Cullen: Address to Auckland Chamber of Commerce
Hon Michael Cullen Address to Auckland Chamber of Commerce
Hyatt Regency Hotel, Waterloo & Princes Sts, Auckland
Thursday 1 September 2005 at 7.15am
This morning I would like to talk about Labour’s economic policy for the next three years. It addresses six key dimensions, and I almost feel I should apologise for its comprehensiveness and complexity.
Economics has always been prey to reductionist theories, whether we think of the monetarist view that the fortunes of an economy could be explained solely by increases and decreases in the money supply, or the ‘funny money’ theory of the Social Credit movement which still lurks on the fringes of New Zealand politics. It seems that reductionist economics is back in fashion, except that marginal rates of income tax are now the indicator that magically explains everything about an economy, from investment to labour market participation to movements in interest rates.
I believe New Zealand deserves better than that. Labour has led New Zealand through six years of strong economic growth. We had a vision of balanced growth; a strong economy alongside an inclusive approach to social wellbeing. 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 can now look foward to reeling in the nations immediately ahead of us.
Any set of policies that delivers a 20 per cent plus increase in GDP and an 11 per cent real increase in household incomes is worth continuing. New Zealanders under Labour are wealthier, healthier, better educated and better connected to the global economy without having sacrificed any of our sovereignty in terms of foreign policy.
So we go into this election with a strategy to keep the economy growing faster than the OECD average and build upon the platform of social and environmental well being that attracts and retains skilled people.
The first of our six platforms is fiscal and economic stability.
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 less as a percentage of GDP 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.
Nevertheless, we have an economy that is hard up against a capacity constraint. Inflationary pressures are pushing against the top of the target band and there is little immediate respite in sight. We have a very tight labour market and a current account deficit that is uncomfortably large.
The OECD itself warned about this in its Economic Outlook on the New Zealand economy issued earlier this year. It 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. What is more we need to invest large amounts of public money in infrastructure development.
The OECD is making a simple equation: large scale tax cuts risk destabilising our economy and choking our growth. That equation is the same however you fund those tax cuts. To fund them by increasing borrowing sends the wrong signal about giving away the prudent fiscal policy of the last decades; and to fund them by harsh cuts to health, education or pensions starts to erode the very basis upon which we are trying to attract skilled workers.
Our second platform is boosting savings and investment.
My government has been an active participant in the task of investing in New Zealand. This marks an important departure from the somewhat lackadaisical approach of our predecessors. I am proud to say that, despite many other claims on available resources, we have succeeded in increasing the flow of investment into infrastructure by something in the region of 80 per cent over the rate when we took office.
That includes investing in the transport, power and water systems that will serve a world class economy, and designing our telecommunications policy to encourage investment in broadband technology and increasing competitive pressures so as to lower prices for businesses and ordinary consumers.
If we just consider roading, the total funds available to the Land Transport Fund over the next 10 years have risen to around $22.3 billion. Our annual spending this year is 90 per cent higher than when we took office, and next year it will be 100 per cent higher.
As an aside, after months of Don Brash promising he would outspend Labour on transport, John Key's numbers reveal he will spend less than half as much as Labour would from the Crown Account over the next three years. What this proves is that any search for $7 billion in spending cuts must pretty soon involve cutting beyond what some may call fat, such as health and pensions, into the muscle of investment in the drivers of economic growth. For $7 billion is the difference between the two major parties on the revenue side over the next two to three years.
Indeed, the major limiting factor to this government’s infrastructure investment is not our willingness to make funds available so much as the sheer question of buildability, given the constraints of a tight labour market and, to a lesser degree, the legitimate requirements of the consenting process.
In Auckland, as Michael Barnett has pointed out, there has also been a unnecessary degree of complexity in the decision making process around transport issues. That is something we are committed to fixing, and on Tuesday the Prime Minister announced that the Crown would take responsibility for completion of the Auckland rail network, and leave the Auckland Regional Authority to focus its energies on upgrading the above rail services such as stations, carriages, and parking facilities.
It is also important that we work with Transit to review the processes used by them to see how they can lead to a better and stronger relationship with the private sector.
Investment in public infrastructure is only one part of the equation. 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, for example, this year’s budget included measures to encourage 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.
We are also in the process of changing tax depreciation rules to make them more neutral and therefore strengthen incentives for businesses to invest in assets that provide the best commercial returns. Tax depreciation rates will be changed to reflect better how assets decline in value. Rates for short-lived plant and equipment will increase and rates on buildings will reduce.
We have also set out to strengthen the role of individual New Zealanders in investment through the KiwiSaver scheme. While this is not a compulsory scheme, 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.
We have considered the option of tax incentives to encourage savings, but all the evidence suggests these are of dubious value. Instead, the government will support KiwiSavers through meeting the costs of the administration through IRD; through a $1,000 upfront contribution to each new KiwiSaver; and through a fee subsidy at a capped level to savers in approved KiwiSaver products.
