John Key: Speech to West Harbour Rotary Club
John Key MP
National Party Finance Spokesman
Speech to West Harbour Rotary Club, 6 March 2006
Growing NZ's economy: Climbing out of the third division
Thank you for inviting me to speak tonight.
The Chinese have declared 2006 the Year of the Dog but from my perspective I think it should be the Year of the Economy. For our country's sake I hope the two aren't related, although I am somewhat fearful they will be.
Why do I think it should be the Year of the Economy? It's not because the Prime Minister and her Government have finally woken up to the fact that New Zealand is under-performing, but because we as a nation face some critical economic challenges. Among these are the widening of the wage gap between New Zealand and our major trading partners, and the enormous challenge of competition for skills, capital and markets from an array of developing nations, not the least of which are China and India.
Whether we like it or not, we are firmly on a path toward ever-increasing globalisation, a path that is littered with both opportunities and threats. And we need to get travelling, because we also know that there can be long lags between government actions and improved economic performance.
National wants to lead the economic debate in New Zealand, so over the course of the next 12 months I've decided to deliver a series of speeches looking at various aspects of the economy. The theme that will overlay all these speeches is a concern for New Zealand's continued economic performance.
National is often portrayed as a party that cares only about business; a party that would be prepared to trade the environment for the economy, and which would look at social issues such as education, crime or health care solely through a financial lens. The reality is that nothing could be further from the truth.
Being the finance spokesman teaches you pretty quickly that having quality, long-term approaches to issues in the environmental and social areas has a lot to do with how much money you have to spend. And how much money you have to spend depends on how well the economy is performing.
At a national level, if we can generate more income in the future, we have more ability, collectively, to do things - to improve our public services and to strengthen our national institutions.
Health and education services are usually the first things people think about as benefiting from a stronger economy. I agree, but I also look further than that. I'm always impressed, for example, with the Australian Institute of Sport, and by the constant stream of gold medal winners and world champions who come out of it. Australia can afford a facility like this because it is a much wealthier country than we are. The quality of a national institution like this is reflected back again in a strong sense of national pride.
In a similar vein, I made the point last year in a speech that part of the reason we should strive to have a prosperous economy is so we can fund and enjoy things like our Symphony Orchestra.
Labour, too, thinks that a strong economy flows through into more government spending. But the traditional Labour approach is to treat the economy with great suspicion, and entirely as a cash cow - a mechanism for generating tax revenue with which to indulge ministers' spending projects. That's about as far as they think.
But having enough cash to foot the bill for taxpayer-funded expenditure is only one of the reasons National thinks a strong economy matters. Here are three more.
The first is simple - that National wants people to be better off. Having more money in the hand is not all that matters in this regard, but it is an important part of the story. Rather than being play money for government ministers, we hold the view that more of the dividend from increased economic performance should go to individual New Zealanders and their families.
Now, I don't mean this in the sense of the greedy acquisition of material goods. Rather, we want people to have a decent enough wage packet to have choices in their lives and a sense of opportunity. We want people to do better for themselves and their families than just getting by, and we want people to have enough money to retire with a degree of comfort and security.
In the end, increasing people's incomes comes down to improving our economic performance: indeed, it is the definition of improved economic performance.
The second reason I'm concerned about growing the economy is to improve the relative standing of New Zealand amongst the world's economies.
Relative differences matter. Skilled people will move to countries which can pay them more; businesses will locate where conditions are favourable to them; investors will put their money where it can get a good return.
National doesn't want all our best and brightest kids going off to the United States or, more likely, to Australia. On the contrary, we want New Zealand to be a place where good doctors want to practise, and where large companies want to be located. And, while some New Zealanders will always drift away, lured by the bright lights of a bigger market, the trick must be to ensure that our country doesn't end up as a giant polytech supplying Australia with skilled labour.
As Don Brash has pointed out many times, the average Australian worker now earns 33 percent more in their hand than the average New Zealand worker, and this wage gap is growing.
The third reason for being concerned about our economic performance is a bit more nebulous, but no less important to us. I think we should be ambitious for New Zealand. We shouldn't settle for small-island mediocrity. We should have a vision and aspirations for this country.
I've previously worked in Ireland, so I have first-hand experience of being in a small country that grew from being one of the poorest economic performers in the OECD to one of the very best. It wasn't just that public services were better funded, or that people had more money in their pockets, or that young Irish people came back home to live. It was more than that. The whole mood and climate and enthusiasm of the country changed with increased economic fortunes.
