Cullen: Speech to AUT Business Faculty, Auckland
Hon Dr Michael Cullen
Deputy Prime Minister, Attorney-General, Minister of Finance, Minister in Charge of Treaty of Waitangi Negotiations, Leader of the House
March 2008 Speech Notes
Embargoed until 3pm, 26 March
Investing in services, investing in success
Good afternoon and thank you for the invitation to speak today and for making this event happen.
As academics studying the business environment, I am sure 2008 has been an interesting year for you so far.
I am also sure you would agree this is a year where the New Zealand economy faces a number of serious challenges and a great deal of uncertainty arising from the global economic situation.
We stand here today, in the first quarter of 2008, with New Zealand having enjoyed the longest period of economic growth since World War II, the lowest unemployment on record, more people in work than ever before, and with household incomes, wages, and profits all having increased strongly since 1999.
But we also stand here with plenty to remind us that New Zealand cannot expect to be immune from a global economic downturn.
The global commodity boom has led to substantially higher food and energy prices, and thus put further pressure on already stretched family budgets.
To complicate matters, many of our farmers are battling drought, just at a time when dairy farmers would had hoped to have a moment to celebrate record prices for their products.
As the Minister of Finance, I am faced with a number of choices about how to respond to this situation. My day-to-day work, and the day-to-day work of the Prime Minister and my Cabinet colleagues, requires us to make decisions about how to respond to events as they happen.
The responsibility of office requires us to choose a course of action, to design responses with the best evidence that we have, and to exercise our judgment in the interest of all New Zealanders.
In my comments today, I want to explain the factors behind the Labour-led government’s judgment in the current environment. I want to outline the factors that are in play as I put together my ninth Budget. And I want to elaborate further on the thinking behind my four tests for the design of personal tax cuts – in particular, that they be delivered without cutting public services.
I also want to take the opportunity provided by speaking with a group of business scholars, to reflect on some of the questionable practices that have led the global economy to its current troubles. It is my belief that many of those at the top of the international financial community have a great deal to answer for.
An economy rebuilt
This is not the first time in recent decades that New Zealand has coped with a global economic downturn. But there is a unique character to our position this time in at least one respect – our economy is fundamentally stronger than it has been in at least several generations.
Eight years ago, Labour was elected to government at a time when our economy was struggling to emerge from a period of recession and stagnation.
Unemployment remained stubbornly high, regional economies were in serious decline, backward labour laws led to a caustic industrial relations environment. Those are evidence of an economy in failure.
But it was not just the economy that was struggling – middle and low income families were increasingly being left behind.
Child poverty rates peaked at 1 in 3.
Disease and overcrowding became a reality in our community as 13,000 state houses were sold off and market rents were introduced, public services crumbled, and superannuation rates were cut.
Our job as the newly elected government was to install confidence that we could work with business, with workers, with community leaders, and with families to turn this around.
The task was not easy, there was scepticism from some, and we did not always get it right.
But there can be no question that by working intelligently together, we have rebuilt this economy.
As I said previously, New Zealand enters this period of global weakness still enjoying its longest period of economic expansion since World War II.
Our unemployment rate stands at a record-low of 3.4 per cent compared with 4.1 per cent in Australia.
Over 370,000 new jobs have been created since 1999 and workforce participation is at an all time high at 68.8 per cent compared with Australia’s 65.2 per cent.
Profits for firms are up 13 per cent in real terms, while real, inflation-adjusted wages are up 15 per cent. Work stoppages have fallen year after year.
Household incomes are up 25 per cent in real terms and our regional economies are thriving.
The growth in the wage gap between Australia and New Zealand has fallen from over 50 per cent during the 1990s, to 0.4 per cent since 1999 – yes we still need to catch up, but we have stopped the rot.
Child poverty rates are down, the cost of seeing the doctor has been halved, superannuation rates have risen, and public services are thriving.
Together we have made this economy stronger and we have made this economy fairer.
And in 2008 we will continue our work.
Next week, we will implement major policies for business, workers, and families.
On 1 April, we will cut the company tax rate.
We will introduce research and development tax credits for business.
We will increase the minimum wage to $12 an hour.
We will increase superannuation and benefit payments.
We will facilitate employer contributions for KiwiSaver with the tax credits to support them – I announced yesterday that there are now 500,000 New Zealanders in KiwiSaver.
