introduced significant moves on tax simplification and the Budget will be signalling a good deal more – indeed some exciting initiatives which Paul Swain has been working on.
These are particularly directed towards the needs of the small to medium sized business sector. Greater support for the sector is very much part of the more active role for government in promoting economic development which has been the third pillar of economic policy.
Much of that is now centred around the Growth and Innovation Framework realised a little over a year ago. The key elements of the overall approach are:
The formation of New Zealand Trade and Enterprise
Investment New Zealand
The sector taskforces
Research and development and its associated commercialisation
The building of basic skills
The reform of tertiary education
Strengthening capital markets
The three pillars of policy are proving stronger support structures for economic growth than mindless ideological adherence to markets, deregulation, and tax cuts. We still have lighter regulation of many key elements of the economy than most other developed countries – including the labour market. Our tax to GDP ratio is below the OECD average. Our total costs to business as a proportion of GDP are well below those of many other developed countries.
All this means that we are well positioned to weather a difficult year ahead after which we expect stronger economic growth to resume. Unsurprisingly, short term confidence levels have fallen dramatically over the last few months. To some extent the surveys are merely catching up with where our views have been for some time.
But the longer term perspective, especially for ordinary New Zealanders, is more hopeful than it has been for many years. New Zealanders know they have a government in tune with their own aspirations which is not going to ambush them with ill thought through structural changes bought from some overpaid consultant.
But entrenching this change of direction and the rebalancing of both economic policy and economic debate is a long term project. It is tempting to be complacent given the level of disarray amongst our opponents.
National in particular seems stuck in a mode of terminal incompetence and indecision. Mr English looks more and more like a rabbit looking for a search light and a rifle to put him out of his misery. But moving to Dr Brash looks about as much use as feeding a dozen oysters to a eunuch.
New Zealand First is simply Mr Angry and the twelve dwarves, a party that will disappear whenever its leader succumbs to the ravages of time and an unusual lifestyle. And Act is a party which has given away flat tax and just gone flat instead.
And yet. Recent history is littered with election surprises which should warn us against complacency. We still have to earn the right to remain in government, not rely on the incompetence of our opponents.
That would be potentially fatal. To retain the privilege of governing we must continue to demonstrate our capacity to do so, our willingness to listen, and our determination to follow policies that deliver real social and economic benefits to New Zealand.
We believe deeply in a fully independent New Zealand taking its place in a world of ever closer collaboration and connection, proud of its past and confident of its future. A country which finds its identity as a southwest Pacific home to many cultures, founded in an understanding between its indigenous people and those who have come later, seeking prosperity and peace for itself and for others.
A nation which welcomes its new members and values the diversity they add, which cares for its senior citizens and those who face misfortune, a nation which seeks to develop all its young people to their full potential and provide opportunities for them in a socially and environmentally sustainable way; which values and treasures its material beauty and heritage; whose people can stand proud in any company, knowing that it is a good thing to be a New Zealander, to represent notions of justice, the rule of law, the affirmation of every individual’s worth, and respect for each other.
I believe in 3 and a half
years we have made great strides towards realising that
vision for our nation. But we still have much more to do.