Cullen Opening speech to NZ Business Budget Summit
Michael Cullen Opening speech to NZ Business Budget Summit, Grand Hall, Parliament
Can I first thank Nick for those opening comments and add also my warm welcome to all of you.
It is always rewarding to engage with business. It is especially so today as it is not often I host so many of you here in Parliament. I don't intend to assault you with my views or even with a manila folder or two! I am unarmed and keen to listen.
Your session topics cover some of the big issues that responsible, responsive governments must regularly ask themselves: How can changes to tax policy make investment more attractive? What are the requirements for improving productivity and efficiency through economic transformation?
I believe that most people these days appreciate that raising the country’s economic and social performance is a long-term process of incremental policy adjustments.
Those old enough to remember the wild policy swings of the 1970s and 1980s are no doubt pleased that in more recent years central government has operated with a long-term focus underlying its every day decision-making.
They know that economic transformation is not a finite event.
They know that it is not something we “do” and then it is over.
It is an ongoing set of programmes designed to continually equip us better to compete in an increasingly competitive international environment and in a world where barriers to investment, trade and migration will continue to diminish.
We must always strive to improve our productivity, increase the quality of our work and constantly adapt to changing international market demands and opportunities.
Over the past seven years the government has been working hard toward improving our performance across a broad range of indicators against which we still have room to make further improvements: in savings, in infrastructure investment, in skills and training investment, in research and development, and in lifting our export performance.
I think it is important today while you are in this arena that you reflect on the pressures facing decision-makers next door in the Beehive where the daily clamour for new spending or tax cuts can be quite deafening. You need to remember that fiscal policy does not exist in isolation of the wider macroeconomic environment.
A responsible government must be sensitive to ensure its fiscal stance does not complicate the job of the central bank. Who would forgive us if our decisions cause interest rates to rise?
Slide 1: Growth
As we all know the economy has enjoyed a golden run which has allowed this government to make significant strategic decisions.
The economy is now taking a bit of a breather, though Treasury expects it to rebound to annual growth of around 3 per cent in 2008 which is above average growth rates in the past. However, the pressures from this growth surge are starting to tell.
Slide 2: Inflation, current account, dollar
The economy is close to a number of constraints. Inflation remains at uncomfortably high levels largely as a consequence of bottlenecks in the domestic economy. The consumption boom has fuelled an unhealthy current account deficit and the dollar remains stubbornly high as our relatively high interest rates attract persisting offshore investor interest.
Slide 3: Gross and net debt
However, the strength of the public finances has been a key factor reassuring the Reserve Bank not to increase interest rates further, and reassuring ratings agencies not to downgrade NZ.
We have run large surpluses during the good years, which have allowed us to get gross debt down to around 20 per cent of GDP, and as a result net debt has been vanquished, we are a net saver for the first time in our history.
Slide 4: Fiscal stimulus
Our opponents two floors up from here have great difficulty with this concept, but maintaining a prudent fiscal policy is critical to prevent further stimulus being injected into the economy. As this slide shows, there is already significant fiscal stimulus forecast. Additional injections at this point would only further increase pressure on the economy from higher inflation and higher interest rates.
This is a point National's finance spokesman John Key seems oblivious to as he seems to think billions of dollars of tax cuts – I am not sure how much as he seems to change his mind on this score every day – are affordable and responsible right now.
I should also reiterate that contrary to headlines you might have seen the cash surplus for the last financial year does not of itself indicate any permanent strengthening of the government’s fiscal position.
Slide 5: Revenue track
We will need to wait for the economic and fiscal forecasts due in December to get a better idea of the likely future path for revenue. As you can see IRD and Treasury have divergent forecasts of future tax revenue. How this pans out will be an important influence on future tax and spending decisions.
It is important to note that our fiscal strategy has paid significant dividends.
As mentioned, we are the first government in New Zealand history to have more financial assets than we have financial liabilities – only seven economies in the OECD can boast that.
With the New Zealand Superannuation Fund, we are through our collective efforts building national savings for the future.
Next year, KiwiSaver kicks in.