There's no reason why we can't have some of that in New Zealand. After all, we already enjoy many of the characteristics which international experience suggests are conducive to a strong economy.
We have, for example, an independent central bank and a floating exchange rate. We are open to the international market. We have a judicial system, a bureaucracy, and a political system which are among the least corrupt in the world. Above all, New Zealanders are a resourceful, innovative and skilled bunch of people.
We need to build on this solid base. We have had a good record of growth in recent years but there is still a long way to go before we are a high-income country.
We are used to thinking of ourselves as a small country punching above its weight - in the first division of the world's economies, if you like. But, if truth be told, we are not in the first division of developed countries. We aren't even in the second division. Within the OECD, our economy is a third-division economy, and our nearest rivals are countries like Spain, Greece, Portugal and the Czech Republic. If I can use a rugby sevens analogy, we are playing for the Bowl, not for the Cup.
This isn't because we are a lazy country. In fact, we have high rates of employment compared with other developed countries and we work long hours. The average person aged 15-64 years spends more time working each year than in any other OECD country except Iceland.
Where we fall down, though, is in the value of what we produce at work. This is what economists refer to as productivity. Productivity in New Zealand is low compared with most other OECD countries and is growing slower than in most other countries.
Improving our productivity is one of the biggest challenges facing the New Zealand economy. The good growth we have enjoyed in recent years has been driven largely by increased numbers of people joining the workforce, and people working longer hours. But that trend has come to an end, and our future growth must therefore be driven by improvements in our productivity.
Apart from our low productivity, there are some distinct features of New Zealand that set us apart from other countries, and which face us as challenges.
Perhaps most obviously, we are a small country and a long way from the world's major markets. A circle centred on London with a 2000 km radius takes in most of Europe and even part of North Africa. The same circle centred on Wellington takes in Norfolk Island, a few hundred fishing boats and about four million seagulls. Our closest neighbour, Australia, is a much bigger and much wealthier country than us, and competes for our skilled workforce.
Being a small country, international trade is particularly important to us. However, we import and export less as a percentage of GDP than many other small OECD countries like Ireland and the Scandinavian countries. New Zealand's share of exports has also been falling since the 1980s.
The bulk of New Zealand's exports come from the primary sector, which is not surprising given this sector's prominence in the economy. It is estimated that the primary sector in the widest sense constitutes 17 per cent of New Zealand's GDP, and in only a handful of other countries in the OECD is the size of the primary sector comparable.
We are also connected to the world in another way, in that we are reliant on foreign savers to fund much of the investment in New Zealand. New Zealand households are not good savers. Taken as a whole, New Zealand households actually consume more than they earn each year, making them "dis-savers", with one of the lowest savings rates in the OECD. New Zealand households also tend to have their wealth tied up in housing, rather than in productive assets, and have amongst the lowest holdings of financial assets in the OECD.
The result of decades of relying on foreign savers is that we are in debt to foreigners to the tune of $135 billion, a level that amounts to around 90 percent of our GDP. This level of foreign investment is the highest in the OECD. And of course this means that a significant proportion of the goods and services produced within New Zealand's borders then belongs to those foreign investors, in the form of interest on debt and profits on shares.
Because we don't enjoy the advantages of some other countries we cannot afford to have economic policies that are only average, or "good enough". We need first-rate policies, and we need constant reflection and self-examination. We need to be continually looking at our economy, our regulatory environment and the best role of the government.
Otherwise we are doomed to repeat the failures of the past.
New Zealand enjoyed a golden period of rising prosperity after the Second World War, with our agricultural exports earning high prices in a guaranteed market. As late as 1974 we had the eighth-highest GDP per capita in the OECD.
Unfortunately we failed to use these years of prosperity to improve the structure of our economy. We sat back and enjoyed the cruise, until our ship hit the sharpest of rocks. The twin shocks of losing our preferred provider status with the United Kingdom and the first oil crisis heralded the start of an economic decline that persisted until about 1993. Our economy was highly regulated and protected and couldn't face international competition and shocks to our terms of trade. By that stage we had slipped well into the lower half of the OECD, and had an economy comparable with Greece, Portugal and Spain, rather than with the leading economic powers of the world.
The economic changes that began in the mid-1980s - painful as they were at the time - have helped make our economy more competitive and resilient. Since 1993, the economy has shown signs that it has undergone a fundamental change, with reasonably strong growth and steadily declining unemployment persisting to the present day. We've also been favoured with high international prices for our main exports, good growing weather and strong immigration. The only dip along the way, in 1998, was a result of successive summer droughts and the Asian crisis.
