Michael Cullen Speech: Playing the long-term game
Playing the long-term game
Speech notes for address to AMP Capital Investors' Morning Meeting, HP Tower, Featherston St, Wellington (closed to media)
Thank you for the opportunity to talk to you today.
The government has been busy preparing the economy for the challenges it faces in the future and the progress we are making is important for the savings and investment industry.
Your business is about preparing for the future.
So too is the government's approach to economic and fiscal management.
It's about getting beyond the “here and now” and setting out a path beyond the next two to three years... one which will prepare us for the next twenty to thirty years.
Opinions about the state of our economy often divide between complacency and pessimism.
On the one hand, there are those who are reasonably satisfied with the state of our economy; they might place a higher priority on dividing the spoils than on growing the cake, or they might simply have enough for themselves and fear change.
On the other hand, there are doomsayers, certain we are going down the gurgler and advocating radical upheaval.
As with most things, the truth is at neither extreme.
Over the last seven years the government has built a robust vehicle to position us for the often bumpy journey ahead.
We face significant challenges...an ageing population, globalisation, climate change, and changing social trends.
How we prepare for our challenges, react to them, and take advantage of them will determine the living standards of future generations.
The economic and fiscal sustainability of decisions we make now matters.
For most of this year our economy was in the cooling off phase of the economic cycle.
A slow down was inevitable after the long period of strong growth since 1999.
You will recall earlier this year there were plenty of pessimists predicting the economy could enter a recession before we picked up the next wave of growth.
Those fears are well behind us now.
The New Zealand economy has proved itself resilient and sound.
In fact the early years of this century were the longest period of sustained growth in the last thirty years.
The New Zealand economy is a quarter larger today than it was when I took office as Finance Minister.
Not only larger, but stronger and better positioned for the long haul:
over 330,000 new jobs, an unemployment rate of 3.8 per cent, still one of the lowest in the developed world, stronger government finances than most developed nations, a massive increase in infrastructure investment, especially in transport, a looming revolution in telecommunications, a revamp of skills training with over 2300 completed modern apprenticeships, and greater certainty about superannuation.
Surveys show business confidence is returning.
The National Bank's latest Business Outlook has overall confidence at a two year high and firm's expectations about their own activity back to early 2005 levels.
There are risks we need to manage as well.
Our dollar remains stubbornly high and those exporters whose competitiveness is based mainly on a low exchange rate have struggled most.
At the same time the world economy has been stung by factors far beyond New Zealand's control.
Oil prices have been high.
Our current account deficit remains large.
Our consumption boom has put pressure on interest rates.
So it's been all the more important that our careful husbandry of the public purse has helped to take some of the pressure off interest rates.
We have reduced our gross debt close to twenty per cent of GDP.
We no longer carry any net debt, allowing for the New Zealand Superannuation Fund.
In November the international ratings agency Standard & Poor's affirmed our rating, saying the government's 'strong fiscal profile' was offsetting the risks from our high current account deficit.
You will get a fresh update on the fiscal picture and economic outlook when Treasury issues its Half Year Economic and Fiscal Update on Tuesday, 19 December.
Interest rates are lower and our economy is stronger because we have been focused on the long-term, preparing New Zealand for the challenges we face.
The government has a strategy to build on our achievements, to sustain and strengthen our economic progress and to continue to improve living standards for all.
The only long-term way to raise our living standards in future is to raise our productivity.
The building blocks of productivity include:
The skills’ base, talents and enterprise of our workforce; The quality of our stock of investment; The quality of our infrastructure; Our national savings culture; The business environment, including the business tax environment; and Our integration into the global economy
These are the components of economic transformation.
We have made real progress over the last seven years in these areas and we have a clear agenda to build on it.
It is important to remember that economic transformation is not a finite event -- We don’t do it and then it’s over.
It is an ongoing process of equipping ourselves to compete in an increasingly globalised world, which has no reason, and little emotion, to do us any favours.
It is a process because there is no end point.
We must always strive to improve our productivity, increase our quality, adapt to changing markets, and take up new opportunities.
