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Cullen: Address to Enterprise Franklin

Hon Dr Michael Cullen
Deputy Prime Minister, Minister of Finance, Minister of Revenue, Attorney General, Leader of the House

27 July 2005 Speech Notes

Address to Enterprise Franklin

Counties Racing Club, Manukau Road, Pukekohe


It is often said that a week is a long time in politics. That is certainly true, but it is a very short time in business.

For any business of a reasonable size, five years is long enough to develop a business strategy, determine what needs to be done to achieve that strategy, decide what investments need to be made, arrange for finance, and perhaps implement a new business plan. But the returns on that activity are barely starting to flow in five years.

Serious investment across an entire economy works to an even longer timeframe. Investing in infrastructure takes decades of persistent work. Investing in raising the skill levels of a workforce can bear some fruit within a few years, through proactive immigration policies and a focus on workplace training and tertiary training focused on immediate skill needs. But the major shifts involve transforming what happens in schools and how young people make the transition into further training and into the workforce.

So too, building a skilled workforce requires building world class social services such as health care, education, and pensions; and encouraging working conditions and a workplace culture that compete with what those skilled workers could expect overseas.

Similarly, the task of creating effective working partnerships between business and government agencies in science, technology and export promotion, is a long one. These do not happen overnight, and they often need a fair amount of trial and error before the most effective ways of working together are found.

So tonight I want to talk about what has been achieved in the New Zealand economy in the past five years; but I want to argue strongly that the job is only half done. While a great deal has been achieved in the last five years, we are only now starting to get real traction on the drivers of long term economic prosperity.

We certainly have much to celebrate, though. We are performing very well on relative measures of social well-being, personal security and educational standards. And we are starting to regain the ground we lost during the last quarter of last century in terms of economic performance and incomes.

Indeed, while the immediate outlook is for growth to slow, we need to recognise that the economy has grown almost 20 per cent over the last five years, outstripping the prevailing growth rates within the OECD, and exceeding that of our major trading partners such as Australia, Japan and the US.

That has been translated into rates of employment and income growth not seen in this country since the boom years of the 1960s.

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. Labour force participation is now at over 67 per cent, while unemployment is 3.9 per cent. These are close to record levels in the 19 year history of the Household Labour Force Survey, and we now have the second lowest unemployment rate of OECD nations with comparable data.

Incomes have grown alongside of employment, with real per capita incomes up 11 per cent since the March 2000 quarter.

What this means is that we have succeeded in halting the slide relative to the OECD average, and have pulled back some territory. We are still positioned towards the back of the pack, however, and although we should in time start to reel in countries such as Italy, we must acknowledge that the challenge is to sustain a higher rate of growth, driven primarily by improvements in productivity, over a period of decades.

So we have at the moment an economy that is strong, but coming under pressure. We are seeing the lagged impact of recent interest rate increases and the appreciation of the exchange rate, slowing net migration and a period of weaker trading partner growth.

Most forecasters expect the economy to slow over the next two years to an annual growth rate of around 2 ½ per cent, and beyond that to pick up to a growth rate of around 3 ½ per cent. In other words, a soft landing followed by a relatively speedy recovery.

So what lies ahead, and what are the priorities that a Labour-led government would pursue in its next term of office and beyond?

First, some things we would not do. We would not undermine the platform of fiscal stability and strength we have built up in the past five years.

Some of you may have been in business long enough to remember what it was like trying to run a business in the context of unstable government finances. Any uncertainty regarding how the government will afford essential public services like health, education and police translates into instability and risk for the business community. Will debt be increased, adding pressure on interest rates? Will taxes need to be changed in short order so as to meet spending commitments? Will the government need to make sudden cuts in expenditure, thereby risking causing a recession in the domestic economy?

This government and its predecessors have worked hard to ensure that New Zealand is no longer ‘the shaky isles’, at least in terms of being vulnerable to macroeconomic shocks.

