Cullen: Annual International CEO Forum, Melbourne
Improving New Zealand's investment climate
When you consider we have experienced the longest economic expansion in 30 years, you have good grounds share in the confidence about the future of New Zealand's economy.
Speech notes for address to Annual International CEO Forum, Melbourne
It's always a pleasure to visit Melbourne.
Given the similarities in population between Melbourne and New Zealand, there are similarities in our relationship with each other and with New South Wales - closeness, historical ties and passionate rivalry.
And importantly, we have deep, mutually beneficial economic ties and business links.
The Australia New Zealand Closer Economic Relations Agreement is possibly the world's most comprehensive, effective and mutually compatible free trade deal.
So it is a pleasure to take the opportunity to talk to Australian businesses and give you an update on the state of New Zealand's economy.
I intend to outline the main measures introduced in the budget two weeks ago and introduce to you some initiatives I think you will find very attractive.
Let me start by expressing confidence that the New Zealand economy is in a robust condition.
There are some imbalances that have built up over the last seven years of continuous growth. They have to be addressed for our long-term strength and this year's budget sets out to do that.
But I think when you consider we have experienced the longest economic expansion in 30 years, you have good grounds share in the confidence about the future of New Zealand's economy.
Average growth rates since 1999 have been over three per cent - faster than the average of developed countries, faster than Europe, Japan, the US and the UK and as fast as here in Australia. Since 1999 the New Zealand economy has grown around 24 per cent larger.
And, of course, that expansion has occurred even though New Zealand does not have a minerals resource base comparable to Australia's, and the very attractive earnings that sector has been able to sustain in recent years. It has proven we have a resilient economy even in very challenging economic times.
More Kiwis than ever are in jobs. Our unemployment rate is one of the lowest in the world.
We consistently rate highly in international comparisons of our openness and competitiveness and of the ease of doing business in New Zealand. Last year we ranked only a sliver behind Singapore at the top of the World Bank Cost of Doing Business Report.
Business has enjoyed good years as a result of our growth. According to company tax returns, profit growth averaged over twenty percent a year in 2003, 2004 and 2005 (those are the most recent years for which data is available.) By comparison the average for the previous eight years - which is about as long as we have comparable data for - was profit growth of five to seven percent.
The government is playing its part by maintaining a very strong fiscal position. For the last decade, successive governments have run fiscal surpluses that have been applied to reducing debt. Gross debt is around 20 per cent of GDP and we carry no net public debt at all.
Our net financial assets will substantially improve over the next decade or two as assets build up in the New Zealand Superannuation Fund - the pension fund dedicated to pre-funding part of the future cost of New Zealand Superannuation. Credit rating agency Standard & Poor's last year noted that New Zealand is one of the best-placed nations in the world to meet the challenges of an ageing population.
For all our success, however, it is inevitable that an economy running at full capacity will show the signs of strain. We are seeing these in a number of ways.
Our dollar is around its highest level against the US since it was floated in 1986. We are not alone in that regard. You will be familiar with the pressures from your similar experience of the Australian dollar.
We ran a trade deficit of NZ$6 billion in the year to March. We have developed a domestic economy running considerably hotter than our tradeable sector. We are in what I call an unvirtuous circle - Our growth created a wealth effect and fuelled demand paid for by borrowing, and inflationary pressure. In turn monetary policy tightened. Higher interest rates and a higher dollar causes more stress on the tradeables sector and helps to fuel demand for cheap imports.
We are not at imminent risk of a sudden correction, but it is prudent to act before we reach that point.
Budget 2007 this year was carefully tailored to respond to the macroeconomic backdrop.
It encourages a change in the mix of growth away from domestic demand and towards investment in productivity growth. It is very much a pro-saving budget, putting in place structural incentives to save rather than increase demand through debt. My eighth budget in essence builds on our progress in raising the economy's 'speed limit', the rate at which the economy can grow sustainably.
The centrepieces of the budget are saving and investing.
There are two major initiatives I want to outline with you in particular:
The budget introduced the biggest changes to business tax law in twenty years, a very large-scale workplace retirement savings scheme called KiwiSaver, and the largest business tax reforms in twenty years.
Let me tell you about KiwiSaver.
When I look across here at Australia's robust economic performance and higher personal incomes, it is difficult to avoid a kind of fiscal envy towards the trillion dollars of funds under management through your compulsory superannuation scheme.
New Zealand has had no similar scheme.
We have seen the results in the somewhat frequent arrival of Australian private equity firms coming to New Zealand, recognising the skills and innovation in some of our iconic, fast-growing businesses ...and buying them up.
I welcome the arrival of foreign capital, the technical expertise and marketing opportunities those sales bring.
But I also wish it was not a one way journey and more New Zealand funds were participating in Australian businesses.
To help make that happen, KiwiSaver is getting underway on 1 July.
Everyone who saves four or eight per cent of their income will get a $1000 contribution from the government into their KiwiSaver accounts to get things started. Some will also get a $5000 subsidy to help buy their first home - $10,000 for a couple. KiwiSaver accounts will be operated by a variety of private sector fund managers. The beauty of KiwiSaver is that it deals with the inertia we face when confronted with the challenge of saving - we put it off. Automatic enrolment as workers start new jobs is designed to counter that. They have to make a conscious decision not to save and opt out. With 700,000 people changing jobs every year, I believe that will mechanism will make a real difference to saving decisions.
