Speech: English - Economy
Hon Bill English
MP for Clutha-Southland
Speech to Chen & Palmer Seminar, NGC House, Wellington, 6pm 28 June 1999
Embargoed until delivery
Thank you for inviting me to speak to you this evening.
The new Zealand economy is recovering and I want to run through an overview of the current economic picture.
Then I want to take the opportunity as a new Treasurer to stand back from the day to day perceptions of the economy and government policy to take a look at the wider world and the features of it which I believe are going to be important for New Zealand. I then want to consider how New Zealand might adapt to the way the world is changing.
Moving from health to finance has been quite a change. Not least of the reasons being that dealing rooms look a lot different from the insides of hospitals. I've spent much of my time in the last few months getting around the country, meeting business people from all sectors.
I would have to say many are ambivalent about where the New Zealand economy is going. New Zealanders have had an expectation that for all the restructuring we would end up better off than we now feel. That attitude is summed up by a recent Evening Post headline: "Why Aren't Kiwis Better Off?"
I think it's a good question. But it rests to some extent on what I believe is a misguided presumption that we are going nowhere. I think we can test that presumption by looking at some facts.
Last Friday's GDP figure of 0.7 percent growth for the March '99 quarter is the third successive quarter of positive growth and confirms the economy is steadily recovering from last year's recession.
We are looking at three percent growth a year over the next three years.
On the jobs front that translates to about 100,000 new jobs over the next three years - around 700 every week. That's good. Every week for the last nine years, right through the boom and the recession, we have created about 600 jobs a week on average.
Low inflation and low interest rates are also important features of the current economic picture. That three percent growth looks sustainable because accompanying it you've got inflation at its lowest level in 30 years and interest rates at similar 30-year lows.
The Reserve Bank believes inflation pressures are low and it is projecting interest rates to stay at around current levels for some time. Low interest rates, and a more competitive dollar, will continue to underpin our economic recovery.
For its part, the Government remains committed to achieving Budget surpluses and reducing net Crown debt. We will continue to be careful and prudent with taxpayers' money. The importance of these measures to the long term strength and stability of our economy should not be underestimated.
The Government has also continued with its work on reducing business costs. It's hard work and it can generate controversy, but it's business as usual for any government that wants to keep New Zealand moving ahead. We may have been doing more than others 10 years ago - now other governments are doing at least as much as us.
The next one off the rank is ACC. While there are the short term transition issues to work through, the long term benefits of the ACC changes will be a safer work place and less lives changed for the worse by work place injuries.
Early estimates show ACC costs in the economy will drop from something like $1 billion down to $600 - 700 million as at 1 July. Even at the most conservative end, that saving is equivalent to a 2c reduction in the corporate tax rate.
Of course some businesses will pay more for ACC, because they are perceived to have less safe workplaces - and that's the right result.
The Government is also engaged in an intensive process with the leaders of our agricultural industries to look at long-term plans for turning around the declining performance in our agricultural sector. This work is crucial. The dairy industry in particular consitutes 20% of all our exports, but our meat, wool and forestry industries can do better too. These industries must be able to grow just as fast as they can.
There are some weaknesses in the economy and in particular there is a lot of comment about the lack of export growth.
The export sector is struggling to get back on its feet after two years of drought, and with low prices and problems in Asian markets. Exporters' confidence was knocked when they saw their commodity prices drop as fast as the exchange rate.
But the outlook is sound . The exchange rate looks reasonable compared to its high levels 18 months ago, and interest rates are helping every single exporter through low finance costs. We expect to see solid export growth in the next three years.
These problems remind us of some basic facts about New Zealand. We are still an agricultural economy and we still sell too many commodities. The growth in volume of our exports in recent years has barely kept pace with the decline in their price. We have tried hard to change these facts with mixed success..
We know that in the future we're going to need a much stronger export economy. We can't get rich borrowing money overseas to buy houses from ourselves in New Zealand.
For a small open economy we have a low export ratio. The ones we compare ourselves with have much higher ratios - Finland and Ireland seem to be the economic flavours of the month and in Finland's case the ratio is over 40% and in Ireland's case over 70%. Ours is around 22% on traded goods.
But we should not forget just how far we have come.
Forestry and fishing are leading the export recovery, yet it is less than a decade since they were properly commercialised. When I was first an MP in 1991 I remember being hauled into the office at a local sawmill and given a good towelling because the Forestry Corporation wasn't coming through with heavily subsidised long term log supply contracts..