We need to remind ourselves of how our poor fiscal situation magnified the impact of the 1987 crash on New Zealand compared to the rest of the world.

And we need to remind ourselves of the lesson of the late 1990s, when the National led government cuts taxes just as the global economy was weakening with the Asian crisis. The result was to send the New Zealand economy into a longer and deeper recession than was necessary.

By way of contrast our robust growth in the past five years has taken place despite enormous uncertainty and strife in our major trading partners. We have thrived in spite of a weak global economy, a great deal of adverse weather conditions and the dampening effect of international terrorism and war.

We are a haven of stability, and this is no time to undermine that by heading backwards into the era of higher debt and volatile shifts in expenditure.

So much for what we will not do. Our number one economic priority is to increase productivity.

We have succeeded in putting New Zealand back to work, but we are now hitting a potentially severe capacity constraint. That is being seen in acute shortages of skilled and semi-skilled labour, with attendant cost pressures.

There are prospects for increasing the size of our workforce, but we need to be realistic about these.

Our immigration policies have focused on better matching of migrants to emerging skill needs. These are starting to have an effect right across the skill spectrum; however, there will always be a limit to our ability to absorb new migrants, as the spread of the Auckland metropolis demonstrates. Importing skills is only part of the answer.

Another part of the answer is in the government’s Working for Families package, which includes childcare measures aimed at providing better choices for parents of small children who want to return to full or part-time work. Once again, however, we cannot expect this to solve all our labour shortages.

The real results are to be gained by productivity gains, which increase how much value each member of the workforce contributes on average. That means three things:

- Increasing skills;

- Increasing capital investment, both in terms of infrastructure and in terms of businesses’ own investment in technology; and

- Lowering compliance costs.

Building skills has been a major focus for government investment in the past five years, and more investment is planned. Budget 2005 included $300 million over the next four years to develop quality tertiary education, and an additional $45 million to expand Modern Apprenticeships and Industry Training.

You will be aware of the recent announcements on reorienting the polytechnics to become the engine room of skills development, rather than having to pursue bums on seats through flighty courses of limited value. Sorting out the wheat from the chaff is not an easy task, of course. There is a demand for professional divers and for tourism staff to service the growing adventure tourism industry. But taxpayers have no desire to fund recreational courses.

Our response is to ensure that tertiary providers are much better hooked into the workforce needs of local and regional industry, and design their programmes around what skills are needed in their local economies.

That is why the package includes higher funding rates for technical and scientific subject areas including science, trades, technical subjects, agriculture and horticulture.

A more skilled workforce needs a higher level of capital investment if it is to meet its full potential. That is why we have reversed the decline in infrastructure spending in the 1990s and are now getting traction on creating the transport, power and water systems that will serve a world class economy.

We have increased by over 70 per cent the net purchase of physical assets by government.

Budget 2005 gave infrastructure spending a further boost through additional transport spending. The total funds available to the Land Transport Fund over the coming four years will be $8.4 billion. In addition to that, we have earmarked a $500 million windfall tax gain to major roading projects.

Infrastructure is only one part of the capital investment that we need. Perhaps more important is our need to turn around the rate of business investment, which is relatively low in areas such as technology and R & D.

The government continues to commit large amounts of resource to applied scientific research, but at the end of the day businesses must drive their own growth. Nevertheless, we are encouraging equity investment in small to medium enterprises by changes to the rules governing access to tax deductions for R&D expenditure. These will benefit companies who bring in new equity investors after their initial development stage, and will therefore make investment in growing businesses more attractive to investors.

Small businesses make up the vast majority of New Zealand businesses and created 12,400 full-time equivalent jobs nationwide over the last year. That equates to a third of the total employment growth.

Helping those businesses grow and reducing the obstacles in their way has been a priority for this government. This year's budget has a range of improvements to the business environment that affects small to medium size businesses.

