Cullen Address to Enterprise Waitakere Business
Michael Cullen Address to Enterprise Waitakere Business Luncheon Waitakere Club, Lincoln Green, Auckland
Last month’s budget has been greeted as primarily a social budget, focusing on the needs of low to middle income working families. I do not dispute that that was its major emphasis; but there is a great deal in the budget that has a positive impact for New Zealand businesses. Today I want to talk about those elements of the budget, alongside the broader programme of business-friendly measures that the government is currently pursuing.
What I need to make clear at the start, however, is that the budget does not provide the kind of ‘circuit-breaker’ that some in the business community think it ought to. What it does is continue a five-year tradition of solid financial management of the government’s share of the economy, as well as strengthen the government’s investment in initiatives to build workforce productivity, support scientific innovation and promote exports.
So, first, New Zealand businesses are benefiting from a platform of stability that is remarkable both in terms of recent history and in terms of the global economic conditions in which it has been achieved.
The economy is forecast to grow by 2.8 per cent in the year to March 2005, and 2.5 per cent in the year ended March 2006. This represents a slow down from the 3.5 per cent growth we posted for 2003, although it remains in OECD terms a very creditable performance, and as the recent trend has been for the economy to consistently outperform the forecasts, one might expect any risk around these forecasts to be on the up side.
After 2006 growth is forecast to pick up to 3.4 per cent in the following year and return to Treasury’s current assumption of medium term growth of 3 per cent.
Significantly the next year is expected to bring with it a rebalancing of our economy. The picture last year was a lopsided one: a strong domestic sector, fuelled by construction, alongside a weak export sector hamstrung by a drop in commodity prices, a weakening global market and a high dollar.
Now strong growth in the United States and Japan should underpin continuing growth in our export volumes. Meanwhile a return of the currency to something near its true value and ongoing strength in commodity prices should lead to an improvement in export earnings.
On the domestic side we are forecasting a slow down as the reduced export incomes of the last year work their way through into reduced consumer demand, and as the construction industry reaches the limits of its capacity.
Meanwhile the government’s fiscal situation remains strong as a result of prudent management. Total core Crown operating expenditure, at $42.2 billion, is around 30 per cent of GDP – down from 35.2 per cent when we took office in 1999 – and even with the new spending announced in the budget this will increase only to 31.6 per cent in 2007/08.
One of our key fiscal objectives has been to keep gross sovereign-issued debt below 30 per cent of GDP on average over the economic cycle. Since taking office we have reduced that indicator from 33.7 per cent of GDP to 24.7 per cent, based on the current June forecast.
We are convinced that the current generation of New Zealanders can and should pay its own way by banking surpluses for the future, rather than pushing out a bow-wave of fiscal costs and risks for future generations to wear. Getting debt down to more prudent levels is a key part of that goal, so we have amended the debt target to further reduce gross sovereign-issued debt over the longer term, aiming to pass through 20 per cent of GDP by 2015.
Alongside reduction of debt, we are continuing to strengthen the long-term fiscal position through making contributions from our operating surplus into the New Zealand Superannuation Fund. Transfers into the Fund will be $2.1 billion in 2004/05, and at June next year the Fund is forecast to total $6.3 billion. Meanwhile the Fund Guardians are moving from a cash portfolio to a fully invested portfolio by the end of this financial year, and, during the first period of investment, have exceeded their target rate of return.
The Fund will contribute to the reduction of net debt, which including the Fund’s assets is forecast to be down to 8.7 per cent of GDP by 30 June this year. What is more by the end of the forecast period this will fall to zero, as financial assets equal gross debt. This will be the first time in decades that the government has been in the black in net terms.
So on this stable platform we are now ready to commit to new operating spending of around $2.4 billion in 2004/05, rising to $3.8 billion in 2007/08.
The bulk of that goes to the Working For Families package, which provides greater income security for 300,000 New Zealand families and stronger incentives for those families to derive their income from the labour market.
