Cullen Speech notes for Simpson Grierson Business
Accelerating New Zealand's growth potential
Michael Cullen Speech notes for Simpson Grierson Business Breakfast, HSBC Tower, Lambton Quay, Wellington
Good morning and thank you for inviting me to talk about New Zealand’s growth potential in 2007 and about the challenges of making policy in an MMP environment.
The Prime Minister recently articulated ideas of sustainability, particularly in the context of the environment. Today, I'd like to set out my thoughts around fiscal and economic sustainability. Not the sexiest topic of conversation, granted. And to disappoint you in advance, I'm not making any hints about tax cuts in Budget 2007.
But I hope you will go to work later this morning understanding that decisions on such issues are not as simple as many in the media like to make out. Perhaps to the exasperation of colleagues at times, I have this tendency to filter day-to-day policy decisions put before the Cabinet through a lens that is alert to the primary long-term challenge before us as a society.
That challenge, in 2007 as in any other year, revolves around the question of how to raise the country’s potential growth rate over time and ensure the government's fiscal house stays in the good shape it is now. Looking out 20, 30, 40 years, the world will feel the effects of an ageing population, globalisation, climate change, and changing social trends.
These effects may seem slow and a long way off. But how we prepare for them, react to them, and take advantage of them will determine the living standards of future generations of New Zealanders. The economic and fiscal sustainability of decisions we make now matters.
The reason a social democratic finance minister’s mind functions this way, of course, is that the only reason we are in politics is to make New Zealand a better place for all of us, now and in the future. You'll notice I said 'all'. We often talk in terms of aggregate measures like GDP per capita, but we shouldn't forget about who that capita is. Those on the political right may be content to raise the average, but a social democrat wants to raise the whole distribution.
These objectives cannot be achieved without ongoing gains in the underlying strength and capacity of the productive economy.
This is a long-term game
In the initial invitation request, penned in the depths of history back in January, David Broome said that, by November, the economy might have found its feet “after a predicted fall in the New Zealand dollar and after reductions in the Official Cash Rate.”
I note this now only because it serves to highlight how, in the short-run, things often do not pan out exactly as we had expected.
The economy has proved more resilient and short-term interest rates have held up for longer than many of the best brains in the financial markets and in the economic forecasting industry had anticipated at the start of this year.
But what has not changed since January is the fact that our economy’s potential, or estimated non-inflationary growth rate, is significantly higher than it was in the 1970s and the 1980s.
Our desire to see even higher sustainable growth has also not changed.
And what has been constant, at least since I became Finance Minister in 1999, is that we have a minority government, working in conjunction with a number of other parties within an MMP environment, putting in place the building blocks to enable higher, sustained growth over the long-term.
A dose of the New Zealand Blues
We have been able to withstand years of often noisy demands to “spend the surplus” only because we are very focused on the long-term and so very committed to stick within a framework that progressively reduces tax obligations in ways which best enhance the economy’s growth potential over time – rather than in ways primarily designed to win short-term electoral favour.
If some of our local commentators don’t get it, foreign commentators often do.
If local commentators sometimes get downcast by our failure to respond to populist demands for instant relief, offshore commentators often have a better handle on the bigger, long-term picture and the contextual realities of working, investing and living in New Zealand in the 21st Century.
Consider a recent article in Forbes Magazine, authored by a manager of investment funds in the United States which reflected on the “strange, yet pervasive” lack of optimism afflicting too many in our island-nation.
The perplexed writer had even coined a term for what he, as a recent visitor to our shores, judged unfathomable: “The New Zealand Blues.”
Something else you hear from time to time is the so-called boat/bach/BMW mentality, where we don't have the aspiration to grow our SMEs into large international companies.
To the extent there is any truth behind these attitudes, I wonder if we need to celebrate our successes more.
We focus on the drivers of long-term prosperity
My periodic trips abroad, to meet potential investors and other governments’ ministers, also provide me with some vaccination against coming down with the unfathomable New Zealand Blues affliction.
I spent, for example, the latter half of September and early October visiting a number of capitals in Asia and in Europe.
The governments and societies I visited face many of the same long-term challenges as our own.
And they do so, like us, in a world where “increasing globalisation” is not something you can either choose to plug into or out of – but rather where globalisation is a descriptive term for an objective reality: all societies, all economies, will swim or sink in an increasingly borderless environment.
While some might choose to see only the threat of a “hollowing out” of economic activity, a challenge for business and community leaders like yourselves is to help the wider society experience and interpret globalisation instead as the tremendous opportunity for economic, social and cultural growth and development that it is.
