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National Is Going For Growth - John Key Speech

John Key MP
National Party Finance Spokesman
04 April 2005
National Is Going For Growth

Address to the Auckland Rotary Club at the Auckland Club

If there is one thing I can assure you, after my three years in Parliament, it’s that there is no shortage of ideas for how and where governments should spend your money.

Not that this is solely the domain of the public sector.

Most of us, given the cash and half a chance, could dream up an almost endless list of places to visit, things to do, and stuff to buy.

So, when I hear people say New Zealanders are different; that somehow we don’t care as much about growth as other nations; that we are satisfied with lower incomes or harbour lower aspirations than Australians, Americans, Singaporeans or a multitude of other high growth countries¡K

Or that we are destined to remain a low wage economy because of our geographic isolation.

I simply say, “Yeah right”

Show me the evidence. Show me the Kiwis who don’t want more spent on health and education, or the ability to have the personal funds to do so themselves.

Show me the Kiwis who, after a lifetime of work, will be satisfied to see out their final days with a meagre state pension and no other financial resources to draw upon.

The truth is most of us aspire to earn more and, in that regard, we are no different from any other developed country. But there’s more to it than that. Our forebears emigrated to New Zealand because they wanted a better life in a new and promising country. Inherent in our culture lies a high expectation for our families, and ourselves. It’s hard-wired in our DNA.

I believe it’s imperative that NZ gets itself back into the top half of the OECD’s income per capita index. It should be a top priority, although not the only priority. Other things do matter in our quality of life but why should New Zealanders accept a lower standard of living when we are capable of achieving more?

National’s “aspiration” is to grow our living standards, both on an absolute and relative basis. We want to deliver an economy that will foster real long-term growth so that we can all enjoy the benefits of a prosperous economy. So we can live in country that enables more of us, not fewer of us, to exercise choice about the things we personally care about - whether it be home ownership, family size or where, when, and how often to take a holiday.

Peter Blake used to say he would only talk about something if it “will make the boat go faster”.

If we are serious about lifting living standards and making the NZ Inc boat go faster then growth cannot remain a second order issue. It has to be a top priority. And growth will be a top priority for an incoming National government.

If I have the privilege of being the next Minister of Finance, I won’t be happy to baby-sit a monster surplus - unlike Dr Cullen who’s watched while our infrastructure crumbles, while real after-tax wages have stagnated and personal debt levels have sky rocketed. Nor will I sit back while ever increasing numbers of people pass into higher tax brackets through the effects of inflation alone.

We will deliver an economy capable of building and sustaining long-term growth.

The task isn’t an easy one and requires a wide range of policies and a degree of fiscal discipline .

There is no silver bullet; but fortunately we are much further down the trail than 20 years ago.

The closed, insular, eastern-bloc economy of the past has been replaced by a more flexible, dynamic, connected and market-orientated economy. The results speak for themselves.

They weren’t the failed policies of the 90s, as Helen Clark likes to say.

Those policies were the springboard for the strongest decade of growth our country has enjoyed for a generation.

And what a decade it has been. For the past ten years NZ has grown in nominal terms on average at 3.7 percent per year; which on a per capita basis equates to around 2.5 percent, double the rate 20 years earlier.

Yet if we dig a little deeper we find that just over half of the growth has been generated from productivity improvements; the rest of the growth is the direct result of more people in the workforce or Kiwis working longer hours.

In this sense the job is becoming more difficult. With unemployment at record lows, simply throwing more people at the problem is fast running out as an option. Our focus must be on ways of getting Kiwis working smarter, not harder.

Today I’d like to give you a flavour of the things we think will make the boat speed up a few notches - and stay on course.

First and foremost, macro policy does matter.

Low inflation, modest government surpluses and low levels of net public sector debt are critical.

Without these settings, the micro issues are either unaffordable or unachievable.

In this regard you can expect an incoming National government to be a prudent manager of the economy.