Tax changes include the alignment of depreciation rates more closely with the useful life of assets. A double declining balance method has been announced, so for example an asset with a ten year economic life will be written off at a rate of 20 per cent of its diminishing value. For equipment such as laptops the change will result in a 25 per cent increase in the allowable depreciation rate to 60 per cent per year.

In addition, the threshold for low value assets has been increased from $200 to $500, and many small to medium enterprises will no longer need to file returns or pay FBT due to the increased threshold of $5,000 per business tool.
For example, when a business provides laptops to employees it will no longer have to worry about FBT liabilities should the computer occasionally be put to personal use.

The minimum value thresholds applying to unclassified fringe benefits has also been raised, to reduce compliance costs. The employee minimum value threshold will go up from $75 to $200 per quarter, and the employer threshold will rise from $450 a quarter to $15,000 a year. This will reduce compliance costs for businesses by reducing the need to measure and account for FBT for minor benefits.

Payroll agents will be paid an allowance to manage the payroll for the first five employees of small businesses. This will mean a reduction in the compliance overhead for many small businesses.

We are also reducing the number of tax payment dates by aligning GST and Provisional tax payment dates. Businesses will also be allowed to calculate their provisional tax payments based on their GST returns, which will bring into alignment their cashflow, and tax payment requirements. It will also make compliance and calculations easier.

This also goes for our efforts to reduce compliance costs. Over the course of 2004, the government announced 104 reductions in compliance burdens. Indeed, a recent Inland Revenue survey showed compliance costs for small businesses have dropped 41 per cent since 1992.

We are not about to rest on our laurels. That is why we have established the new Small Business Advisory group with a mandate to keep compliance issues under review and propose improvements wherever they can be found. This will ensure that government’s concern for this issue never flags.

A bill reforming the Resource Management Act is currently going through the House. The RMA has become a whipping boy, with opposition politicians calling for it to be gutted for the sake of haphazard development.

The changes in the Bill are not about altering its intent. We remain committed to a clean and healthy environment, and ensuring communities have say in environmental decision-making. Indeed, the latest survey of RMA performance carried out by the Ministry for the Environment showed that 95 per cent of resource consents were processed without being publicly notified and only 1.2 per cent of decisions were appealed to the Environment Court.

According to a 2004 Business New Zealand-KPMG Compliance Costs Survey, average total environment-related compliance costs have decreased 39.2 per cent between 2003 and 2004 (from $12,928 in 2003 to $7,855 in 2004). KPMG attributed the reduced costs to 'improved implementation of the RMA by local authorities and increased resources for the Environment Court since 2001'.

This was an issue we identified as soon as we became the government. The RMA was good law, but depended heavily upon a level of expertise in local authorities that could not be guaranteed. Both central and local government have been working on improving capability in this area, and we are seeing the fruits of those labours.

The proposed improvements to the RMA in the current Bill give councils more tools to continue improving their game. Inquisitorial-style hearings will make the process more robust. Accredited decision-makers will improve hearings, reduce delays and increase certainty for everyone.

I am confident that the changes in the Bill will make a good law better, and that a well resourced and clear set of planning processes will lead to lower costs and speedier decisions.

To sum up, in the last five years we have been creating the kind of virtuous cycle that will put New Zealand back into the top half of the OECD in per capita income terms. The important lesson we have learned is that if we focus on building for the long term, then the short term takes care of itself because of a greater overall level of confidence.

We are in a better position to compete for the skilled labour we need. Our investments in education and training sit alongside our ongoing investment in public services such as health and education, which make New Zealand a good place to live and work and bring up children.

The reality is we still have some distance to travel. It would be relatively easy to undermine confidence in the economy through a loose fiscal policy. And it would be easy to undermine New Zealanders sense of participation and belonging by threatening the public services they regard, quite rightly, as essential to a modern and advanced nation.

A lot has been achieved in five years. A lot more needs to be achieved, and to do that we need to stay the course on a set of economic and social policies that is delivering for New Zealand.

Thank you.

ENDS

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