To deliver on-going improvements in productivity in a small domestic market like ours, we need to realise economies of scale by going increasingly global.
Scaling-up existing export activity and diversifying into new markets are not take-it-or-leave it options. They are requirements.
To increase the value of our export endeavour, we need more globally competitive firms that are internationally recognised and able to compete with the best that the world has to offer.
We need a great deal more firms of sufficient size and scale to carry the risks and costs of innovation and development.
And in a world where financial and human resources can with increasing ease relocate across borders, we need an ever-more highly educated, adaptive workforce.
It is ultimately, of course, the quality of our people, and that means all of our people, which will provide New Zealand’s enduring competitive advantage.
It is imperative to act now in order to better enhance the building blocks upon which future productivity growth depends.
We know what these building blocks are. They include:
The skills’ base, talents and level of enterprise of our workforce;
The quality of our stock of investment;
Our national savings culture;
The business environment, including the business tax environment.
The promotion of competition - including in critical sectors which offer positive flow-on effects to other sectors of the economy;
We have made tremendous progress over the last seven years in these areas and have a clear agenda to build on that.
In particular, we realise that strong infrastructure is a key enabler of economic sustainability.
My colleague Annette King in transport is overseeing a major increase in investment over the next five years to counter the investment deficit of the 90s. It's not so much a case of build it and they will come, but that they are trying to come at the moment and are stuck in a two hour traffic jam because we haven't built it.
David Cunliffe is pushing through unbundling of the local loop so we can at last embrace the opportunities of swift broadband. Here's an example where they didn't build it and didn't seem intent on building it.
David Parker is active on long term security of electricity supply. And here's where they were trying to build it but the process and perhaps personalities got in the way. More generally, the regulatory environment is also critical. We have a history in New Zealand of underinvestment – we need to make sure businesses can earn an adequate return on investment to provide incentives to invest.
My colleague Lianne Dalziel is looking at the quality of regulation and a review of the Commerce Act – have we got the appropriate settings for a small country like New Zealand, that increasingly plays in international markets rather than domestic ones.
The review of business tax rules being undertaken by myself and Revenue Minister Peter Dunne is also critical to helping more businesses step up to the demands of international competition.
Our economic transformation agenda will be further fleshed out by my colleague Trevor Mallard later today.
What I hope you are getting a sense of is that we are an active government that is focused on sustainable economic performance, and is looking ahead in a number of areas to ensure that we have the settings in place for the decades to come.
We are in a good position relative to peers in the face of future challenges
In terms of governments’ readiness for known future fiscal challenges, which when you think about it are the challenges that will be faced by future generations of taxpayers, you can feel confident that you live in a country with a great deal less to be blue about than almost any other.
For seven years we have had a minority government that has turned to a range of parties with whom we co-operate to advance a policy agenda in anticipation of challenges not of the next two or three years – but the next 20 and 30 years.
The New Zealand Superannuation Fund, established in our first term when we were two seats short of a majority, was advanced with the aid of a solitary opposition party: NZ First.
I freely acknowledge that there was initially plenty of vocal, even indignant, opposition from some other parties at the time. But the enduring point is that, in 2006, there is now cross-Parliamentary allegiance to the fund and that must mean that there is dramatically more buy-in to its underlying message which is that all politicians must embrace strategic, long-term and sustainable policies and thinking.
KiwiSaver, an effort to improve our national savings culture, was recently enacted by a government that is ten seats short of a majority.
The initiative sailed through Parliament with the support of no less than four opposition parties.
How is all of this significant?
It means we have very broad consensus on the need to raise our national savings performance.
It means that all parties these days are committed to strengthening the Crown’s net financial asset position over coming decades.
It means they have all accepted the idea to divert a portion of current revenue into insurance against future fiscal strife down the road – long after all of today’s crop of political actors have departed the stage.
I cannot think of many Parliaments in the position of our one where a minority administration, elected under a proportional representation system, is in a positive net financial position and where its Treasury department is forecasting, as ours is, that that position will significantly strengthen over the coming decades.
This is all enormously significant for New Zealand. It means we are better positioned than most other advanced economies to cope with known and yet unknown future challenges that inevitably lie before us in the decades ahead.
Now of course I accept that not many Kiwis can be expected to dance in their streets celebrating the important transformation that has occurred in the behaviour of their elected representatives over recent years.
But if you put yourself for a moment in the shoes of a foreign investor looking in, New Zealanders really do have a great deal to be pleased about.
So that's one area where I think we've got it right. But there are other areas where we haven't yet achieved fiscal sustainability nirvana. One of those is health.
