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Government For Growth

Hon Pete Hodgson

Government For Growth

(Address to Importers Institute "Smarter Importing" conference, Heritage Hotel, Auckland)

Thankyou for the invitation to your conference.

You've asked me to talk about the role of Government in business development. I'm going to tell you why I think there is one, then a little about some practical measures we're taking to fill that role.

Roger Kerr will then tell you there is no role for Government in business development. Not even the National Party argues that any more, but I know Roger will keep the faith. Then we can have a little to-and-fro that I hope will involve some of you as well.

To begin with, let's get things in perspective. There has been a significant shift in political direction in this country, and the crucial difference is that this Government believes there is a need to transform the New Zealand economy.

We believe that a modern Government in a modern economy has a role in that transformation. We believe that role is an obligation, not an option. And that role is to be a leader, a partner, a broker a facilitator and occasionally a funder.

That's a pragmatic difference from the last Government, not an ideological one. We've accepted that the New Zealand model of extreme market liberalism is no longer sustainable. It hasn't delivered the prosperity New Zealanders need to sustain our standard of living. Nor has it delivered the stable and cohesive society we want.

National seemed to be waking up to that when it had a stab at economic development policy last year with its "Bright Futures" package. We don't yet know if that awakening will last, or if they'll doze off and lose the plot in Opposition. But I suspect that Bill English, their next leader, realises full well that New Zealand Inc needs more practical support from Government if it is to compete internationally. He's not on my side in this debate, but he's not on Roger's either. The tide has changed.

New Zealand has not embarked on some wild lurch to the Left, or return to the 1970s, or any other such breathless exaggeration. We are not bent on delivering "a one-term lesson in socialism," as your institute's secretary wrote earlier this year in the Herald. Don't bother saying that stuff. It's wrong, and it's just a bit silly.

The Government is sticking with fiscal conservatism and orthodox monetary policy. Our first Budget projected operating surpluses in the current financial year, the year following, and the year after that. The volatility of oil prices and the dollar may well affect growth in the short term, but at this stage there is no reason to think that the three year fiscal results will be markedly different from Budget.

Today's Crown financial statements show a larger than forecast operating surplus for the year to June. We are on track for fiscal surpluses, a falling debt burden and a gradually reducing level of Government spending as a percent of GDP.

We are not a high tax government. Our top personal income tax rate is still lower than Australia's. Actually it's the second lowest in the western world. Only Mexico is lower.

Our new tax and other revenue measures net about $900 million a year, less than one percent of GDP and less than 2.5 percent of total revenue.

We are, by international standards, about a medium tax Government. Or a bit below medium, depending on how local taxes, rates or charges are factored in.

New Zealand remains open to foreign investment. This Government has in fact rapidly increased efforts to facilitate it. We remain an advocate internationally for free trade.

By moving back into industry and business development we're simply becoming a bit more normal amongst developed nations. For the last decade or so New Zealand's extreme market liberalism has been decidedly abnormal. We've been a western world freak.

We're abandoning our freak status because the free-market policy experiment failed to recognise that the rest of the world does not play by those rules. Some nations pay lip service to them while acting otherwise, as our exporters have found time and time again. Most nations cheerfully and sensibly carry on supporting their domestic industry and business in various ways, as they have always done.

The market liberal experiment was economically unsustainable. It did not address basic issues of under-performance in the New Zealand economy. It left us with a very large current account deficit, poor national savings and an unhealthy dependence on domestic consumption as the driver of growth.

We're setting out to achieve growth based on the production of wealth, not consumption. That requires a strong emphasis on the promotion of exports. That in turn requires an increase in the productive capacity of our business sector.

We need an improvement in the management capacity of many of our small and medium sized enterprises. We need an improvement in their research and development capacity. We need an improvement in their ability to source capital. We need an improvement in their use and development of technology.

This Government says simply that there are things a Government can do to stimulate or accelerate those improvements. We can't do it for business, but we can help. There's no magic bullet, no Think Big, but there are modest, careful investments we can usefully make. So we're making them.

We're not offering subsidies or corporate welfare. We're offering partnerships. We're offering information, facilitation, and brokerage services. We're developing modest programmes that we'll test and monitor as we go along. If it works, we'll keep doing it. If it doesn't we'll dump it.

That's what I mean when I say we've replaced ideology with common sense. We're looking for initiatives that work, not refusing on principle to try anything at all.

I don't want to embark on a litany of new programmes, but I'll give you a few examples of the kind of initiative I'm talking about.

To improve research and development capacity we've put almost $12m into a fund for grants to co-fund new private sector R&D. That's the largest ever boost for private sector R&D in this country. It opened on Monday. Applications are by website registration, so the transaction costs are low.

To improve the ability of SMEs to access capital, we're developing plans for Angel Networks, matching up small and medium businesses with suitable, often small, investors. For larger investments we're developing the Strategic Investor Programme, which will put major domestic investors in touch with investment opportunities.

To improve the technological capacity of New Zealand business we've significantly increased support for the successful Technology New Zealand programmes. They provide dollar-for-dollar support for businesses to invest in new technology, to assess and access their technology needs, and to employ research graduates.

