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Cullen To Simpson Grierson Business Breakfast

Hon. Michael Cullen
6 November 2007 Speech Notes

Address to Simpson Grierson Business Breakfast


Speech at the Simpson Grierson Business Breakfast, L24, HSBC Tower, Lambton Quay, Wellington. 7.30am Tuesday, 6 November 2007.

Good morning.

Tomorrow marks one year to the day since I last addressed a Simpson Grierson event. In my comments last year I made reference to the fact that when David Broome invited me to speak some 10 months before the event, he had the courage to make predictions about economic growth during 2006. I pointed out that David, like many commentators, had predicted a significantly weaker year than eventuated, cuts to interest rates, and a falling dollar.

This year David’s request came in February, and again came with a forecast for the months ahead. I am happy to report, however, that this year it was characterised by a great deal of foresight.

He saw addressing economic imbalances as a priority, and indeed it has been a major priority area.

He asked if the government might use KiwiSaver as a vehicle for implementing non-inflationary tax cuts, and indeed we did.

He also asked about government work to put climate change in the context of transformation of the economy, which is exactly what we have done over the course of the year.

I want to discuss all of these points today and update you on progress over the last year. Climate change and savings remain right at the top of the government’s priority list. On each topic, however, more work is still required to build a durable consensus around New Zealand’s long-term policy choices.

But it is the need for a long-term focus across all economic policy that I want to centre my comments on today. New Zealand is much better-prepared for the economic challenges of this century than we were eight years ago. But challenges remain.

I believe strongly that our response to the progress of recent years cannot be complacency. We must have a discussion about what is needed to quicken the pace of New Zealand’s economic transformation. We need to continue to ensure all New Zealanders can enjoy the benefits of our economic success. We need to make sure that we are as prepared as we can be for the new challenges that globalisation will continue to create.

But most importantly, we must realise that to meet any of our challenges, we must not allow short-term interests and political posturing to distract us from making the right decisions for the long-term.

Over the last eight years, the Labour-led government has worked hard to reinvest in the fundamentals that are the building blocks of a strong society and a strong economy. We took office after a decade of underinvestment in our infrastructure, of cuts to social services, benefits, and superannuation rates. The previous government failed to build a consensus about how New Zealand should be positioned for the 21st century.

In fact, as the last century drew to a close, New Zealand was in many respects sliding backwards in many respects.

Child poverty rates peaked at one in three in the 1990s, and when National left office unemployment rates stood at close to eight per cent. Economic growth was sluggish at best and our firms suffered as the government failed to invest in infrastructure, cut industry training, and failed to implement active employment policies to help get people into work.

We entered office optimistic about the prospects for our economy, but we knew that a major strategic reinvestment period would be required. We needed to reinvest in our infrastructure, in our services, in our communities, and in our families.

The results are clear.

With the longest period of economic growth in more than a generation New Zealand’s GDP is now 28 per cent larger in real terms than it was in 1999.

At 3.6 per cent our unemployment rate is the envy of the developed world.

More than 360,000 jobs have been created.

Over 100,000 children have been lifted out of poverty.

Regional economies that were in decline are now thriving.

Corporate profits are up and work stoppages are down.

We have more hospitals, smaller classrooms, more people participating in tertiary education and tens of thousands fewer people relying on benefits.

And we have built a genuine consensus around the need for fairness in the economy, around the necessity of ongoing investment in services and infrastructure, and around the responsibility of government to prepare for future challenges.

But periods of reinvestment are always followed by new opportunities to address challenges that have previously rested in the ‘too-hard basket’. And in any economy, new challenges and new opportunities are continually created.

For New Zealand today, those challenges are not small.

One of the most pressing challenges facing the economy is our poor record on savings.

The simple truth is that New Zealanders are spending more than they earn. Retirement savings above superannuation are paltry and too many people are relying on equity in their homes as their only significant savings base.

While the government continues to run a strong fiscal position with major investments in the New Zealand Superannuation Fund, our country’s position in relation to the rest of the world continues to be unsatisfactory.

The Reserve Bank and the OECD have both expressed concerns about household savings rates.

The recent World Economic Forum has ranked New Zealand 108th out of 131 nations in our national savings rate.

Our current account deficit stands at over 8 per cent. Our international investment position is a sobering negative eighty-nine and a half per cent of GDP. Net debt levels increased to one hundred and twenty-nine billion dollars.

