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

7 March 2007 Speech Notes

Economic transformation 2007 and beyond

Speech notes for North Shore Business Excellence Network breakfast, North Harbour Stadium, Auckland

Thank you for the invitation to speak to you today.

Twenty-two thousand firms - or six percent of New Zealand's businesses - are based here on the shore, so this is a significant part of our national economy.

And of course the success of the wider Auckland economy, as our only international city, is crucial to our national economy. So I welcome this opportunity to talk about the economy and how some events ahead of us provide opportunities for you.

For example, the Business Tax Review is coming up, with announcements to be made in the budget. KiwiSaver will begin from 1 July this year. I'll have more to say about those today.

Initiatives like these fit into an overall context of the government's efforts to prepare New Zealand for the future.

The challenges are not just about the next two or three years, but for the vision we have for New Zealand over ten to twenty years.

It's a vision of a fair society and a strong economy.

I'm interested in your network's commitment to business excellence.

An idea behind business excellence is that organisations should have clearly articulated goals and measures of their progress towards achieving them.

Processes within the business should be aligned with those goals. And processes should be tested against 'best practice' standards externally.

The goals and processes of a government are not the same as those of a business.

But the idea of long-term goals and smart processes to achieve them are all at work in the government's approach to the economy.

And they start with an awareness of issues we need to confront as a nation.

* We need a consensus for the direction of economic growth because you cannot have a long-term economic strategy that is altered every time the wind changes. And if the benefits of growth are not shared equitably, we will undermine that consensus - so we all benefit from ensuring our economy brings along with it all New Zealanders.

* In coming years our businesses and farms will need to move into higher value goods and services, through greater innovation and exporting.

* We need to be saving more and investing more.

* We need to maximise the potential of our people as part of a globalised world.

* We need to foster participation and promote skills training at all levels and stages of life.

* And we need to take advantage of our role in the world, by seeing climate change as an opportunity rather than a risk, and by tapping into the rising Asian powerhouses in our neighbourhood.

To set the economy up for the future, we need to start making these changes now.

I want to outline our response to these issues individually, but in doing so we should recognise they are all interlinked.

And we start with an economy that has performed better since 2000 than at any time in the last three decades at least.

The New Zealand economy is a quarter larger today than it was in 1999.

Even taking into account the slower part of the economic cycle over the last year, our economy has been growing faster than the average of developed countries.

From the end of 1999, when the Labour-led government came to office, we have been growing at an average annual rate of three percent. Faster than Europe, Japan, the US and the UK and as fast as Australia.

While gains have been enjoyed across the economy, our business sector has particularly prospered.

According to company tax returns, profit growth averaged over twenty percent a year in 2003, 2004 and 2005.

By comparison the average for the previous eight years - which is about as long as we have comparable data for - was profit growth of five to seven percent a year.

GDP is continuing to grow at close to two percent.

If we think back to just a year ago, doomsayers were forecasting recession.

Indeed a slow down was inevitable after such a long period of strong growth. I have never pretended to have discovered how to abolish the economic cycle, something only ever achieved by parties in Opposition.

But the downturn seems to have bottomed out and we are emerging, with some encouraging signs.

Indeed, the Reserve Bank has expressed its concern the economy is bouncing back somewhat faster than it is comfortable with.

We'll see tomorrow when the bank issues its latest monetary policy statement whether it thinks there is so much pressure in the economy it has to act by increasing interest rates. I don’t know what will happen tomorrow, but I know that when pressure is on for interest rates to rise, it is because the economy is too bouyant, not because it is too dormant.

Our economy is not only larger, but stronger and better positioned for the long haul.

• More Kiwis than ever - 2.1 million of us - are in jobs and our unemployment rate is lower than at any time in the last twenty-five years.

• Our public finances are sound. Gross debt is approaching twenty per cent of GDP and we no longer carry any net debt at all. New Zealand has better public finances than nearly all other OECD countries.

• The infrastructure deficit that built up through the nineties in critical areas like electricity and telecommunications is being addressed. Your transport network here in Auckland - as with the rest of the country – is benefitting from the largest road building programme since the nineteenth century, and perhaps ever. In Auckland you are getting more than the rest.

All of this leaves us much better positioned for the challenges ahead.

But we are far from finished.

Economic transformation is not something that you do, then it's over: There is a never-ending need to adapt to challenges in the world.

And our current account deficit of nearly ten percent of GDP tells us starkly we are neither saving enough nor exporting enough.

The picture over the last generation on innovation and exporting is not that pretty.

We have one of the lowest rates of business research and development in the OECD.

Exports as a percent of GDP have barely moved in the last thirty years by OECD standards, despite all the economic reforms.

And although our exports are growing, world exports are moving so quickly as the world globalises that our share of global trade is falling.

We simply have to do better at producing and selling more of the high value products the rest of the world wants to buy.

The government is responding through agencies such as New Zealand Trade & Enterprise to integrate our economy better with opportunities available in the global economy.

We're also lifting the ability of our industry to innovate, for example through a substantial increase in our investment in science.

There is more funding for both through the public sector Crown Research Institutes and universities, and for the private sector in grants from FoRST and Tech NZ.

Here on the North Shore is a fine example of the innovative thinking we need. Massey University's Albany Campus hosts the CMC Technology Export Centre – a joint venture between the university's E-centre high tech business incubator and Indian technology company CMC.

This smart partnership will allow CMC access to New Zealand technology and New Zealand companies a gateway to an emerging Asian giant economy.

It is also another example of the knowledge economy this government is striving to create.

It is not entirely coincidental that I hold both the Finance and Tertiary Education portfolios.

The tertiary education sector is being revamped to put a sharper focus on quality, relevance and value for the $2.6 billion we invest in the tertiary sector every year.

