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Birch Speech To Christchurch Businessmen

Speech To Christchurch Businessmen's Club

Rt Hon Sir William Birch, Minister of Finance

12.30 p.m., 15 November 1999

Christchurch

Thank you for the opportunity to talk to you today. After 27 years in Parliament, I stand down at this election. I have nothing whatever to win or lose, as a politician, on the result of this election. Within a month or so, I will be back in the private sector as a businessman.

But the stakes are very high in this election, for business people. You are right in your choice of theme for me today: Creating a climate for profitability in business, new and in the future. It goes to the heart of the hopes of the people of New Zealand for a continuously improving future.

On the other hand, raising it as a question suggests a certain anxiety, an insecurity. Some among you, I'm warned, think the profitability has already gone out of small business in this country. In New Zealand, we grow up, I think, with an inborn sense of anxiety, and the need to battle with it is, perhaps, one of the most constructive forces in our psyche.

It is bred into us that we live in a very small country with limited resources, infinitesimal market power, inordinately distant from world markets. We have to be careful, so policy is another anxiety. New Zealand is notoriously vulnerable to international economic or market shock.

The 1930s Depression left a permanent mark on us. It drove New Zealand into a period of industrial protectionism that lasted from the mid-1930s into the mid-1980s. Some people still look back to that period as Nirvana.

Let me start from there, because it raises interesting questions about the nature and quality of business profitability. Protectionism did not, for example, damage the profitability of manufacturing firms in New Zealand. On the contrary. Profitability was, in effect, guaranteed by the State. Import licensing controlled the volume of foreign competition faced. Tariffs kept import prices high enough to give local firms an advantage.

Safe from the risk of foreign competition, local manufacturers could safely charge whatever it took to achieve profitability. If costs or wages increased, in the absence of competition, they simply raised prices to cover the extra cost. Higher prices did not put export markets at risk. Because they weren't competitive, they had no export market to lose.

Profitability in manufacturing was protected. But over time, rising costs and rising wages in the industrial sector fed through to farmers who were totally dependent for profit on export markets. Profitability in farming was destroyed. The farmers looked around, saw manufacturers subsidised and protected, said we are the backbone of the country, they're driving us broke, you subsidise them, so in fairness now, subsidise us.

As a result, in both sectors, ultimately, the taxpayer, not the market, became the guarantor of profitability, and many producers welcomed it. I can recall one old farmer saying: "I will not hear one word against Rob Muldoon. He was a great man! I made a fortune out of that bugger."

Making money out of the taxpayer is always a lot easier than maintaining your edge in a global market. Relieved of the struggle, you get paradise on earth-until in one hit, the debt and tax required to fund that system collapse the economy, the exchange rate, the stock exchange, job market and the ability of the Government to fund the welfare system.

For business, it seems to me there is a quite simple moral. We go into business to compete with each other, do a better job for customers where possible, and by doing so, improve our own share of the reward. The risk of loss and the possibility of profit are the heart of enterprise. You can't remove them. There will always be anxiety about profitability, and only one fully satisfactory answer-an internationally competitive business.

One needs to recognise from the outset that Government subsidies, large or small, do not ultimately assist you to that end. When a Government gives money to you or anyone else, they begin by taking that money away from somebody. There are real practical limits on how much extra a Government can raise from low or middle income groups. So when they want to spend more, they are always going to turn to you, as an individual or a business, for a very large proportion of the tax required.

The more you take, the more you're going to pay, and the balance, at the end of the day, will always be on the wrong side of the ledger. The most you can hope from Government is to limit their interference. The day you need help most when the crunch comes, is the day they cancel the subsidy, and at that point, State assistance becomes the kiss of death.

Politicians like Michael Cullen, Winston Peters and Jim Anderton specialise in offering the assistance of Government to remove the anxiety from the difficult responsibility of running a business profitably.

They trail like a lure, in front of business, the illusion that, with the right policies in place, whether or not you're internationally competitive, you can still make a healthy profit out of the taxpayer. As if a good government can always use taxpayer funds somehow, to help top up your balance.

The Left has turned this election into a bizarre parody of a marriage ceremony. Helen and Jim, to plight their troth, are scattering, like confetti at a wedding, money and pledges and policies in a thousand tiny pieces to anybody offering a worry or a niggle or a dissatisfaction they can woo with the promise of some simple inexpensive solution. And it all adds up.

For inexpensive, read $4.3 billion over anything intended by a quite possibly over-generous National-led Government. If it hurts or it itches, Michael Cullen is happy to stick a bit of confetti on it. To date, on our count, Labour has promised 164 Ministers, Ministries, Offices, Commissions, Funds, Forums, Councils, Committees and Trusts.

