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Michael Cullen Address to Oamaru Public Meeting

Making promises is easy. Keeping them is the stuff of good government.

Hon Michael Cullen

Speech Notes
Wednesday 7 July 2005
Address to Oamaru Public Meeting
Oamaru Working Men's Club, Oamaru

As we head towards the next election it is important to avoid the lure of single-issue politics. Governing a nation is always a balancing act, and voters should never trust anyone who pretends to solve our problems by giving one sector of society everything they are asking for.

That's why I am urging people to take a balanced scorecard approach to assessing the Labour-led government's second term of office. We may not have got everything right. The question is, on balance, is the country in a better state now than it was five years ago?

Making promises is easy. That's why our opponents feel able to promise large tax cuts and large spending increases and stable mortgage rates and quality public services. This is economic nonsense. And it ought to be political nonsense too.

Keeping promises is the stuff of government, and that's why this government is not about to take the New Zealand public for a ride with proposals that cannot be delivered without damaging the economy or sacrificing public services.

So, when I look at a balanced scorecard for this government, I see a number of highs and lows. I see:

· High rates of employment;

· High rates of economic growth and growth in household incomes; and

· High levels of investment in public services like education, health and law and order.

And I see:

· Low government spending relative to GDP;

· Low taxes relative to our trading partners; and

· Low crime rates.

Whatever anyone may say about the last five years, we have put New Zealand back to work. Between March 2000 and March 2005 the economy added on some 260,000 more jobs, of which 218,000 were full-time and 42,000 part-time.

We have managed to get unemployment down to 3.9 per cent, and what is particularly encouraging is that the job growth has been spread across the regions as well as the major urban areas.

Our policies have sustained higher rates of economic growth than any set of policies in quarter of a century.

In the last five years, New Zealand's GDP growth has been running well ahead of the OECD average growth rate. GDP growth came in at 4.2 per cent for the year ending March 2005.

The expectation is that it will ease to about two and a half per cent for the year ending March 2006, and then rebuild to around 3 to 3.5 per cent over the medium term.

What that means is that New Zealand's relative slide in relation to the OECD average has ceased and begun to reverse. Real per capita incomes have grown by 11 per cent since the March 2000 quarter. That means the average annual household income has risen from around $53,000 in 2000 to over $60,000 today.

That does not yet take account of the impact of the Working for Families package, which is starting to deliver significant further increases in living standards to around 300,000 families.

To the extent that it works through the tax system, Working for Families is in a sense a tax cut that benefits low income families first. That compares to the reductions in marginal tax rates that National is talking about, which deliver the lion's share of the benefit to those in the higher tax brackets.

Our stronger economic performance did not simply happen by chance. These past five years have seen considerable international turmoil in the aftermath of the September 11 attacks. Many of our major trading partners have seen faltering growth, and we have been challenged by a very strong dollar, reflecting persistent weakness in the US economy in particular.

Nevertheless, we have thrived. That has been thanks to a New Zealand business sector that is more diverse and more focused on serving high value niche markets and emphasising added value through highly skilled workers. It has also been the result of careful economic management and a willingness by this government to invest in the fundamentals, be that infrastructure, higher education or strategic partnerships with key export industries.

For example, transport spending over the next ten years is set to top $21 billion. This does not yet include the $500 million package announced for transport last week.

This government has spent years ramping up investment to wipe out the legacy of neglect left by the last National government. A record $1.7 billion has been allocated for 2005/06, an increase of over 80 per cent on National's last year in office.

The allocation for the construction of state highways is up nearly 30 per cent over 2004/05 to $518.2 million in 2005/06. For passenger transport, traffic demand management rail and sea transport, it's up nearly 46 per cent to $249.7 million.

In education, which is crucial if we are going to create the skilled workforce we need to boost productivity, Budget 2005 allocated $300 million over the next four years to develop quality tertiary education. Our notion of quality is a very pragmatic one: it means a high degree of relevance to the skills needed in the economy. It means producing people who are masters of new technology and not servants of it.

That is why the package includes higher funding rates for technical and scientific subject areas including science, trades, technical subjects, agriculture and horticulture. It is also why we have given an additional $45 million to expand Modern Apprenticeships and Industry Training.

Alongside of that we have reoriented our immigration policies towards attracting the skilled people we need and facilitating their settlement here.

Investing in infrastructure and skills is only part of the picture. We have made major investments in the quality and capacity of public services.

There are those who say we need to sacrifice public services in order to give the economy a kick start now. We say we need to maintain public services and we say the economy doesn't need a kick start. What it needs is consistent economic policies, a continuation of the investments we are making in skills and infrastructure, and strong public services.

In health, for example, the government's commitment is reflected in new budget spending of $969.7 million in 2005/06 and $4.09 billion over the next four years. Total Vote Health will reach an unprecedented $9.68 billion in 2005/06.

There are now 77 Primary Health Organisations (PHOs) serving 3.8 million New Zealanders. Funding for them over the next four years will be increased by $196.4 million.

Under 18s and over 65s in PHOs already qualify for lower cost primary health care visits and lower charges on most prescription items. From 1 July, $17.2 million of new money ($74.4 million over four years) will allow some 330,000 18 to 24 year olds enrolled in PHOs to do likewise.

This will be extended to 45 to 64 year olds enrolled in PHOs, in July 2006 and all other New Zealanders in PHOs from July 2007.

Overall the government has now committed to spending $2.2 billion in new money over the seven years from 2002-03 to make primary health care more affordable and accessible, representing an unprecedented investment in sustainable funding.

One of our greatest achievements is that we have done all this while maintaining a careful watch on total government spending.

Despite what is being alleged, there has been no spending blowout in New Zealand under the Labour-led government. Indeed we have reduced government spending in relative terms whilst maintaining and enhancing public services.

