Cullen: Address to APEC Business Advisory Council
19 August 2004 Speech Notes
Thursday 19 August 2004
Hon Michael Cullen Address to APEC Business Advisory Council Working Luncheon
Hilton Hotel, Princes Wharf, Auckland
One of the key objectives that we as a government have for APEC is to make it a more effective instrument for addressing specific economic management issues amongst its members. As one of the mid-sized member states, New Zealand has found itself in the role of an honest broker between the interests of the very large member economies and the small to medium ones.
We are committed to the APEC process because we are convinced that it has produced beneficial results in the past, and can continue to do so.
What I want to stress today is that we see the involvement of business leaders as an important element. It is gratifying to see that ABAC is now invited to attend officials preparatory meetings for the Finance Ministers Meeting, and that it is playing a more prominent role in this year’s APEC meetings. As some of you will be aware, the New Zealand government is a supporter of the inclusion of labour representatives in APEC for a as well.
While we believe APEC should aim to be relatively streamlined, we see real benefits in a focused tripartite discussion around the key economic development issues for the region.
The themes for this year’s APEC finance ministers meeting are:
the benefits of sound fiscal management and budget discipline; and
2. the effects of capital flows on macroeconomic stability. On the first of these, New Zealand has in the past two decades undertaken a long and sometimes difficult journey. As a result, we find ourselves now in a position to speak with authority on the link between prudent fiscal management and economic strength.
During the late 1980s and 1990s, New Zealand governments struggled to bring budget deficits under control and to strengthen the government’s debt position by reducing debt as a percentage of GDP. In the last five years, since my government took office, we have been able to pass some significant milestones. We have practised strong budget disciplines, despite difficult economic circumstances and the familiar pressures to increase social spending.
One of our key fiscal objectives has been to keep gross sovereign-issued debt below 30 percent of GDP on average over the economic cycle. Since taking office we have reduced that indicator from 33.7 percent of GDP to just under 25 percent. Accordingly, we have amended the debt target to further reduce gross sovereign-issued debt over the longer term, aiming for 20 percent of GDP by 2015.
Alongside reduction of debt, we are continuing to strengthen our 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.
The Fund mitigates the fiscal risk of the demographic shift, which will begin to take effect in around 2015 and intensify in the decades that follow. At its peak, the Fund will pay for around a third of the cost of New Zealand Superannuation, enough to make the scheme affordable as a basic universal pension. The Fund will also contribute to the reduction of net debt, which is forecast to be down to 8.7 percent of GDP by 30 June this year. Looking forward, we see within our grasp a situation where financial assets will equal gross debt. This will be the first time in decades that the government has been in the black in net terms.
This endeavour is not merely an exercise in extreme fiscal rectitude. We believe that stable fiscal policy tied to long term goals, alongside of stable monetary policy, is an essential support to business growth. It can be an important factor in improving credit ratings. And as perceptions of business risk come down so too do interest rates, and inward investment tends to become deeper, as foreign investors feel more confident in tying their resources into new greenfields ventures, long-term equity positions, or investments that involve alliances with global marketing and distribution systems.
Poor or indifferent fiscal management puts a damper on business and investment; so conversely raising the game across the APEC member economies should lead to increased investment flows and new business opportunities.
As I mentioned, the second major theme of the Finance Ministers’ meeting relates to capital flows and macroeconomic stability.
The New Zealand government has a long running policy dialogue called the Voluntary Action Plan for promoting freer and more stable capital flows. The initial report, which was produced in 1999, has been followed up by policy dialogues in subsequent years. The most recent policy dialogue was held in February 2004 in Malaysia, where the topics were financial disclosure and deposit insurance.
There is a nest of difficult issues in here, many of which impact in a differential way upon economies of varying sizes and structures. Without a doubt, capital flows can in certain circumstances threaten macroeconomic stability. We have seen that in the last year as the New Zealand dollar became significantly over-valued, with a deleterious effect upon our exporters.
This is a very serious matter for any small trading nation. We have learned to deal with a certain level of fluctuation in our exchange rate as part of the ongoing task of macroeconomic management across business and commodity cycles. However, there are occasions when combinations of global economic factors (abetted, I have to say, by a particular style of fund management) can create a serious mismatch between a currency’s value and the conditions in the economy that underlie it.
We are acting to provide the Governor of the Reserve Bank with a broader capacity to intervene when it is appropriate, recognising that such interventions have limited effectiveness.
So we recognise that there are risks related to capital flows that have to be managed. Nevertheless, the benefits of free flows of capital are self-evident, and New Zealand’s position will always be to encourage APEC member economies to minimise the obstacles to cross-border investment flows, and – perhaps more importantly – to create the kind of regulatory and fiscal environments that reduce business risk and encourage deeper, more stable and ultimately more beneficial forms of investment.
We believe therefore that while we might have some differences with ABAC on the detail of the APEC agenda (in particular the speed at which reforms can occur) we have very broad agreement on an agenda for reducing barriers to investment and achieving closer integration and harmonisation across the regional economies.