From next year resources will be shifted to better match the areas where we need skills and learning. Industry and employers will have a greater role in defining the competencies that graduates need to have.

I know the importance of skills is respected in this region. In fact here one of the reasons the North Shore has a strongly performing economy by the standards of our urban centres is that it has a relatively low proportion of unkilled adults.

One of the Labour-led government's great achievements since coming into power in 1999 was to breathe life into skills training with the Modern Apprenticeship scheme and industry training. Immediately after I leave here this morning I'm going to an event where I'll congratulate our three thousandth Modern Apprentice.

Better skills are the key to higher productivity, and higher productivity is the only way to sustainably increase per capita incomes.

That is, unless you are in Opposition - then cash can apparently be conjured from thin air and spent over and over again while running both a tighter and looser fiscal policy simultaneously.

While the government is investing in skills, we are also working through the Business Tax Review on other measures that will improve New Zealand's productivity and competitiveness.

It will involve the headline corporate rate; a much more favourable and well understood international tax regime; and assistance, through the tax system, to the drivers of growth.

Proposed tax credits for R&D and export market development are cases where I think the government can make a difference.

Whenever I mention this topic, I am inevitably asked to comment on the personal tax rate and the potential for a cut to rates. I said in February there is no room for significant changes this year.

But I also point with some satisfaction to an OECD survey released last week. It measured the so-called 'tax wedge', or level of income tax on wages - once you take into account social security contributions and the like.

And it showed New Zealand has some of the lowest tax burdens in the developed world for someone on the average wage. Lower than Australia, lower than the US or UK and far lower than the OECD average. It's a timely reality check.

Take a couple of examples:

'Mary' is a single income earner with no children being paid the average wage. Mary pays 20.9 percent of her income in tax- a lower rate than in any country other than Korea and Mexico.

Now take her cousin, Patrick, who is married and has two children. They're on one income because Patrick's partner is home looking after the pre-schooler. The OECD survey shows Patrick is dramatically lower taxed than in other comparable countries. He pays an income tax rate of 2.6 percent.

The average income tax in OECD countries on someone like Patrick is 27.5 percent.

It's clear those calling for further personal income tax cuts do not have average income earners like Mary or Patrick in mind. There is not much left to cut.

But what tax cuts have not delivered over the years is a better savings rate.

And improving our savings is the best way to ensure Patrick and Mary and their families have something to call on in the future.

It's the best way to improve their position relative to others in their community. Inequalities in income translate into much greater inequalities in wealth over time, as we have seen in most developed countries over the last quarter of a century.

When savings levels are low, there is a shallower pool of capital for development, domestic demand pressures in the economy are excessive and there are inadequate savings in far too many of our households.

If we want to make sure we own more of our own businesses, we need to save more.

If we want to have deeper capital markets that provide the oil for a well-functioning business sector, we need to save more.

If we want to have a better standard of living in retirement than NZ Superannuation alone, we need to save more.

The government has been active across a broad range of policies to increase our savings.

The New Zealand Superannuation Fund is a very significant initiative set up to provide better long-term stability to superannuation by partially pre-funding it. By setting aside some of the future cost of superannuation, New Zealand will be better placed to meet the cost pressures that are ahead as more of us retire.

The Fund is performing well, and I am proud of that. But for all its success it will only help fund the cost of providing the basic pension.

Most New Zealanders will want their own retirement savings as well.

Workplace savings schemes are a key tool, and on 1 July KiwiSaver will come into effect.

It is an historic piece of economic and social legislation, admired around the world. Britain is proposing something very similar.

Everyone who signs up for KiwiSaver will get a kickstart of $1000 contribution from the government immediately. Its unique feature is automatic enrolment – new employees are automatically enrolled. With 700,000 people starting new jobs each year I hope this will be a real catalyst for many to embrace KiwiSaver.

The incentives are very strong for young people to join as they start out in the workforce. And, as we know, the younger a person starts saving the more benefits multiply later in life.

By making employer contributions tax exempt we are making it even more attractive for workers to save.

I hope as employers you will find the scheme gives you more choices for negotiating wage settlements with your staff and helping to attract and recruit the skilled and talented staff you need.

KiwiSaver is an easy-to-access vehicle for working New Zealanders to set aside some of their earnings for their long-term income security.

We should all be able to enjoy the benefits of a higher standard of living.

KiwiSaver will help position our economy for the future, so that the next generation will be able to enjoy that higher standard of living too.

It's vital to keep a focus on the future and on responding to opportunities coming towards us.

Climate change is another example.

We are the most agriculturally dependent developed nation in the world, by far. We are also the most remote developed country. We send our products furtherest to market, so we are more exposed than anyone to spurious arguments about 'food miles' and 'wood miles'.

But vexatious as those arguments are, they highlight that there will be opportunities and demand for sustainably produced goods and services.

New Zealand is well placed to grab these opportunities. But they can't all be resolved easily with slogans and easy options. Some way or other the cost of carbon will have to be reflected in the workings of the economy.

The government has a vision for becoming the world's first truly sustainable nation.

That will help businesses from here on the Shore and elsewhere go in to offshore markets and stake a claim for excellence not only in their processes, but in their environmental responsibility.

The common thread from increasing our savings, to improving our export performance, to investing in our people, is the need to prepare better for the future.

As I started out by arguing, this is a key component of excellence in governance. It means thinking about where we are going and utilising best-practice tools to get us there.

This government's active involvement in our economy, through initiatives such as KiwiSaver, is building an excellent platform for the future.

We are recognising the economic challenges we face and addressing them with smart, durable policies.

I'm very proud of the gains we have made already.

I'm proud of the preparations we are making to create a stronger economy and a fairer New Zealand.

Thank you.

ENDS

© Scoop Media