Speech to Gisborne Chamber of Commerce Luncheon

Hon Dr Michael Cullen, Minister of Finance

Embargoed to 1300

Tuesday 9 July 2002

Poverty Bay Club, Customhouse St, Gisborne

Thank you for your warm welcome. Yesterday I had the pleasure of launching Labour’s economic policy. It sets out the kind of fresh mandate we are seeking to provide leadership and public investment in the New Zealand economy.

We believe that the New Zealand economy can do a lot better. There is a great deal of potential, both nationally and in individual regions, and much of it is still untapped. But we do not believe there are simple bumper-sticker answers. Our challenge is a complex one, and our response needs to be sophisticated and balanced.

The Labour-led government has been something of a watershed in New Zealand politics and economic management. Contrary to the philosophy that held sway during the late 1980s and 1990s, we do not believe that government’s place is on the sidelines. We see government’s role as an active support, coach, facilitator and investor in talent.

So when I consider the question of how to achieve long term stable growth, the answers that ring true involve three things:

 First, stable economic and fiscal policy,

 Second, a partnership between business and government based upon innovative leadership, and

 Third building workforce productivity through higher average levels of skills.

These are the building blocks which over time will create a solid foundation for growth for the nation as a whole for regions such as Gisborne.

The first part of the equation is stable economic management. When we were elected in 1999 New Zealand’s economy was fragile and out of balance. Economic growth was forecast at around 2.3 percent in the year to March 2000, and employment growth was expected to be only 1.1 percent. Unemployment was forecast to remain at an uncomfortable 7 percent, and our Balance of Payments with the rest of the world was a very unhealthy 8.3 percent of GDP.

We saw it as our task to work with the business community to turn this situation around, and we have largely achieved this. The budget this year forecast growth to March 2003 at a much healthier 3.1 percent, employment growth nearly doubled compared with 1999 at 2 percent, and the unemployment rate a more respectable 5.4 percent. The Balance of Payments deficit is now dramatically lower at 4.4 percent of GDP.

As a government we have sought to strengthen the country’s economic fundamentals by taking a conservative approach to government expenditure and public debt.

We have managed government expenditure well, and this has been done within sound parameters, rather than the kind of slash and burn that some governments have favoured as a substitute for competent management of spending programmes. The Government is on track to meet the operating balance and debt goals that we set for the term.

All of this was achieved without adding to inflation, which at 2.5 percent remains roughly where it was at the end of 1999.

This is more than just numbers, however. It is particularly pleasing to see that 100,000 new jobs have been created, the bulk of them full time. The unemployment rate has fallen, and the better prospects for finding jobs have meant that more and more people are looking for them. As a result, the participation rate – the proportion of people looking for work out of the working age population – is now at its highest level since this survey started.

In other words, there are many New Zealand families who are back in work, and back on track to achieve the future they want for their families.

It is particularly gratifying for me as a Labour finance minister to see that this growth has been achieved alongside better protections for workers through increases in the minimum wage and the passage of the Employment Relations Act.

Our opponents on the right argued that higher wages and better protections would simply fuel inflation and decrease employment. We said their arguments were wrong, and they were. What we now see is more people working their hours of choice in better-paid jobs. And the effect has been a lift in the total value of wages by more than ten percent above the rate of inflation.

A lift in the real incomes of working New Zealand families of this order has not been seen in many decades. At the end of the day, this is the litmus test for a Labour-led government. Has it created real jobs in thriving industries paying increased real wages, and providing real prospects for the future? The answer is: yes.

The second element in the equation is a partnership between business and government based upon innovative leadership. In the Gisborne region, the major focus of the partnership between the Government, the local councils and the business community has been to pursue a strategy to diversify the regional economy by adding more value to forestry and farming products within the region, before they leave for export or for processing.

A major step forward was signalled by last week’s announcement of the establishment of a wood processing facility by Hikurangi Forest Farms, a Malaysian company, after negotiations with the Government, the Gisborne District Council and Port Gisborne. This will involve an investment of $100 million, and the plant will be so large that it will process the equivalent of the volume of logs currently shipped out from the Gisborne Port per year and will be three times the size of the largest plant in the region.

This kind of initiative proves the logic of business, local authorities and central government pooling their resources and finding ways of working together to the benefit of all.

More broadly, the government is providing leadership in areas such as:

 initiatives in dealing with skill shortages;

 upgrading the regulatory environment that applies to the electricity and telecommunications sectors;

 supporting the development of e-commerce;

 improving the funding of research and development; and

 simplifying the tax treatment of private sector R&D.

Our method is pragmatic and case-by-case, as evidenced by the consolidation of the dairy industry on the one hand and the deregulation of the apple industry on the other. Each was a considered response based on a careful analysis of the global marketplace.

We are also providing leadership through our innovation strategy, and one of the key aspects of that was a recognition that New Zealand has advantages of environment and national aptitude that merit special attention if we are to deepen our business activity. We need to acknowledge that we cannot excel in every industry. We cannot be a nation of lone rangers. There is no point in a focus on an area of advantage unless it is also an area where the potential of the global market coincides with the potential of New Zealand to sell into it.

We have identified three areas where there is a good fit: biotechnology, information and communications technology, and creative industries. It is important to stress that we are not trying to pick individual industries as winners. Instead, innovative advances in these areas have the potential to complement each other and to thicken value added in a number of industries that use or could use these technologies. In other words, they are sectoral competencies that have multi-industry applications.

A further area of sound economic management is our programme of reducing the cost of doing business, including the compliance costs that New Zealand businesses face. We recognise that small to medium enterprises are the backbone of the economy, and that economies of scale mean that compliance costs disproportionately affect these business.