The budget also considerably strengthens KiwiSaver by improving the incentives for people to save.
The government will provide a tax credit to savers that matches their contributions up to $20 a week. Employers will in future have to match their employees' contribution. They will receive a tax credit to offset that by up to $20 a week. So effectively, savers will get up to $40 a week from the government towards their retirement savings.
Because of the reimbursement, and assuming a 50 per cent take-up, the scheme will add around one percent extra to the national wage bill when it is fully in place from 2011. And that also assumes no wage trade-off.
You will know that is a far lower imposition than you experience here in Australia.
And you will also know what a positive difference a workplace retirement savings scheme can make to employees.
Over time Treasury estimates that funds under management will grow to around $100 billion in today's dollars after thirty years. That's about sixty per cent of GDP.
It's likely to result in a fundamental shift in our saving landscape. It will substantially deepen capital markets and significantly change the mix of growth from spending to saving and investing.
The other very significant package in the budget this year was investing.
It is the focus of the Business Tax Reform package.
The package is aimed at raising productivity and improving competitiveness by providing incentives for our businesses to increase investment in innovation and to expand overseas.
The headline corporate tax rate is being cut from 33 per cent to 30 per cent. The company tax rate cut alone will cost $2.1 billion over four years.
The overall business tax package builds strongly on a $1.4 billion package of depreciation and other measures I announced three years ago in Budget 2004.
I think you should take a close look at the headline rate cut.
It will help businesses reinvest their profits and shows we are serious about remaining in a competitive position with other OECD countries.
I know international businesses have a lot of options in a marketplace crowded with possibilities for their investment.
We are now putting our hand up and saying...'take a closer look at us.'
But we haven't stopped simply with the headline rate. We have invested strongly in measures to grow the sophistication and value of our exports, and to improve our export performance and international connections.
Tax credits for research and development make it attractive to take a fresh look at locating your research and development in New Zealand.
If you are investing in research and development you will be eligible for a tax credit of fifteen per cent.
There is also fresh incentive to partner with kiwi companies in entering overseas markets together. We have changed our international tax regime to allow businesses with international operations to compete more effectively in foreign markets. Until now, kiwi companies were taxed on their worldwide income. Other countries distinguish between the active and passive income of controlled foreign companies. Income from manufacturing and income from investment is treated differently by tax law in those countries.
We will join the international norm, and active income earned for example from manufacturing by New Zealand resident companies from their controlled foreign companies will be exempt from New Zealand tax. Only 'passive', or investment income, will be taxed.
This is an active measure in every sense to encourage our companies to grow their global connections.
Taken together, the initiatives in this year's New Zealand budget significantly strengthen our corporate sector.
It will help to increase the potential rate of growth in our economy, it will help to raise productivity and it will help to deepen our capital markets.
It will ensure we are prepared for challenges ahead.
These measures complement our very liberal foreign direct investment regime. We want more foreign investment in New Zealand-based firms that can export to the world, in order to raise both our services and merchandise export receipts and underpin rising living standards and social services for all New Zealanders.
Under our foreign investment rules, no business investment proposal has been denied under the business category since the early 1980s. I note that of all applications received since 1999 (across all investment categories), 97.1 per cent of applications have been approved.
These measures form a picture of an economy where we are steadily becoming more dynamic, increasing the value and sophistication of our exports and deepening our ties to global markets.
For decades now New Zealand has been building a bilateral network of trade deals.
The impetus has sharpened with the prospects receding for Doha trade talks producing the kind of reform New Zealand would like to see. We secured a closer economic partnership deal with Singapore in 2001, negotiated the Trans-Pacific Strategic Economic Partnership linking Brunei, Chile, New Zealand and Singapore last year and signed a free trade agreement with Thailand in 2005.
We are also currently in the midst of trade access negotiations with Malaysia and, like Australia, with China.
Last year we announced an agreement to enter into negotiations with six key Gulf states that currently provide New Zealand with an export market the size of Germany's.
Together with Australia, we are also involved with the ten-member Association of South East Asian Nations and we are engaged in the East Asia Summit process - an initiative involving the ten ASEAN members plus China, Korea, Japan, India, Australia and New Zealand.
This is an economy I urge you to look at closely and to feel excited about.
New Zealand in the late 19th and through much of the 20th centuries traditionally depended on our benign climate for our economic success. Climate enabled us to produce and grow things better than our competitors.
A good climate remains key to our performance, although these days our focus is more than ever on the investment climate.
We have an efficient, low cost regulatory environment, and one that encourages foreign investment, we are one of easiest places in the world to do business, our solid fiscal profile is the envy of governments around the world, we have a low cost, fair and efficient tax system, and our education climate is heavily focused on investment in skills and linking businesses' needs to tertiary training.
It all adds up to an attractive proposition for the investor with an eye to being positioned to maximise the gains from a growing world economy.
I urge you to continue to keep your sights on New Zealand and grasp an opportunity to expand with confidence.