This does not mean, however, that we will be terrified to invest capital where prospective economic returns outweigh the costs.

Dr Cullen argues the Crown cannot spend more on roads or energy because gross debt to GDP would either stop declining or rise modestly for a short period of time.

He misses the point

This is like suggesting you should never buy a house because your debt levels would rise.

It’s not gross debt to GDP that matters, but net worth.

Debt-funded roads, where the benefit exceeds the cost of capital, have a positive impact on net worth; that’s why all countries have periods of infrastructure expansion when they are serious about having the physical capacity to grow.

It doesn’t always make sense to fund new roads or all manner of capital expenditure on a “pay as you go basis’ when the results of the spending will last generations. If a NZ business took this approach, many would still be saving up for their first cash register or computer system. Julius Vogel, New Zealand’s visionary colonial treasurer, didn’t take the “pay as you go’ approach in the 1870s when he borrowed heavily in London to construct roads, railways, bridges and telegraph lines to stimulate economic growth in this young country.

The private sector has a big part to play in future infrastructure development, through PPPs, or Public Private Partnerships.

My view is that few will be self financing in their own right because we lack the population size, consistent traffic density, and in part because of the topography of our cities. But a partnership of government funds and toll revenue will mean a great deal can be achieved, and New Zealanders will be prepared to pay a little more if they start to see real progress.

It is for these reasons that a few days ago my leader, Dr Don Brash, announced that the next National Government will spend at least a further $2 billion on road construction over the next six years.

National won’t be afraid to sensibly use the Crown balance sheet to make this happen because we are determined that NZ should not simply run into an economic bottleneck caused by a short-sighted failure to make the investments any growing economy should be making as a matter of course

It’s also true that money is only part of the issue. Keeping the lights on and the wheels turning in New Zealand in 20 years will depend on decisions we take now. That’s why overhauling the Resource Management Act will be a top priority for National.

It is critical for New Zealand’s long term growth prospects that neither the RMA nor any other piece of legislation should stand in the way of sensible long-term decisions

Clearly there must always be balance and consideration given to a range of factors, but we can’t sit back and treat as acceptable the fact that government SOE Meridian is looking to invest 500 million in a wind farm in Australia because it has run out of patience with the planning process here at home.

Reserve Bank Governor Alan Bollard summed it up nicely after the interest rate hike on March 10, when he noted that he will not allow wages to rise when driven solely by inflation, not productivity growth. His message is clear. Unless we build an infrastructure that can accommodate real growth with increased capacity, workers can kiss goodbye to higher, real wages and affordable mortgages.

But it isn’t just physical capital that needs improving, our human capital also deserves better.

In this area, funding is not the issue

New Zealand’s education spend is in the top echelon with other Western nations.

Here, it’s the quality of spending, the lack of parental choice and the wasteful government-funded programmes that lead to inferior results for far too many of our students.

New Zealand’s education system continues to produce a large number of well educated students, that’s why they are so well sought after in countries around the globe, but no country serious about growth can let 20 percent of school leavers exit the system without adequate literacy and numeracy skills.

It would be too easy for me to present this and for you to accept it as a statistic that is uniform across Pakeha, Maori and Pacific Island communities.

It is not. Evidence proves that. Which is why, when you dig a little deeper as the OCED has done, New Zealand ranks extremely well in a raft of indicators including maths and science literacy for older teenagers - in other words, those who are likely to stay in the education system longer - and yet we still have this large tail that is failing the current system.

If you combine this knowledge to the relative birth rates in the various communities and roll the clock forward then all I can say is if we are serious as a nation about lifting our long term growth rates then we have to address this issue.

I will work with our Education spokesman Bill English as he finds ways to improve the failures in our current education system, because I see this as an economic and social issue as much as an educational one.

Nor can we sit back and see hundreds of millions of dollars wasted each and every year on poorly targeted programmes loosely termed as tertiary education, while at the same time we limit the resources and the numbers of those who undergo trade training.

