Hon Dr Michael Cullen

Deputy Prime Minister, Attorney-General, Minister of Finance, Minister for Tertiary Education, Leader of the House

16 November 2006 Speech Notes

Embargoed until 9.15am

PSA National Delegates Conference

Speech notes for PSA National Delegates Conference, Brentwood Hotel, Wellington

It’s a pleasure to join you for your conference.

The relationship between a Labour-led government and the public sector should always be a positive one.

It's in the nature of the labour movement that we recognise the contribution of a high quality public sector to the strength of New Zealand.

A strong public sector, delivering value for money, allows us to provide essential social services.

In crucial ways a modern economy relies on services provided by the public sector.

From the perspective of a finance minister, there are two critical elements of interest.

There is always pressure on funding of public services, pressure to provide more services and pressure to ensure the returns from our investment in public services grow.

Second, the finance minister is charged with ensuring our investment in the public sector aligns with our economic strategy.

This government's economic priority is to transform the economy.

Our economy needs to grow and evolve to meet the challenges the future will certainly bring.

We need to transform it into a high wage, knowledge-based economy. Innovation and rising productivity will be crucial.

Our ambition for higher productivity has to include the state sector. It is a substantial part of the economy.

When we achieve more services for our dollar we can direct our economy's resources into other demands -- including more services, rising incomes and provision for our future.

It's a matter of being smarter and adapting our approach to maximise outcomes.

The focus needs to be not on how little we can get away with providing, but on how much value we can achieve - that is, how much we can achieve for our limited resources.

The Demos study you are releasing at this conference reflects the sentiment. It notes change in our public services is inevitable. I welcome the PSA’s intention through the Fresh Perspectives documents to support increased innovation and productivity in the public service.

As the demands of the public change over time, it is essential that our public services are responsive and able to remain relevant.

There will always be a role for the PSA and for front line staff in contributing ideas about innovation and productivity across the sector.

Increased public spending must deliver value for money to the taxpayer.

At the same time, I expect to see state sector employers work with unions and employees to ensure that the state is a good employer. This is a process of ongoing dialogue. It can include looking for ways for staff to innovate and improve productivity. It might include innovation in work-life balance initiatives.

For example, knowledge workers in particular are recognising productivity gains that enable them to spend less time in office cubicles and more time with family.

Knowledge workers are ubiquitous in the public sector, so these sorts of innovations are directly relevant.

Productivity gains are not only about growing fatter wallets, though they will do that - they are also about growing richer balances in our lives.

It is pleasing to see that the PSA, State Services Commission and the Department of Labour are working collaboratively to advance public sector productivity initiatives.

When we look at the constraints on our economic growth in the future, some areas stand out.

One is that there will be fewer opportunities for participation in the labour force to increase. Future growth will therefore need to be driven by increases in productivity.

This is a challenge not only for the public sector as an employer, but for private sector employers as well. We need to extract more value from hours worked, and not just expect to add on hours.

Rising productivity will help to transform our economy. But so too will continued prudent management of public finances.

Our economy has been growing faster in part because this government has been a prudent manager.

Low unemployment and strong growth over the last six years have not happened by accident. We are experiencing the benefits of fiscal restraint allied to careful investment in public services and infrastructure.

Strengthened public services and strengthened public accounts have, together, strengthened the economy.

For most of the last six years New Zealand has grown faster than the average of developed countries. Our economy is a quarter bigger than it was when we took office. As a result, we have more available to put aside for the future, and more to meet our needs today.

But I need to emphasise the gains we have made are mostly already committed. The government's 'surplus' also includes a large number of non-cash items, such as the retained earnings of our state owned enterprises and loans to student.

Trying to give it all away in tax cuts would be like a household saying 'property prices have risen, so we can put more money on the credit card to buy groceries.'

Sure – some people do it, but it isn't prudent. It would also be inflationary, which would push up interest rates.

There are limits to how quickly our economy can grow. If we keep fuelling demand without the economy being able to expand supply, we get inflation.

The Reserve Bank will respond with higher interest rates.

The strength of our public finances has been a key factor reassuring the Reserve Bank not to increase rates further.

Our careful stewardship also helps to reassure ratings agencies. It is indeed pleasing to note that just yesterday Standard & Poor's reaffirmed our ratings, stating that the government's "strong fiscal profile" was offsetting risks from our high current account deficit. That's important because any downgrade would inevitably push interest rates higher, penalising exporters and homeowners.

If we were to lurch away from fiscal prudence as out political opponents want, we would simply burn cash.

If you are pro-savings, and pro-prudent fiscal management, you are against burning the public's cash.

If you want to start providing now for some of the needs we know we will have in the future, and you want to grow the economy as effectively as we can, you are against burning cash.

What we need is a prudent balance between the different demands the government faces. Before we spend anything we have to be sure that our income will continue to exceed our outgoings.

It is asking for trouble to make decisions at the top of the economic cycle as if the sun was going to shine forever. Prudent management requires us to ensure we have enough available to see us through the slower part of the cycle as well -- without policy lurches.