None of this is sustainable. Over time the effect of this deficit will be a greater reliance on overseas lenders, an inability to set our own economic path, increased vulnerability to global shocks, and increasing problems for businesses looking for capital to expand and grow.

It is against this backdrop that the Labour-led government has made KiwiSaver a major priority. The scheme will make it easier than ever for families to save significant amounts for their retirement, with some middle income families potentially able to double their retirement income.
It will provide a ready-made retirement savings scheme for New Zealand employers, who in tight labour market conditions and with international competition for skilled workers are having to find new ways to attract and retain staff.

And it will lead to a large pool of New Zealand-based savings, helping to offset our current account deficit and building a strong investment base for Kiwi companies to draw from.

KiwiSaver is a very substantial and positive change for working families, for businesses, and for the economy as a whole. It shows that it is possible to turn one of our major challenges into a significant economic opportunity.

It is in that same frame of mind that the government has approached our response to global climate change.

Internationally, most remaining doubts on the economic necessity of taking action on climate change were squashed by the release of the Stern review in October 2006. It showed that if climate change is left uncontrolled, global GDP could fall by as much as 20 per cent per head. Countries like New Zealand that are so dependent on our primary sector would be particularly vulnerable.

But even if you don’t look at the numbers, the threat of rising sea levels and extreme weather patterns no longer seem as distant as they once did. Climate change is real, it is happening now, and the public expects us to act.

It is true that New Zealand is only a very small contributor to global emissions. But those who are still calling for New Zealand to free ride on the back of the efforts of other nations completely misunderstand the way climate change is influencing purchasing decisions around the world and will increasingly influence the competitiveness of firms.

It is not just the threats of the misleading food-miles campaign I am talking about here. The question is about New Zealand’s ability to market ourselves as clean and green, to continue to be seen as an acceptable place to travel to despite the long and carbon-intensive journey, to be an acceptable place for foreign investment, and a credible diplomatic player and trading partner.

But in addressing climate change, and being seen as one of the leaders in doing so, we can turn these challenges into a major opportunity for New Zealand.

The recently announced emissions trading scheme has been well-received. We are by no means all alone in the approach we are taking. Europe and a number of American states are ahead of us on emissions trading. Australia has announced their intention to develop a scheme. But we do need to ensure we remain part of the leading pack.

And beyond emissions trading, by pursuing the Prime Minister’s goal of carbon neutrality, we can overtime transform New Zealand into the world’s first truly sustainable nation, with substantial benefits for the economy and for wider society.

On both savings and climate change, the government’s approach has been to clearly communicate how we view challenges, to engage with business and with communities on policy approaches, and to ground our responses in solid New Zealand values.

The aim is for consensus. We do not want to treat our long-term challenges as political footballs. We want to govern in a way that recognises the seriousness of the issues we are facing and respects the impact our decisions will have on families and businesses.

I think on both issues we have been largely successful in doing so. While the past few weeks have seen some of the expected grumbles on emissions trading, most feedback has been either very positive or constructively critical. There is a wide consensus across society that New Zealand must demonstrate sensible leadership in pursuing sustainability.

The political consensus is not quite as strong, but is improving. Old opponents who have dismissed climate change as a hoax in the past are coming around, even if it is for short term political gain rather than born of genuine belief.

On savings, the public response has been overwhelmingly positive. I announced on Sunday that we already have more than a quarter million KiwiSavers signed up. A number of our leading employers have announced that they will accelerate their matching contributions. We will continue to work with employers to make the transition as simple and comfortable as possible.

Politically, however, we have not yet seen a consensus emerge. There is clearly a feeling in the right-wing fringes of economic debate that our savings problem is actually some sort of conspiracy, dreamed up by myself with assistance from the OECD, the Reserve Bank, the World Economic Forum, Statistics New Zealand, leading bank economists, academics, Treasury, and others.

While these claims are easily dismissed, the failure of our main opposition party to endorse KiwiSaver is getting stranger by the day given the huge popularity of the scheme. Stranger still are hints about cutting superannuation rates and investment in the New Zealand Superannuation Fund.

Our savings problem and our balance of payments issues are serious, but the National Party does not seem capable of making the political sacrifice to endorse government action on these issues. Their dismissal of our policy prescriptions is misguided, but their cavalier attitude towards the problems themselves is truly worrying.