It may be very PC to offer taxpayer-funded courses in sing-along songs and twilight golf, but only if the PC stands for Political Claptrap. If we are serious about growth it’s got to stop unless we as a nation think it makes sense that:

- 8000 people enrolled in the Eastern Institute of Technology’s sing-along song course in 2003 - 1000 more than the total of modern apprentices in the whole country;

- It’s value for money that $15 million was spent in the Christchurch polytechnic’s “Cool IT course’ in which a CD rom was handed out on a course that less than 3% of those enrolled finished;

- Last year the funding for Te Wananga Aotearoa was $100 million more than was provided for industry and modern apprenticeships combined;

National will focus on ensuring that tertiary education spending is achieving quality outcomes, driving innovation and growth. Our focus will be to ensure that tertiary dollars are spent where they add real value, on skills development, training and research.

Big government and the taxes required to fund it are my next target.

Left-wing governments like growing the size of the state sector.

Take a quick look at the UK. It’s no surprise Gordon Brown has announced he will be sacking government employees, as it is costing too much and not working.

Not surprising because since 1997 Brown has hired 861,231 additional employees, one in every two new jobs in the UK has been paid for by the state.

At home our government hasn’t been much better. Labour has been hiring at a fast and furious rate, racking up thousands of new employees in the core state sector to the extent that government now occupies over half of all the commercial real estate in downtown Wellington.

Bigger is not always better. Not only does it costs more it also substantially slows the decision making process.

And the higher taxes become, the harder raising revenue becomes for governments because more and more individuals and companies seek ways to avoid the taxes - or go abroad.

Often, governments forget to ask the simple question.

“Is this something the state should be involved with in the first place, and if it is, then is value for money being achieved?”

A National government will take a sensible and constructive approach to the activities we wish to engage in as a government

Having a clearer idea of what fits into the purview of a government, what are indeed public goods and what are not, allows you to actually do a better job of the things you undertake while leaving others to fill the gaps where the case for government involvement is must less compelling.

Sorting out this philosophical approach to public expenditure early on, gives clarity to both Ministers and the public, leaving government in a better position to fund those things that are identified as a public good more fully.

Some areas like law and order or defence are clearly public goods. Others may be less obvious and yet aspects of them fit the definition.

Our national orchestra, preservation of our cultural history or promotion of major sports events and trade expos are examples of this.

Sensible spending in these areas can and does effect growth by influencing all manner of decisions from how hard people work, their willingness to invest, right through to decisions about whether to immigrate, or ultimately to emigrate.

Equally, our attitude to hiring staff in the core state sector will be to recruit and retain the best. I would rather pay more and have fewer staff than simply throw more bodies at the problem and somehow hope they come up with a solution.

The next National Government will identify waste thorough a through baseline review process of all government spending.

As I just mentioned, our approach won’t be a formula that seeks to cut every area and every department, rather to identity areas where spending programmes are unwarranted and not working or where the quantum of staff is simply too large.

Some critical functions may get more. My hunch is quite a number will be able to function much better with less.

That said, if we could save just one percent per annum, that alone equates to $500 million of savings per annum.

For the same reason, you can expect to see future budgets under a National government operate with a smaller new spending component than those flagged by Labour.

This approach and discipline means a wide programme of tax relief will be possible, while ensuring a sound and appropriate government sector remains intact.

The next National Government will ensure fairness in our tax system and transmit the messages to encourage hard work, personal responsibility and a deep belief that New Zealand is the same land of opportunity that our forbears intended.

National doesn’t support the current Government’s “Working for Families’ package where a hard-working family earning $70,000 deserves to take home only $2200 more than the same sized family earning $38,000.

Such a policy destroys the critical incentive and belief that has fostered New Zealand society, the belief that personal contribution to our economy and society matters.

Policies that turn every second family with children into state dependents might be a result the Labour Party is comfortable with, but simply put, National is not.

Too often governments act as an impediment to growth, not an enabler.