The government is also committed to providing for our future needs.

By running large surpluses gross debt has been tracking down to around twenty per cent of GDP. We have the New Zealand Superannuation Fund and KiwiSaver to build more savings and to take pressure off future demand on the public purse.

Now that we have met these demands, we can look at further priorities.

In making choices we need to support policies that will continue to transform our economy and also ensure our gains are fairly distributed among New Zealanders.

And we need to make choices that improve the quality of our public spending. I don't want to pick on individual sectors, but let me give you one example: our spending on health.

In 1993/4, health spending accounted for around 15.5 per cent of government expenditure. This year, around 21 percent of our total spending will go to health.

In 1990, health spending per head was around $1,400 in today's dollars; in 2006, this has risen to around $2,300.

I have no doubt that we have a better health sector as a result of this investment. Health outcomes are better in many ways; we have a positive trend in suicide for example, because we invested heavily in improving the mental health system.

But we need to do better than simply increase health spending. We need to find innovation and we need to get more value as we invest in the sector.

As with health, so in other sectors. There is always pressure to spend more. We have been able to withstand years of often noisy demands to “spend the surplus” only because we are very focused on the long-term.

One of the elements in strengthening and locking in our long-term economic growth will be the business tax package.

The package, whatever its final shape, aims to help our businesses remain competitive and growing. I have already signalled the package will help to ensure our economy focuses better on exports and the research and development we need to promote innovation.

OECD studies show our tax rates are not high by comparison with other developed countries. We do collect a higher proportion from personal income tax and GST, whereas other countries tax other sources more aggressively.

That's not about to change - there is no enthusiasm for another upheaval or the introduction of new taxes.

We also need to recognise New Zealand has one of the most skewed income distributions in the OECD. In the eighties and nineties the real incomes of poorer and middle-income households were static or fell.

If we want to maintain consensus around the economic policies that are essential in a globalising world, it is vital that the income gains of growth are spread more widely.

That is why policies like Working for Families, for example, are an integral part of our economic transformation programme.

And it's why investment in public services will continue to balance any tax adjustments fiscal conditions permit. It's not just a matter of trade-offs; if we get the balance right, then one enables the other.

Stronger business conditions provide the background for stronger public services; better public services, lay the groundwork for a sophisticated and growing economy.

With respect to wages surveys show the labour cost index increased by 4.2 percent across the state sector last year, compared with 3.1 percent in the private sector.

Health and education pay rates have grown particularly. In those sectors, increases have outstripped the private sector.

There is a good argument - they needed to. There were serious recruitment and retention issues in the public sector. The government has already moved to address them.

Our advice is that public sector pay rates are competitive and major anomalies have been removed. The government accepts there needs to be fairness between the private and public sectors in setting pay.

The employment relationship in the public sector should be a good one, and the Partnership for Quality demonstrates the government's commitment.

Any issues need to be solved at the negotiating table and the government is asking central agencies to work more closely and proactively with employers where help is necessary.

One issue that is relevant is the interest expressed by the wider state sector in extending the State Sector Retirement Savings Scheme.

As you know, Angela Foulkes is chairing a working party on the subject. It's expected to report in December and it will be some time before any decisions are made.

There are costs and benefits in the proposal. They need to be carefully balanced against other priorities, including the effects on wage settlements in the state sector.

In the meantime the KiwiSaver scheme fills some of the role. It will provide an opportunity for those in the wider public service to save for retirement, and a way for their employer to contribute to those savings.

With respect to pay and employment equity, the government is committed to a plan of action. This includes a managed approach to investigating and prioritising remedial pay settlements.

No pay investigations have been completed, and we are not anticipating any before next year's budget. There will be a need for a balanced approach to pay investigations and subsequent negotiations.

Remedial settlements can't become an excuse for relativity claims to be made that would allow a wage inflation spiral to develop. That would, at least, undo the good work of narrowing gender gaps - apart from the macroeconomic effects!

The facts need to be handled responsibly. But remedial settlements can also lead to a win-win if they are handled well and provide an opportunity to address organisational or operational issues.

Remedial settlements will generally take place within wider bargaining, and the government is likely to prioritise low paid groups.

This government has made significant contributions to improving conditions for low paid and disadvantaged workers, including those in the state sector. The minimum wage has been substantially increased and minimum holiday entitlements increased.

Protections under the Employment Relations Act have been improved. The Health and Safety in Employment Act has been expanded. These are substantial gains.

They need to be measured alongside wider gains that have been made for working New Zealanders:

- Rising incomes and more jobs from our economic successes and Working For Families.

- A more secure future from our investment in the New Zealand Superannuation Fund and Kiwisaver, as well as our prudent management of debt.

- And better public services from our steady investment in the sector.

The government will continue to address all these fronts.

We are committed to high quality public services that provide value for money. And we are supporting the strength of our public sector with prudent policies that grow our economy and ensure all New Zealanders gain from the progress we are making.

I welcome the contribution the PSA is making to these issues with its thoughtful discussions at this conference.

And I look forward to continuing a strong relationship in the future. Thank you.

ENDS

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