The Government used to give away its forests. There weren't the commercial pressures to develop an efficient saw-milling industry let alone a proper processing industry.
In the case of fishing it is less than a decade since we created tradeable property rights
Commercialising those two industries has been successful, but it hasn't yet been running 10 years.
Economic changes can take a long time to have an impact. I represent a large rural electorate with more sheep in it than anywhere else in the world. The people there who have massive capital tied up in land are only just beginning to understand the effects of long term low inflation. For years we farmed inflation - we farmed for capital gain and inflation looked after the mortgage, ably assisted by price support schemes. Now it just doesn't work - performance matters.
I am optimistic that the changes New Zealand has made are leading to better investment decisions in the export sector and so will lead to better performance..
I now want to stand back a little to look at what the features of the wider world are that are going to matter to us in New Zealand.
The first is simply that it's global. Global economics, global business - it's a cliché but I don't think in New Zealand we understand it yet.
When we say global in New Zealand we still think it's all out there. But it's not. It's sitting in the personal computer on the desk at home. That is where the world economy is right now and that means changing our understanding of what amounts to a market.
I met a taxi driver recently who told me he collects a certain type of antique American clock. He'd discovered e-buy, an internet auction site and he's found the market in his clocks. He's been buying them for $300 or $400 and he can sell them now for several thousand. So he's in the global market from his PC at home. We tend to think global means big, but it might just mean a few people, and a few clocks located world-wide.
The second important feature is that value increasingly lies in intangible assets. This is a real challenge for New Zealand.
One suggested way to measure this would be to measure what proportion of stock market capitalisation is backed by physical assets. I have seen analysis which suggests that in New Zealand most of the market value is backed by physical assets. In the US stock market a much smaller proportion would be backed by physical assets and Australia probably somewhere in between..
New Zealanders are struggling with the idea that there is value in things other than a paddock or a quarter acre. Our investment habits are all real estate oriented, and our sense of risk is real estate oriented, whether we are investors or lenders. In the next 10 years this will change a lot because it has to. What we know about our sheep and our trees and our cows will be worth a lot more than the wool, logs and milk produced.
The third feature is that talent is the multiplier. Smart people can create an awful lot of wealth because there are now the tools to deliver a concept or lever off a piece of knowledge instantaneously around the globe. The Titanic movie wasn't exactly an original idea but the people who made it generated enormous wealth out of one simple idea. And they didn't spend 150 years building an economy in order to deliver that wealth last year. They spent a few years building a few models, getting the marketing channels and cashing up right around the world.
So people matter, and getting the best of their talents will be a wealth-creating activity that countries and organisations need to understand much better. In New Zealand we all need to work together to train, keep and attract smart people.
The fourth feature of a changing world is changing relationships. These features I have talked about, and many others are changing who we do business with and how. We will have to work with other people more to create value, whether it's capturing the hearts and minds within an organisation around a vision, or going into business with people who have the capital or the skill or the market knowledge we don't have.
I recently spoke with a person I knew who sold his business to an Australian firm. He had been working at it for 10 years - getting it up and running, dominating the local market, getting into exporting. It needed capital to grow more and get a better grip in the export market. But he wasn't interested in dealing with other partners. As he put it, "if I can't run it I don't want to be in it'.
That's not an uncommon attitude in New Zealand and it needs to change.
So how can New Zealand adapt to these changes?
That's the next chapter of the New Zealand story - the chapter about knowledge building and people building.
Our expectations have risen. One of the important part's of the story about this economic recovery is that it has got to be a better-than-average recovery. Kiwis want to feel that incomes are rising across the board, that no-one is left too far behind, and that takes growth of the style seen recently in the US of 4% year on year.
I believe we have earned the right to grow. We have done the restructuring, we have got our labour market in shape, the financial markets are working well, and we've got a good uptake in technology. But over the next five years there are some particular issues I think we need to deal with and they're related to some of those larger forces I've talked about.
Can I put these issues in the context of demographics. New Zealand will get older and the proportion of the population that is Maori or Polynesian will increase.
Both these groups now show high levels of dependency, because they rely disproportionately on the wider population for income and services. If you can see the common image of the young Maori or Polynesian male, and then the changing world I've talked about, anyone can see there is a gap. Our next chapter is about how to fill that gap.
The first issue is around education and ideas.
If we're moving to intangible assets, and value and wealth generated out of the intangibles, then what is the Government's contribution going to be?