If they are elected, then you, in particular, will be among those with the privilege of paying, on income over $60,000, an extra 9 cents in the dollar of income tax-39 cents instead of 30-to help them do so.

POLICY, not the market or the world economy or technology or anything else, is the big business risk in the system as we run it under MMP today.

Helen Clark has already chosen Jim Anderton as deputy prime minister if she is elected. The Alliance is offering $6.5 bn more in 3 years than the present Government thinks safe. Jim sees Cullen as a wimp on spending.

Jim, to fund that sum:

* One, backs Labour's 9-cent tax hike on income over $60,000, then pushes it to 43c from $75,000 and 47c from $100,000. His attitude is clear. These rich people who did not earn their money by making a quality contribution to society. They got it by robbery. Take it back.

* Two, he aims to restore an antiquated tax on the value of unimproved commercial land. Not Crown land or farm land or forest land or residential land. They're all socially desirable. But the sort of land your business stands on. Why? Well, you're rich. Why not?

* Finally, still a billion dollars short, Jim, looking round for more, has said: "In the days when I was in Government and New Zealand was Great, we used high tariffs to protect manufacturers and jobs." So he's whopped a billion extra dollars, across the board, on to the tariff bill. If it was good for New Zealand then, he says, it's good for us now.

I asked my advisors last week: "How far does this turn the clock back? How long is it since tariffs were $1 billion higher than they are today?"

What's your own personal guess? Make a mental note of it, because here's the answer. Never. Off the back of his hand, Jim Anderton has invented and proposed a level of tariff revenue way higher than anything ever previously collected or contemplated, in this country, and Helen Clark, if she wins this election, intends to appoint him deputy prime minister.

MMP has released a surge of ideology on the left of politics unlike anything we have seen in this country at any time in the last 15 years. In the Labour Party, the force driving it is now nakedly and unashamedly the trade union movement. Forty-two per cent of the Labour party's top 50 List Candidates at this election are graduates from union jobs, determined to recover the centralised power they used to have under protectionism.

All of those are things that deserve to be causing you anxiety. By contrast, the outlook for business as revealed in economic indicators contains nothing to cause anxiety, and a great deal about the bright future ahead.

The Asian crisis no longer darkens the horizon. In the last 12 months, forecasts of growth for our top ten trading partners in 1999 have doubled to 3.4%, and next year's forecast has also lifted to a level above 3%. The international expectation is for strong positive performance in the markets our producers depend on for profit.

The exchange rate remains strongly favourable to export activity.

The trade-weighted index, which peaked at 68.6 in April 1997, was down more than 20% to 54.86 by 12 November last week-a very significant incentive for firms to boost their export marketing drive.

Interest rates are at a 30-year low. 90-day bills dropped from over 8% in June 1998 to just above 5% at 1 October. Demand is rising quite fast now. If demand exceeds productive capacity, then we will get prices rising at the expense of sustainable growth we all want to see.

It is the Reserve Bank's job to manage interest rates to avoid inflationary wheel-spin. Its next monetary policy statement comes out on Wednesday this week. All the independent analysts have said they expect a lift in the official cash rate. That is in line with Treasury forecasts, and has already been taken into account in market expectation. The 90-day bill rate, which is the major influence on mortgage rates, has steadily moved up to 5.3% over the past few months. The financial sector has moved floating mortgage rates from 6.5% to 6.75%. If the overnight cash rate goes up on Wednesday, that should reassure you rather than causing concern. These are minor adjustments in the service of a medium term objective of fundamental importance to all of us. The preservation of price stability is the key obligation of the Reserve Bank. It is the best contribution a central bank can make to sustained levels of non-inflationary economic growth.

Low inflation has been one of the secrets of improved growth in the 1990s. Across the six years from 1984 to 1990, inflation had averaged more than 101/2% annually. An independent reserve bank, restructuring, and prudent fiscal policy have let us cut that to an average 1.8% in the 1991-99 period. The reliability and predictability of low inflation has changed the shape of business risk in New Zealand, enormously helped investors to make sound decisions, and significantly improved their real returns.

Manufacturers' export expectations, for example, continue at very high levels. Export expectation started rising around March last year. We have seen a net positive balance in the 35-50% region consistently for the last 15 months. The latest figure from the National Bank's September 1999 survey maintains a very strong 44% net positive balance.