There is more, and if you want to ask me about the Enterprise Awards Scheme for small start-ups, for example, or the Technologists in Industry Fund, or export credits and insurance, or the work we're doing on R&D tax treatment, or the e-commerce strategy, or our plans to double education exports in four years, or why a change in GST has brought more pharmaceutical R&D here, or whatever, I'll tell you.

But at this point our political opponents, and associated commentators, tend to remark that a few grants, facilitation programmes and tax changes are not going to create a vibrant economy.

Of course they're not. Not on their own.

But our business and industry development measures are part of a much wider cross-government programme aimed at economic growth. That involves the integration of three basic systems: the skills development system, the science and technology system, and the financial system.

Initiatives in a wide range of portfolios are aimed at lifting our skills capacity, improving our technological performance and deepening our capital markets.

We've revived and modernised apprenticeships. They can now be about crunching computer code as well as metal. We're beginning to talk with the universities about the development of centres of excellence. We've moved to make tertiary education cheaper for students by changing the loans scheme. And we're looking at how we can help more effective cooperation between businesses, research institutions and universities.

We are moving to fix defects in regulatory structures, or in some cases the lack of them. Examples include the takeovers code, tougher measures in the Commerce Act against anti-competitive behaviour and the development of constraints on the local monopoly powers of electricity lines companies.

Our labour law changes, like our approach to industry development, simply return New Zealand to the international mainstream. Hysterical rhetoric to the contrary is just plain wrong. There is no revival of demarcation, national awards, compulsory unionism or compulsory arbitration.

The Employment Contracts Act, which we have replaced, was economically short-sighted as well as unfair. It encouraged employers to look on their workforce primarily as a cost, not an asset. It was designed to depress the cost of labour, not to increase its quality. Productivity growth during the 1990s was pathetic. It was worse, in fact, than in the more regulated environment that preceded the ECA.

The only progress under the ECA came because many employers ignored the premise on which it was constructed. They remained good employers despite it, and reaped the benefits that good employment practices bring.

The economic transformation we're pursuing is not going to happen overnight. It's a long-term project. But there are some signs that the right kind of change is happening to New Zealand's economic output. Exports are growing strongly, tourism is very healthy, and the recent composition of imports has been richer in new plant and equipment.

You're worried about the low dollar, of course. Exporters for several years were worried it was too high.

I'm in the den of importers today. Times are tough for you. The prices you must pay are increasing.

By contrast, I come from a province, Otago, that has posted more than five percent growth all year. It will again next year. It's profiting from good snow, good rain, good technology commercialisation and a low dollar.

The fact is there is nothing magical or good about a high or low dollar. The consensus amongst market economists at the moment is that the kiwi has been oversold and is undervalued. There has been plenty of publicity about the reasons why and about how other currencies have suffered too. I won't rehearse all that.

I'll just make the point that the value of the currency is not bad news, it's mixed news. With a more proactive Government approach to export, industry and regional development, it should help stimulate the globally orientated sectors of our economy. It should reinforce the movement of resources into the export sector and enhance the prospects for import-competing industries.

Of course that makes business more difficult for you as importers. And we do not wish a plague upon your houses. You are a significant and essential part of the economy. But some rebalancing of import consumption and export earnings is needed to correct this country's current account deficit.

The value of the dollar has moved up and down significantly since it was floated in 1985. Against the Australian dollar, for example, it started at a little over 60 Australian cents. It shot up to nearly 95 cents in 1988, dropped back to around 70 cents in 1989 and climbed again to 95 cents in 1995. Now it's back around the 75 cent mark.

Some of the gains in the dollar's value in the 1990s were the result of short-term, unsustainable factors including state asset sales and overseas borrowing. Some of the fluctuations are simply inevitable with a floating dollar and an open economy. In the longer term, only an export-led recovery and an improvement in our savings rate will help reverse New Zealand's recent dependence on foreign borrowing and result in a sustainable appreciation of the dollar.

What won't help is a silly rhetoric like your Institute's recent press statement saying the Minister of Finance should resign. Chipping in to an Act party effort to destabilise the Government achieves nothing positive at all.

Nor does dogmatic refusal to join the public policy dialogue with the Government over matters of immediate interest to your members.

When the Government decided recently not to merge quarantine and customs services into a single agency, it had genuine concerns that restructuring would consume resources unnecessarily and disrupt existing risk management work by Customs and Biosecurity staff. We said we would be inviting interested parties to contribute ideas on getting Customs and MAF to work together more effectively.

Your institute said it would decline any such invitation. That is self-defeating, and I hope you reconsider.

One more thing. I know that at least one of you has noticed this Government's investment in the arts, because one of you, in a response to my request for ideas, complained about it.

You might have registered, further, that we've talked about that investment contributing to one of our key goals, which is to strengthen national identity.

If you think that's got nothing to do with business, consider these questions.

In a business environment where innovation is more than ever the key to survival, what future is there for a country that tells itself creativity has nothing to do with prosperity? What future is there in cultivating the mindset that business and imagination are polar opposites? What future is there in raising generation after generation with the assumption that New Zealand is too small, too anonymous, too culturally empty to hold its own in the world?

We will not succeed without believing that we can, and that we deserve it. This Government believes that, as many New Zealanders do. That belief is as important to the future as the state of any economic indicator. We need to nurture it with the same care.

Thank you.

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