Cullen: Economic outlook 2007
Hon Dr Michael Cullen
Deputy Prime Minister, Attorney-General, Minister of Finance, Minister for Tertiary Education, Leader of the House
12 December 2006 Speech Notes
Embargoed until: 5.45pm
Economic outlook 2007
Speech notes for address to The Property Group Christmas drinks, Copthorne Hotel, Wellington
Thank you for inviting me to talk to you today.
There's an old saying that ,“No man's life, liberty or property are safe while the legislature is in session.” No one would be more enthusiastic, therefore, than the property group that Parliament's work for this year is just about done.
If we look at the year from the perspective of different people in property then we can get one perspective on where we have been and where we are going.
* A property investor, for example, wants to see a vigorous commercial sector so that demand for property is strong and low interest rates to keep yields up.
In a week, Treasury will release the Half Year Economic and Fiscal Update. I'm confident it will show our economy is set to grow faster this year than we believed when I read the Budget. We have weathered the slower part of the economic cycle and we're looking ahead to stronger growth.
Business confidence has improved this year. For example, the National Bank's latest Business Outlook has overall confidence at a two year high. Firm's expectations about their own activity are back to early 2005 levels.
Interest rates, on the other hand, have been stubborn. The Reserve Bank has had to keep a firm rein on factors beyond our control, like imported inflation from higher petrol prices.
* The robust housing sector has been another contributor, so it's important to look also at the economy from the perspective of a home-buyer. Home-buyers have taken into account not just interest rates, for example, but their overall financial security. Home owners paying off mortgages have welcomed 330,000 new jobs in the last seven years and an unemployment rate of 3.8 per cent - one of the lowest in the developed world. It's made them more confident investors in their own property.
* Lenders in the property sector have plainly benefited from higher interest rates. Many of those lenders, of course, are not New Zealanders but overseas mutual funds. If we want to keep using their savings to fund our lifestyle we need to offer them a competitive rate of return, and a secure and reputable investment environment. And if we don't offer those then we will have to pay more to borrow and our growth will stumble.
This government has tackled the challenges both with careful management in the short term, and by creating the conditions that will set us up for the next twenty years or more of growth.
Take interest rates, for example.
The government has played its part in keeping pressure off interest rates. We have run sound fiscal surpluses; the government hasn't contributed to inflationary pressure with large cash deficits, in net terms we don't have a mortgage any longer.
The importance of this has recently been emphasised by commentators such as the international ratings agency Standard & Poors, when it affirmed our high credit rating.
Then we heard the Reserve Bank Governor repeat the message in his monetary policy statement last week. He cautioned against further fiscal loosening either through more spending or through tax cuts. It would simply result in more inflationary pressure and the Bank would respond with higher interest rates. So home-owners, for example, would lose with one hand anything they gained in cash.
No government could ignore the warnings of the Reserve Bank. But nor would I read the Bank's messages as an excuse to sit still. The Bank is not saying 'never' to tax cuts, for example; it is saying 'not now'.
So my colleague Revenue Minister Peter Dunne and I are working on a business tax package to further strengthen our competitiveness. It will place the priority on investment in areas to help New Zealand compete in the globalised world: research and development, skills training, exporting and innovation. 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.
Tomorrow Peter and I release a discussion document on possible changes to international tax rules which will also benefit companies keen to expand offshore.
We are already very competitive in tax. For example, a World Bank/PricewaterhouseCoopers study published last month assessed the ease of paying taxes for business in 175 economies.
New Zealand ranks tenth out of 175. 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. )
Of course, we need to be prudent in the way we phase any new tax measures; we need to phase initiatives carefully. No business is going to thank us for lower taxes on profits, if higher interest rates harm its ability to make a profit in the first place.
This government has focused beyond the 'here and now' and a path for the next two to three years. 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 only long-term way to raise our living standards in future is to raise our productivity.
The building blocks of productivity
* 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.
We have made real progress over the last seven years in these areas and we have a clear agenda to build on it.
In the skills area, for example, we are building on improved industry training with a revamp of the tertiary sector. Graduates’ skills need to be better aligned with the needs of employers.
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. The 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.
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 comes into effect from next July. It's a voluntary scheme, 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 contribution to encourage savers to open an account. Contributions by employers will also be tax exempt and as I announced yesterday, the exemption will be extended to other workplace superannuation schemes that are KiwiSaver compliant.
I am confident these moves will help create a savings culture among New Zealanders to boost our savings rate. Savings become investment and investment raises our productivity.
The investment industry - whether in the property sector, equities, bonds or elsewhere - should welcome a stronger savings culture in New Zealand.
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.
Economies with flexible labour, product and capital markets will be best placed to adapt. Integration with the global community is a key opportunity for New Zealand and vital for our futures.
The government has a role in helping business seize those opportunities.
It's engaged through trade
talks, and New Zealand Trade and Enterprise's work
developing capability and opportunities. And we're engaged
through our investment in priorities industry needs. For
* A massive increase in infrastructure investment, especially in transport;
* A looming revolution in telecommunications; and
* A revamp of skills training with over 2300 completed modern apprenticeships.
The government has a strategy to build on our achievements and to prepare New Zealand for the challenges that lie ahead.
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 with no end point.
We must always strive to improve our productivity, increase our quality, adapt to changing markets, and take up new opportunities.
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.
We started the year with doomsayers forecasting recession and the prospect of a lean Christmas. We end the year with signs we are growing again and preparing well for the future, a future that will allow us to have full and valuable stockings for the Christmases to come.
Thank you and have a happy festive season.