Michael Cullen: Speech to Herald
Michael Cullen: Speech to Herald
Discussion of the government's economic policy
Launch of Herald "Mood of the Boardroom" SurveyThe Hilton Hotel, Princes Wharf, Auckland
The survey being released today is, I would suggest, very aptly named. It documents, in more detail than most surveys, the current mood of those who sit around the board table and make decisions about the future of New Zealand businesses.
>From my own perspective and that of the government it presents a mixture of brickbats and bouquets. In most regards these are predictable; although there is one surprising result that I want to return to in more depth later on.
The immediate question is: what is the connection between 'mood' as reflected in this and similar surveys, and the decisions that businesses will make in the foreseeable future? Does 'mood' drive those decisions, or is it froth on the surface? And what connection is there between 'mood' and the underlying state of the key economic indicators?
One of the most constant and puzzling features of surveys of business has been the disparity between the perceptions business leaders have of the economy at large and their own intentions with regards to hiring and investment. The latest National Bank business confidence survey, for example, showed a slide in general business confidence from net 16 per cent negative to net 28 per cent since December. And yet the own activity indicator was still firmly in positive territory and employment and investment intentions remained robust.
This latest survey maintains this pattern: pessimism regarding the general business situation, combined with strong intentions in capital expenditure, IT expenditure and hiring of new workers. And yet it is surely illogical. The whole ought to be the sum of its parts.
What this disparity suggests is either that business leaders are curiously ill-informed, or that there is a mood of pessimism - a kind of dark but insubstantial fog hanging over the economy - which bears no relation to the real economic forces which drive decision making. I suspect the latter, as you might expect. And at the risk of being thought churlish towards our hosts I lay a good portion of the blame at the door of some business journalists who cannot seem to bring themselves to acknowledge that, on balance, the Labour-led government has presided over and contributed to a period of very positive economic growth, and has done so in spite of an international situation (including the impact of SARS and the Iraq War) that has many of the OECD economies languishing in a cycle of poor growth.
Let me remind you of some of the facts:
New Zealand's GDP growth rate over the year ended September 2003 was 3.9 per cent. This was considerably faster than in the United States, the UK, Europe or Japan.
Consumer and business spending, and investment in housing in particular, have grown strongly. Real gross domestic expenditure rose 6 per cent over the year ended September.
The labour market is humming, and unemployment rate has fallen from a peak of 7.7 per cent in 1998 to 4.6 per cent in December 2003, in spite of rapid working-age population growth. This occurred, I would note, in spite of the restoration of worker's rights through the Employment Relations Act, which commentators on the right predicted would stop economic growth in its tracks.
In its 2003 Economic Survey, the OECD commented that "in New Zealand, government regulation is generally of good quality, and compliance costs are not high by international standards." This has been reinforced by a number of other surveys, including by the World Bank and the Heritage Index of Economic Freedom.
The government has maintained a commitment to fiscal conservatism. Government debt and spending, as a proportion of GDP, are low by OECD standards. Core government operating spending was 32.4 per cent of GDP in the 2002/03 fiscal year and is forecast to decline further to 30.8 per cent by the end of the current year. Sovereign-issued gross debt was 28 per cent in 2002/03, and is forecast to decline to 25.3 per cent in 2003/04. This is the lowest it has been since the mid 1970s. This has given us a good deal of headroom to cope with unexpected downturns in economic activity.
Our major challenge, as you all know, is in the export sector. But we are in one sense victims of our own success. Export volumes have increased steadily over the last year, and export incomes remain high compared to the historical average. The problem is the rising exchange rate which has already reduced nominal export earnings by 6.4 per cent over the year to September, with worse to come in the short term.
The dollar is high because the international money markets are responding enthusiastically to our ability to sustain growth rates higher than the rest of the OECD, and, what is more important, they are expressing confidence that the New Zealand economy will remain in a relatively strong position into the medium term. Of course, I have gone on record recently saying that I believe the money markets are irrationally exuberant about our economy and that they are over-valuing the currency as a result and may end up causing unnecessary damage.
The best antidote for irrational exuberance is rational analysis, and I have to say that this has recently been absent from the general tenor of business comment. Sadly, a preoccupation with surveys and an unwillingness to dig further into what is driving change in the economy is a big part of this.
Hardly a week goes by without another sample of business people being asked whether they would like to pay less tax and whether they would like less regulation of the labour market. The results are entirely predictable, and, I would suggest, not very interesting. They certainly do not tell us anything new about the economy and how it is evolving.
What I would like to see investigated is the question of whether New Zealand business people would prefer to be subject to, say, the Australian or the British tax regime in its entirety, since it is that, and not simply the headline rate, that their competitors have to deal with. The same goes for labour market regulation where our current reforms place us toward the flexible end of the OECD and not, as some are suggesting, on a path back to the 1960s and 70s. That is not to say we should not engage on the detail of the present bill. But business leaders and some commentators need to remind themselves of how poor their predictions were in 2000.
And I would like to see some questions asked about the impact on business of the higher profile of the New Zealand dollar. What does it mean for businesses to be part of an economy that has weathered the recent severe economic storms better than most? We have seen the risks in terms of an over-valued currency; but are there opportunities to be grasped?
