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Cullen: Address to the Rotary Club of Christchurch

Hon Dr Michael Cullen

Deputy Prime Minister, Minister of Finance, Minister of Revenue, Attorney General, Leader of the House

9 August 2005 Speech Notes


Address to the Rotary Club of Christchurch

Level 2, Dining Room, Copthorne Central Hotel, 776 Colombo St, Christchurch


It is often said that a week is a long time in politics, and that is certainly borne out in the recent swings in the polls as we head towards the election. One can only say, ¡¥watch this space¡¦, as we embark upon the usual fairground ride of ups and downs and thrills and spills.

One of the hazards of debate on issues of public importance is the well-chosen anecdote. It is a relatively easy task, and one especially beloved of opposition MPs, to take a single example and portray it as a universal truth.

That¡¦s why what I want to do this afternoon is spell out in factual terms where the country is positioned both economically and socially, and what are the real issues that will drive whether or not we create the future we want.

I want to start by drawing your attention to a report that came out a couple of weeks ago and quickly disappeared from view, despite the fact that it deserves much closer attention. That is the Social Report, which is part of a series of reports put out by the Ministry of Social Development which pulls together New Zealand¡¦s performance on a variety of social measures and places us in context of the developed countries we normally compare ourselves to.

The report is important because, as everyone knows save the most hardened economists, what New Zealanders really care about is prosperity in the broadest sense. We want to live in a healthy and growing community; not just one that clocks up milestones in terms of gross domestic product. If I could put Labour¡¦s philosophy in a nutshell, and add in a dash of the Rotary motto, it is that the economy exists to serve the people, and not the other way round.

So how are we faring on the indicators of long term well-being?

The latest Social Report provides evidence of solid progress on social issues, but at the same time highlighted the need for ongoing investment in core areas such as health, education and family assistance if we are to continue on our strong growth path. In school teacher terms, a consistent B-plus average, but yet to reach our full potential.

The report shows that social wellbeing continues to improve in areas like health, education, employment and incomes. To take a few examples:

„h Real median hourly wages have increased for young people aged 15-24 since 1997;

„h Children starting school are more likely to have had early childhood education;

„h Child poverty rates fell from 27 percent in 2001 to 21 per cent in 2004;

„h Life expectancy has increased, while smoking, road casualties and suicide deaths have declined;

„h Most employed New Zealanders say they are satisfied with their work-life balance.

On the downside, obesity among adults has become more prevalent, and while our education system delivers world-class results in many areas, there remains a long ¡¥tail¡¦ of under-achievement which needs to be addressed.

As well as bringing all of these results together in one place, the Social Report also provides a comparison with comparable measures in the rest of the OECD, where these are available. What this shows is that we are in the top half of the OECD on two thirds of the measures where there is comparable data, and we are continuing to climb.

Obviously the recent strength of the New Zealand economy has a lot to do with these results, and I want to return to that later on. But what the last five years have demonstrated is that a strong economy needs to be combined with enlightened social policies in order to increase wellbeing across the community and, more importantly, build the resilience that is needed for when economic conditions worsen, as they do from time to time.

That is why we have taken the opportunity of a strong economy to rethink the benefit system so that it becomes a form of transitional assistance when people are between jobs or adjusting to changing family circumstances. The results can be seen in the fact that the number of working-aged New Zealanders on benefits has fallen in every region in the country over the past year. The total number of working-aged New Zealanders on benefits is down to 290,466. This is a 17 year low and a 25 per cent fall since 1999

Unemployment benefit numbers have fallen 66 per cent since 1999 and have reached a 19 year low. There are 98,500 fewer people on the unemployment benefit than there were in 1999.

DPB numbers have also fallen in every region as the number of sole parents on the DPB reached an 11 year low. In addition, the growth in Sickness Benefit numbers has been more or less stopped in its tracks, falling from 11 per cent to 3 per cent in the year to June 30.

This is all very pleasing for me as Finance Minister, as the fall in benefit numbers has reduced forecast benefit expenditure by $3.3 billion between Budget 2003 and Budget 2005.

These successes cannot be entirely attributed to the strong labour market. Moving away from the punitive approach to welfare that prevailed in the 1990s has also been important. In that decade governments cut benefit rates, instituted work for the dole schemes and work-tested DPB clients. Far from reducing welfare dependency, the number of beneficiaries grew in that period by 20 per cent. Meanwhile, child poverty hit 34 per cent and 165,000 people were unemployed as late as 1999.

Our approach has been markedly different. We have invested in things that make the transition to work easier, such as quality childcare, education and the Working for Families package which ensures a much larger step up in household income when people move off benefits into work.

We cannot deny that the strong economy has helped, not just on welfare changes but across the range of social indicators described in the Social Report. The reality is that it is hard to make progress on major social issues with a weak economy.

The economy has grown by some 20 per cent since we came to power, putting us back in touch with the OECD pack. That is the result of many factors, including a more diversified economy, a shift away from commodity exports towards higher value added products and services, and healthy inward migration.

Just as important is that growth has been spread throughout the community through a very strong labour market. Unemployment is at levels we thought we would never see again, and household incomes have risen by around 11 per cent on average.

