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Cullen: Economic Transformation – Govt-Union Forum

Hon Dr Michael Cullen
Deputy Prime Minister, Minister of Finance, Minister for Tertiary Education, Leader of the House

7 March 2006 Speech Notes

Tuesday 7 March 2006

Economic Transformation – Speech to Government-Union Forum

Palmerston North Convention Centre, Main St, Palmerston North

It is my job this afternoon to outline the government’s economic transformation programme. As a first step, it’s helpful to remind ourselves of how much positive transformation has taken place since the Labour-led government took office in 1999.

Labour led New Zealand out of the doldrums in the late 1990s through six years of strong economic growth. Over that period we have posted GDP growth consistently ahead of the OECD average, and as a result have made up considerable lost ground relative to other developed nations. Our economy is 20 percent larger than when we took office, average weekly incomes for individuals have increased by 17 percent in real terms, and average household incomes have increased by 11 percent.

What’s more, we have achieved the lowest unemployment rate in the OECD, and seen an economic resurgence in regions such as Northland, Gisborne and the West Coast, which were more or less written off by previous governments. Maori unemployment rates, which have long been a cause of concern, have also fallen sharply.

Alongside a vibrant labour market and rising incomes we have seen improvements in a range of social indicators in health, educational participation, and crime. And, let us not forget, we have made New Zealand workplaces more positive and equitable places through repealing the Employment Contracts Act, and improvements to statutory leave provisions.

New Zealanders under Labour are wealthier, healthier, better educated, better protected in the workplace and on the street, and better connected to the global economy.

This year we are starting to see that growth rate slow, but it is essential that we give no credence to the loose talk about recession. The wheels are not falling off, and Rome is not burning.

Just yesterday we received a timely reality check with Australian media giant Fairfax spending $700 million buying on-line auction house Trade Me. That is a stunning vote of confidence in the fundamental strength of the New Zealand economy. Forget those business confidence surveys and the doomsayers. Fairfax would not have spent that money if it was not confident in the medium to long-term health of this economy.

But in the short-term there will be a deceleration in the rate of growth, which is forecast to fall to no less than 1.6 percent at the trough of the cycle.

Importantly, the expectations are that the slowdown will not have a significant impact upon unemployment or incomes. Our labour market is currently at full capacity and forecasts are for unemployment to stay below 5 percent for the duration of the slowdown. That is below the current Australian rate.

What we are facing is, in part, an economy that is pulling back from unsustainable levels of activity and allowing some imbalances to right themselves. We are already starting to see this with the recent decline in the dollar, which, if it continues as forecast, should have the effect of dampening our domestic economy and improving the competitiveness of our exports.

I am not suggesting that there not be some pain in a slowdown in growth. However, the key question we need to be asking ourselves is: how can we learn the lessons of the growth cycle that is ending and emerge stronger and sustain the next cycle of growth for longer?

That is where continuing the process of economic transformation is key. What the last six years have shown us is that we cannot sustain the rate of growth we want without putting pressure on our workforce, on our infrastructure and on monetary stability. We need to increase productivity: to produce more with less and to add more value to our exports.

That has been the goal of the government’s economic transformation agenda in the last few years. Some parts of that agenda could be described as ‘rocket science’, and other parts definitely are not.

At the rocket science end, we have consistently improved both the volume of resources going into research and development and the effectiveness of that spend.

Overall science funding is up by 65 percent over the last six years. Just as important, we have been getting better returns on that investment by working in partnership with key industry sectors, including biotechnology and agritech, information & communications technology, creative industries, food and beverages.

For example, ninety-eight companies so far have graduated from the government's incubator programme, with thirty-nine already showing good high growth potential.

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, last 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.

Of course, at the heart of renewed productivity is a more skilled workforce. We have made good progress in this regard, but there is still much to do.
We have brought back industry training from the moribund state into which it had lapsed. Skills training numbers have doubled, and there'll be an extra 5000 Modern Apprenticeships by 2008. We continue to work towards the target of 250,000 people in industry training overall. That is significant achievement, when you consider that it represents more than 10 percent of the adult workforce.

Getting the right balance in tertiary education is a longer term process, largely because it is a very complex task to align the interests of employers, who tend to have fairly short term horizons in terms of the skills they are looking, providers, who have to plan over a much longer timeframe what courses to offer, and students, who have varying degrees of focus on what skills they want to achieve and when.

Governments in the 1990s threw in the towel and opted for a model that rewarded institutions for bums on seats and let the market decide the outcome. That outcome is clearly unsatisfactory in many regards. Although the large majority of what the system produces is high quality and relevant to the skills needs of the nation, there was an increasing margin of duplication and low value courses with little real link to employment outcomes. We had students taking on debt to achieve very little in terms of relevant skills.

It is a much harder task to get tertiary institutions, local government, industry, unions, chambers of commerce and central agencies to work together on determining what type of education is most relevant to the emerging skills needs of regional economies. Yet that is the task that has to be attempted.

Later this month I hope to announce some changes to tertiary sector funding to encourage a better focus on linking together the various parts of the skills value-chain.

The third key area of economic transformation is infrastructure. 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.

. Indeed, our annual public spend on transport capital assets is up something in the region of 90 percent this year on the 1999 level and 100 per cent next year. The recent announcements by Transit New Zealand of a forecast shortfall in long-term roading revenues illustrate that we are not out of the woods yet.

There is no reason to panic, however. In the context of a ten-year programme worth around $12 billion, a $684 million forecast shortfall is serious issue, but by no means an insurmountable one. We have set up a ministerial advisory group to examine costs and revenues in the roading sector and consider ways of moderating the cost increases. This far out, I am very confident that we can maintain our commitment to the roading plan and to the businesses and communities who are depending upon it. That includes the commitments on regional roading priorities.

I want to say a few words about the role of unions in economic transformation. There is enormous scope for government and unions to make common cause of increasing workplace skills and productivity, and to make the links with what we have been doing for the last five years in improving the regulation of the workplace.

Our opponents see labour market regulations as a constraint. We do not. The fact is that skilled labour is internationally mobile. We are in a globally competitive labour market where workers move to where they can get the opportunities and rewards they want. We need opportunities and working conditions that are attractive – both to New Zealanders contemplating leaving or returning, and to people from overseas.

The last thing we should be doing is dropping the ball on issues such as health and safety, holidays, minimum wage and paid parental leave. We must not forget the lesson of the 1990s.

That is where KiwiSaver is major step forward. It is a fact that high-wage, high-skill, high-growth economies tend also to be economies where there is a high level of participation in long term savings schemes, mostly through the workplace. The two go together, because when you have a stake in the future of the economy you are much more likely to be committed to it for the long term.

While it 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.

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.

The scheme is already receiving accolades from around the world, for the way in which it encourages participation without forfeiting a sense of individual choice and without wasting energy and resources through cumbersome tax breaks.

KiwiSaver is a way of encouraging New Zealanders to think in terms of careers rather than jobs, and in terms of wealth rather than income. I have been very pleased with the enthusiastic support it has so far received from the union movement, and I am sure that will continue once the legislation is passed and we begin implementation.

To sum up, the government has sought to develop a broad based strategy for economic transformation, and we are very pleased with how far we have come in the last six years. We are still part way through, and in many areas we are only starting to get the traction we need on improving skills, strengthening infrastructure, developing capital markets, and so on.

If this is solely a government strategy, it is probably doomed. I am happy to say that partnership with industry and with unions has been an important element in the progress so far, and that is something I earnestly hope will continue.

Thank you.


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