It is my job over the next year to continue to press for a consensus, politically, economically, and socially on those issues that are central to New Zealand’s position within the global economy.

The consensus on climate change and savings are all the more essential in the face of the next wave of challenges that globalisation will deliver.

I do not intend to lay out here a long explanation of current global trends and pressures or to pontificate on the unique characteristics of the next wave of globalisation. But I do want to briefly explain what some of the next major challenges are, and explain why they will continue to require an economic discussion that is focused on the long-term.

The first, and perhaps the most pressing and exciting, is the opportunity to make significant improvements in New Zealand’s skills base.

The skills and knowledge base of our workforce already matter, but they are only going to grow in importance.

If we want increasingly mobile international and domestic firms to see New Zealand as an attractive place to do business, we must ensure that our workforce has the wide range of skills and knowledge they will need to succeed. If we want to keep our local firms competitive, we must ensure that they have a world-class skills base to draw from.

And if we want to ensure that New Zealanders are given every opportunity to gain from the benefits of globalisation, and to be protected from sharp edge of some of the changes that will be eventuate, we must ensure that all our people have the chance to continually improve their skills.

In the months ahead, the Labour-led government will announce a comprehensive skills strategy, developed with the Skills New Zealand forum including representation from business, unions, and the tertiary sector. I expect the strategy to significantly raise the profile of the skills issue and I hope business leaders will see it as a new opportunity to work with government in seizing a significant opportunity.

One of the other things we must do is ensure that we send clear signals continue to send signals about the stability and strength of New Zealand’s economic fundamentals. We must be committed to macroeconomic stability if we want markets and firms to have the certainty they need to do business here. We must demonstrate a commitment to long-term infrastructure investment so our firms have access to world-class communications and transport networks.

But we also need wider thinking about the range of things firms consider when they make choices about where to locate their businesses. The Treasury is releasing a study today that outlines the thoughts of a number of firms on the location of their economic activity.

Over the past year, we have seen some firms choose to move parts of their operations off-shore. Some have moved their production bases to other countries while retaining their research and development operations in New Zealand. Still others have expanded their entirely New Zealand-based operations. The R&D tax credit coming into effect from 1 April 2008 is a big plank in helping retain parts of the value chain in New Zealand.

The study found that overseas ownership tends to reduce the ‘inertia’ for firms to stay in New Zealand. I think this gives an interesting insight into the economic case for greater domestic savings. KiwiSaver provides the means to build up savings by New Zealanders, for New Zealand businesses to stay New Zealand-owned, for the benefit of all New Zealanders.

What this tells us is that there will be no one way that businesses will respond to the pressures and opportunities of globalisation. I think the Treasury-commissioned study shows that if New Zealand can determine which elements in the value chain we can realistically seek to achieve some level of dominance, we can go one step further in improving our competitiveness and in securing greater gains from globalisation. Gaining national consensus on the direction for New Zealand’s future economic development in the face of globalisation is something we must forge together.

The summary of all this is that setting our economic agenda has always been about making sure we are competitive internationally. What I am saying to you all today is that while we have made huge progress, there is no time to stand still.

I am concerned that what I am hearing from the opposition benches is sounding an awful lot like a call for cashing out and taking a breather.

That leads to me to my final point. Returning to David’s invitation to speak today, he asked if I would be able to outline some of the dividing lines between government and opposition policies going into next year’s election.

One of the things that is already clear is that voters will be offered a choice between moving forward or turning back.

The Labour-led government is serious about the long-term, serious about our economic credibility, and serious about doing what is necessary to further lift wages, profits, and economic growth. We want to be honest with New Zealanders about our challenges and build a consensus on the way ahead.

And while the opposition has talked a lot about a new aspirational brand and a new marketing strategy, there will be little new about the direction National will propose. Behind the grin, we will see more calls for privatisation for the sake of ideology; more calls to sell off our assets with no thought to the long-term effects on our infrastructure; more calls loosen fiscal policy and ignore our macroeconomic weaknesses. They will offer a dishonest package, built on telling New Zealanders what they want to hear. They will tell New Zealanders we can head backwards and re-instate the policies of the 1990s without the disastrous outcomes of the 1990s.

My job will be to make it clear that we cannot allow that to happen.

ENDS

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