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Dr Michael Cullen - Melbourne Economist Breakfast

12 September 2000
Speech Notes
Embargoed until: 9.00 am NZ time Tuesday 12 September
(8.00 am Melbourne time)

Speech to Economist Intelligence Unit CEO Forum Breakfast

Canberra Room, Windsor Hotel, 103 Spring Street, Melbourne
Hon DR Michael Cullen, New Zealand Minister of Finance Speech to the Economist Intelligence Unit CEO Forum Breakfast

Thank you for inviting me here this morning. I note from the programme that the main purpose of the meeting is for you to ask questions and to raise issues with me, and not to sit through a long set piece speech. I will try and be as brief as I can in trying to set a context for our discussion.
The sorts of comments I have encountered during the last few months suggest that I need to canvass the policy agenda of the new New Zealand government, summarise the core economic challenges facing us, and talk briefly about current conditions.
I need to stress that in economic policy terms, the differences between this government and the last one are essentially pragmatic, not ideological. We have come to the view that the New Zealand model of extreme market liberalism is no longer sustainable for one simple reason: it does not work.
There were features of our economic policy framework that have worked and are being sustained.

At the macroeconomic level, the government is continuing with a programme of fiscal conservatism and monetary policy orthodoxy.

The 2000 Budget confirmed that the incoming government is fiscally conservative.

That Budget projected an operating surplus of around 0.9 percent of GDP in the current financial year, 1.8 percent in 2002, and 2.2 percent in 2003.

There has been a lot of economic volatility associated with variable exchange rates and rising oil prices, and the growth track that underpins the fiscal outlook could well alter in the short term. We will be publishing an economic and fiscal update in December, but at this stage there is no reason to think that the three year fiscal results will be markedly different from Budget.

I will be releasing the Crown financial statements for the year to June 2000 on Thursday. They will show a larger than forecast operating surplus for a number of non-recurring reasons. The point here is that despite short term volatility, the government is looking at a fiscal track that is consistent with surpluses over the course of the business cycle, falling debt burdens, and a gradually reducing level of government spending as a percent of GDP.

This does raise the issue of whether we are a fiscally prudent but high tax government. Again, perspective has to triumph over rhetoric.

The net effect of various tax and other revenue initiatives is about $900 million a year. This is less than one percent of GDP and less than 2.5 percent of total revenue.

There are a number of other features of the economic policy framework that have been retained or reinforced. Among them are:

 A commitment to an open and facilitative inward investment regime.

 A determination to forge wider trading partnerships, especially in the East Asian and South American theatres.

 Ongoing efforts to reduce business compliance costs.

What have we changed? The main concern with the liberal economic experiment was that it failed to recognise firstly that the rest of the world did not play by free market rules, and secondly that what is sustainable in the short term is not necessarily sustainable in the long term.

The result is that we have a very large balance of payments deficit, and an unhealthy dependence on domestic consumption as the engine of economic growth.

The government set out quite deliberately to shift the emphasis of growth from consumption of wealth to the production of wealth, and to do that via a strong emphasis on the promotion of exports.

Of course it isn’t possible to establish cost-effective industry development programmes overnight, but good progress is being made.

There is no return to stifling regulation, or to open-ended subsidies.

Instead, the government is looking to smart partnerships for export led growth.

At the broadest level this involves integrating three basic systems: the skills development system, the science and technology system, and the financial system.

We have a number of specific initiatives under way or under development. They all aim at lifting our skills capacity, improving our technological performance and deepening our capital markets.

We have also identified some defects with the regulatory structures, or lack of them, that emerged under the old regime.

There were defects with the protections offered minority shareholders in the event of take-overs and with the lack of constraint on the exploitation of local monopoly powers by some utilities.

I would think that business would generally support the stronger competitive environment that commercial law reform and regulatory reform creates.

Our labour market reforms are similarly constructive.

We have not returned to a demarcation of the workforce. We do not have a system of national awards. There is no compulsory union membership. There is no recourse to compulsory arbitration.

The new labour laws are a return to the international mainstream. In an Australasian context, our labour market remains more lightly regulated than that in any Australian jurisdiction with the possible exception of Victoria.

The motivations were largely equity concerns. Our laws were unbalanced. I must stress, though, that we are not foreclosing on an industrial golden age. Productivity growth during the 1990s has been pathetic – worse in fact than that in the more regulated environment that existed before the passage of our Employment Relations Act.

The hope is that the emphasis on developing harmonious employment relationships will ultimately be more consistent with the needs of adaptive, high quality, knowledge intensive production than the arms length take-it-or-leave it contracting that we have replaced.

Overall, then, we have a modest regulatory rebalancing around the centre, and a more active, pragmatic role for the government in economic and industrial development.

So is it working?