It is clearly wrong to suggest that business gains no benefit from these measures. It is first of all a package that will provide mild stimulation to the domestic economy.
More importantly Working for Families and the increases in Vote: Education constitute an investment in the workforce of the future. Given the aging of our population, we need to take this longer term perspective.
It is a phased package, costing $221 million in 2004/05 and rising eventually to $1.1 billion in 2007/08 and outyears. Once it is fully implemented over 60 per cent of families with dependent children will be financially better off, with an average gain of $66 per week overall.
The package places workforce participation at the heart of a strategy for the long-term well-being of families. Indeed the majority of the expenditure will be on families who are in work. The package is about altering the factors that make it hard for low-income New Zealand families to remain attached to the world of work.
That is why, for example, improved access to good quality childcare is an important part of the package. Childcare Assistance thresholds will be increased by about 50 per cent in October this year, immediately making a large additional tranche of families eligible. The Childcare Assistance rates will also increase, by 10 per cent this year, and a further 10 per cent next year.
In addition an extra $365 million over four years will be spent on early childhood education, including, from July 2007 an entitlement to 20 hours free education per week for all three and four year-olds. This commitment represents an increase of 79 per cent over government spending in 1999.
The package is likely to have a positive effect on the supply of semi-skilled labour. Many manufacturers in particular are saying that it is hard to fill positions which require moderate level skills. Some part of the problem appears to be that people with children currently face very limited gains in income from increasing their labour market participation, say by taking on a part-time job, or increasing their work hours. This package will go some way towards fixing that problem.
It has been suggested that much of the Working For Families package could have been delivered via a cut in personal income tax. That, I am afraid, is simply not true.
Under the Working For Families package a family with four young children and a single income of $55,000 a year will be better off by nearly $150 a week once it is fully implemented in 2007. To get the same benefit from a flat tax, you would need to slash the rate to 9.5 per cent at a cost of around $15.9 billion. A 20 per cent flat tax rate, which has been suggested, would give that family just $39 for a fiscal cost of some $5.5 billion.
The simple fact which the advocates of tax cuts fail to acknowledge is that tax cuts are an incredibly blunt instrument when one is trying to assist low to middle income families with children. The costs are tremendously high and the gains are meagre. There are much smarter ways of managing the benefit-tax interface, and of improving the rewards that ordinary New Zealanders receive from acquiring and applying their skills.
Budget 2004 also announced $500 million of additional spending over four years for economic development initiatives. The new measures include:
$26 million over four years to enable New Zealand Trade and Enterprise to boost its offshore efforts;
$35 million over four years to market specialised business sectors offshore;
$42.6 million to deepen Investment New Zealand’s offshore representation and funding, increasing their capacity to find offshore companies to partner growing New Zealand companies; and
$40 million over four years for the education sector to develop stronger offshore relationships to protect and promote export education.
Research, Science and Technology receives $212 million extra over four years, with $50 million allocated in 2004/05. Of that $50 million, $17.3 million is earmarked for the Research for Industry fund, rising to $19.2 million in each of the following three years. This will take that particular fund to around $205 million per year.
Funding increases are also earmarked for the research consortia programme, the international investment opportunities fund, the new economy research fund and funding for environmental and health research.
What is contained in the budget is of course only a small part of what government is doing to encourage economic growth. The business community should not evaluate the budget merely on the basis of whether it delivers a shot of economic caffeine. What is more important is to see new initiatives in the light of the ongoing programme of government.
Hence, aspects of the Working For Families package sit alongside our ongoing investment in education and industry training and our immigration policies as instruments for building a higher skilled workforce. We are working to make tertiary education more affordable and to encourage better quality and focus in the system to ensure that the qualifications that students gain bear a close relationship to the competencies that employers are looking for.
Similarly our science and technology spending sits alongside a recurring theme of all budgets in the last five years, which is the uptake of new technologies and creating better international linkages through investment and trade.
