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Cullen: NZ's strategy for climbing the OECD ladder

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

31 October 2006 Speech Notes

Embargoed until: 8am
New Zealand's strategy for climbing the OECD ladder


Speech notes to Chartered Institute of Management Accountants, Royal New Zealand Yacht Squadron, Westhaven, Auckland


You have invited me to talk about New Zealand’s strategy for climbing the O.E.C.D. economic ladder.

Lifting New Zealand’s relative economic and social performance over time will succeed on the foundation of thousands of successful individual business strategies to grow their own trading profits and to raise their own investment levels in new technologies, skills and training, market development and research and development.

As firms enhance their own potential output, and meet more ambitious goals, so New Zealand’s overall economic performance will strengthen over time.

As a key actor in the economy, the government plays a number of diverse roles to facilitate this virtuous process and today I will talk about some of these roles that responsive governments must pay increasing attention to in order to help create the best environment for success.

* First, remove impediments to growth

An observation that I will make from my own experience, having first entered the Cabinet in the late 1980s, and then returning after a nine-year break in 1999, is that government priorities must always be in tune with the requirements of the times.

In the late 1980s, the economic strategy of the government had a measure of defensiveness about it. I mean that in the sense that our first objective was a strong, reactive impulse simply to stop the rot.

We acted to defend our society against further deterioration relative to our peers and competitors in the wake of the 1975-1984 administration which had pursued a policy of ever-rising public debt-financed government interventions which further eroded our national competitiveness with each passing year.

The late 1980s, then, were characterised by a rapid dismantling of wage and price controls, the removal of prescriptive financial market controls, an end to actively managing the exchange rate, the removal of expensive and so-called export assistance programmes which often distorted important market signals to New Zealand-based producers, a substantial reduction in import barriers, a widening in the tax base and a transformation of a large number of loss-making, ill-focused departments into responsive organizations.

We were focused on removing glaring impediments and distortions which were stifling innovation and growth.

It does not do any harm to remind ourselves every once in a while just how quickly we were falling behind – our GDP per capita, measured on a purchasing power parity basis, collapsed from 9th highest in the OECD in 1975 to 18th by 1985.

The fall had to be stopped, and the fall was indeed broken.

In 1999, when we came back into government, we inherited an economy reaping the efficiency gains of the earlier structural adjustments. Our economic ranking had stabilized at around 20th in the O.E.C.D.

The messages that we got loud and clear from business upon our return to government were all about skills shortages, inadequate opportunities for workforce training, infrastructure deficits affecting key areas relevant to national economic performance, such as in transportation and in the security of energy supply.

We had the macro-economic framework about right, but we could not rest on our laurels with a “she’ll be right, mate’ mentality of business-as-usual if we wanted to embark on the long journey back up the international rankings.

That is why these past seven years of government have been largely about putting in place measures aimed at assisting in the process of transforming the productive capacity of our economy in ways that will put us in a more competitive position over the medium and longer term than we would otherwise find ourselves in.

The programmes to promote economic transformation require us to stay above the noisy, here and now issues of day-to-day politics. It is incumbent upon us to resolutely focus on helping to clear that pathway to put us in a better position to leverage more out of our competitive advantages over the next 20 and 30 years.

It is important to remember that economic transformation is a continual process of adaptation, without an “end point”.

* The building blocks upon which greater productivity growth depends

The government’s economic transformation strategy is focused on facilitating the enablers of growth over the medium and long term.

* We are increasing public investment in post-school education and training.

* We are raising public investment in R&D.

* We are making determined efforts to better integrate our national R&D effort into areas that optimise market opportunities for New Zealand-based firms.

* We are closing the infrastructure investment deficit which was holding us back as an economy and as a society.

* We are sticking with one of the most forward-focused set of government fiscal strategies in the world which is assisting our national savings efforts. We will never return to the populist, short-term fiscal policy decision-making that characterized the bad old days when we were a near-basket case waiting only for the I.M.F. and World Bank to come knocking at our door.

I would stress that the strategy incorporates the 1980s’ effort to weed-out unnecessary impediments to growth: we are always open to re-assessing the quality of current government expenditures, for example, and the appropriateness of spending commitments as measured against current priorities.

I make no apologies for our strategy these days being wider in scope than it was in the 1980s. It is imperative to act now to better enhance the building blocks upon which private companies’ future productivity growth depend.

We know what these building blocks are:

* the quality of the skills base and the talents of our workforce.

* the degree of innovation, enterprise and international market integration of New Zealand-based firms.

* our national savings culture.

