Speech To Federated Farmers National Conference

Hon Dr Michael Cullen, Minister of Finance

1130

Tuesday 16 July 2002

Hotel Grand Chancellor, Cashel Street, Christchurch

I am very pleased to have this opportunity to address your national conference on behalf of the Prime Minister, to whom the invitation was originally extended.

A lot has changed since arrangements for this conference were made. We now have an election set for Saturday week, and the events of the last week have catapulted issues of biotechnology - albeit in a very restricted way - onto the national consciousness.

There is a need now to get away from single issue politics and to refocus attention on the broader set of issues that are important for determining where we go next as a nation.

The government has in the past three years pursued a set of linked strategies aimed at promoting the rural sector:

- We have stabilised the macroeconomy;

- We have aggressively promoted trade access;

- We have revitalised investment in skills and infrastructure; and

- We have invested in biosecurity and contributed to global efforts to minimise the risk of climate change.

The facts on the macroeconomy speak for themselves. When we were elected in 1999, economic growth was forecast at around 2.3 percent in the year to March 2000. The budget this year forecast growth to March 2003 at a much healthier 3.1 percent.

In 1999, employment growth was expected to be only 1.1 percent, and unemployment was forecast to remain at an uncomfortable 7 percent. The figures in this year’s budget show employment growth nearly doubled compared with 1999 at 2 percent, and the unemployment rate at a more respectable 5.4 percent. This improvement represents 100,000 new jobs, most of them full time.

In 1999 our Balance of Payments with the rest of the world was a very unhealthy 8.3 percent of GDP. That deficit is now dramatically lower at 2.2 percent of GDP.

All of this was achieved without adding to inflation. This was due in part to the conservative approach we took to government expenditure and public debt. These achievements have brought very tangible benefits. For example, in the last fiscal year debt servicing cost the taxpayer some $171 million less than it did in 1999. More significantly, financing costs absorbed 7 percent of government spending in 1999, but are forecast to command only 5.7 percent in the coming year.

At 2.5 percent, inflation remains roughly where it was at the end of 1999. This is within the zero to 3 percent target that the government set in the Policy Targets Agreement with the Governor of the Reserve Bank, and - as I have had to reiterate recently - the intent of the PTA is to signal that I am entirely relaxed about inflationary expectations that stay within that band.

The 1999 amendment to the PTA made it clear that while the primary objective of the Bank was to control inflation, in setting the Official Cash Rate the Governor needed to have regard to the effects of monetary policy on the exchange rate, interest rates and output volatility. The task is to keep inflation within the target range, but to seek to smooth monetary policy changes where feasible and to recognise that there will be brief periods where headline inflation moves outside the band for good reason, and that this in itself is no reason to panic.

My recent concern has been about the hard line advocated by the former Reserve Bank Governor that argues that monetary policy should be anchored to the mid-point of 1.5 percent, rather than utilising the full band. This is like seeking to land a plane in the first half of the runway (or, even more absurd, in a field several kilometres short of the runway) in order to avoid the risk of overshooting.

The most enthusiastic supporters of these hard landings are some in the financial markets whose peace of mind is disturbed by even small amounts of inflation. However, the fluctuations in interest and exchange rates which buy peace of mind for the financial markets amplify the bottom lines of farmers and exporters, and endanger the profit that is needed to fuel the next round of investment and to build confidence in regional economies.

I will be seeking to make it clear to the new Governor of the Reserve Bank that I expect the entire target range to be used if required, so as not to stifle growth that is clearly non-inflationary. I do not think my opponents on the Right are prepared to give this assurance.

Trade access is an ongoing struggle, and one that we are committed to fighting. We established the Closer Economic Partnership agreement with Singapore, and have begun negotiating a similar partnership with Hong Kong.

There is no reason for complacency, however, as recently we have seen moves towards increasing protectionism around the world, which have unfortunately coincided with a tightening of the commodity cycle and a rise in the value of the dollar.

Nevertheless, there is reason for optimism in the genuine will to complete the Doha Round of trade negotiations by 2005 as scheduled, and the growing consensus amongst the members of the World Trade Organisation that agricultural trade reform should be the highest priority.

The recent proposals for reform of the EU’s Common Agricultural Policy may hold significant promise for liberalisation, although it is early days yet.

Arguing for better trade access is one part of a diversified strategy to secure the future of our land-based industries. The other major part is our policy of investment in skills, innovation and rural infrastructure.

We see the New Zealand economy - and the land-based industries within it - as being at an “invest or wither” stage of development. What is more, we see a need for a partnership between government and industry in guiding, funding and managing this investment. This is essential if we are to sustain the level and intensity of investment that is required over time.

In the area of workforce skills, we are putting unprecedented levels of resources into industry training and modern apprenticeships, both of which involve a close working relationship between training providers and the employers who will utilise the skills that are developed.

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.

In scientific research 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.

An extra $48 million will be invested in such partnerships over the next four years, mostly through funding of research consortia. These consortia bring industry and public institutions together for research programmes that are jointly funded, with shared decisions about the direction and focus of the research.

The funding available for consortia will increase by $6.3 million in each of the next four years. Such partnerships produce research which is more immediately relevant and more likely to lead to profitable application of the results.

Bio-technology plays a prominent role in our research programme. It is one of the three areas where our research identified a good strategic fit between our natural capabilities and our ability to sell into world markets. One of our most important challenges as a nation is to diversify within our land-based industries, so that we grow our range of products, including more and more high-value niche products, and also expand our range of markets to provide more stable long term returns.