So in the skills area, for example, we are building on improved industry training with a revamp of the tertiary sector.
I want a sharper focus on quality, relevance and value for the $2.6 billion we invest in the tertiary sector every year.
Graduates’ skills need to be better aligned with the needs of employers.
From 2008 tertiary institutions will have to make plans that take into account the needs of their regions – students, employers, communities.
They will have to consult with industry to find out what skills those businesses need.
The government's funding will follow the demand for skills and the needs of the region, rather than following last year's enrolment figures.
As well as increasing the relevance of skills coming out of tertiary institutions, I hope to see increasing relevance of research. I attended a summit organised by the Government between business and researchers earlier in the year to discuss 'capitalising on research'. I see co-operation, linkages and general interaction between researchers and end users as crucial for ensuring that research is focused on the right areas.
In promoting our national savings culture the government has introduced two landmark schemes to strengthen our economy and prepare it for the future.
The New Zealand Superannuation Fund will help take pressure off the rising cost of retirement incomes.
Our population is getting older; the number of retired New Zealanders is increasing.
The proportion of New Zealanders aged over 65 will double over the next half century.
With more seniors as a proportion of the population we have three alternatives:
One, you could reduce the cost of superannuation - either by reducing super payments or raising the age of eligibility.
The previous government tried to cut superannuation in real terms and found there was little appetite for it.
Nor is it fair to do so - When you have retired, or you are close to retirement, it is too late to change your position to respond to government changes of direction.
The second option is to to increase taxes in the future.
But there are both economic and equity reasons why we should not try to shift more of the burden of paying for superannuation onto our children.
The third option is the one the government has taken.
The New Zealand Superannuation Fund sets aside some of the future cost of superannuation today.
It will help to make the economy in future stronger and more able to sustain the cost of supporting its seniors.
The Super Fund is now well underway.
It has assets of over ten billion dollars.
The fund equips New Zealand better than virtually any other country to deal with our ageing population.
Its success will improve our ability to meet demands on the government budget as more of us retire.
And the better we meet those demands, the more of us will be able to participate in and belong to our society in our senior years.
But no matter how well we protect superannuation, New Zealanders will want to save for retirement as well.
So the government introduced a major scheme to make it easier to save through our working lives.
Kiwisaver is a voluntary scheme which comes into effect from next July. But we have stacked the deck in favour of savings by making enrolment compulsory with workers able to opt out between two to eight weeks of being employed.
The government will make $1000 government contribution to encourage savers to open an account.
Employees can put away four or eight percent of their gross salary and employers can make tax exempt contributions.
The scheme gives first home buyers $5000 towards buying their first home.
Putting something aside for when we need it later is an old-fashioned virtue.
It is also a very good way for today's generation to ensure they have the means to enjoy a higher standard of living when they retire.
And it's my hope that the scheme helps create a savings culture among New Zealanders to boost our savings rate.
Savings become investment and investment raises our productivity.
Increased savings are part of our strategy to transform our economy and prepare New Zealand for our future.
So too are the measures we are taking to make New Zealand more competitive in the world.
There are significant challenges ahead to raise our game in an increasingly globalised world.
A new OECD economic outlook predicts world trade will grow by nearly 10 per cent this year, nearly 8 per cent more next year and 8.4 per cent in 2008.
In other words world trade will grow by more than a quarter in just three years.
Unless our trade grows by the same amount, then our share of world trade will fall.
That is partly because, as a remote country, we will have little in the way of trans-shipped products - not many people will send things here for us to add a little value and then forward again.
But it does mean the global economy is changing extremely quickly - niches are opening up in global value chains.
We need to seize those opportunities.
Economies with flexible labour, product and capital markets will be best placed to adapt.
Last week I visited a fine example of the sorts of companies that are helping to transform our economy. This year the family owned Christchurch furniture maker Davies celebrates 45 years in a fiercely competitive business.
It survives because it has been flexible and has identified a high value niche which is opening doors in overseas markets like the UK. It uses a unique New Zealand resource -swamp kauri - to craft beautiful period furniture. It well knows the value of smart design, innovative marketing and highly skilled craftspeople. These combine to help it to maintain an edge, especially over low cost Asian furniture manufacturers.