The size of the total public sector in New Zealand, compared to the size of the economy as a whole is significantly smaller than for the rest of the OECD.

In 1999, central government spending (that is, excluding state-owned enterprises and local government) was 33.3 per cent of GDP. It is now 30.1 per cent. That means there has been a three percentage point decline, or a 10 per cent fall in the relative size of central government.

In addition, Crown debt has been falling relative to GDP, from 35.4 per cent of GDP in 1999 to an estimated 22.6 per cent in 2005. Under the last National-led government, we were spending 3.0 per cent of GDP servicing debt. By 2004 we had reduced that by almost half, to 1.6 per cent.

Had we not done that, we would now be spending an extra $2.0 billion on debt servicing.

To increase Crown debt once more, as our opponents are suggesting to fund their tax cuts for the rich and their spending promises, would be immensely harmful to the economy, if not today, then in the future when our children's generation are attempting to raise their families and look after their parents.

The irony of the call to lower tax rates in New Zealand is that we already have taxes that are lower than the OECD average, and certainly lower than our nearest neighbour.

Even after the tax cuts announced in the recent Australian federal budget, Australians pay more tax than New Zealanders. The top New Zealand rate is 39 cents in the dollar and applies to incomes above $60,000 per annum. By comparison, Australians pay 42 per cent on incomes between A$63,000; and 47 per cent on incomes over A$95,000.

The Australian budget announced that these thresholds would rise in two steps, from 1 July 2005 and 1 July 2006, but the 42 and 47 per cent tax rates remain.

In addition, they pay a 1.5 per cent Medicare levy, which is in essence a dedicated health tax. Australian taxpayers also face several taxes that do not exist in New Zealand, such as stamp duty on house purchases and generalised capital gains tax.

We are the first to accept that just because our tax burden is already lower, it does not mean we should not take the opportunity to lower it further, if we can do so without endangering public services and public investment.

For example, small businesses have consistently told us they would like a tax system which encourages investment and involves lower compliance costs. We have listened to those concerns, and responded in the budget.

Tax changes include:

· The alignment of depreciation rates more closely with the useful life of assets;

· Changes to fringe benefit tax that will mean many small to medium enterprises will no longer need to file returns or pay FBT; and

· An allowance for payroll agents to manage the payroll for the first five employees of small businesses, which will mean a reduction in the compliance overhead for many such businesses.

These are not the kind of wholesale tax cuts that some would like; but they are significant, and they are targeted at encouraging investment and increasing productivity, whereas history tells us that the kind of tax cut National is favouring tends to stimulate domestic consumption for a while and then evaporate with no long term benefit for the economy.

Our approach has been to get the right balance between ensuring taxes are competitive and ensuring public services deliver a good quality of life to New Zealanders.

What many people forget about when it comes to building a skilled workforce is that workers are attracted not just by career opportunities, but also by the quality of life for them and their families. That includes a clean environment and a healthy lifestyle; but also good quality public services like education and health care.

In this respect, there is a serious threat to the North Otago economy in the form of promises by some opposition parties to make large cuts in government spending.

The facts are that almost 80 per cent of government spending goes on social security (including NZ Superannuation), health, education, defence and law and order. What one might call spending on the bureaucracy is only 4.3 per cent of total spending.

That means there is very little scope to cut government spending without reducing frontline services. Besides, it is frankly absurd to think that we can keep nurses on the wards and police on the beat without having a team of professional administrators providing the essential backup. There would be no frontline staff without others organising their pay and conditions, providing training, purchasing and managing their equipment and so on.

It is inevitable that the spending cuts needed to fund National's tax cuts and their spending promises in defence and law and order will have to go beyond the core government departments. They would need to attack social services like pensions, health and education, and no-one in our regional communities should be under illusion as to where those cuts would bite first.

Even at the best of times it is difficult to maintain a high quality of services such as hospital care in smaller centres. When the knife is taken to public expenditure, the only response is to further centralise services in larger population centres. That means downsizing or withdrawing them from smaller communities such as North Otago.

That would be a backwards step, both in terms of the community and the economy. If we want to attract skilled Kiwis back from overseas, and if we want to attract skilled migrants from other countries, we need to offer them more than just jobs and incomes. We need to offer high quality health and education, a safe community, and the kind of quality of life that is hard to find in London or Singapore or Sydney.

We also need to take seriously the threat of climate change. A recent report by the National Institute of Water and Atmospheric Research (NIWA) shows that drought risk will increase dramatically in already drought prone regions, including the Maniototo and North Otago. Our support for the Kyoto Protocol is not a matter of green ideology; it is a matter of addressing real risks to our economy and to the livelihood of our children and grandchildren. Going soft on climate change, as some of our opponents are proposing, puts our future in danger.

The simple fact is, tax cuts of the kind that our opponents are proposing will deliver very little to ordinary working families, but they will come at a cost. That cost will be:

· Rising interest rates for those with mortgages or business loans;

· Higher public debt which places an additional impost on our children who will have to repay it; and

· Cuts in services such as health care, education, police or any of the other things we value as New Zealanders, like border control, civil defence, or public broadcasting.

We believe there is a way forward that involves sustaining public services, keeping a tight rein on government spending and growing the economy through long term investments. It involves meeting the real challenges that New Zealand faces in the next three years are beyond; challenges such as:

· Increasing our skilled workforce and boosting our productivity;

· Ensuring that public services are value for money; and

· Building a world class infrastructure to underpin our economic growth.

Achieving these things involves more than just latching onto a single issue and riding it to death. It involves disciplined thinking and planning, and keeping our eyes on the prize.

That is what this government has done for the past five years. That is what we are offering for the next five years and beyond.

Thank you.


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