These questions are not asked in this way, I suspect, because to do so would require a great deal of effort and would yield a complex set of results. They should, however, provide some insight into what drives the actions of business people in New Zealand, rather than just the fluctuations in mood which may be unconnected to any real change in economic fundamentals.
To those who would accuse me of shooting the messenger I would simply say this: who is the real messenger here? Is there a message from the net 29 per cent of businesses who responded positively to the National Bank's own activity indicator? Is there a message from the 64 percent of SMEs in today's survey who say they will on balance be hiring over the next year? And is there a message from the thousands of New Zealanders who now have jobs thanks to the robust job growth which has sent our unemployment rate to historic lows? How much coverage is given to these people and their future plans?
The aspect of today's survey that I find most interesting is the very high degree of enthusiasm expressed for the current moves to form a single Trans Tasman market. Indeed the level of support for a common currency and a combined stock exchange is quite surprising.
Since my government took office in 1999, making progress on the Trans Tasman relationship has been a particular priority. Progress towards a single market stalled somewhat in the 1990s, with the missing ingredient being active sponsorship at the highest level.
In the last few years Peter Costello and I have developed a strong consensus on the benefits to be gained from greater economic integration and the need to clear away obstacles expeditiously. We believe there is untapped value in a single market of some 25 million people. New Zealand businesses will benefit from greater opportunities to sell into the larger Australian market and a freer flow of investment within the trans-Tasman economy as compliance costs and other regulatory barriers are reduced.
We have agreed to meet annually to advance a formal agenda which encompasses business law, taxation and regulation of securities, and in our two such meetings to date have managed to make some significant steps forward:
We are undertaking work on options for mutual recognition and harmonisation in prudential regulation of our banking systems with a view to enhancing the efficiency and soundness of the banking systems in each country.
We have recently established an Advisory Group on Accounting Standards whose task is to propose a single set of accounting standards to operate across the Tasman to streamline business for companies which are doing business on both sides of the Tasman. The ultimate aim is to permit such companies to keep only one set accounts which serve in both jurisdictions.
In May of this year we will be releasing a discussion document on mutual recognition of securities offerings.
We are also working on coordinating trans-Tasman competition policy. This includes some immediate issues that can be worked on now without legislative reform, and some medium term issues that will require legislative reform in at least one of the countries. We have agreed that all options should be left on the table, including the options of joint laws and joint competition agencies.
Economic integration with Australia will be a key driver of growth in our economy in the decade ahead. But it is probably the last major opportunity to release latent value in the economy through structural change.
That is why our focus has to be increasingly on improving productivity. We must also acknowledge that in the last two decades productivity growth has largely meant cutting costs, and that the opportunities for that to continue are fast diminishing.
Our primary challenges are those of acquiring and utilising better technology, building and retaining a higher skilled workforce, maintaining and expanding our infrastructure and enhancing the marketing of our products and services.
In an economy as small as ours, we cannot afford to take a confrontational approach to challenges as important as this. Those who still think in terms of a clash between grand Victorian forces of capital and labour need to be reminded that Victoria has been dead more than a hundred years. With a workforce that is more mobile - notably at the top end, but in fact throughout the spectrum of skills - it is foolhardy to think that we can fall out of step with the rest of the OECD in terms of labour relations and standard conditions without serious long-term consequences.
The fact is we are currently facing skill shortages and relatively high labour participation rates, and there is no reason to believe that this will change. Many New Zealand firms are now achieving productivity gains, not by programmes of cost-cutting, but with business practices that improve timeliness and quality, minimise costs and waste, and enable employee participation in setting and reviewing company goals. These examples need to more widely known and understood.
This is the driver of the recent establishment of a Workplace Productivity Working Group to raise awareness and debate on workplace productivity. The Group has members from a variety of industries, as well as HR specialists and Dr James Buwalda, the Chief Executive of the Department of Labour, who sponsors the group. It will look at successful methods already developed by businesses, and find ways to promote the issue throughout the business community and will advise government on ways it can promote workplace productivity.
The need to increase workplace productivity is also a driver of the tertiary education reforms, which are shifting the emphasis in our tertiary institutions from a mad scramble to put bums on seats to a system that rewards excellence in teaching and highlights performance in terms of outcomes for students and the degree of coordination with the business community who are the employers of graduates. The reforms also aim to reorient academic research so that it involves more joint ventures with New Zealand companies and is better able to transfer new knowledge into commercial uses.
And finally productivity is the driver behind the Growth and Innovation Framework, with its focus on investment in building capability in areas of major potential benefit across the whole economy, notably biotechnology, information and communications technology and the creative industries.
It has been and remains a top priority of my government to engage with business leaders at all levels on these issues. We are seeing the fruits of this engagement in the government-business partnerships that are up and running. There is always room for a better mutual appreciation of what role government and business should respectively play in strengthening the economy, and I welcome today's survey as a contribution towards that.
My conviction remains, however, that understanding the mood of the boardroom is not a substitute for understanding what is shaping the economic fundamentals upon which the future of New Zealand business must be built. It is a companion to that and in part is a measure of the extent to which there is a common understanding of these fundamentals.