Cullen Speech to Federated Farmers Nat. Council
Hon Michael Cullen
10 November 2004
Speech to Federated Farmers National Council
James Cook Hotel Grand Chancellor, The Terrace, Wellington
Later this month we will mark the fifth anniversary of the election of the Labour-led government. It is a time when my colleagues and I are looking back and asking ourselves what has been achieved, and what remains to be done. Five years is a long enough period to have implemented a policy programme and to be starting to see the results, for good or ill.
What I would argue is that, looking dispassionately at the facts, the results have been largely good. Good for New Zealand businesses in general. Good, with some current reservations about the currency, for New Zealand exporters. And good for the low to middle income New Zealand families who are Labour’s heartland constituency, and also represent the bulk of the rural community.
Our record of economic and fiscal management speaks for itself. It has been founded on a conservative approach to government expenditure and debt, and a proactive approach to returning the economy to a higher growth path.
New Zealand has a set of government accounts that is envied throughout the world, and that has been achieved by careful management rather than by an excess of taxation. Tax rates on businesses in New Zealand are lower than in Australia, once the total picture of state and federal taxes and payroll levies is taken into account. And they compare very favourably with other developed nations.
Government debt and spending, as a proportion of GDP, are low by OECD standards. Core government operating spending was 32 per cent of GDP in the 2002/03 fiscal year, and declined further to 29.7 per cent in the 2003/04 fiscal year.
What is more we have set the scene for future fiscal stability by establishing the New Zealand Superannuation Fund in order to partially pre-fund the cost of the state pension at the height of the demographic bulge towards the middle of the century. This fund will provide future governments with a significant hedge against the rising cost of superannuation, and will also have the effect of placing the Crown in a position of eliminating its net debt within the next decade. Few countries are able to boast of that, and it is a factor that will strengthen our credit-worthiness and our economic stability going forward.
Of course, a conservative fiscal policy can achieve fiscal goals at the expense of economic growth. The 1990s proved that. Growth, with stability, has been our main focus.
We now enjoy one of the fastest growing economies in the OECD. Economic growth in the year to June 2004 was well above forecast, at 4.4 per cent. While much of the impetus has been a strong domestic economy, growth over the past six months has broadened as exports and business investment pick up.
The labour market is very strong, with employment growing 3 per cent in the year to June 2004, and the unemployment rate falling to 4 per cent, from around 7 per cent in 1999. More people in work means increasing household incomes. Total gross labour income increased 7.5 per cent between June 2003 and June 2004. Private consumption expanded 5.7 per cent and residential investment 13 per cent in the year to June.
There are concerns, of course, principally the persistent strength of the New Zealand dollar and the rise in the oil price (both of which are showing signs of being at or near their peak). However, the strength of the oil price is part of a broader surge in commodity prices, including dairy, lamb and beef prices sustained by a combination of high demand and some supply constraints in competing countries. This has meant that New Zealand’s terms of trade have been largely unchanged overall, although there are significant variations within that picture.
The main thrust of economic policy in the past five years has been improving its potential for growth. Last month New Zealand’s export economy quietly passed an important milestone. In a study prepared for New Zealand Trade and Enterprise, Professor Ray Winger of Massey University’s Institute of Food, Nutrition and Human Health showed that, for the first time, value added food and beverage exports represented more than half the value of our total food exports.
This represents significant progress in the long process of breaking our dependence on commodity exports, with their vulnerability to the volatile cycles of world commodity markets.
The study showed that value added food and beverage exports increased by 7 per cent from 2002 to 2003, up to 53 per cent of our total food exports. Value-added food products generated $7.6 billion of export income, an increase of $200 million over the year before.
This kind of change in the structure of our export economy is something New Zealand businesses and governments have been working towards for several decades. The fact that we are now starting to chalk up significant milestones is, I believe, one reason for the ongoing confidence of New Zealand businesses in their own future, and the confidence of overseas investors in New Zealand’s long term prospects.
My government has been facilitating the shift to value-added exports through our growth and innovation strategy. Among other objectives, that strategy has sought to increase investment in the kind of new technologies that can give us greater leverage on our world-class agricultural production.
We have put significant amounts of additional funding in research, and are increasing research spending by a further $212 million over the next four years. Importantly, a large portion of this increase has been targeted at research ventures involving CRIs and industries where public and private investment work hand in hand.
Biotechnology is an important focus of that research programme. It accounts for around $20 million of the additional annual funding (depending on how one defines biotechnology). In addition, we are working to strengthen the pathways to market for New Zealand’s biotechnology products and services, so that we can support best practice commercialisation of biotechnology research. Along the same lines, we are working to build closer ties with Australia in biotechnology to provide opportunities for collaborative research and development.
Technology opens up opportunities for new products and new ways of reaching customers. However, it also contributes to pressure on old institutions and ways of doing things. In recognition of those forces for change, we have been champions of farmer-supported restructuring in the dairy, kiwifruit, and hops industries, with work ongoing in the wool, meat, and wine industries. We have shown ourselves to be driven by pragmatism rather than dogmatism.
We have also worked hard on a set of skills policies that better orient tertiary education and immigration towards the future skills needs of New Zealand businesses. What many businesses – and certainly the farming sector among them – have been telling us is that a major constraint on their growth is the shortage of skilled workers.