It is worth remembering that this is the first significant attempt in our country in more than a generation to improve our domestic savings record and also a step toward diversifying our household savings efforts away from the traditional narrow base which is of course our stock of housing.
At the same time, tax changes are being introduced to support employer contributions, reduce the taxes on savings for those earning under $38,000 a year and to reduce the taxes on investment in New Zealand equities - in addition to the incentives to participate in KiwiSaver itself.
So, contrary to what you may have seen, read or heard in some media, the government is cutting the taxes on savings by around $140 million a year and that is before any further decisions are taken ahead of our Business Tax Review.
I know the review is probably close to the heart of many of you. The discussion document released three months ago underscores our strong desire to further improve the capability of business to grow and to compete in an increasingly borderless international economy.
We want to ensure that our business tax rules best encourage innovation, better support business investment and further encourage New Zealand-based firms to either enter or to expand their engagement in offshore market opportunities
It will be consistent with our efforts to over-turn the infrastructure investment deficit that we inherited when we came into office. We are the first government in decades that is spending all of the income that we receive from general petrol excise duty and road user charges on land transport.
Over the next five years, for example, we will invest ten times as much on public transport as National did in its last five years in power. Yet we accept that we still face difficult decisions over the future of our rail network.
We are moving to ensure we have a truly modern telecommunications infrastructure because we recognise the positive flow-on effect that will have on the competitiveness of every other sector of our economy.
Challenges lie ahead in terms of water quality and management, energy security and land management. These are not just issues related to global climate change or the environment, but also highly relevant to our economic performance over time.
This government is also engaged in major changes in our tertiary education system. Over the last seven years we have done much to open the doors to higher education to young people. My big challenge right now is to ensure the current reforms to the tertiary funding system deliver a high quality network of providers, more focused on producing the right mix of skilled graduates needed to drive economic transformation. You will see more on our thinking on this over the next few months.
What connects all the issues I have briefly touched on this morning are two things: The first is that all involve a strategic role from a responsive, forward-looking central government as an organiser, part-funder or as a facilitator of change.
And most, if not all, also demand a commitment to significant amounts of current taxpayers’ dollars to be invested in the enablers of productivity growth down the track - either by way of direct expenditure or via foregone revenue.
I believe our experience tells us strongly that New Zealand’s ultimate success in moving ahead economically requires that we take our people with us every step of the way. Economic and social progress will advance hand-in-hand and any economic transformation process will falter in a society divided against itself.
And just before I conclude my remarks I thought I would share with you some commentary on our country that caught my eye recently. I apologise to those of you that may have seen it reprinted in some of our business media.
The commentary, originally published in Forbes magazine, was from the founder and president of California-based Barclay Partners Asset Management, William J. Buechler, after a recent trip to New Zealand to assess investment opportunities here.
“To my surprise,” Mr Buechler said, “I continually experienced a strange, yet pervasive, lack of optimism for the future of New Zealand and a lack of confidence in business and the economy. For lack of a better term, it might be called ‘The New Zealand Blues’."
He went on to note that as someone who does not live in New Zealand, he begs to differ.
His advice to potential international investors in New Zealand is that when it comes to leadership and vision, “the Kiwis have it.
“As other investors from around the world realise the opportunities and advantages of investing in New Zealand, new money from these outside investors – both retail and institutional – will flow to New Zealand in amounts well beyond anything experienced in the past and will serve as the catalyst that jumpstarts an economic boom in New Zealand that will simply defy current expectations. At least that is the way I see it, as an outsider looking in.”
Even as we sit down together to discuss how best to make further steps to strengthen our economy ahead of the inevitable challenges in the medium- and longer-term, I do not think it does us any harm also to remind ourselves every once in a while how much progress we have made as an economy, and as a society, in the past 20 or so years - a short period of time in historic terms.
We have so much going for us as a place to live, as a place to bring up a family, as a place to invest in and as a place to do business with. We should never lose sight of that, even as we strive to be better and stronger still.
Thank you again for coming to Parliament for this event. I trust all of us will have a rewarding day.