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John Key MP: The pathway to prosperity

John Key MP: The pathway to prosperity

Speech to National Party 2006 Annual Conference

Time is an interesting phenomenon.

For a child, a year is an endlessly long time, but for adults the years seem to flash by at a frightening rate.

In a few weeks’ time our stunning group of 21 new MPs will have been in the job for a full year now. I fondly remember my first year in Parliament. I was so much in awe of the place I often wondered how I got there.

How time moves on. After four years, not only has much of the mystery gone, but I now find myself wondering not how I got there, but how on Earth the majority of the Labour Party caucus got there.

Of course, politicians have their own sense of time. It’s said that a week is a long time in politics, and the longest we tend to look out into the future is until the next election.

The three years between elections, however, is only a short period of time when it comes to the economy. Economic cycles run over much longer periods.

So this morning I want to step back and take a longer-term look. I want to think about what the New Zealand economy could look like some time – say 25 years – into the future, the challenges we face, and indeed what we might need to do now if we are to prepare for those challenges.

It might be useful, before looking 25 years into the future, to take an equivalent step back into the past and see how things have changed since then.

I’m aware when I dabble in history that this is, of course, the previous occupation of Michael Cullen. I’m sure, however, that Michael will forgive me straying into his former area of expertise, history, just as I forgive his occasional amateur forays into the areas I know about, namely business and finance.

So what was happening 25 years ago in 1981? It seems a long time ago.

We are all aware, of course, that this was a year of particularly bitter divisions and social turmoil associated with the Springbok Tour.

The economy was in no great shape, either. From the mid-1970s, when Britain joined the EEC and the first oil crisis hit, the New Zealand economy had a pronounced limp. What is more, our economy became so regulated that, in David Lange’s famous words, it resembled a Polish shipyard. Budget deficits were the norm, and the total public debt in 1981 was around 50% of GDP.

Some serious medicine was required. That medicine, in the form of monetary and fiscal stabilisation, and substantial economic restructuring, took some time to have a positive effect. It was a time of great pain and hardship for many, made all the worse because long-delayed changes all happened in a relatively short space of time.

It was not until 1993 that the economy really turned around, with strong growth and steadily declining unemployment, trends that have persisted to the present day.

In the meantime, between the mid-70s and the mid-90s, New Zealand slipped further and further behind other countries. In 1981, for example, Australia’s GDP per capita was only 14% higher than ours; today it is almost 30% higher.

But we were pretty optimistic about the future in 1981. Some of this optimism was justified, in retrospect, and some of it wasn’t.

The All Whites had just qualified for the World Cup Finals in Spain and it seemed to everyone that soccer was about to take over from rugby as the number one sport in New Zealand. The Wellington rugby team had the Ranfurly Shield and a long reign was predicted.

More optimistically, at least for Cantabrians, the Carter family were about to have a son called Daniel, who would grow up to destroy Aucklanders and Wellingtonians, as well as Wallabies and Springboks.

In 1981, IBM released something they called a “PC”, but it was not expected to be much of a success.

Young people made up a larger part of the population in those days. In 1981, 27% of the population was aged under 15; nowadays this is only 21%.

Back then, life expectancy was different too. In 1981, life expectancy at birth for men was 70 years – now it is 76. Women’s life expectancy has risen from 76 to 81 years.

So what do we get from looking back 25 years? And how does any of this relate to what will happen 25 years from now?

To me, thinking about the past emphasises five important things about the future.

The first is that there will undoubtedly be huge technological progress made in the next 25 years. What exact form this takes, though, is anyone’s guess.

When I did social studies at school we were taught that when the year 2000 came we would work less, and in a paperless office, and that lunch would consist of taking a tablet instead of eating a sandwich and an apple. The lucky among us would be living in space.

None of this has in fact come to pass – especially in my case the paperless office – although a whole lot more things, never dreamt of in 1981, certainly have. What’s a sure bet is that in 2031 the tools we use, the medicines we take, and the ways we communicate with each other will be vastly different from today, and we almost certainly haven’t even thought of them yet.

The second observation is that there will be significant demographic changes.

It’s no news that the ageing of New Zealand’s population is continuing at an even greater rate than it has in the past. Currently, 12% of the population is aged 65 or over. By 2031 this will have risen to 22%.

My third observation is that pressure on government spending will continue and intensify into the future.

One reason for this is that an ageing population will put significant pressure on health and superannuation spending. Also, the kind of technological progress I mentioned earlier will see advances that will make it possible to provide more and better-quality services. This is a good thing, but will also push up overall costs.

Another more subtle and interesting change that results from a growing economy is that people's expectations of what governments should provide seem to rise, rather than recede, as aggregate incomes grow. In 1981, public health spending made up 5.6% of GDP, yet today this has grown to nearly 7% of GDP, and public pressure on the health system is as intense as it has ever been.

Having said all this, I think there is a tendency, when talking about future spending pressures, to get overly gloomy about our ability to manage them. After all, if real incomes continue to rise, then future generations of New Zealanders will be considerably wealthier than we are now. This will give us a lot more scope to deal with issues individually or collectively through government spending.

That is why lifting New Zealand incomes is so vital, and why National is committed to that task.

My fourth observation is that economic policies can take a long time to have an effect.

