Cullen to ICANZ CFOs Group
Address to ICANZ Chief Financial Officers Special Interest Group: “Business under Labour”
Institute of Chartered Accountants, Ohinerau St, Ellerslie, Auckland
Wednesday 7 September 2005 at 5.35pm
Speech delivered on Dr Cullen’s
behalf by Associate Finance Minister David Cunliffe
In spite of all the dire warnings from our opponents and some within the business community, the Labour-led government has definitely been good for business. That does not mean we have allowed business lobby groups to write our policy for us. It does mean that we have guided the economy into a position where solid growth of 3 or more per cent per annum is firmly established as the norm.
It is always helpful to benchmark our performance, and the best way to do that is to compare ourselves with the rest of the OECD. There are three key dimensions:
- First, in the last five years we have posted GDP growth consistently ahead of the OECD average. 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. As a result we have made up considerable lost ground in terms of GDP per capita, to the point where we are now starting to reel in the nations immediately ahead of us.
- Second, the OECD ranks us Number One in terms of ease of doing business. That reflects that we have a fair and efficient tax system, regulatory systems that are transparent and easy to engage with, and a high standard of ethical behaviour within the business community. Of course, our high ranking 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.
- Thirdly, we are 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.
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 in places like Gisborne, Taranaki, Northland and the West Coast.
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 GDP terms and maintain our high ranking in terms of ease of doing business and social well being?
First, we continue what we have 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.
The third thing I believe we have done right is to throw away the fantasy that overtook us in the 1990s that government has no role in creating economic growth. That fantasy still holds some people in its spell but the fact is that growth in a modern economy is always a partnership between government and business. As I will argue, that is the only way to meet the significant challenges that we face.
The major challenge can be seen in the latest Household Labour Force Survey for the June quarter, which shows we now have the tightest labour market in the developed world, finally surpassing the South Koreans. 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.
From a Labour perspective, having the lowest unemployment in the developed world is a matter of immense pride for us.
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 endeavours in which government and business must cooperate to varying degrees. To use a golfing analogy which I hope isn’t too crude, government’s job is get the ball onto the fairway, and preferably in the middle of it. Business’s job is to take the ball from there and get it into the hole.
Education is a good example. Those of our opponents who glibly say government has no role in business are overlooking the enormous subsidy government provides to the business community by funding a world class education system.
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, NZ Trade and Enterprise’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, for example, measures in this year’s budget 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.
Meanwhile 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.
In addition, we 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 are part of creating 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.
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 scheme has been endorsed by the Economist magazine which says New Zealand is leading the way in superannuation policy through the KiwiSaver scheme and that Britain may follow New Zealand’s lead. The features they particularly liked were automatic enrolment with provision to opt out after three weeks, the contribution holidays, the ability to choose a fund manager and the choice of contributing at either 4 per cent or 8 per cent of wages.
It says the scheme’s design reflects the latest trends in behavioural finance and could prove a politically alluring alternative to compulsion in Britain.
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. 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 $23.5 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 to fund tax cuts must pretty soon involve digging beyond what some may call fat, such as health and pensions, into the muscle of investment in the drivers of economic growth.
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 an unnecessary degree of complexity in the decision making process around transport issues. That is something we are committed to fixing, and last 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.
Our fourth strategy is pursuing freer trade. 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 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.
These four strategies – skills, investment, infrastructure and free trade – constitute the long game in terms of increasing productivity and building the platform for long term economic growth.
Of course, this is the time of the electoral cycle when alternative economic visions are being touted round. What is interesting is that, by and large, those alternative visions accept the bulk of what Labour has been doing in the last five years. The major divergences are on tax and, to a lesser degree, regulation; and what needs to be said is that these are often promises that cannot be delivered.
Even under the best of circumstances, cutting tax hardly constitutes a well-rounded economic policy; yet Mr Keys is proposing it as a kind of magic potion which will boost every economic indicator. That ignores the fact that his plan involves exactly 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.”
The OECD is making a simple equation: large scale tax cuts risk destabilising our economy and choking our growth, in particular if they are funded by increased borrowing.
The only option then is to cut public services, but slashing $3.5 billion from the budget, as National’s own figures suggest, means either undermining some of the essential supports for our economy, such as biosecurity, or undermining the confidence of ordinary New Zealanders in their quality of life, or both. During the 1990s we went down the route of divisiveness and two-tier health and education. The economic effects of that should be obvious, and that is why it is something of pipe dream for National to believe it can form a coalition within Parliament which would support cuts of this magnitude.
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 to make those investments work for us, not to fritter them away.