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Cullen Address to Gisborne Chamber of Commerce

Michael Cullen Address to Gisborne Chamber of Commerce

Irish Rover, Peel St, Gisborne

Tuesday 30 August 2005 at 5.30pm

When the Labour-led government first came to power in 1999, we were driven by a conviction that New Zealand was squandering its opportunities. We had the basis for a strong economy, but our energy was sapped by unstable government and inconsistent fiscal policy. The National-led government had started the decade with massive cuts in social services, and continued to foster division within our communities and our workplaces, while allowing our infrastructure to crumble.

We had a vision of balanced growth; a strong economy alongside an inclusive approach to social well being. The results speak for themselves.

In the last five years we have posted GDP growth consistently ahead of the OECD average, and as a result have made up considerable lost ground, to the point where we are now starting to reel in the nations immediately ahead of us.

Our economy has expanded by some 20 per cent in the last five years, and household incomes have risen by around 11 per cent on average during that period.

We are also well-placed within the OECD on a range of indicators of social wellbeing, including a variety of indicators of health, child poverty, educational achievement and personal security. Indeed we are already in the top half of the OECD on two thirds of the measures where there is comparable data, and we are continuing to climb.

In other words, our quality of life, such as it can be measured, is generally high in OECD terms, and improving. That is very relevant, in that our future economic wellbeing depends to a large degree on keeping skilled New Zealanders at home and attracting the skilled migrants we need. Within the Labour economic strategy, social wellbeing in its various forms is a goose that lays golden eggs for the future of the economy.

Growth has also been widely spread throughout the country. We are the first government in decades to take seriously the challenge of investing in the regions, and we are reaping the rewards. The Gisborne region has been a stand-out performer over the last five years, after decades of relative stagnation.

While growth in the region has come off its 2002 peak, it remains firmly positive. In the year to March the regional economy grew 3.7 per cent, which was just ahead of the 3.6 per cent increase measured nationally. That has fallen back to 3.2 per cent growth in the year to June, but commercial and residential building permits still recorded double-digit growth, with respective increases of 14 and 12 per cent, and new car registrations increased strongly, rising 11 per cent.

There is still considerable momentum in the regional economy, as there is nationwide; and this is despite the adverse exchange rate effects and the dampening effect of oil prices.

So what are the priorities as we move forward? How do we keep ourselves on the path towards the top half of the OECD in both economic and social terms?

In my view, there are three key priorities:

We need to acknowledge what we have done right in the last five years and ensure that we keep doing those things;

We need to prepare for the difficult terrain ahead, in particular the need to improve our productivity in light of the capacity constraints we are hitting; and

We need to avoid some obvious potholes.

First, what have we done right in the last five years? As an exporting nation we have continued the process that has in fact been under way for several decades of shifting the balance of our export economy away from commodities with their vulnerability to the volatile cycles of world commodity markets, towards a more diverse range of products and services, and also towards exports with a higher value added component. Thus our tourism industry has been investing in the kind of tourism product that appeals to higher spending tourists and keeps them here for longer.

Similarly, research reported late last year confirmed that, for the first time, value added food and beverage exports represented more than half the value of our total food exports. Value added food and beverage exports increased by 7 per cent from 2002 to 2003, up to 53 per cent of our total food exports.

This kind of change in the structure of our export economy is something New Zealand businesses and governments have been working towards for several decades.

The second thing we have done right is maintaining fiscal strength and stability. This is one of the things that business people are generally aware of only when it is absent. In the last five years we have run a conservative fiscal policy. We have made significant progress in reducing public debt, and, despite what my opponents allege, we have controlled government spending relative to GDP, so that we now spend around 10 per cent less than in 1999. That shrinking of government has been at a time when most OECD countries either held government expenditure steady as a percentage of GDP or increased it slightly.

Our third success is that we have maintained and enhanced one of the advanced world’s most competitive regulatory regimes for business. That includes a tax system which in international terms is a model of simplicity and transparency. I appreciate that this is not a popular view, but it is a view that is confirmed repeatedly by our high placement in comparative international studies by generally conservative bodies such as the OECD and the IMF.

Of course, that is no reason for complacency, and this government has a very good track record in consulting with business on ways to reduce compliance costs and acting quickly on those consultations. Over the course of 2004, the government announced 104 reductions in compliance burdens.

The fact remains we are making good systems better. If we set our tax system, or our planning laws, or our labour laws, alongside those of the remainder of the OECD, I doubt that any New Zealand business owner would opt for a swap.

The fourth thing I believe we have done right is to throw away the fantasy that overtook us in the 1990s that a kind of Darwinian laissez-faire was the only way to approach economic strategy. As the Chinese say, “The peasant must stand on a hillside with his mouth open for a very long time before a roast duck will fly into it.”

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, not by a return to central planning of any kind, but 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.

As you would expect, there is some risk attached to being proactive in this way, and we have accepted that as a necessary evil. However, it is churlish to criticise the occasional failure and overlook the successes. More importantly, these partnerships are creating better information flows to guide the actions of industry leaders, regulatory agencies, tertiary education providers, and investors.

So to keep ourselves on the pathway we need to carry forward the set of policies that is delivering tangible results for New Zealand’s economy. However, there are some major challenges ahead; in particular, as I said, we need to improve our productivity.

Many of you will have read the latest Household Labour Force Survey for the June quarter. We now officially have the tightest labour market in the developed world, finally surpassing the South Koreans. That’s the glowing view some in business might take. From a Labour perspective, we have the lowest unemployment in the developed world, a matter of immense pride for us.