Our 1 April initiatives are a reminder that this is a government that has a plan for the future of our economy, that we are delivering real solutions for the economy today, and that we are serious about the challenges we face.
These points will again be demonstrated in the Budget I will deliver in less than two months time.
As I have been working on the Budget over the past few months my focus has been on how to build on the success of recent years, how to support the economy through a difficult patch, and how to deliver a dividend of eight years of economic success to tax payers. I want to briefly discuss each of these points, and explain why I think they are central to the debate New Zealand should have this election year.
A test for personal tax cuts: no cuts to services
Starting with tax cuts, it is important to remember that Labour has in fact delivered $4.5 billion in tax relief already – to business from 1 April, to savers, and to families.
In the Budget, I will announce a programme of personal tax cuts. I do realise that the package I announce is likely to be smaller than my political opponents will propose going into this year’s General Election. But what I also realise that my opponents will not be able to outspend the government on tax cuts without eroding New Zealand’s economic platform in the process.
The Labour-led government’s personal tax cut programme will pass four tests and each test is fundamental to the economic platform that we have created; the platform that has delivered the strongest growth we have seen in generations.
Our tax cut programme will not require borrowing to fund it.
It will not exacerbate inflationary pressures in our economy.
It will not lead to greater inequality in our society.
And it will not require cuts to public services.
This final point is the argument that most New Zealanders would have heard from the government for quite some time. In 2005, when it was clear that National’s tax cut policy would require over $2 billion in cuts to services, it was the argument I used repeatedly when urging New Zealanders to consider what they stood to lose in exchange for National’s personal tax cut.
Three years on, it is not an argument that has changed.
Our investment in services has been fundamental to Labour’s mission in government. We have doubled health spending in nominal terms, school funding has increased by nearly 50 per cent, and we have invested heavily in Child, Youth, and Family and the work of the non-government and community sectors.
My opponents like to tell you that this investment was squandered and that it delivered no improvements. But I am confident that New Zealanders know the real story.
New Zealanders know that Labour’s investment has cut the price of seeing the doctor in half and cut the price of standard prescriptions from $15 to $3.
New Zealanders know that they have seen new and modern schools built right across the country, especially in our growing communities.
New Zealanders know that they have seen new, world-class hospitals built in their communities as part of the largest hospital building programme in our country’s history.
New Zealanders know that the community organisations they rely on are in better heart than they were eight years ago – and will be in better heart still following the government’s announcement that we will fund 100 per cent of the work we contract these groups for.
New Zealanders know that there are far fewer cases of the deadly meningococcal B epidemic killing and maiming our children following the government’s investment in the largest mass immunisation programme ever undertaken in New Zealand.
They know we have provided 20 hours free pre-school to three and four year olds and they know that last year we made a record investment in improving the health of older New Zealanders.
New Zealanders know we have thousands more teachers in our schools, thousands more nurses and doctors in our hospitals, and are soon to have over a thousand more police in our communities.
Yes we are a government that has spent more on services. That is because we are a government that has delivered a great deal more to the public that we serve.
Rebuilding public services has been a costly process and it is true that we prioritised health, education and infrastructure investment in our first few years in government ahead of cutting personal tax rates – that is because when we came into government in 1999 we were a society that had significantly under-invested in its social and economic infrastructure under nine years of National Party administration.
The 1990s was a period when the National government in New Zealand failed to raise the minimum wage the way that Australia's government did – that helps explain why Australian firms allocated greater investment into new plant and technology than New Zealand firms in the 1990s.
In the 1990s, National failed to address the needs of working parents. For example, it left New Zealand as a society in an uncompetitive position relative to Australia, for example, regarding working people’s annual paid leave and paid parental leave entitlements.
In the 1990s, National failed to improve our competitiveness versus Australia on the corporate business tax rate front, the depreciation front and on the personal savings front.
In an age where there is increasing international competition for labour, due in part to population ageing, the measures adopted over the past eight years not only significantly improve families’ well-being and living standards, they also strengthen our competitiveness as a place to work, live, raise a family and to do business.
And this year, when we announce personal tax cuts, we will not sacrifice the progress we have made.
Indeed, we will do the opposite as we continue to build and improve the way services are delivered and continue to invest strongly in our communities.
Economic leadership in challenging times
I have noted in recent weeks that some have called on me to cut spending on services and benefits in response to the global economic situation. The logic behind these calls is unclear, especially when the evidence is that the bulk of our inflationary pressures are coming from global commodity prices and not government spending.
