Cullen: Upper Hutt Chamber of Commerce Speech
6 October, 2008
Address to the Upper Hutt Chamber of Commerce
Address to the Upper Hutt Chamber of Commerce, Ascot Cinema, 68 Queen Street, Upper Hutt
Thank you for the invitation to speak to you today.
I am very pleased to have an opportunity to address you on an important day, the day that the Treasury publishes its latest set of economic forecasts for our economy together with its assessment of what that means for the Crown's accounts in the years ahead.
Recent times have been a period of real stress for the global credit markets.
By late last year it was becoming clear that the fallout from the subprime mortgage crisis was going to be felt here in New Zealand.
When I spoke at the release of the Treasury's Half Year Economic and Fiscal Update report last December, I cautioned that the economic debates of the last few years were going to be inadequate in the year ahead.
I repeated that message at the time of the May Budget.
We knew late last year that New Zealanders were entering a period of economic uncertainty and we have watched even more intently, as this year has progressed, the developments in America and elsewhere.
The news from Washington on Saturday that the Bush Administration and Congressional negotiators had sealed a framework bailout agreement aimed at restoring some confidence into credit markets and the financial system was most welcome indeed.
The consensus expectation among economists here at home is for growth in the New Zealand economy to pick up from this current December quarter and for modest growth next year, but it should be noted that these forecasts are based on the premise that confidence is restored in America's financial markets.
While it is true that our connections with the emerging markets of Asia will lend support to our economy next year and the years thereafter, the United States is the largest and wealthiest economy in the world and the maintenance of solid global growth requires an America on the mend.
The truth is that since 2000, the expectations of what the New Zealand economy can deliver have changed fundamentally.
We no longer believe that unemployment has to remain stubbornly stuck between 6 and 10 per cent - we know we can sustain strong workforce participation and near full employment over the long-term.
We do not accept that aiming to keep unemployment around 3-4 per cent is a "cruel hoax" as some claimed.
We now know that governments can be both prudent managers of the Crown accounts and strong investors in public services, infrastructure, and family support.
We can have confidence that we can grow faster than our major trading partners while still adopting policies to reduce poverty and inequality in our society.
We no longer accept that policies to protect our environment will harm our economy.
We now reject the idea that New Zealanders cannot be trusted to set our own economic direction and own our own assets - we have put the Kiwi back into the Kiwi Economy.
And overall, New Zealanders know now more than they have for many, many years that regardless of their background, they can and should expect their families to have every chance to enjoy a prosperous, healthy future.
This dramatic shift in expectations has occurred in just nine years and it is certainly something to be celebrated.
But it is equally true that when the expectations of what our economy can achieve shift so fundamentally we always run the risk of complacency.
The truth is that nothing about our position can ever be taken for granted.
We are a small, isolated, trading nation and we will never be immune from periodic, externally-generated economic shocks.
The Treasury's report really highlighted how the dramatic events in global markets these past 18 months or so have flowed through into our economy.
The deepening stress in international financial markets, and its impact on mortgage repayment costs and the housing market at home, and the effect on household and business budgets, arising from skyrocketing global petrol and food prices, have all taken their toll.
They have taken their toll on the performance of the economy and on the state of the Crown's accounts.
- Economic slowdowns translate into less-than-anticipated income revenue for the Crown.
- Economic slowdowns translate into a relative increase in some government expenses, such as on welfare.
- Economic slowdowns have a cumulative effect on the Crown's balance sheet as debt-servicing costs rise as debt rises.
The Treasury update reports a significantly weaker position for the Crown than was anticipated by the Treasury at the time of Budget 2008.
But because we have worked hard over many years to so significantly strengthen the Crown's balance sheet, there is no need for any knee-jerk cut-back in social services as we witnessed during the Asian financial market crisis of the late 1990s or during the recession of the early 1990s.
But equally as important as not making any hasty wrong move in the direction of knee-jerk cutbacks to social services,
The Treasury release also contains a very important message to our country and that is that any government moving forward must be careful - careful to protect the nation's interest now but also into the future.
The external shocks to our economy these past 18 months are a timely reminder not only that New Zealand is a small, trading nation but also that our society does have a very high dependence on foreign capital.
Because of that vulnerability, governments have, I believe, a strong ethical responsibility to maintain prudent financial management policies for the Crown's accounts and governments also have a responsibility to promote a real strengthening in our personal savings culture in the years ahead.
The commitment to maintaining prudent fiscal management for the Crown is an expression of the government's commitment to the security and well-being of this and future generations of New Zealanders.
Today's forecasts underline the need for a coherent and multifaceted plan to continue our economic development and ensure stronger sustainable growth into the future.