In a globalised world, those who prosper, like Davies, will be skilled and innovative.
But resources will increasingly flow across borders – production, investment, and people.
Here in Wellington Phil&Teds baby gear company is another example of a different, but also successful approach. And I know AMP Capital Investors values that since you have a stake in the company.
I am sure you would have been thrilled last week when Phil&Teds was named Creative Exporter of the Year. Like that other great Wellington company, Icebreaker, Phil&Teds now manufactures in China, while retaining the intellectual property and the design and marketing expertise here in the capital.
Both are smart companies, with a reputation for design excellence which is being recognised overseas. It's certainly proving a successful recipe for export growth with Phil&Teds exporting to 26 countries and Icebreaker's woollen clothing selling in 20 countries.
The point is, we cannot expect to be the right place for every part of the global value chain.
However, this integration with the global community is a key opportunity for New Zealand and vital for our futures.
My colleague Phil Goff has just returned from leading our largest ever trade mission to China.
Our two-way trade with China is already worth $6.1 billion a year; our merchandise exports there have tripled over the last decade
There are even larger opportunities ahead as China passes the US as the world's largest economy in under twenty years.
The government has a role in helping business seize those opportunities.
It's engaged in talks with China over a trade agreement.
New Zealand Trade and Enterprise is also working closely with innovative businesses preparing to develop their export capability.
It has on-shore capability in developing markets in China.
At home, we are investing more in science and technology to increase the level of innovation in our production.
The business tax package my colleague Revenue Minister Peter Dunne and I are working on will help further.
It will place the priority on investment in research and development, skills training, exporting and innovation. Companies like Davies Furniture which wants to spend more on research and development to maintain its excellence in product design should benefit from our decisions.
A package comprising a mix of a headline company tax rate cut and tax credits will be a compelling proposition to retain and attract foreign investment and to enhance prospects for our exporters.
I will also be releasing a discussion document later this month on international tax changes. In my view, potential changes to the controlled foreign company regime could well be even more important to encouraging expansion offshore than a reduction in the headline rate.
We have already made good progress in lifting competitiveness.
An example: A World Bank/PricewaterhouseCoopers study published in November assessed the ease of paying taxes for business in 175 economies.
It found the total tax rate borne by businesses in New Zealand including the corporate rate, and other taxes, was 36.5 per cent of pretax profit.
In Australia, the comparable rate is 52.2 per cent.
New Zealand ranks tenth out of 175 for ease of businesses paying taxes.
Australia ranks 35th.
If we exclude a couple of tax havens and oil producers that don't need to tax to finance their spending, our ranking rises to fifth in the world.
And since that study was published we have made some parts of the compliance simpler, such as aligning filing dates for provisional tax and GST.
The study found that when the tax system is less onerous, we get better infrastructure and education systems, higher investment and lower avoidance activity.
And New Zealand is already near the best in class in reducing compliance costs.
There is another World Bank report on the ease of doing business that ranks New Zealand second in the world.
But there has been an important shift in the last seven years with New Zealand thinking moving on from “get the conditions right and all will be well”.
Government has a central role as organiser or funder or facilitator across a number of areas where we can help to transform the economy.
I see a role for government in setting up institutions and incentives that drive economic activity in ways that will raise New Zealanders' living standards.
Our focus on skills and innovation will help to prepare a high-performing twenty-first century economy.
We have many challenges to prepare for, from increased globalisation of markets and value chains, to ageing populations and climate threats.
A responsible government prepares for those challenges.
As I have outlined, we have a long-term vision to improve the economy and manage risks to it.
It is coherent, responsible and endorsed by overseas agencies.
Preparing New Zealand for the future, as with a household saving for its future, might not seem as exciting as going out on a bender.
But over time it locks in the benefits of our work and ensures we have a steadily more enriching economy in the future.
The signs in our economy today are good that we are growing stronger and preparing well.
And can look forward to the future with confidence and enthusiasm.