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Cullen: Address to the Breakfast Club, AUT

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

24 August 2005 Speech Notes

Address to the Breakfast Club, Auckland University of Technology

The Conference Centre, Building WA 224, Auckland University of Technology


It is a great pleasure for me to be back in the halls of academia for a while. It is a world I abandoned in 1981 when I entered Parliament, and although I do not regret that move, there are times when one hankers after the opportunity to reflect upon the broad sweep of history as opposed to making history one day at a time.

Since many of you are students of business, I thought it would be appropriate to focus this morning on the relationship between business and government. One of the goals that the Labour-led government set out to achieve in 1999 was to recast that relationship. We had endured at that time a prolonged dose of laissez faire economics, under which it was assumed that the interests of business and government were mostly incompatible with each other.

The relationship was seen in the same light as Tolstoy’s famous description of serfdom in Russia: “I sit on a man’s back slowly choking him, but assuring him that I sympathise with his predicament and would do anything within my power to alleviate his suffering … except getting off his back”.

Our conviction when we took office was that, despite the rhetoric of the new right, government is not necessarily an obstacle to business. In fact, what recent economic history shows throughout the world is that good government is a principal determinant of whether or not business thrives.

Good government delivers macroeconomic stability, invests in infrastructure, builds a skilled workforce, supports research and development, promotes trade and provides quality public education, pensions and health care. Without these, it is hard to imagine any sustained economic growth.

The lesson of the 1990s was that in a small economy we simply do not have the time to wait around for market forces to align what is happening in the various parts of the wealth generation process. We inherited a system in which trade promotion, science, higher education and the capital markets were all supposed to respond to market signals and work together. The reality was a lack of focus, dissipated energy and poor coordination.

We have endeavoured to turn that around by creating partnerships with key sectors where we bring into line all of the elements needed to create and sustain growth. That includes coordinating science and industry training, building the capacity of the domestic venture capital market, and promoting better cluster activity amongst complementary businesses, both in New Zealand and in offshore markets.

That is why it is often galling as a minister to find business lobby groups complaining very loudly at some fairly minor change in regulation or taxation and declaring it to be anti-business, when the government is at the same time investing enormous amounts in creating the conditions for business growth.

My major appeal to you as future business leaders is that, as you step up to the plate, you take a broader view of the relationship between business and government.

Of course, you should be acutely aware of the fact that education is a very large government subsidy to business. It has been a crucial part of this government’s economic strategy.

One of our first priorities has been to turn 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 has been to work towards a system that provides greater opportunities for steering; that ensures 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 what is behind the requirement for institutions to submit charters and profiles that set out their contribution to meeting national economic and social goals. It is also what is behind our recent efforts to refocus polytechnics to become the engine room of skills development. To assist in this 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. While the loans system has succeeded to making tertiary study more accessible, what is increasingly obvious is that there are unwelcome effects of large amounts of student debt. That is especially so where that debt was incurred acquiring a qualification whose worth to the labour market is questionable.

It is no accident that our first priority was to get a better focus on quality and relevance in the tertiary system. Education is an investment that is shared between the taxpayer and the individual. Our primary concern has been to ensure that good investment decisions are taken. Having made progress in that regard, we now feel able to reduce the financial barriers that students face.

As business students I assume that you all very quickly recalculated the internal rate of return on your investment in your qualification in light of the abolition of interest, and that you are either celebrating a shortened pay back period or contemplating increasing your investment in education.

Some of our opponents in Parliament appear to have a vision of spurring on economic growth through reducing labour costs and cutting back on conditions of employment. Their utopia is a low-skill, low-wage, high-profit economy.

My government has always believed our future is as a high-skill, high value-added economy, and as a result we have sought to encourage better quality in education and to create quality public services and a regime of employment standards that makes us competitive in a globalised labour market.

Building a skilled workforce is only one aspect of government support for business. Business is a major user of infrastructure, and, despite some discussion of introducing private financing of major infrastructure, the government remains the principal investor.