Our working assumption is that 25 per cent of the eligible workforce will have enrolled in KiwiSaver by 2012. All things being equal, the scheme should lead to a general increase in the liquidity of New Zealand’s capital markets. It is noticeable that the scheme has received favourable mention in the latest issue of The Economist.
Our third platform is lifting productivity.
We now have the lowest unemployment in the OECD, and along with that a historically high labour force participation rate. We are at the limit of our capacity, given current skills and capital investment. All hands are on deck, and the only way we will grow further is if we make give those hands better tools to work with and make them more skilful.
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 goal to have 250,000 people participating in structured industry training.
More broadly, we have turned around a tertiary education system that failed to make any connection between its activities and what was happening in the labour market, where the returns are made on investment in education. We have strengthened the relationship between tertiary education providers and the industries which hire their graduates. The point of this is not to threaten academic freedom, but to increase the relevance of what is taught, and hence to make it a better quality of learning.
More recently, and having confidence that we were creating a more focused tertiary education sector, we announced that we would provide student loans free of any interest so long as the recipient remained resident in New Zealand. This is a bold step. However, we acknowledged the level of public concern about the rise of student debt, and took action accordingly.
In times past we looked at the student loan asset on the government’s books and asked ourselves how valuable an asset that actually was. How much of it had been incurred to gain qualifications that were not immediately relevant to the skills demanded by the labour market?
Now and in times to come we will be able to look at it with much greater confidence that it represents a valuable investment in human capital, from which individuals, their families, and the country will continue to benefit for years and decades to come.
Our fourth platform is supporting growth and innovation.
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. But 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. 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.
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.
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.
The fifth platform is strengthening international economic relationships.
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 NZ Trade and Enterprise, 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.
In our next term, we will continue to strengthen the effectiveness of border protection through enforcement of New Zealand standards, including labelling requirements, protection of intellectual property and copyright and anti-dumping rules so as to ensure a fair competitive environment for local manufacturers.
Similarly, Labour has committed to providing specific assistance to businesses in the textiles, clothing and footwear sectors so that they can re-equip and be able to compete in an open trade environment.
We have maintained one of the more liberal FDI regimes in the world, and I believe our experience has put to rest the alarmist concerns about the perils of foreign ownership. We have recently made some adjustments to our overseas investment regime which make the process smoother, while adding in protections around sensitive sites.
Meanwhile Peter Costello and I have made significant progress on reducing barriers to trans-Tasman trade and investment flows. Australia’s 20 million consumers remain an enormous opportunity for many small to medium sized New Zealand businesses. An invigorated CER is increasingly giving those businesses a sizeable platform for expansion which can function as the springboard into larger markets in Asia and the United States.
Changes to taxation and business law will ultimately create a single Australasian investment market. For example, Cabinet recently signed off on a regime that would allow issuers to offer securities in both Australia and New Zealand using the same offer documents and offer structure. A mutual recognition regime would reduce the costs of raising capital in both countries, while maintaining investor protection through appropriate disclosure. It will also promote investment between Australia and New Zealand, enhance competition in capital markets, and increase the choice for investors.
The sixth and final platform for growth is improved corporate governance, alongside a fair and efficient tax and regulatory system.
In recent years, New Zealand has risen to the top of world rankings in terms of the ease of doing business. We have built a reputation for high ethical standards, effective competition law, low compliance costs and a tax system which in international terms is a model of simplicity and transparency. I appreciate that some of you may dispute this, but it is a view that is confirmed repeatedly by bodies such as the OECD and the IMF.
Of course, that is no reason for complacency. We will ensure that the reforms we have made to the Takeovers Code and the powers of the Securities Commission will achieve their objectives. We will implement changes to the Resource Management Act that make for smoother decision making, and we will continue to invest in building the skill levels of local authority level to handle applications more effectively.
And we will continue to consult with business on ways to reduce compliance costs. That commitment can be seen in the fact that, over the course of 2004, the government announced 104 reductions in compliance burdens.
The fact remains we are making good systems better. I have several times issued a challenge to anyone to set our tax system, or our planning laws, or our labour laws, alongside those of any other country in the OECD, and to propose a wholesale swap. So far I have no takers.
To sum up, the next parliamentary term needs to focus on sustaining the momentum of economic growth and overcoming the capacity constraints in our labour market, our infrastructure and our capital stock. There is no credible growth path that does not involve heavy investment in building our economic capacity and our productivity.
And I would argue there is no credible growth path that involves downgrading the quality of life for working families. We have made solid investments in long term fiscal stability, in workforce skills, in infrastructure, science, and global connectedness. The challenge is make those investments work for us, not to fritter them away.