We run, own, and fund the whole education system and if you want my frank opinion we're falling behind. Our top university is ranked 33rd in the Asia Pacific region. I hate to think where our bottom one is ranked. Our compulsory education system still systematically fails to help too many of our young people. Teachers can tell you after about a week of children being at school which ones are going to fail. How do they know that? Because they know there's a system and some children are not going to fit.
With our schools we need to move to diversity in education, a bigger bolder version of some small successful efforts in place now.
At the other end we've got universities and Crown research institutes. Over the next five years the Government will spend about $3 billion on research and development. The private sector doesn't contribute much to our R&D in this country because Government has always done it. We own, run, and fund the ideas machine and we need to make it a lot more dynamic than it is.
Think of it this way - when we were building damns the Government owned the Ministry of Works. Now that it's time to build ideas the Government owns all the machinery for that job. There are some searching questions to be asked about how we improve the incentives, performance and focus of our ideas machinery.
The second force at work is about our global outlook.
I've already talked a bit about whether New Zealanders really understand what global economics is all about. For all we talk about going global, I wonder if that really is our outlook. The APEC example shows me we aren't sure.
For the worlds greatest travellers we can be quite ambivalent about how much of the world we want to see here.
I've met a number of otherwise thoughtful people around New Zealand, who say APEC is a waste of time and that it's all just for pre-election political mileage. But how many people here think that President Zhang Xemin of China, the Prime Minister Abuchi of Japan, President Clinton - three of the most powerful people in the world - are expected here just to provide Jenny Shipley with a photo opportunity? The idea doesn't quite stack up.
The leaders of the single biggest population group in the world - the Asia-Pacific region - are coming to New Zealand. Are we seriously saying we don't care whether they come all the way down to this end of the world, we don't care whether they buy our products, we don't care if they're impressed with what they see?
I think we do care because we are a nation with pride. We have got the trade ministers here this week and I know there will be a huge effort put in by all the people working on APEC and by our politicians who are hosting them to make sure the meeting is a success.
New Zealand is a trading nation and APEC is a crucial part of our trading future. Seventy percent of all our exports are to APEC economies, 70% of all our imports are from APEC economies and 70% of all tourists to New Zealand are from APEC countries.
It matters enormously that New Zealand takes its chance to influence positively those people whose success will drive our economy for the next decade. If we are part of their success we will be better able to meet our aspirations.
That's related to the third factor that matters for our future - a sense of teamwork in New Zealand. In the last decade we've had what can be described as a long theological debate about the role of Government.
Should the Government intervene or not intervene? Well sometimes it should and sometimes it shouldn't. When government is 35% of the economy it's hard to be too purist about these things. Government is still 20% of the real service economy. We're by far the biggest employer, biggest landlord, biggest investor in risk IT, biggest anything you can think of.
Whatever is happening in New Zealand, the Government does more of it than anybody. We still do more business than anyone else. The Government owns companies valued at $15.5 billion and probably worth a lot more. There's not really an argument about whether the Government's in or out, we're in it up to our necks and you need us to do a good job of it.
We've got a lot more common interest with the business community than the debate of the last 10 years would indicate. We have spent time debating our differences - what we don't and shouldn't do together. Now its time to debate what we can and should do together.
That means a team hustling for New Zealand, a team where everyone has their own role, but built around a sense of common purpose.
The last factor on my list is social cohesion, and a sense of community.
Some people find it strange hearing a Minister of Finance and now a Treasurer talking about that. But if you look at some of the harsh realities of New Zealand you need to think about it. In the next five years we will spend $135 billion on health, education and welfare.
We're going to spend $135 billion of your money on these social services and we need to do a better job of it. People getting off benefits and into jobs, succeeding in the education system, being healthy and having hope for the future depends on us working smarter with this money. We've got some deep thinking to do about how we use that resource.
I talked earlier about the demographics. What we see as the demographic features of dependency in New Zealand - age and race - will dominate change in population for the next 50 years We simply can't afford to leave too many people too far behind. We don't have a choice about that. We only have the choice of whether we make it work or not.
To conclude, I think we can be confident that New Zealand is heading in the right direction. The economy is steadily recovering from last year's recession and there are a number of positive factors underpinning that recovery: a competitive exchange rate, low inflation, and low interest rates.
We are looking at three percent growth a year over the next three years.
But if we want to really step on the accelerator into the next century we are going to have to work harder to build our knowledge and build our people.
We are going to have to get a firm grip on the way we educate our youngsters and how our ideas machinery works, make sure our outlook is truly global, work as a team, and develop a real sense of community.
I am looking forward to the challenge.