New Zealand lost the plot in terms of infrastructure spending in the 1990s. What the National-led government failed to appreciate was that once you fall behind in creating the transport, power and water systems that can serve a growing population it becomes immensely hard to catch up. Even under the best of conditions, infrastructure investment is measured in decades rather than years, and its costs include both those of construction itself and the economic loss of congested roads, stressed water systems and insecure electricity supply.

Moreover, for a politician it is always a hard option to deny some parts of the country the infrastructure upgrades they value in order to divert resources into infrastructure ‘black spots’. Hence while the economic analysis might suggest that Auckland should grab the lion’s share of resources, that cuts little ice in the rest of the country.

Even so, since coming to power we have reversed the decline in infrastructure spending. For example, in roading, our spending this year is up 90 per cent over what the National-led government was spending in 1999, and next year it will be double. The total funds available to the Land Transport Fund over the next ten years come to $23.5 billion, including the various regional packages the government has announced.

The government continues to commit large amounts of resource to applied scientific research. Total public spending on research, science and technology (excluding capital expenditure) has risen to $600 million for 2005-06, a boost of over 56 per cent since 1999.

We have also been successful in boosting private investment through measures such as the Research Consortia programme. The programme was set up in 2002 to improve the competitiveness of New Zealand enterprises by matching private investment in research and development. Recently, the total invested in the programme, from both public and private sources, reached a quarter of a billion dollars.

We are also encouraging equity investment in small to medium enterprises through the tax system. Changes announced in this year’s budget to rules governing access to tax deductions for R&D expenditure 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.

I could go on to discuss a range of other government activities which serve the business community, including trade negotiations, export promotion, biosecurity and border control. However, some of the most significant supports for business are more subtle, and therefore less widely appreciated and valued.

Fiscal stability is to business what clean air is to the human body. When we have it we barely give it a thought; but when the air is clogged with noxious chemicals we suffer immediately.

I suspect none of you has any memory of 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 and 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?

My first priority as finance minister has been to achieve a credible regime of long term fiscal stability. That has meant reducing public debt to prudent levels, reducing government expenditure as a percentage of GDP, and building up the NZ Superannuation Fund to manage the most significant source of fiscal risk on the horizon.

We have seen the benefit of that prudent approach in the last five years, when we posted consistently strong growth despite a weak global economy, some very adverse weather conditions and the dampening effect of international terrorism and war.

Our opponents are dropping fairly definite hints that they are happy to head back into a world of higher debt and the risk of volatile shifts in expenditure. The simple lesson of history is that large scale tax cuts combined with large scale increases in spending on things like defence and police make for very bad economic policy.

The second subtle support to business I want to highlight is quality public services. One of the principal challenges businesses are facing at the moment is a shortage of skilled labour. We are addressing that by investing in trades training and modern apprenticeships; but at the end of the day New Zealand is in a competitive market for labour across the skills spectrum.

We need to hold on to our people, and not just our brightest and best, but also those with the mid-level skills that drive the productivity of our major industries. In the same way we need to attract migrants with those skills, by offering them a better lifestyle and income package than they can get elsewhere.

This is where quality public services become crucial. Health care, education, housing and personal security are key elements in the quality of life New Zealand offers. If we endanger those by talk of large scale cutbacks we immediately endanger our ability to attract and keep skilled workers.

If we are concerned about student loans keeping talented New Zealanders offshore, we should be even more concerned about the effect of cuts to public services.

One of the realities of political economy is that it is always possible to cash in some chips in the short term in order to secure short term gain; but at the expense of long term objectives. This is no different to the choices you will face in business, regarding how to balance long term investment in business development over the short term demands of shareholders and the pressures of cost drivers and profit margins.

I am very comfortable with the choices we have made in the last five years. They have been manifestly good for business, and if we stay on the same course we will create over time a world class economy based on quality infrastructure and a skilled workforce.

I trust that you, as future business leaders, will make the most of that opportunity, and recognise as you do so the benefit of a strong partnership between business and government.

Thank you.

ENDS

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