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Cullen: Vision Manawatu Business Leaders Meeting

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

8 June 2006 Speech Notes

Address to Vision Manawatu Business Leaders Meeting

Vision Manawatu, 53 Queen St, Palmerston North

Today I want to talk about the Budget and what it means for the Manawatu economy.

I think it is essential that we understand what is happening to the New Zealand economy over the medium term, and hence what strategies the government and the business community need to pursue.

What we are witnessing is the end of an extended period of golden weather. We are seeing a slowing rate of economic growth, due to declining terms of trade (especially from the rising oil price), lower net migration, and a dampening of demand in the latter half of 2005. GDP growth is expected to fall from 3.7 percent in the year to March 2005 to 2.1 per cent in the year to March 2006, and will bottom out at 1.0 per cent in the year to March 2007.

We need to see this slowdown in context. The New Zealand economy today is around 20 percent larger than it was in 1999, when the Labour-led government took office. We have enjoyed one of the longest periods of sustained economic growth in living memory, and it has enabled us to do two things:

- It has enabled us to improve the living standards of ordinary households, through creating over 300,000 new jobs, delivering better incomes and improvements to public services like free doctors visits and more accessible childcare.

- And it has enabled us to start investing in the things that will secure our future. Those investments include building up our essential infrastructures, supporting our exporters, focusing our scientific research on key areas of competitive advantage, and placing our public finances on a more stable long term footing.

I say ‘start’ investing, because many of these investments require sustained attention over a long period of time. For example, in the 1990s we fell seriously behind in maintaining infrastructures like roading. The government has increased annual roading expenditure by almost double; and yet it takes many years to regain the lost ground and to bring our road network up to the expectations of a growing population and a growing economy.

We cannot leave the job half done.

It is perhaps unfortunate that government’s revenues show a lagged effect, so that, despite the weakness in the economy, the Crown accounts showed another healthy operating surplus in the year to June 2006. If this is the only figure we look at, we get an unrealistic view of the fiscal situation, and we might be tempted to think that the government’s finances are more robust than is actually the case.

The fact is this is the last time we will see a significant surplus for quite some time. We are moving into several years when our expenditure will exceed our revenues. We are forecasting cash deficits totalling some $7.4 billion over the forecast period. The deficit will be $1.5 billion for 2006/07, rising to a peak of $2.7 billion in 2008/09, before falling back to $1.1 billion in 2009/10.

Unfortunately, the current year operating surplus is the only figure that interests some parts of the media. I would like to see headlines that read, “$7.4 billion deficit: Tax cuts unaffordable”, or, in response to the recent Colmar Brunton poll, “75 percent of Kiwis say, give us roads and health care before tax cuts”. This appears to be a vain hope.

In fact, what is remarkable about the Budget is not the absence of tax cuts, but the fact that despite the economic downturn we are able to sustain quality public services, and sustain our programme of investing in the things that build our productivity.

A major component is the extra $1.3 billion over the next five years to guarantee the State Highway programme and accelerate some critical roading projects. While the major metropolitan areas get a large share of this expenditure, including improvements to Wellington’s Western Corridor, a number of important regional projects will also be fast-tracked.

We are also continuing to invest in initiatives that propel us towards a high value knowledge-based economy. For example, there will be a $100 million increase in research and science funding over the next four years, including $81 million to support research in key industries and $16 million to accelerate the commercialisation of research. All told we are spending $630 million a year on research, science and technology, which is a 65 per cent increase since 1999.

In the same vein, Budget 2006 puts $64.2 million more into market development assistance, assisting New Zealand firms crack key overseas markets.

Education and skills training are also important areas for investment. So, for example, the Budget includes:

- Funding of $34.4 million to expand the number of Modern Apprentices to 14,000 by the end of 2008;

- A further boost to industry training of $15.6 million, now that we have surpassed our initial goal of getting 150,000 people into work-based training by the end of 2005;

- New initiatives costing $33.5 million in improving the literacy, numeracy and language skills or the workforce, aimed at making many of our lower skilled workers more productive; and

- A major investment of $8.1 million in the Gateway programme, which assists school leavers make a successful transition into the workforce.

So Budget 2006 makes major commitments to strengthen the key drivers of our economy, so that when we begin to move out of the current downturn we will be in a better position to sustain another period of high growth.

The Manawatu is of course home to some very successful knowledge-based industries, in particular bio-tech industries, many of whom have research links to Massey University. This may be part of the reason why business confidence in the Manawatu is the second highest in the country. Our aim is to strengthen these kinds of clusters, so that we produce more globally competitive firms.

What is very clear is that it is the performance of our export sector that will pull us out of the current downturn. The falling dollar will provide some immediate impetus to some exporters, and we are seeing promising developments in our free trade negotiations with China and other countries; but the important task remains building stronger positions in key markets, including the emerging markets in Asia and Latin America.

Budget 2006 is about a plan to finish the unfinished business in transforming the New Zealand economy. We are part way to achieving long term fiscal stability, part way to creating a successful knowledge-economy, and part way to providing a world-class infrastructure. As I said, the key message from Budget 2006 is that, despite a temporary dip in our growth rate, we remain firmly on track.

Thank you.


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