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Cullen Address to BOP Regional Business-Govt Forum

Michael Cullen Address to Bay of Plenty Regional Business-Government Forum.

Good evening and thank you for coming along to this forum. I know that you are all busy people, and it is difficult for you to take time away from running your businesses to talk with government ministers about how we can work together.

Your attendance at this forum is, though, a statement. It is a statement that there is an appropriate role for the government in promoting a healthy business environment, and that that role should be developed and refined through dialogue. I believe that the government – business relationship in New Zealand has matured.

In the second half of the 20th century the relationship was both unhealthy and unstable. Before the mid 1980s, you could say that there was a patronising and paternalistic relationship. Through import quotas and various forms of licensing, the government virtually guaranteed business a market: and a profit. It then set about telling business exactly how to operate in that market: the prices it could charge, the wages it had to pay, the hours it could operate, how it could transport its goods and so on.

There is an apochryphal story that Fred Turnovsky, a colourful character in the business community and a clothing manufacturer, had a furious argument with a price control officer in the old Department of Trade and Industry about what he could charge for men’s shirts. When the price control officer would not budge, Fred is alleged to have told him “young man, you have just cut two inches off the length of men’s shirts in New Zealand”. So the end result of the regulation of business was that it went as far as determining the length of men’s shirts!

We then went to the other extreme where there was virtually no relationship between government and business. Governments made a virtue of having nothing to do with business because business was not the business of government. It was also quite convenient politically.

If the government shouldn’t be doing anything it couldn’t be doing anything wrong. If the government had got out of the way, any apparent failure in business performance must be because of business failure. The deregulation fashion was marketed under the slogan of TINA – there is no alternative. The blame shifting went in Tina’s little brother’s name – TINE: there is no excuse!

That is all behind us. Of course what governments do affects business. The structure of monetary policy influences interest rates, and possibly exchange rates. (I say possibly because this is an area where global forces tend to swamp what small country governments might do). The government sets tax rates, it provides much of the infrastructure businesses need, it negotiates trade agreements and defines the rules around the use of labour and for environmental protection. Governments determine, if you like, the macroeconomic and regulatory environments and business simply gets on as best it can within that environment.

The question is if there is another level at which the government – business relationship should operate.

Nobody is suggesting that we can or should go back to the Muldoonist past (except perhaps the person who is happy just being your local MP). The new age of business is dominated by incredibly fast and mobile finance, and by a much freer movement of capital, labour and trade. It just cannot be micromanaged by a central government. The flip side of that, though, is that it becomes more important for business to form an effective working partnership with the government if it is going to prosper in this uncertain and fickle world. There are parts of the business equation that are just too hard for businesses – especially small businesses – to manage alone.

I see this partnership being built on three basic principles.

One is that the government should not presume to tell business how to run their businesses: where to invest, what to produce, how to produce it.

The second is that the government can help by reducing or removing barriers to effective business development and by enabling businesses to reach their full potential.

The third is that business must recognise that they operate in and draw resources from a wider social organisation, and need to accept that there will be standards, constraints and responsibilities that go with the rights to pursue profits.

Tonight I want to make some brief comments about where I see the government having the potential to facilitate business development, and where I see the government having the capacity to help business – again especially small business - meet the costs of complying with wider social obligations.

New Zealand is a small economy, far away from the major markets and with high overhead costs. It is also an economy operating in a nation founded on hope, and legendary for its inventiveness and adaptability.

The government has to develop a programme that nurtures inventiveness, exploits the enthusiasm and overcomes the tyrannies of distance and scale.

That programme came together in what we have described as the Growth and Innovation Framework. The framework has three core elements.

Firstly, we want to strengthen the foundations that are the necessary conditions for successful economic performance in an uncertain and ever-changing world. This means we need sound government finances, a competitive economy, a cohesive society, a healthy and skilled population, sound environmental management, a strong research base and a globally connected economy.

The budget confirmed the governments’ commitment to stable finances, to developing skills and to a cohesive rather than divisive society.

The second element of the framework is that we will build more effective innovation, through a mix of attracting and developing talent, creating new venture investment funds, making better linkages between tertiary institutions, industry and communities and by increasing global connectedness.