Since 1999 we have:
1. Skills (including Schools Plus)
- Revitalised skills and industry training through modern apprenticeships, school-based training, and greater support for training organisations and institutions;
- Reformed the tertiary education sector first to expand access and then to improve quality, promoting greater synergy between our economic and educational priorities;
- Embedded the NCEA, allowing employers to have greater confidence in the skills of new school leavers and boosting those skills in the process;
- Reformed immigration policy to attract more skilled workers, leading to year after year of net positive skilled migration, something other nations look at with envy;
- Promoted active labour market policies that have joined up industries with acute shortages with unemployed workers seeking jobs and training.
It is the Labour-led government's belief that further fundamental reforms of our education system, from Schools Plus through to the New Zealand Skills Strategy and the embedding of the tertiary reforms, are among the most pressing economic undertakings of our day.
Over the Labour-led government's nine Budgets, annual funding for roading has more than doubled from $850 million in 1999/2000 to over $1.9 billion this year.
This has seen new highways and motorway extensions built throughout New Zealand, including for example the Wellington Inner City Bypass.
Our annual investment in public transport this year is over fifteen times greater than that of 1999/2000.
Our buyback of the rail track five years ago has already been followed by over half a billion dollars in investments.
The purchase of a majority shareholding in Air New Zealand in the government's first term not only rescued the airline, but allowed it to flourish, bringing significant benefits for the economy.
In the energy sector, the government acted quickly to improve the regulatory environment and to bring greater coordination through the Electricity Commission. This is being followed by a major investment in generating capacity and transmission that is unmatched by anything seen in the last 30 years.
Over 1600 megawatts have been added to our electricity generating capacity since 2000. Already there are over 1,400 megawatts on the drawing board for the next three to four years equating to around $3.5-4 billion in investments, more than needed to deal with increasing demand.
Labour's programme to encourage the economic transformation has been expressed through many policies, from the international tax reforms designed to strengthen the international competitiveness of New Zealand-based firms through through to the reduction in the company tax rate by ten per cent from 33 to 30 per cent, and the Research and Development tax credit.
Encouraging innovation also motivates our work in the ICT sector. Our regulatory reform agenda - including the operational separation of Telecom - along with significant public and private sector investments have seen broadband coverage and take-up expand significantly.
Broadband coverage is now essentially universal and fixed line DSL-based broadband is available to 93 per cent of all lines. The government's Project Probe played a significant role in achieving this universality by extending coverage to rural areas.
In this year's Budget, the government announced a $500 million broadband investment package - a five year down payment on our ten year plan for a fast broadband future.
The new Broadband Investment Fund will be used to accelerate broadband investment in three critical areas:
- facilitating high speed broadband to businesses and entities such as municipalities, universities, schools and hospitals in urban centres;
- extending the reach of broadband into underserved regions; and
- improving the resilience of New Zealand's international connections.
4. Savings & investment
The government has reduced the tax rate on savings and devoted a considerable level of resource into encouraging a transformation of New Zealanders' personal savings culture through the establishment of the KiwiSaver scheme.
The reality is that New Zealand as a nation has a very high level of exposure to foreign debt. Our private sector and household sector external levels are captured in Statistics New Zealand balance of payments data, and what they show is that we need to significantly improve our savings culture over time in order to lower our vulnerability on that front.
5. Sustainability ETSs
Although the government's strong measures to meet the country's international obligations to combat global warming have been criticised by some business lobbies and their allies, the reality is that New Zealand is an export-dependent nation that needs in fact needs to grow the size of its exports as a ratio to its overall economy in the years ahead.
We simply cannot afford to take the risk of not taking action.
The expectation of consumers in the rich markets of Europe, Asia and North America are rising and showing growing intolerance of goods and services produced in nations that are not perceived to be doing their fair share in joining efforts to combat climate change.
The Labour-led government's savings and investment programmes are designed to lift New Zealand's potential rate of growth over time and to raise New Zealanders' living standards over time.
The government's achievement has been to conduct the largest investment programme in the nation's history even as we progressively reduced gross crown debt from over 35 per cent of GDP when we came into office, to under 20 per cent of GDP today - 20 per cent of GDP is the government's medium- and long-term target level for gross debt.
For the first time in our history, the Crown moved into a net postivie financial asset position in 2006 and in its PREFU report today the Crown's net financial asset position is forecast to weaken over the next few years.
In spite of all of the negative fallout from international financial and economic market developments, however, the Treasury forecasts the Crown's net financial asset position to remain in positive territory through until the end of its formal forecast period ending 30 June, 2013, although by 2013 it is only marginally positive.
Although that is an extraordinatily dramatic turn-around from the situation we inherited in 1999, when the Crown's net debt position was equal to 21.3 per cent of GDP, the Treasury report does send a clear message to all New Zealanders and political parties.
The report indicates that, once we get through this troubled period for the international economy, the prudent and wise approach will be to utilise a strengthening economy to once again build-up the Crown balance sheet into a stronger position through fiscal restraint.
Thank you for having me here today