A lot of the time, this Labour Government, and Trevor Mallard in particular, seems to think economic policy is a bit like those old Frankenstein movies, where you pull a big lever on the wall marked “economic transformation”, some electricity sparks, and the previously lifeless creature rises off the slab.

I wish it were that simple.

Growing the economy is about the medium term. Many of the policies being developed now will have an impact, not next year but next decade.

My final observation is that small differences each year, though they might not seem all that significant on an annual basis, start adding up over a quarter of a century.

For example, if the New Zealand economy grows at 3% a year, then in 25 years it will have slightly more than doubled. If it grows at 4% a year, the economy will be well over two-and-a-half times as big in 25 years. The difference is substantial.

Because small differences compound over time, countries can pull right away from others, or fall right behind, in their standard of living. In 1950, for example, Japan had a standard of living, measured in terms of GDP per capita, that was about the same as Turkey, Portugal and Greece. Now, Japan is one of the richer countries in the OECD and Turkey is by far the poorest.

So how do these reflections on the past help us understand what the New Zealand economy could look like 25 years into the future, and therefore what we should be doing now?

One scenario is that we keep muddling along as we are doing at the moment.

We get lulled into a false sense of prosperity by the good period of growth we have enjoyed over the past six years.

Rather than facing up to the problems our economy has, and recognising the time it will take to address them, we simply put the economy on autopilot. In short, we continue doing what the Labour Government is doing right now and we squander a golden opportunity to prepare the economy for the challenges of the future.

Michael Cullen has always at heart had a narrow, accountant’s view of the New Zealand economy. As long as the books balance, everything is fine. As long as revenue exceeds spending, preferably by a considerable amount, his work is done. As long as debt is on a constant track, he can put his feet up.

But something fundamental is missing here. You can balance the books in a growing country or in a country in decline. You can balance the books even by taxing furiously and spending furiously. You can balance the books while doing nothing in terms of productivity-enhancing policies, which will prepare the economy for the years ahead.

If we simply muddle along as we have been we will find some years later that, because of the effects I identified earlier, we have slipped into a trough. We may find ourselves in a 1981-type situation. Perhaps more likely, we will find ourselves in the position where many European countries are now, where excessive levels of tax, public spending, red tape, and overly-protective labour laws have sucked the life out of their economies.

Another, brighter, scenario is where we keep one eye on the future, where spending is justified not only on what it does today – or, in Labour’s case, whose vote it buys today – but on what it will do to provide a real future for the country tomorrow.

For starters, and as my bench mate Bill English argued in the last election, we need to be much more aggressive in solving the problems of literacy and numeracy in our society.

It’s a disgrace that we sit by and allow kids to leave after 10 or 11 years of schooling with no more than the most basic reading or maths skills. Not only is this a sickening waste of human capital, it is also setting kids up for a lifetime of failure and social exclusion.

Surely we can’t be serious about a high-growth economy when parts of our future workforce have difficulty reading job advertisements, interpreting bus timetables or understanding what is on a medicine label.

We need to have an education system that provides kids with the skills necessary to have roles in the modern economy and to fully participate in society.

Secondly, we need to start investing much more intensively in New Zealand’s infrastructure – in roads, public transport, energy, telecommunications and water. And we need to start now, because it takes years before these sorts of projects are completed.

Unfortunately, not only does Michael Cullen’s toolbox of solutions exclude the private sector, but the increase in public spending that has occurred has been funded through one-off events like the windfall gain from Meridian or the banks fronting up with overdue taxes.

Of all people, I would expect him to understand that New Zealand doesn’t have a public sector debt problem, because the Crown actually owns more in the way of financial assets than it has in debt. Put bluntly, we don’t have a debt problem, we have a growth problem, or, to be more precise, we have a productivity growth problem, and thus an income growth problem.

Thirdly, we have to have competitive tax rates that give people the incentive to get ahead from their own efforts. Both the company and the personal tax systems have to send out the simple message that working matters, and that if you take responsibility and work hard then you will be rewarded for your efforts.

It’s an open secret that Helen Clark will eventually force the Minister of Finance, whoever that might be, into some sort of tax cuts before the next election. What New Zealanders should not be fooled by is the difference between a cynical and belated tax cut by Labour, and a National Government firmly committed to an on-going process of ensuring that our tax system stays relevant and competitive – the sort of commitment so admirably demonstrated in Australia.

Finally, we must narrow the relative wage gap between Australia and New Zealand. At a time when New Zealand needs people to drive innovation and growth, it seems the fastest growing export we have is people to Australia.

In part that’s an issue of taxes; in part it’s about becoming smarter and better connected as a nation, with a workforce that has the skills to progress into more complex and demanding jobs.

Maybe, most of all, New Zealand needs to constantly consider ways to turn our remoteness and smallness from being a disadvantage to an advantage.

I have to say, I am optimistic about the future of New Zealand. I think we can look forward to a vibrant economy and a vibrant society, where people have opportunities to get ahead, no matter what jobs their parents did; where success is rewarded; where we have top-class public services funded by a fair level of taxation; and where people want to stay, work, and raise their families.

Who knows, 2031 could be a vintage year in our history. But as I have been saying this morning, 2031 starts now.



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