Finally, we are developing areas where our natural advantages and aptitudes give us scope to boost growth and innovation. These are biotechnology, information and communications technology and the creative industries. These sector level competencies have applications across a range of industries.

There were a number of new initiatives announced in the budget that breathed life and down to earth pragmatism into this framework. Over the next four years we will put an extra $140 million into improving the innovation that can flow from a better alignment of public and private research and development, and the commercialisation of the results of that R&D. There is also new money going into the early commercial development of promising discoveries.

The work of business incubators will be accelerated and the integration of Trade New Zealand and Industry New Zealand will provide seamless support for businesses from the time they start up to the time they go global. There are other examples; but I won’t re-read the budget while you eat your dinner! The point is that the government is taking a determined and consistent approach to use collective knowledge and energy and collective money to create opportunities for business.

A lot of the response from business is to say that it is all very well to create opportunities, but if we are tied up with regulatory compliance we will never have the time to take advantage of those opportunities!

I want to warn against the excesses of the clamour for removal of compliance with basic standards. Business needs standards. Standards give investors, bankers, customers and workers confidence to commit to enterprise. You just have to look at the uncertainities that the exposures of the Enron and Worldcom excesses created to realise that standards matter. Closer to home, we have the costs and the distrust and the personal heartbreak that came from weak standards and leaky buildings.

Nobody defends intrusive regulation and excessive compliance cost, but if we are talking about a government – business partnership, the emphasis needs to go on how government can assist small business with cost effective compliance with tax, labour and environmental obligations.

The main initiatives to assist business to meet the responsibilities of living in a well ordered and progressive society at minimal cost in time and money fall into four categories: access to skilled labour; assistance with paying tax; meeting employment relations standards and complying with the Resource Management Act. Those are the four issues that I hear most frequently when I try and dig into what lies underneath more general complaints about compliance cost.

I will start with skills. We have increased spending on education through the formal education system at all leves. In addition, we are ugrading our immigration marketing to attract skilled migrants and have committed an extra $84 million over the next four years to give predictable multi-year funding for the Industry Training sector. We have established a goal of having 150,000 people being trained in workplaces by 2005, and 250,000 trainees in 2007.

On the tax front we are seeking comment on a number of measures that should reduce the compliance costs of small business. The first proposal is to align the payment date for provisional tax with with that for GST to improve small business cash management and reduce compliance cost. Another proposal is to base provisional tax on a percentage of GST turnover so that small businesses can match tax with cash flow more closely. For new businesses, the proposal is to provide an incentive to pay provisional tax in the first year of business to smooth the transition through the following year. There are also plans to simplify the multi-rate Fringe Benefit Tax calculation.

With labour, we are inviting comment on a scheme that would subsidise the cost of an employer engaging a payroll firm to managage the payroll and associated tax obligations for up to the first five employees. It is possible that the payroll firm would be able to take on other compliance costs as well and thus further assist small businesses. The Department of Labour is developing best practice employment information so that firms do not have to try and develop employment relations practices from scratch.

With the RMA, the government is developing a training and accreditation scheme for councillors and commissioners involved in decision making.

None of these measures will set the world on fire, but each will make a small contribution to lower compliance cost and together they will make a significant difference.

That is the big picture of the growth and innovation framework and how the government business relationships contributes to it. Where does that leave the Bay of Plenty? While all of our regions have similarities and common needs, each one is special, with its particular problems and prospects.

It would be absolutely wrong for me to try and tell you what they are. That is for tomorrow, and it is for you to tell us where the opportunities lie and where effective collaboration can exploit them.

The government is contributing to this process through its support for the Western Bay of Plenty’s regional partnership plan. Industry New Zealand contributed $100,000 toward this last year, and my colleague Jim Anderton has today announced a further $100,000 in funding. But, while we can assist with the resourcing, the strategy has to come from you.

The world in which business is done is incredibly uncertain and changing rapidly. Part of the challenge is to position the regional economy around its inherent strengths and natural advantages, but then to have systems in place that allow it to adapt to the challenges and opportunities that will inevitably come its way.

That is a very demanding agenda and I look forward to a constructive discussion in the morning.

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