We are in the process of setting up the Bio-Technology Taskforce, whose task is to advise on how best to build up our scientific and product development capacity. The membership includes a number of people with a strong background in the farming sector, notably Bruce Munro from the New Zealand Wool Board and Paul Tocker from Crop and Food Research Limited.

We are also moving the Crown Research Institutes and - very importantly - the universities and other tertiary institutions towards partnerships with industries around new product development. An important step has been made in the commissioning of several new science parks and business incubators -such as the Waikato Innovation Park - whose purpose is to facilitate the commercialisation of technology arising from research emerging from the University and CRIs.

I hardly think I need to reiterate the government’s stance on genetic modification technologies. Suffice it to say that we, like most New Zealanders, are pro-science and have no sympathy for the Luddite tendencies that drive some parts of the political spectrum. We believe that gene-based technologies are one important element in the knowledge economy of the future, and that these technologies - like any other technology which has an impact upon the environment - need to be managed within a sensible evidence-based regulatory framework which adopts a cautious approach to risk.

Turning to infrastructure, we recently announced a $227 million land transport package, and a major focus of this package was in ensuring a smoother road for our exporters to move goods to market. This includes upgrading of rural road networks, and improving road access to the port of the Auckland.

We are also investing in the infrastructure of the future, namely broadband telecommunications networks, through a multi-million dollar programme to expand broadband internet services to rural centres, thereby providing the platform for turning our land-based industries into e-businesses, with all that means in terms of reducing the impact of our geographical isolation on our ability to operate in global markets.

We also recognise that there is essential community infrastructure that needs to be maintained in rural areas, despite static or even falling populations. For that reason we have invested in initiatives such as:

- The establishment of the Heartland Service Centres, to restore face to face access with a range of government services;

- Increasing police presence in rural areas, and maintaining court services; and

- Supporting rural health services through a $32 million premium to attract GPs to rural areas, the establishment of mobile surgical units and other measures.

We continue to invest in our bio-security infrastructure, and in specific projects such as the TB Eradication Strategy, which has received increased funding with a view to achieving "official freedom" from Bovine TB by June 2013. And we need to see our commitment to ratify the Kyoto Protocol on Climate Change as part of our bio-security strategy.

There are compelling reasons for New Zealand to support international action on climate change. For us climate change is an issue of economic security. The impacts of global warming on our land-based industries are likely to be severe. These include:

- More frequent and extreme floods and droughts;

- Bio-security threats from subtropical pests and diseases;

- Saltwater intrusion and infrastructure damage from sea level rises; and

- Water supply and infrastructure damage from higher rainfall in the west of the country and drier conditions in the east.

The costs of inaction on climate change are likely to be especially severe for land-based industries, and likely to magnify with time. Doing nothing is not the low-cost option.

We are aware that the Kyoto Protocol has its limitations. However, as the only concerted international action on offer, it establishes a functional international mechanism for reducing greenhouse gas emissions. New Zealand, for its part, is committed to showing leadership, but is acting in step with ¡X not ahead of ¡X a broad consensus of western countries on the Kyoto Protocol.

It is important to bear in mind that by the time New Zealand ratifies, some two dozen western nations are expected to have done so, including major trading partners like Britain and the EU. Indeed the Protocol does not come into force until enough developed nations have ratified. In practice that means both Russia and Japan must join the European Union, Canada, Britain, Scandinavia and others in ratifying.

We recognise that there are some industries that will need to change as a result of ratification, including some major primary industries, such as agriculture and timber processing. That is why we have been working on designing agreed sheltering processes to ensure that there is a sensible transition period which does not expose those industries to unfair competition from countries which have yet to ratify.

For example, our preferred policy package includes an exemption for the agricultural sector from any price measure (that is, any emissions charge or trading regime) in the first commitment period. There is an important rider on this; and that is that the sector is willing to join with the government and invest in research to identify options for reducing agricultural emissions which comprise about half of New Zealand’s total greenhouse gas emissions.

The government for its part recently announced an additional $1 million in funding for research into reducing agricultural greenhouse gas emissions. This brings the government’s total investment in agricultural emission research to about $3 million a year.

This is a signal that the government is committed to developing greenhouse policies consistent with economic growth and with our policy of minimising compliance costs on business. We have absolutely no interest in adopting crude or extreme climate change policies that would run counter to that goal.

If the Protocol does come into force, it comes into full effect on the first of January 2008. That is when our greenhouse gas emissions begin to count against our target. The more lead time we have, the easier it will be to implement a careful and progressive approach to reducing emissions, rather than a last-minute rush.

On the more positive side, we should bear in mind that, even prior to its adoption, the Protocol will create business opportunities by raising international demand for new technologies, and improvements to existing ones that reduce greenhouse gas emissions and make more efficient use of energy. New Zealand should aim to be a country that originates and profits from such technological advances.

So, to sum up, the last three years have on balance been good ones for the farming sector. The road ahead looks to have some tricky obstacles to be negotiated, but the threat from tighter commodity prices and unilateral protectionism is offset to a large degree by the promise of biotechnology and the ongoing multi-lateral initiatives towards free trade in agricultural products.

There are as many ladders as there are snakes, and we are already embarked upon a programme that will equip us to catch the former and avoid the latter. That programme is based upon solid economic management and a considered approach to investment in skills, technology and infrastructure within the context of a new set of partnerships between government and the sector.

Thank you.

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