If we are to succeed in our growth ambition then we must encourage the private sector to grow, remain strong, and succeed.

The next National Government will cut the red tape and compliance costs that are choking our businesses and preventing them from getting off first base.

I have already mentioned the Resource Management Act. We will also remove many of the arcane principles of the Treaty of Waitangi that lurk unnecessarily in much of our legislation. Our approach will be rigorous.

We will ask the hard questions about what it is in both central and local government legislation that is making life more cumbersome for our businesses many of which are small. And when we get the results we will do something about it.

A practical example of what I am talking about is in the area of Fringe Benefit Tax

Today I want to announce that National will revamp Fringe Benefit Tax to remove a substantial amount of the paperwork that currently occupies too much administrative time for many of our businesses, especially the small ones.

I anticipate it will have an impact on Crown revenue, reducing it by around $45 million annually, but National thinks it’s worth every cent.

- Starting with motor vehicles, National will allow employers to value the vehicle by reference to either original cost or the tax written down value, while also giving employers the choice of valuing usage benefits from either actual use or vehicle availability. In addition we will simplify the definition of a work related vehicle.

- National will eliminate the need for complex record keeping and calculations caused by split-rate FBT. For the purposes of calculating FBT, a notional single marginal tax rate of 33 cents will be applied to all taxable benefits from which FBT can be calculated.

- In addition, we will raise the thresholds that apply to the other benefits category, which encompasses the likes of laptops, mobile phones, business tools and flowers etc. Currently the threshold is $75 per employee and $450 per employer. We will increase these to $200 and $2,000 respectively.

- We will investigate the possibility of integrating FBT into the PAYE regime.

- We won’t entertain suggestions of applying FBT to on-premises car parks.

This is one practical example which shows how National will restore common sense and balance between government and the private sector.

Increasing savings and encouraging more capital investment by our businesses will also be important, but we cannot expect Kiwis to save when the only ones with much in the way of surplus cash every month is the Government.

Michael Cullen laments the country’s private sector savings record, yet his greatest contribution to the economy is raising the tax burden on most New Zealand families. He can’t expect to take over $35 billion of additional taxes in the past 5 years and now wonder why private sector debt levels are rising.

Time doesn’t permit me to comment on all areas. Many have and will continue to play a vital part in our growth story, such as the critical need for continued flexibility in our labour markets, further liberalisation of trade access, and working harder to make doing business with our nearest competitor Australia even easier

But I’d like to conclude with an example of why National places such importance on economic growth and growing real incomes.

Six years ago, when Labour took office, the average after-tax wage of an Australian worker exceeded that of an NZ counterpart by $5000 annually. Today it’s $9000 and there is no sign of the gap closing. If anything, it will just keep going.

That might be okay if we were behind an iron curtain, but we are not.

Every New Zealand worker has the easy option of going across the Tasman.

And plenty do, 550 people leave NZ for Australia every week - that should be a wake-up call for Labour.

Our ageing baby boomer population means the war for talent is about to step up a notch, as is the global price of human capital.

Governments everywhere will change their immigration policies and citizenship rules to attract workers who can boost their income stream and reduce the burden of paying for a rapidly expanding retired workforce.

New Zealand workers will be a hugely attractive target for such policies.

And it won’t just be the recent flood of nurses and doctors. All sorts of skilled and professional workers will be targeted. And it’s already begun. We’ve had the biggest exodus of skilled workers of any developed nation, with nearly 500,000 Kiwis living in 26 other countries, and 25% of our tertiary-qualified people living abroad. Our brain drain is 10 times worse than Australia’s. And it’s worse than that¡Kour expatriates are more highly educated than our immigrants, so we’re losing scientists and gaining taxi drivers.

If we are serious about our country’s future, we need to lay the foundations for an economy that can grow and deliver higher wages and higher standards of living.

That’s why National is “going for growth’.

We’re playing for very high stakes. That’s why so much rests on the outcome of election 2005. We have no time to waste.

Ends


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