For that reason, we have been reforming the tertiary education system, so that tertiary institutions are now encouraged to become more integrated into their local and regional economies, and to link their teaching and research activities to the growth areas in the economy.
We have also turned immigration policy on its head, so that we are now actively targeting the skills that are in short supply, and changing policy settings to attract those people. With unemployment at 4 per cent, it is clear that we cannot meet labour demand without attracting skilled migrants. Last week, the Minister of Immigration announced increases in the number of points allocated to applicants for residency if they have qualifications and work experience in areas of skill shortage.
In addition to getting better alignment between the research and skills sectors and our major growth opportunities, we have taken some major steps forward in strengthening the global linkages that add value to our exports.
Since being elected, this government has made it clear that its main international trade priority is the World Trade Organisation’s multilateral round of negotiations. The potential benefits are immense. The Uruguay Round, negotiated from 1986 to 1994, has produced gains for the New Zealand economy over the last decade of more than NZ$9 billion.
For an agricultural exporter like New Zealand, the Uruguay Round result was particularly important because it brought agriculture under multilateral trade rules for the first time. Research carried out by MAF showed in the single year of 2000 (the year that many of the gains of the Uruguay Round kicked in) the beef, sheepmeat, and dairy sectors gained about $590 million from product price and volume increases in the two major markets of the United States and the European Union.
We worked hard to ensure the Doha Round was started three years ago, and we worked hard, albeit unrewarded, for a result at the Cancun meeting last year. This year, in Geneva, our negotiating team played a prominent role. Jim Sutton was one of 20 or so members invited to the Green Room – the inner circle – where the key outcomes were hammered out before taking them to the wider membership for decision. In addition to that, we had New Zealand Ambassador Tim Groser chairing the agricultural negotiations.
As a result of their efforts, we now have an historic commitment to eliminate export subsidies – the most egregious form of trade distorting support. For the first time in 50 years, the debate will now be about when and not whether we do it at all.
On market access, while the language could have been more ambitious, we have the basis for arguing for substantial improvement in market access for all products, including tariff quota expansion for sensitive products. And the framework sets the basis for big cuts in domestic subsidies.
The other important negotiation was on non-agricultural market access. NAMA covers what used to be known as “industrial goods”, which includes sectors of major importance to New Zealand, such as forestry and fisheries
My government is also putting significant effort into bilateral trade negotiations. We are currently negotiating a free trade agreement with China, where the potential for growth with China is enormous, and not just for our agricultural producers.
We are making good progress on other fronts, including the ASEAN nations, a bilateral agreement with Mexico, and the “Pacific 3” agreement with Singapore and Chile, which will create a more effective launching pad for New Zealand exporters into the Asian and South American markets respectively.
Government and business have also been working together at building international linkages to realise growth potential. Traditionally we have been good at creating successful small to medium sized businesses, but have found it harder to grow that business beyond Australasia. The reasons for that are many and varied; however, an increasing number of businesses are developing and implementing strategies for expanding into new markets. We need to make sure that the next generation of businesses can benefit from their experience, and for that reason New Zealand Trade and Enterprise has a number of programmes aimed at helping businesses connect with overseas investors, distributors and marketing networks.
In the same vein, we have recognised the need to improve the level and quality of capital investment in the New Zealand economy. This is a crucial aspect of the effort to shift commodity-based export industries to a more value-added approach. Foreign investment gives our companies access to a larger pool of investment funds, but it is also often accompanied by access to new technology and links to global marketing and distribution systems.
We often hear concerns voiced about foreign investment, especially when it relates to so-called ‘iconic’ properties, or when it is limited to the short-term money markets. There are legitimate issues to be addressed, and earlier this year we introduced a number of changes to our foreign direct investment regime, which increased protection for sensitive sites, but raised a number of thresholds to make investments in other types of land and in non-land business assets more straightforward.
Accessing foreign capital is one thing, and when our interest rate differential with the rest of the world is large, as it is at present, there is no shortage of investors linking up to provide short term funds. However, the real benefit comes when investments are accompanied by the active participation of foreign businesses which see the potential of New Zealand and want to add value to them.
As well as working to create the conditions in which New Zealand farming can thrive as a business proposition, my government has been working to strengthen rural communities, as we have sought to strengthen all New Zealand communities.
We have focused our efforts on returning services to the rural community, by establishing the Heartland Services Centres, returning essential government agencies back to rural and provincial areas.
We have strengthened health services by providing extra funding to help retain and recruit GPs in isolated rural areas, providing for a rural premium, a Rural Locum Support Scheme and the Rural Practice Support Scheme. We have funded mobile surgical units to reinforce services in rural areas.
We made sure that our paid parental leave scheme included seasonal workers who have been in work for at least six months, a measure which assists meatworkers particularly.
We also established the Sustainable Farming Fund, which has funded almost 200 projects around the country, including world-leading research. This fund works with community funding as well, but would not have been possible without the government’s funding.
We are helping extend broadband internet access to people wherever they live, something that will improve rural young people’s education, but also the efficiency of farm businesses, and opportunities for niche marketing.
We have been consistent in providing money to help farmers deal with the adverse effects of climate on their businesses, including the severe March floods that damaged many farming properties in the southern half of the North Island.