* the business environment, including the business tax environment.

* the promotion of competition, including in critical sectors of the economy such as telecommunications where increased competition in the sector will have positive flow-on effects to all other sectors.

* quality infrastructure investment. We are the first government in decades to use all of the income from general petrol excise duty and road user-charges on land transport investment. Over the next five years, we will spend ten times as much on public transport as the previous administration did in its last five years in office.

We have spent the last seven years making significant progress on all these fronts.

* This is a long-term game

There is general consensus about the range of indicators against which we must make sustained progress to achieve higher average living standards.

Our estimated potential growth rate – that is the estimated rate of growth our economy can sustain without generating undue inflationary pressures – is one.

Estimates of our economy’s long-term potential growth rate are significantly higher these days than when I first entered Parliament in 1981. We are able to sustain a rate of growth which is higher, and lasts longer, than we were able to.

New Zealand’s annual economic growth rate of 3.2 per cent in the decade to 2005 outperformed the OECD average annual economic growth rate of 2.6 per cent in the same period.

That was a complete turnaround from the previous two decades to 1995 and 1985 when the OECD left us in the dust.

But of course having a more resilient, broad-based economy does not mean we are immune from business cycles. The economy is currently taking a bit of a breather.

London-based Consensus Economics, in its October Forecasts, anticipates a couple of years of growth at 1.9 per cent a year in 2006 and 2007, before we recover back to steady, solid growth of around 3 per cent a year from 2008 onwards.

Inputs into an economy’s non-inflationary or potential growth rate include its labour utilization and labour productivity rates.

Over recent years New Zealand has scored above average compared with its peers on measures of labour utilisation. The participation rate of working-age people in the labour market, our employment and unemployment rates have all been very strong.

In terms of hours worked per head of population, we ranked in sixth place among 30 advanced economies according to an O.E.C.D. Productivity Database report issued last month surveying the latest comparative data available.

Annual growth in labour utilisation in New Zealand was running at 1.8 per cent in the decade to 2005, up from 0.4 per cent in the previous decade and 0.8 per cent in the decade to 1985.

Measures to facilitate on-the-job training and work/life balance, just like removing unnecessary rigidities in labour law, encourage greater labour force participation, more on-the-job and over-the-life-cycle training.

Labour productivity in New Zealand grew by around 1.2 per cent per annum in the decade to 2005, similar to in the previous decade but significantly higher than 0.5 per cent per annum in the decade to 1985.

One of the reasons our labour productivity performance has not been stronger in recent years is likely to be at least partly due to the rational responses of employers to the impressive opportunities to utilise more labour.

Given the inevitable constraints on forever raising our labour utilisation, raising labour productivity is going to play a growing role in efforts to raise our overall economic performance.

New Zealand will increase its labour productivity rate over time as we raise the level of investment in workplace skills and in training.

Whereas the attainment of skills training and higher education obviously provide private gains to those acquiring them, it are the economy-wide benefits accruing from the investment in raising the average level of skills and training that primarily explain the high priority that governments must devote to facilitating the process.
There were 9,171 Modern Apprentices at June 30, almost 13 per cent more than in June 2005. Some 2300 Modern Apprentices have completed their training. Total industry trainees now number 123,202, over 11 per cent up from June last year.
Training and apprenticeships are pillars in lifting business productivity which is why this year’s budget allocated an additional $58 million over the next four years to expand the number of Modern Apprenticeships to 14,000 by December 2008 and for other industry training initiatives.
The annual report on the Student Loan Scheme, which was presented to Parliament recently, also sheds light on some of the dramatic changes occurring in the relationship between New Zealanders and higher education.


From 1994 to 2005:
* The percentage of New Zealanders aged 15 and over who have participated in tertiary education increased to 14.2 percent – up from 8.9 percent: enrolments by women in public tertiary education providers increased by 84 percent while Maori and Pasifika enrolments rose 177 percent.
* The number of people with a bachelors’ degree or higher qualification has increased by 142 percent – from 195,000 to 471,000.
The report also noted that the number of tertiary students, including domestic as well as international students, has nearly doubled to 504,400 – up from 254,100. Every international student is a future link between New Zealand-based firms and overseas markets – whether they return to work overseas, or remain here with us.
Our current reforms to the tertiary funding system are all about ensuring this rising participation provides greater added value for the economy. The changes will ensure tertiary education organisations are more focused on playing to their strengths rather than competing with each other and are more responsive to the needs of employers, students, communities and of course taxpayers.