Seasonally adjusted employment rose by 11,000 to 2,065,000. The seasonally adjusted unemployment rate fell to 3.7 per cent. The seasonally adjusted labour force participation rate rose slightly
to 67.7 per cent. And seasonally adjusted total actual hours worked rose 2.9 per cent.

What this illustrates is that we are reaching the limit of our ability to grow by expanding the workforce base. We have added on something in the region of 273,000 full time equivalent jobs in the last six years, and we are quite simply running out of people.

That puts the focus back on four things:

Improving the skills level of our workforce;

Boosting investment;

Creating a world class infrastructure; and

Securing free trade agreements.

These are all long-term endeavours, but they are endeavours in which New Zealand lost the plot during the 1990s. As a result, we are only now starting to get them back on track.

In the last five years the government has virtually reinvented industry training and the apprenticeship scheme. We inherited a skills culture that venerated the chiefs but paid little or no attention to the Indians. The truth is the successful economies emphasize both the high level skills that drive technological advancement and the mid level skills that drive productivity.

We have emphasized both as well. 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.

Recently the Prime Minister announced another 5,000 Modern Apprenticeships, 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. We are 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.

And we are ensuring 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 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. That effectively encourages individuals to invest more in skills than they would otherwise. I have to say this is not a move we would have contemplated prior to this year. It is appropriate now that we have better steering mechanisms for the tertiary sector as a whole to ensure the quality and relevance of courses.

A more skilled workforce needs a higher level of capital investment if it is to meet its full potential. When we came to power, domestic savings and investment was a relatively weak suit, and we have taken measures to improve that.

We have provided direct support to the venture capital market through support for business incubators, Trade NZ’s Escalator programme, and the New Zealand Venture Investment Fund Ltd (VIF), which manages a number of programmes, including the recently announced $40 million Seed Co-investment Fund (SCIF) targeted at SMEs.

And we have provided indirect support through changes to the taxation of venture capital, the recent changes to R&D depreciation and the remedying of several flaws in our investment taxation regime that encouraged investors to chase tax advantages.

We are also acting to improve New Zealand’s domestic savings rate through the KiwiSaver scheme. This scheme will build a wealth management and share owning culture on top of our existing savings culture which is focused largely on residential property. To remind you of the details, this is not a compulsory scheme like Australia’s, but it is a definite tilting of the playing field towards participation. New employees will automatically be enrolled in the KiwiSaver scheme and will have to opt out if they do not wish to participate.

The emphasis from the contributor’s point of view is on choice, with competing providers and a capacity for contributors to specify their preference for risk. Nevertheless, there are clear expectations that savings will be locked in for retirement or, under certain circumstances, for the purchase of a first home.

The government will support KiwiSavers in three ways:

First, we will meet the costs of the administration through IRD;

Second, a $1,000 upfront contribution will be provided to each new KiwiSaver, including members of an existing registered superannuation scheme that fully converts to a KiwiSaver product;

And third, the government will provide a fee subsidy at a capped level to savers in approved KiwiSaver products. The details of this subsidy will be determined after consultation and negotiation with providers

Our working assumption is that 25 per cent of the eligible workforce will have enrolled in KiwiSaver by 2012. What we know is that domestic savings, when invested under a diversified strategy, exhibit a ‘home bias’. This means that over time we will see an increased pool of savings seeking productive employment within New Zealand.

The third plank of our strategy to increase productivity is infrastructure. We have reversed the decline in infrastructure spending in the 1990s and are now spending at a rate around 70 per cent higher than our predecessors. In roading we have increased funding by 90 per cent, and the total funds available to the Land Transport Fund over the next 10 years will be around $22.3 billion. That includes a number of regional packages.

We have consistently increased transport funding in the Tairawhiti region, addressing issues such as the growth in forestry traffic, growth in tourist traffic and route security south to Napier and the port.

We are also investing in the power and water systems that will serve a world class economy, and our telecommunications policy is encouraging investment in broadband technology and increasing competitive pressures so as to lower prices for businesses and ordinary consumers.

Our fourth strategy is pursuing freer trade. We have made very significant process 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.

These four strategies – skills, investment, infrastructure and free trade – constitute the long game in terms of increasing productivity.

The final thing we need to do to stay on the pathway is to watch out for potholes and other hazards, such as crazed spectators running onto the road. Two such hazards spring to mind.

The first is the kind of fiscal loosening that the OECD itself warned about in its Economic Outlook on the New Zealand economy issued earlier this year. They stated that “any additional fiscal stimulus beyond that already planned could put the projected soft landing at risk and would need to be offset by higher interest rates in order to bring the economy back onto a sustainable growth path.”

What this means is that our fiscal options are limited if we are serious about meeting head on the need for future stability. Looking out over the next decade, it is clear that the expenditure risks are all on the upside in areas such as health and education. The risk on New Zealand Superannuation has been brought under control, but only if we continue to build up the Superannuation Fund.

The OECD is making a simple equation: large scale tax cuts or large scale expenditure increases risk destabilising our economy and choking our growth.

The converse risk is that of cutting public services so harshly that we undermine some of the essential supports for our economy, such as biosecurity, or undermine the confidence of ordinary New Zealanders in their quality of life. During the 1990s we went down the route of divisiveness and two-tier health and education. The economic effects of that should be obvious.

It is no coincidence that, in the last five years, alongside restoring the quality of our public services, we have seen a restoration of confidence in our economy. We already enjoy a quality of life that ranks highly in the OECD. And we are firmly on the pathway towards the top quartile in terms of economic wealth.

Thank you.


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