All of this has been achieved without significant inflation, and without any increase in the size of government relative to the economy. In fact, contrary to the myths that our opponents are circulating, we have reduced central government spending (that is, excluding state-owned enterprises and local government) from 33.3 per cent of GDP in 1999, to 30.1 per cent. That means there has been a three percentage point decline, or a ten per cent fall in the relative size of central government.

What is more, and again contrary to myth, we have kept taxes low in relative terms. Our tax burden is lower than Australia and most of the OECD. While the recent Australian tax cuts have brought their income tax system more into line with ours, the Australian tax system still has higher marginal rates, at 42 per cent and 47 per cent, to which must be added a Medicare levy of 1.5 per cent, a generalised capital gains tax and significant stamp duties on the purchase of items like houses and cars.

So we have succeeded in combining strong growth, low inflation, low taxes, low public debt and more efficient public spending. That is quite an achievement; but it is no reason to rest on our laurels.

My ambition is to raise our B-plus average to an A-plus, and to do that I have two key priorities for the next three years: skills and investment.

We lost the plot on both of these during the 1990s. As a result, we have been playing catch up for the last five years, and we are only now starting to get real traction.

The simplest way to acquire a skilled workforce is to import it through immigration. We have made important changes in the way immigration works in order to better target the skills New Zealand needs, and make moving here more attractive. Most recently, I announced in the budget a temporary tax exemption of five years on foreign income for people who are recruited to New Zealand to work, be they foreigners or New Zealanders who have been living abroad for ten years or more.

Immigration is only a small part of the answer, however. It creates pressures on infrastructure and requires social adjustments that mean it is best seen as an adjunct to a broader skills policy.

Last week the Prime Minister announced further investment in trades training through the Modern Apprenticeship programme. We have severe shortages in the labour market of people with mid-level technical skills. These are the skills that distinguish first-world economies from the low-skill low-cost economies to which industries such as light manufacturing are increasingly moving. They are the skills that drive many of our export industries.

By failing to promote them during the 1990s, we have made the job doubly difficult. The next twenty years will see many of our skilled workers move into retirement, and the generation following on from them has had a lower rate of participation in skills training. So we are now faced with the challenge of creating two generations of skilled workers.

More broadly we have turned around a tertiary education sector that had been growing in a largely unfocused way under a market model where institutions were rewarded for enrolments rather than results. Christchurch saw one of the less salutary examples of what can go wrong in this regard.

While we need to retain academic freedom, we need also to get academic focus. That means that tertiary institutions keep their ears to the ground in terms of what skills the local and regional economy needs, what priorities communities have and what opportunities exist for research which benefits the New Zealand economy, while providing rich learning experiences for students.

None of this can be done overnight, but recent guidelines issued by the Tertiary Education Commission on quality and relevance are an important step in getting our tertiary system aligned to what the economy and the community needs.

As most of you will be aware, we made a major announcement on student loans recently. Loans will be free of interest to students while studying and after graduation, so long as they remain resident in New Zealand. The loans system was brought in during the early 1990s, and it has succeeded to making tertiary study more accessible. What is increasingly obvious, however, is that there are unwelcome effects of large amounts of student debt.

The principle that some sharing of the cost of study between the individual and the taxpayer is still a sound one. After all, graduates draw significant benefit from their qualifications; and the community draws significant benefit from having high rates of tertiary education. It is a question of balance, and what many people have been telling us is that the burden was tipped too far towards the individual students and their families.

Our goal is a loan system which encourages students to make considered choices about what they study, but which does not lead to debt levels that prey on the minds of New Zealand families.

Our other priority for the next five years is investment. A more skilled workforce needs a higher level of capital investment if it is to meet its full potential. That means boosting investment by government in public infrastructure, investment by businesses in capital and equipment and, perhaps a more subtle point, investment by individuals in their own future prosperity.

We have made progress on all three fronts, although there is much still to be done.

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.

We have also taken steps to turn around the rate of business investment, which is relatively low in areas such as technology and R & D. We are encouraging equity investment in small to medium enterprises by changes to rules governing access to tax deductions for R&D expenditure. These will benefit companies which 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.

At the individual level, this year has seen the introduction of the KiwiSaver scheme, which aims to shift the mindset of ordinary working New Zealanders away from current consumption and towards managing their wealth for the future. As I said earlier, we have overseen five years of strong economic growth, during which the real incomes of New Zealand households have risen by around 11 per cent. We want to ensure that New Zealanders have both the opportunity and the skills to manage that wealth.

We recognise the importance of home ownership and our policies assist New Zealanders with the purchase of their first home. We have extended the Mortgage Insurance Scheme, which assists people who have a good credit history and the capacity to support a mortgage, but limited ability to raise a deposit. And a housing deposit subsidy will be available through KiwiSaver, which will provide assistance with a deposit in the form of a suspensory loan up to a maximum of $5,000.

The heart of the KiwiSaver scheme is to provide all employees with an opportunity to make regular contributions into an approved work-based savings scheme. In return for locking in their savings, the scheme provides an upfront contribution from the government and ongoing assistance with administration costs. Our aim with the scheme is to strengthen the savings habit in New Zealand so that more of us have a stake in the growth of our economy that extends beyond the labour market.

Indeed, giving more New Zealanders a tangible stake in the future is a key plank of our strategy. Without that, any gains we might make are vulnerable. With it, a stronger economy and stronger communities are within our grasp.

Thank you.

ENDS

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