Regardless, I believe the Labour-led government’s commitment to investing in families, seniors, and services during this challenging economic moment will emerge as one of the key dividing lines in the debate over the next few months. Our investment in services has reinforced growth over the last eight years that has out-paced the OECD average and the growth rate of Australia.
We have shown that the economy can be strong and fair at the same time. And we did so by rejecting the approach shown by our predecessors who did not deliver strong growth, and did not deliver fairness for New Zealanders.
The clearest evidence of that failure to deliver fairness and failure to responsibly manage the economy came during the economic troubles of the 1990s. Following a decade of benefit cuts, the mass sell-off of state houses, and a failure to invest in services, New Zealand struggled to weather the economic storm set off by the Asian Economic Crisis.
Thus we saw a package of cuts that included reducing the floor or New Zealand Superannuation down to 60 per cent of the average wage, compared with 65 per cent where it had previously been set.
Now that was a choice reflecting a certain judgement.
It was a judgement that did nothing to help the economy, but it is a judgement that the previous government was entitled to make.
And today, I am entitled to my judgement that we should celebrate the increase in superannuation payments we will implement on 1 April rather than cut back in response to the downturn.
I am entitled to my judgement that we should celebrate the fact that we strengthened our fiscal position ahead of a downturn, especially when we see other countries rushing to do so now once the downturn has well and truly begun.
And I am entitled to my judgement that if I listened to the calls of my opponents to cut services, I would actually contribute to the contraction of our economy and could actually make this downturn far worse.
The Labour-led government will be talking a lot about judgement on the economy in the months ahead. We will be talking about those moments when we are required to make decisions as events unfold, and the values and judgements we employ when doing so.
And while we are on the subject of judgement, I want to take an opportunity in addressing a group of business scholars to comment on the judgement – or lack thereof – that has led to the global economic downturn we are facing.
Throughout the summer, it became clear that the subprime mortgage crisis in the United States would have repercussions for the global economy. And it became clear that it was a crisis caused by what should be considered scandalous and immoral business practices.
Huge numbers of Americans were lured into mortgages by predatory lenders. These lenders told ordinary Americans, some with extremely negligible incomes, no real assets, and often high levels of existing debt that they could afford to take out a mortgage and achieve home ownership.
In doing so, these lenders were backed up by an embarrassing number of major financial institutions.
When foreclosures unsurprisingly began to rise, a web of ‘innovative’ financial instruments began to unravel and the credit crunch was born.
Some banks realised that some of their financial officers had lost their way in their relentless pursuit for big deals, had lost sight of the big picture, and had lost touch with reasonable risk assessments.
As the embarrassment has travelled around the global financial community, conduct has hardly improved. The pronouncement from Bear Sterns that rumours of their demise were totally unfounded just days before they were rescued by the U.S. Federal Reserve is at least one example of less than honourable behaviour from a Wall Street heavyweight.
I raise this issue for two reasons.
One is to make sure we take an opportunity to acknowledge that in New Zealand, we have not witnessed the behaviour that has caused problems overseas. It is true that we have some instances of 100 per cent mortgages being issued, but we do not have our own subprime market. Our banks deserve credit for being much more conservative and thus decent in their lending practices.
But I also raise it to reinforce the vulnerabilities we face going forward.
Our economy today, even with vastly reduced government debt and vastly improved economic fundamentals, will slow as a result of the unethical practices of the global financial community.
We are a much stronger economy than we were eight years ago.
But we are not strong enough to be entirely immune from a relatively small group of merchant bankers, traders, and predatory lenders who were willing to play fast and loose with global credit markets.
People throughout the world should use this moment to ask serious questions about the culture inside the international elite financial institutions. And certainly every political and business leader in New Zealand should speak out strongly about what we have seen.
But we must also take this moment to reflect on our vulnerability as a further reminder that we must plan for the long-term. Yes, we should invest in our current success and we should celebrate the sunny days in our economic journey.
But we should never take our sunny days for granted. We should never stop putting aside money when we know there are challenges ahead.
We should never take our eye off the potential challenges on the horizon.
It is that seriousness and that genuine dedication to continued success that is guiding the Labour-led government’s work on Budget 2008.
And it is that seriousness that we will employ as we judge how to lead New Zealand through the economic challenges we face in the months ahead.