The growth in employment and decline in unemployment demonstrate the same positive trend. We are already doing significantly better on both fronts than the Treasury forecast in the Pre-Election Economic and Fiscal Update. Total employment is down to 6.8%, significantly better than Australia. Under the last Labour Government, the economy shed jobs. Since the ECA was passed in 1991, employers have created 285,000 new jobs. Pakeha unemployment has been reduced to 5.1%. Maori and Pacific Island rates remain in the 12-18% range, but that problem is no longer about inadequate job creation-it is now about lack of marketable work skills, and we know how to tackle that to win future improvement.

Productivity, according to the most comprehensive study ever done in this country, has surged since 1993. Authors Professor Diewert and Lawrence identify the ECA as a likely contributor to those gains. And incomes have also responded. Average hourly rates have risen by 16% in nominal terms since the ECA was passed. They have risen more than 5% in real terms.

As a result of all these gains, the climate for business profitability in this country has been fundamentally transformed. This year's 1999 Global Competitiveness Report of the World Economic Forum puts New Zealand second in the world after the US as a country where it is easy to start a new business. The same report rates us 9th in the world on capacity for annual average per capita growth of GDP in the period from 2000 to 2008. Australia came 15th, six places behind, with Japan at 19th, Korea 21st, Sweden 29th, and France in 39th place.

Those gains have come, in no small measure, from the transformation by the Employment Contracts Act of our old centralised industrial reIations system into a modern system of individual contracts and enterprise bargaining. The number of working days lost through strikes and stoppages had averaged more than 540,000 a year in 1984-90. Since then, it has averaged 46,500, less than a tenth of its earlier level. Under a National-led Government, you can be confident of maintaining that improvement. If Labour wins, running policies dominated by the unionists in its Caucus, they are determined to relitigate those gains.

At the same time, the Government accepts that low and middle income working families did come under economic pressure in the past 20 years. They need improved incentives. Since 1996, the middle income tax rate has been cut by 25% from 28c to 21c. If re-elected, we will cut the middle rate again next year to 20c, taking the total reduction to 8 cents or 28%. Labour, by reversing that tax cut, is in fact promising that every person more than more than $200 a week will get a tax increase.

But that was not, in our view, enough. We wanted, in particular, clear recognition of the responsibilities undertaken by the low and middle income working family in modern society.

To do that, we developed an additional series of credits that give back tax in recognition of those responsibilities. Taking the tax cuts and the tax credits both into account, a family of three on $30,000 is already $128 a week better off tax-wise than they were three years ago-over $6650 a year. Building on those changes, the next step, as we have announced is to cut the company rate by 3c to 30c. We are committed to do that within three years if re-elected, and to cut the top personal rate by the same amount as soon as it is fiscally prudent to do so. Those changes all make this a better and more successful country for working people to live in, and contribute to its future prosperity.

One of the few indices not already showing significant improvement is the current account. Some large one-offs, including the second frigate, a ferry and an oil tanker which comprise 0.8% of GDP all by themselves, push the deficit to 8.3% in the year to March 2000, before it falls steadily to a Treasury forecast of 5.8% by March 2003.

Last but not least, the contribution of the accounts of the Government itself to the climate for present and future business profitability. The New Zealand Government ran fiscal deficits every year 1978 to 1993. Since then, under National, we have had six surpluses in a row, and based on Treasury's Pre-EFU forecasts, if National leads the new Government, we are set to add four more by March 2003. We have produced the fiscal results we set out to obtain. What would you get under Cullen and Anderton? Make your own judgement.

Net Crown debt rose from 40.5% of GDP in 1984-5 to peak at 52.5% of GDP by 1991-92. National led Governments have already reduced that to 22.4% of GDP. The Pre-EFU shows the policies already in place cutting that further to 17.8% of GDP by 2002-3. Once again, make your own judgement about the ability of Michael Cullen and Helen Clark to control Jim Anderton, and the ability of the three of them to control Winston, if that's the way the cookie ultimately crumbles. I can't help you with that conundrum.

New Zealand's economy grew at an average rate of 1.35% a year in the period from 1979 to 1992. Actual figures and current forecasts show that we are now averaging 3.1% a year, across the whole of the decade from 1993 to 2002, a huge and sustained improvement.

The independent forecasts of the Treasury Pre-EFU for the period ahead are for a further 10% of growth in the size of the New Zealand economy by March 2003, at expected rates of 3.5%, 3.3% and 2.9% annually during each of the next three years.

In a competitive world, business is always going to be hard work. There is no hiding place. Continuous improvement is the name of the game. Ignore that imperative, and you will be history. But without a competitive economy, whatever the colour of our Government, New Zealand has no prospect of future international success.

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