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Cullen: Waikato Business and Export Growth Forum

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

10 August 2005 Speech Notes

Address to Waikato Business and Export Growth Forum
Gallagher Group, Kahikatea Drive, Hamilton

The last five years have been a watershed period for the New Zealand economy. Over that period the New Zealand economy has performed more strongly than in any five year period in the working life of virtually any adult in the workforce today. We have had average GDP growth of around 4 per cent a year over the last five years.

That growth rate out-strips the OECD average of 2.5 per cent a year GDP growth. Unemployment fell at the end of last year to its lowest level since we started collecting household labour force data in the mid-eighties, and we remain second lowest in the OECD behind South Korea. Household incomes have risen over the period by around 11 per cent in real terms.

What this shows is that we are on our way to achieving our objective: an inclusive, high wage, high value-added, high growth economy, which delivers a higher quality of life for all New Zealanders.

That growth is important for the additional prosperity it has brought to many New Zealand businesses and households. But it is also important because it has prompted a mind shift. We are now confident as a nation in our ability to grow, because we have seen how a set of strong economic fundamentals has a compounding effect on our prosperity.

We have put behind us the 1990s, when governments and business lobby groups held to the view that the economy needed to be kick started by dramatic policy changes. We are beginning to play the long game, which focuses on the drivers of productivity, and to play it very well.

The Waikato has enjoyed its share of this growth, and in March this year recorded its 18th consecutive quarterly rise in economic activity.

This achievement, like that of the economy at large, has been built on very solid export performance, and to continue that we need to do three things:

„h We need to develop markets;

„h We need to expand and improve our products; and

„h We need to secure our capacity to deliver, through a skilled workforce and efficient, modern infrastructure.

This government, in partnership with New Zealand exporters and the business community generally, has made important strides on all of these fronts. In the late 80s and the 90s the focus of the effort was on shifting from an insular economic fortress dealing with a limited number of markets to an open economy that encouraged freer flows of capital, cut back on regulation and encouraged diversity.

What we learned, however, is that an open economy and an internationally connected economy are not one and the same. We allowed goods and services, information, capital and other factors of production to flow between our domestic economy and the rest of the world, but that freedom needed to be supplemented by a set of strategies to take advantage of openness. Those were strategies to boost trade, attract foreign investment and invest offshore, and facilitate inflows of skilled labour, technology and ideas.

The research shows that, while we have low barriers to trade, our total trade (as a proportion of GDP) is lower than that of other small OECD countries and our share of total world trade has declined over the last twenty years. However, on the other side of the ledger, the domestic value-added component of our exports is relatively high.

The level of processing of our exports has been increasing steadily since the late 1980s. In 1988 unprocessed exports represented nearly 33 per cent of all exports. By 2001 that was down to 20 per cent.

That is a trend we need to continue, since our chances of building long-term prosperity as a commodity exporter are increasingly slim. We also need to continue the trend towards diversification. We still rely on just 160 companies for over 80 per cent of our entire foreign exchange earnings.

In the next three years a Labour-led government will continue to focus on expanding markets, supporting a diversity of value-added products and building the base of skills and infrastructure.

We have made very significant progress in trade liberalisation, both through our participation in the WTO negotiations process (in which our ministers and officials have played a pivotal role) and through bilateral and trilateral negotiations with key trading partners in Asia and Latin America. We are absolutely committed to free trade, and also to supporting New Zealand exporters to ready themselves to take advantage of the opportunities as they open up.

Throughout the last five years, we have consistently increased the budget of what is now Trade NZ, and given it a clear mandate to innovate in areas such as creating ¡¥beach-head¡¦ operations in key markets which support a range of New Zealand companies seeking to establish themselves in those markets.

We have recognised that as a small country we need to make choices about which sectors have the strongest potential for growth. We have adopted a strategic approach to identifying those industry sectors and aligning our resources in terms of trade promotion, scientific research, and workforce development. This is evolving into a ¡¥whole of government¡¦ approach to supporting key sectors, such as the Food and Beverage sector. This approach enables us to identify sector wide issues, such as specific regulatory barriers, weaknesses in industry clusters and compliance cost issues, and drive comprehensive solutions to those problems.

In addition to improving trade access and supporting innovation, building skills has been a major focus for government investment in the past five years. More investment is planned.

Last week the Prime Minister announced further investment in trades training through the Modern Apprenticeship programme. We will create another 5,000 places, taking the total number to 14,000 by 2008. This is part of our broader goal to have 250,000 people participating in structured industry training.

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. 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 Budget 2005 included $300 million over the next four years to develop quality tertiary education. We are introducing higher funding rates for technical and scientific subject areas including science, trades, technical subjects, agriculture and horticulture.

We also announced recently that student 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 there should be 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 imposing costs on individual students and their families.

A more skilled workforce needs a higher level of capital investment if it is to meet its full potential. It matters little how smart our people are if they do not have the latest technology and spend good portions of their time stuck in traffic. We are moving on both fronts.

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.

Equally important is our need to turn around the rate of business investment, which is relatively low in areas such as technology and R & D. That is why 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 who bring in new equity investors after their initial development stage, and will therefore make investment in growing businesses more attractive to investors.

This is part of a package of tax changes aimed at ensuring a more productive use of capital and improving New Zealand's access to worldwide capital, skills and labour.

One of the major changes is 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. This is designed to assist New Zealand businesses to recruit top talent and to assist in the process of settlement of skilled migrants.

Other key elements were a range of tax simplification measures including alignment of payment dates for provisional tax and GST and changes to FBT. The cost of these and other tax measures in the budget will be an estimated $1.86 billion over the forecast period. This will be partially offset by revenue from the new carbon charge of around $720 million over the same period. However, we are talking of a net reduction in revenues of over $1.1 billion from these measures.

There are some who will point out that, for the same amount of foregone revenue, we could have knocked 3 cents off the top income tax rate and made a few more friends. The reality is that the business tax package in the budget was carefully designed after several years of consultation to give us the best possible boost to investment for the revenue foregone.

Our judgement was that, when faced with the capacity to cut a small margin off the tax take, it is always better to make changes that demonstrably boost investment, rather than those that merely boost domestic consumption.

This is a point that appears lost on many people. The Reserve Bank is already concerned that inflation is in the upper end of the target range, and would be rightly concerned at any loosening of fiscal policy.

In other words, a tax cut that boosts investment buys us future growth; whereas in the current environment a tax cut that boosts domestic consumption buys us nothing but inflation or higher interest rates.

The choice is not a hard one to make, provided your focus is on the long game. That has been our focus for the last five years, and we aim to keep it there for the next five.

Thank you.


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