This government recognised at the outset that there was no quick fix for the structural weakness in our export industries. There are a number of signs of a healthy turn around in the makeup of economic output. Exports are growing strongly, tourism is very healthy, and the recent composition of imports has been rich in new plant and equipment.

There has been some turbulence caused by recent internal events and external influences, and these can show up in volatile economic statistics, particularly over very short time spans. I am talking here about the influences of things like the America’s Cup, millennial celebrations, Y2K provisioning, a surge in some forms of construction and the like.

More recently, we have had the appreciation of the US dollar, a depreciation of our own currency, and sharply rising international oil prices to contend with.

The recent rises in oil prices are having a marked affect on the economy. They have showed up, for example, in higher import values than would be associated with the underlying trend in import volumes, and in a stubborn trade deficit that has not responded as quickly as would normally be the case to a more export friendly interest and exchange rate environment. I can’t speculate on the long-term trend in oil prices, but do expect the fundamentals to reassert themselves and for the trade balance to improve progressively in spite of any oil price impact.

This leads to the story of the dollar. The value of the dollar is the net result of inflows and outflows of funds: exports, imports, repatriation of profits, remittances by tourists, sale of assets, reallocation of financial portfolios and the like. There is nothing magical or good about a high (or low) dollar. A high dollar can reflect a rash of asset sales, or large borrowing from foreigners, and is not in itself either a reflection of good policy or a signal of future prosperity.

The dollar has been driven down as capital has been attracted into the United States where returns are perceived to be higher.
This has been at the expense of other currencies such and the New Zealand and Australian dollars and also the Euro. I would note that the currency is at almost exactly the same level against the mighty Euro as it was in November last year!

The history of the dollar vis-à-vis the Australian dollar is also interesting. When our currency was floated in 1985 it was worth a little over 60 Australian cents. It shot up to nearly 95 cents in 1988, dropped back to around 70 cents in 1989, soared again to that 95 percent level in 1995, and is now back around the 75 cent mark.

This trading pattern indicates the wide swings through which our dollar has moved since its float, with bouts of both currency strength and weakness.

The consensus amongst market economists is that the dollar has been oversold and is now undervalued.

The point, though, is that the value of the currency is not all bad news, provided we can use a more proactive export, industry and regional development policy mix to interface with it in breathing new life into the globally orientated sectors of our economy.

Indeed, the recent weakness in the currency should reinforce the movement of resources towards the export-oriented sectors. Furthermore, recent currency developments also enhance the prospects for import-competing industries. The next effect of this rebalancing from a domestic to an external focus is part of the process required to correct New Zealand's external sector imbalance.

Longer term, our policies of improved skills development, support for science, business development and extended trade partnerships will reverse the recent dependence on foreign borrowing and result in a sustainable appreciation of the currency, in contrast to the unsustainable factors that pushed it up in the 1990s.

Before I conclude. I think I ought to explain the way that the New Zealand coalition government is structured. We are in the learning stage with a new proportional system of government. In 1996, the incoming coalition government tried to resolve all differences in advance by way of a detailed Coalition Agreement.

They soon found out those times and circumstances change, and that there are often trade-offs and compromises needed along the way. In my view, the rigidity of the coalition agreement was a factor in the break-up of the coalition.

This coalition has formed around a more generalised statement of common values and an agreement to work constructively on issues of the day. It also has a provision that allows for disagreements between coalition partners. This provides for flexibility while maintaining stable government.

Under the agreement, the minor party may publicly state its position on specific government policies, at the same time respecting that those are the policies of the government and supporting them with appropriate votes and the like.

For example, the Alliance Party has a long-standing and well-known view on the operation of monetary policy. Under the flexibility clause of the coalition agreement it can express concerns and establish its brand differentiation on this issue. The bottom line, though, is that I speak for the government on matters relating to monetary policy, and the Deputy Prime Minister, who leads the Alliance, acknowledges, respects and supports that.

It is important for external observers of New Zealand policies to focus on the formal government programme, not on any qualifications that are registered about aspects of it. This is a strength: the government can maintain unity of purpose alongside a healthy contesting of means by which it is pursued.

What I would wish to emphasise in conclusion is that New Zealand is going through a modest level of rebalancing after many years of rigid adherence to neo-classical economics and its associated theories of governance.

Looked at in Trans-Tasman terms, this means that some of our policy settings are now a little closer to yours.
But at both state and commonwealth levels, Australia remains more interventionist, less orthodox, than New Zealand. Our policy changes have been about a modest move to the centre.

The bottom line is that our mission is to assert New Zealand’s right to a place in the premier league of the global economy by a more pragmatic use of the power of the government to transform the base of the New Zealand economy. To do that requires us to address how to improve our performance in research and development, science and technology, savings and investment, skills and infrastructure.

We welcome any and all assistance that is directed to the same ends.
Inevitably, Australian investors, Australian companies and Australian institutions will be part of that. We welcome that continued co-operation and linkage.


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