It is important, though, to keep pushing forward and continually trying to improve the economy. We can't sit back and enjoy the good times, thinking that everything's going to be okay in the future. Thinking you've sorted out the economy once and for all is like thinking you've mown the lawns once and for all - if you believe that, you're in for a nasty surprise.
Improving the economy is about taking a longer-term perspective, looking forward and realising that government actions - the changes in policy governments make, or neglect to make - may take many years to flow through into increased economic performance. And though we have been doing better in recent years, there is a long way to go to catch up to the countries we would dearly like to compare ourselves with.
After Don Brash's latest Orewa speech, which looked in part at differences between New Zealand and Australia, Michael Cullen was very quick to point out that GDP per capita has risen faster in New Zealand than in Australia over the selected period of 2000-2004. Well, that's true, but the difference is so small it would take 50 years for our GDP per capita to be the same as theirs. That doesn't sound to me like we are catching up to Australia any time soon.
The truth is that in 1999 Labour inherited a good economic and fiscal position, thanks to the hard decisions and good policies previous governments had made. Over the next six years, the economy just kept on growing and growing, and unemployment went down and down.
Michael Cullen likes to portray himself as a miserly householder, spending wisely and saving his pennies. In reality, he has been a householder who won first division Lotto and somehow managed not to spend it all. That's an accomplishment of sorts, but not one to get wildly excited about.
So have Labour used the strength of the past six years to lay the foundation for a stronger economy going forward? Most people, including the Government's own advisors at the Treasury, don't think so.
Instead, they see a state sector that gobbles up more and more cash with less and less to show for it. It doesn't help that Michael Cullen has to spend most of his time and energy cleaning up the never-ending failures of hapless Ministers like Steve Maharey. And when it comes to big budget items like health, Dr Cullen has given up looking for a solution. All he intends to do is throw more cash at the problem until he retires at the next election.
Labour has not taken a longer-term perspective on the economy, and it is clear they don't have a clue how to develop one. If there was any real vision to be shown by this Government you'd think it would have been apparent by now. They once had a target, or a dream, or a distant hope, of moving New Zealand to the top half of the OECD but that seems to have fallen by the wayside, never to be picked up again.
As a government they have squandered a golden opportunity to prepare the economy for the challenges of the future. All Helen Clark can do now is talk vacuously about "economic transformation", as if by saying it she can make it so. I guarantee that when this Government is long since consigned to the history books, the one thing it won't be remembered for is economic transformation.
Still, that hasn't stopped the Prime Minister from repeating the same old slogan since 1999, which at least shows that it's a term that appeals to the people in Labour's focus groups. Mind you, having begun the year with a raft of announcements of industry lay-offs, I too think there's a risk we are heading for an economic transformation. But I fear it's not the same one she has in mind.
So where to from here? Firstly, National will continue to be guided by its core principles of freedom of choice, private enterprise, personal responsibility, and a supportive but not over-bearing government. We will continue to argue for relieving some of the tax burden on ordinary New Zealanders and, in conjunction with this, for a state sector that is adequately funded to do its job but not allowed to run wild with public funds. We will remain committed to an open and competitive business environment, to improving New Zealand's infrastructure, and to developing a skilled population with opportunities to work.
Against this backdrop, we will be pragmatic and look at the issues facing New Zealand with an open mind. We will not close the door to innovative solutions to what are some very difficult problems. In this vein, I will be seeking to debate some of the aspects of this country's economic performance that play a part in delivering higher living standards. Some of the topics considered in my forthcoming speeches may include:
· How we lift New Zealand from having one of the poorest levels of productivity to having one of the best.
· Whether we believe our future is best served aligning New Zealand business practice with Australia's, because of our unique investment and trading relationship.
· What our focus should be when it comes to exporting and whether we can grow our exports relative to growth in the economy.
· Whether the structure of our savings and capital markets are holding New Zealand back and if so what can be done about it.
· Whether and how we can encourage innovation and entrepreneurship in New Zealand.
I've tried to give a flavour of what might be covered - but the list could go on forever. The point is not to canvass everything, however, but to take stock of some of the big issues and challenges that face us. We need to be thinking about and debating these issues, and not just in the four weeks before each election.
I am sure many of you, irrespective of your political allegiance, will be keen to do this.