The Treasury's recent Long-Term Fiscal Report highlights the factors that will influence New Zealand's fiscal position over the next 40 years. While these sorts of long-run projections are fraught with uncertainty, we can't ignore the trends. We can't see - for instance - expenditure on health continuing to rise as it has to date. I'll give you a few facts. In 1993/4, health spending accounted for around 15.5 per cent of government expenditure. This year, we are forecast to spend around 21 per cent on health. In 1990, health spending per head was around $1,400 in today's dollars; in 2006, this has risen to around $2,300. I don't want to be alarmist here, we are not doomed, and we do have choices about how to manage our future in a sustainable way. And we're not bound by demographic change - the predominant driver of long-term health expenditure growth is not an ageing population, but the higher costs of health care - increasingly complex and expensive technology, for instance. And we're not alone - most OECD countries face a similar challenge. As with superannuation, I see an opportunity here for New Zealanders to debate these issues openly and come to some world best solutions.
Getting buy-in from the public is crucial
Cross-party support on some of these big issues is important, but none of it really matters if we can't get buy-in from the public.
I believe that one of the greatest achievements of this government is also one of the most difficult to quantify.
There is a much greater degree of trust in the overall political process these days than in the last 30 years of the 20th century. Those years were characterised by widening social inequalities and confusion about, and wild policy swings in, economic policy that left much of the electorate cynical and dispirited. We have heard much about pledge cards recently, but let me remind you of their importance. The Labour-led government takes pride in delivering on its promises to the electorate and to support parties. We have done that, we are still doing it. For us, instilling trust in government is paramount.
As a result, I believe that these days we are taking a large majority of the public with us as we continue along the road of transforming the economy precisely because we are also investing in social services and in people – and are seen to be doing that.
I concede there is still work to be one in convincing some especially in the media if the recent reaction to the larger-then-expected final year operating surplus is anything to go by.
As this audience well knows the surplus reflected past investments in the New Zealand Superannuation Fund and investments in schools, hospitals, roads as well as a cash residual from the ongoing strength in the economy. So most of it was not money to be spent today or money that may be repeated in the future.
You might recall some of the headlines that were along the lines of "Back-dated tax cuts for everyone and their dog, now!"
My favourite was:
"Huge surplus shows Labour has gouged taxpayers."
Think about that last one for a moment.
Like every advanced economy, we face the prospect of very significant demographic change over the course of this century as a greater proportion of our population reaches retirement age.
Future governments – and that means future generations - face significant fiscal challenges.
Why would a responsive, forward-looking government apologise for positioning New Zealand to be in a more competitive position compared with our competitors as we enter the fiscally challenging decades ahead?
The statement continued:
"New Zealand is now running the second biggest surplus in the developed world."
I suspect this short line was intended as an insult, not a recognition that we are in a competitive position relative to other economies ahead of the challenging marathon ahead.
Strong environment and social policies are part and parcel of transformation
For economic success to be sustainable, we also have to ensure our social and environmental policies are also future-focused.
Many of us would say that social and environmental policies are important in their own right. But even taking a very narrow or purist economic perspective, they are essential for economic success.
New Zealand has one of the most skewed income distributions in the O.E.C.D. group of advanced, successful economies. In the 1980s and 1990s the real incomes of poorer and middle-income households were static or fell.
If we want to maintain consensus around the economic policies that are essential in a globalising world, it is vital that the income gains of growth are spread more widely. That is why policies like Working for Families, for example, are an integral part of our economic transformation programme.
Doing better on environmental performance is an economic necessity. A unique competitive position in export markets comes from our ‘clean and green’ brand but that will only be enduring to the extent that the brand matches reality and matches often consumer-set standards that are rising.
Climate change is another policy area where we must take significant steps. For a small, distant trading economy we absolutely cannot afford to thumb our noses at international efforts in this area. We cannot afford the decadent luxury of putting our collective heads in the sand.
You will have already heard that there is pressure to take account of ‘food miles’ of food imported into Europe. The Stern Report released last week provoked some in England to single out the export of New Zealand-grown kiwifruit for its impact on the climate.
Yet empirical research indicates that when the energy costs of production as well as transport are taken into account, then actually New Zealand’s carbon emissions from agricultural exports are substantially lower than home-grown European produce.
If we don’t work with the international community to both turn the tide against global climate change as well as to turn the tide against any incorrect misapprehensions about the quality of our produce, we will find ourselves being shut out of the very global market value chains that we must in fact increasingly tune into.
We are certainly determined to confront these challenges and are working hard to lift our economic performance so all of us can share a more prosperous future. I hope you leave this morning understanding that this government has a clear strategy to better position New Zealand today for the challenges of tomorrow.