Tax legislation now in front of Parliament includes further major areas of simplification. They include clarification on over- and underpayments, reducing the number of taxpayers exposed to use-of-money interest and allowing the pooling of tax payments.

We will be doing further work on simplifying the tax obligations of small to medium-sized enterprises. We will be examining whether current legal forms available to small business are appropriate, and developing ways of reducing the tax impact on businesses during different phases of their life cycles. We are also reviewing the existing rules to see whether income can be calculated on a cash rather than an accrual basis for small taxpayers.

Looking more broadly than taxation, the government is actively considering a range of measures to reduce business compliance costs, including:

 Making the Internet the dominant means of accessing government information, services and processes.

 Simplifying ACC levies and claims processes; and

 Improving the quality and implementation of regulations, in particular the Resource Management Act.

The third part of the economic equation is investment in our economic fundamentals, and in particular the productivity of our workforce. As I said before, we have worked hard to put the country in a position where there is some economic and fiscal headroom that will allow us to invest in future growth.

Our challenge is to lift our sustainable growth rate, in the first instance to somewhere around the 4 percent mark, if we are to see a long-term rise in our standard of living relative to the rest of the developed world.

There is a complex set of reasons why our growth rate, while positive, has lagged behind that of other countries over the past quarter century. It is tempting to think that there are simple answers to these complex issues; but that is at best a naïve belief, and at worst a dangerous delusion.

Clearly the answers lie in the direction of changing economic fundamentals such as:

 the productivity of our labour force;

 the role that technology plays in creating and exploiting niches in world markets; and

 the level and role of foreign direct investment in New Zealand.

Our opponents believe that government should have no role in investing in the future of the economy. They believe in a government on the sideline. They had the opportunity to trial these policies in the 1990s, and the result was a clear failure. They want to try again.

We believe the partnership approach is our best hope, and we are proving that already. So in the next three years we are aiming to improve the productivity of our labour force by a combination of investment in tertiary education and also in the skill levels of people already in the labour force.

Industry training is a partnership approach to industry training, with Industry Training Organisations being funded to purchase training in line with the needs of industry, the cost of which is shared between government, who pay 70 percent of the cost, and industry, who pay 30%. In the Budget the Government increased the level of the Industry Training Fund by $14 million over the next four years. This is on top of the additional $56 million over four years that I announced in last year’s Budget and represents an unprecedented investment in industry training.

We now have over 2,500 young New Zealanders employed as Modern Apprentices in a wide and growing range of industries. The Budget provided sufficient funding to double the numbers of Modern Apprentices, so that we will have 6,000 in employment by December 2003.

We want to continue to invest in technology through the funding of research partnerships. The Government is committing more than $100 million of new investment to Vote Research, Science and Technology over the next four years, almost half of which is focused on funding partnerships with industry.

As the Hikurangi Forest example illustrates, we need to attract foreign direct investment to New Zealand, in particular in those areas of strategic fit. And we are merging the Investment New Zealand arm of Trade New Zealand and Industry New Zealand’s Major Investment Service into a single world-class investment promotion agency operating under the wing of Industry New Zealand, with an initial budget of $14.5 million.

All of these are long term investments which need to be sustained over time. They are the kind of investments that only government can sustain, but they need to be made in the context of a partnership with business and with local communities.

There is not much that is flashy about this programme of investments. It is about a number of small initiatives having a position cumulative effect over time. Rather like the task of raising children or building up a small business or creating a cohesive local community.

This is the way it should be. We have to beware of the temptation to clutch at Big Ideas that are offered as means of economic salvation. New Zealanders fell into that trap with the Muldoon government with its Think Big projects. The National Party’s grand plan for tax cuts is from the same stable. Tax cuts may sound like a welcome shot in the arm for the economy, but the evidence indicates that they are nothing more than a stimulant, and that their long term impact on growth is unclear.

First, as I have to point out to journalists repeatedly, a comparison of the tax rates and structures of different countries reveals that New Zealand is nowhere near the head of the pack. In the six countries studied the total burden on businesses – including corporate taxes, social security levies, local body rates, and excise duties –varied from 9.5 percent of GDP (for the USA) to 19 percent of GDP (for France). The comparative figure for New Zealand is about 7 percent of GDP. Whatever distinguishes us from these other countries it is not higher taxes.

Second, we only need to examine the impact on the New Zealand economy of the significant cuts to personal taxes that took place in 1986, 1988, 1996 and 1998 and the massive cut to the corporate tax rate in 1988. The truth is that all of these tax cuts failed to lift the sustainable growth rate. At the most, they created the inflationary growth one would expect from any fiscal loosening. That is like pulling out the clutch on your car. The engine revs faster, but no more power is produced.

So what the evidence shows is simply this: that in and of themselves tax cuts have not sparked a lift in the sustainable growth rate. This is because lowering taxes does not in itself alter the fundamentals of an economy. It does not increase the level of skills in the workforce, it does not increase our uptake of technology, and it does not gain better access to global markets.

As any businessperson knows, investing is not compatible with a policy of paying out any operating surplus as a dividend. Those who are calling for tax cuts are implicitly calling for the government to rein in strategic investments in our economic future.

So we are looking for a fresh mandate for solid economic management and a balanced programme of making changes to the way the New Zealand economy works.

Our vision for New Zealand is based upon strong regional economies, which draw upon a skilled workforce, utilise the best technology available and are linked to global marketplaces. These are policies we have pursued for the past three years, and I believe they are beginning to bear fruit for the nation as a whole, and for regions such as this one.

Thank you.

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