Other ingredients in the campaign to lift our national performance include our national investment in R&D, the ratio of our exports of goods and services to GDP and our firms’ investments offshore.

Annual real exports, as a per cent of real GDP, has been running at over 30 per cent these past seven years or so, up from below 25 per cent in the late 1980s.

Expressed in New Zealand dollars, New Zealand-owned firms’ direct investment overseas currently stands equivalent to 11.5 per cent of GDP and it is desirable that New Zealand’s stake in offshore opportunities rises from this level.

The government recognises that New Zealand needs to constantly assess the role of business tax rules to keep them flexible and responsive to encouraging innovation, investment, exporting and offshore investment by New Zealand-based firms as well as increased inward direct investment in locally-based enterprise.

The driving force behind the range of options identified by the business tax review discussion document released three months ago is the strong desire by the government to further improve the capability of business to grow and to compete in an increasingly borderless international economy.

The purpose of the review process is to facilitate the progressive transformation of our economy into becoming a higher-wage, higher-skill and more knowledge-based economy over time.

We want to ensure that our business tax rules best encourage innovation, better support business investment and further encourage New Zealand-based firms to either enter or to expand their engagement in offshore market opportunities.

New Zealand’s current levels of R&D, and particularly business R&D, are low by OECD standards and lifting levels of R&D and patenting is likely to be positive for growth. Tomorrow, the Capitalising on Research Summit opens, bringing together leaders from across the business, research and government sectors to focus on ways to more rapidly commercialise ideas produced by the science community. Business investment in R&D, and collaboration between businesses, is still relatively low in OECD terms and we all recognize that this is a front where we all have work to do, together.

* We have come a long way as a society

We have come a long way as a society in a short period of time and we should not lose sight of that.

Reflect for a moment on the deeper implications of the fact that, these days, we have consensus across parties on the need for current taxpayers to contribute hundreds of thousands of dollars every month toward the Superannuation Fund.

That means, at the very least, that there is public buy-in to thinking today about the fiscal challenges that an ageing population and other challenges will throw up in 20, 30 or 40 years from now.

By law, the Treasury is now required to regularly produce a statement on the very long-term fiscal outlook, looking out no less than 40 years into the future.

I think that this business audience can take some comfort out of that. Think of it as a reality check on any future government that should ever think of trying to win short-term electoral benefits with policies that undermine our long-term national interests.

You often hear commentators lament our national savings habits, but I believe we are on the cusp of quite a sea change in public attitudes. The government’s KiwiSaver policy is, in part, about assisting to change mindsets and learned behaviours by individuals and households.

The government is leading by example.

Every measure that the government takes is considered in the context of known and possible future fiscal challenges because every decision we take has to be grounded with a view to sustaining and enhancing growth over the medium and long-term.

We know that the costs of providing some key public services are projected to rise over time. To some extent this is due to demographic change – for example, a society with a higher ratio of older people with higher health needs.

But actually the larger projected potential cost-growth drivers are around higher costs of health care (for example, using increasingly complex and expensive technology).

Along with other societies, we don’t yet have all the solutions to this challenge, but we cannot ignore it. But I do think that we will need to think smarter about how we best use resources going into health sector, with more public demand to see real results.

The government’s resolute commitment to setting and achieving long-term fiscal targets – primarily our determination to maintain gross debt stable at around 20 per cent of GDP – is a measure of our determination to provide the stable macro economic environment that business absolutely requires to make the best of its own long-term investment decisions.

Every one here knows what an accrual accounting surplus is.

Everyone here knows it is not residual cash hanging about looking for a good home to go to.

Everyone here should know that $2.3 billion of the government’s recently reported surplus got invested in to the NZ Superannuation Fund, $1.8 billion of it was committed to physical assets like schools and $1.7 billion was advances to District Health Boards and student loans.

Because the economy was more resilient than we expected in the first half of 2006, residual cash was $1.2 billion higher than anticipated at the time of the Budget.

Some of my political opponents and media feel this is enough to make permanent tax decisions. Not only would that be fiscally reckless, it would also be economically naïve at a time of uncomfortable inflationary pressures and a consumption fuelled current account deficit.

Everyone here can take comfort from having a government these days that does not pretend its strong fiscal position puts it in a position to splash out on a lolly scramble designed to win some short-term electoral gain at the expense of your long-term interests.

We are focused on the long term game and are confident our strategy has put in place a robust sole to our economic boots so we can climb steadily up the OECD ladder.

Thank you again for asking me to be here with you to discuss what is an absolutely critical issue for all of us.

I would be happy to take any questions that you may have.


ENDS

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