The additional spending on the operations of the Ministry of Foreign Affairs and Trade - $19 million initially, rising to $28 million in out years – will assist that organisation with the very significant work load they will carry in securing trade access with some of our key trading partners. There is a very full agenda in reducing the remaining barriers to trans-Tasman trade and investment. As many of you will know, we have just released a discussion document on mutual recognition of securities offerings. This proposes a model under which an issuer, having complied with the substantive requirements of one jurisdiction’s fundraising laws, will be able to extend an offer of securities to the other jurisdiction with only minimal further requirements.
We are also considering a proposal for mutual recognition and harmonisation in prudential regulation of our banking systems; we have established an Advisory Group on Accounting Standards whose task is to propose a single set of accounting standards to operate across the Tasman; and we are also working on coordinating trans-Tasman competition policy.
Our goal is to arrive at the point where a properly constituted New Zealand company can function as a company in Australia as of right, and vice versa. It is, if you like, a sort of de facto common citizenship for companies. There are significant gains to be made if we can achieve this, and I think you will find that more symbolic gestures such as the notion of a common currency will fall by the wayside.
Beyond the relationship with Australia we have very real prospects of a free trade agreement with China in the medium term. New Zealand’s small size, and the fact that we have relatively few areas where tariffs currently operate, offers China an opportunity to take its first steps on an FTA with an OECD economy that would involve a less complex negotiation than it would face with larger developed economy trading partners. The Chinese also recall that New Zealand was the first developed country to sign off on terms for China’s accession to the WTO.
If the current WTO round fails to deliver, an FTA with China would provide us with some insurance against the possible creation of free trade blocks in the Americas, Europe and Asia. It would mean we are not locked out, if this eventuates.
Alongside CER and China, we are also actively pursuing and FTA with the ASEAN nations after their economic ministers recommended initiating discussions with Australia and New Zealand on free trade. ASEAN is a region of some half a billion people with increasingly sophisticated economies and very fast growing middle classes.
Improving trade access is only part of our work agenda on behalf of New Zealand businesses. There are two further initiatives in particular I would like to mention: the review of the Resource Management Act and investment in infrastructure.
Over the past year-and-a-half we have been talking with business, local government, environmental organisations and the broader community about how the RMA is working. Some key problem areas emerged, and our focus is on finding practical solutions to them.
It is important that we do not fall into the trap of laying all of our woes at the door of this Act. It is easy to make it the scapegoat for other barriers to investment, whether technical or cost-related. For example, the recent decision by Meridian Energy to abandon the Project Aqua hydro scheme was as much driven by geotechnical work which revealed a much more extensive programme of earthworks than had initially been estimated, as by the challenge of gaining resource consents across a number of territorial local authorities.
Nevertheless, there are some aspects of the RMA that are clearly unhelpful. Some of the key processes have become onerous, both in terms of cost and time. And while the Act was originally conceived to prevent the denial of natural justice in major resource decisions, it was not its intention to provide opponents of developments with opportunities for ‘greenmail’ and protracted filibustering. An average period of five to six years to secure resource consent is, I would argue, not conscionable and certainly not necessary for the preservation of democratic rights and processes.
So we are not revisiting the ideas and principles that underpin the RMA, because they are fundamentally sound. Rather, our aim is to get greater certainty and efficiency in the way the RMA operates. The review will focus on some areas where we believe there is room for improvement.
One example is the need to achieve the right balance of national and local interests. This is particularly important for transport and energy infrastructure where local authorities are increasingly being asked to consider projects that raise issues of national significance using an Act that provides little or no guidance on how competing national benefits and local costs should be weighed. There is no need for the Act to be silent on such matters, and I am confident we can find a way of expressing some straightforward principles in this regard.
The review will also look at improving the consent decision making process, to ensure more consistency between councils; reduce delays and costs; provide greater clarity and certainty for applicants; and largely eliminate opportunities for abuse of the process for personal gain, trade competition, or other vexatious reasons.
We will also be considering measures for building capacity and promoting best practice among the 86 councils who decide approximately 50,000 resource consents each year. While local authority practice has steadily improved, the performance of some councils could still be better.
We will be looking to introduce proposed RMA amendments to the House in September 2004 and those amendments should be passed in this term of Parliament.
The review of the RMA is part of a larger set of government around securing our infrastructure. Good quality infrastructure is one of the key factors underpinning economic growth. It is something that investors – both domestic and overseas – consider when they are contemplating long-term investment. Any uncertainty about the quality and stability of key infrastructures can quickly undermine confidence.
In May of this year, the Ministry of Economic Development released New Zealand’s first nationwide infrastructure stocktake. A key component was an audit carried out by Price Waterhouse Coopers, which was largely reassuring, in that it showed that the major problem areas have been identified and work is under way towards resolving them. One of the areas of highest concern was security of electricity supply, both in the short term (due to the shortcomings of a market model which does not factor in security margins), and in the long term (due to issues around the supply of gas in particular, but also the environmental issues around alternative fuels).
We are putting a great deal of effort into addressing this issue. Last year we established the Electricity Commission and provided it with tools to deal with the failure of the electricity market to deal adequately with the issue of reserve capacity.
On the questions of securing long-term baseload electricity supply, we have recently made announcements on oil and gas exploration, which has become a crucial issue in light of the approaching depletion of the Maui gasfield. Our energy markets face significant uncertainty about fuel availability and forward prices, and also about how New Zealand’s commitments under the Kyoto Protocol will be worked out in practice.
Indigenous natural gas fuels about 20 percent of electricity generation, and around 75 per cent of supply has been from the Maui field. That field will be significantly depleted by 2008, and although other gas fields will probably be sufficient to meet reticulated gas demand they are not sufficient to sustain electricity generation beyond about 2015. There are alternatives to indigenous gas, of course, including imported LNG, new hydro power, wind, geothermal and coal fired plant. These have the drawbacks of being more expensive than indigenous gas-fired generation, and, in the instance of coal, creating the added challenge of carbon emissions.
Alongside of options for maintaining cost-efficient electricity generation is the important objective of increasing the efficiency of electricity use. This is of course the greenest option of them all, and over time probably also the most cost effective; however the rate and level of efficiency improvements are uncertain, and we cannot afford to plan on the basis of assumptions that are hard to test.
For these reasons increasing the level of gas exploration over the next few years is an essential option for reducing uncertainty in the energy market and releasing pressure on sustainable energy development goals. The market is starting to respond to the changing supply conditions, but the speed and extent of that response may not be sufficient. To address the situation, we are now seeking to encourage exploration for new gas reserves through a suite of proposed changes to taxation:
We are relaxing the royalty regime for a five year window to kick start exploration activity in the short term;
We are reviewing the tax treatment of oil and gas exploration so that it does not create unnecessary barriers. Our focus is on the tax rules applying to non-resident drilling rig operators; aspects of the capital treatment of development expenditure; and the application of certain GST rules to the oil and gas industry.
We are also committing $15 million over three years for seismic mapping and increased resources to Crown Minerals to promote New Zealand overseas as a petroleum prospecting destination.
So to sum up, these are the priorities the government is working on to improve conditions for business growth. Financial strength and stability, and going forward an economy that is growing as a result of skills, international trade linkages and solid infrastructure.
Thus far the National Party has failed to take the opportunity a budget offers the opposition and outline their alternative policy programme, apart from reiterating their belief (sadly shared by some of the business lobby groups) that business people and investors are not intelligent enough to perform some quite simple calculations and work out that although our headline rate of corporate tax is higher than Australia’s, businesses in New Zealand actually shoulder a smaller tax burden because of Australia’s payroll taxes, worker’s compensation levies and capital gains tax. This is disappointing, although largely predictable.
Budget 2004 confirms that there is no fundamental clash between prudent financial management, proactive social policy and an active role for government in supporting business and investing in economic capacity.