Michael Cullen Speech: Union-government forum

Good evening, and thank you for coming here tonight. I realise that for most of you, the discussions come at the end of a full day’s work outside of a policy and union context. I hope you find the exercise both interesting and relevant. My colleagues and I certainly do expect to learn, as well as to communicate and explain what we are doing. We are therefore quite open to what may euphemistically be described as a free and frank exchange of views. Because we all embrace broadly similar values and share a vision of the sort of New Zealand we would like to work together in shaping, we need to add friendly to the free and frank.

In setting the scene for this evening’s discussions, I want to go back four months. In early November last year, unions from the full spectrum of the Council of Trade Unions Affiliates Council and eight Cabinet Ministers held a forum to discuss how we might develop a more effective policy dialogue. One of the strong conclusions of that meeting was that if we were serious about an effective constructive engagement, we needed to deepen and broaden participation in the debate. We could not confine it to Wellington based officials of peak level union councils and Cabinet Ministers.

If we were to broaden participation, it was likely to happen in two dimensions. One was at the level of industry or sector. There are issues, for example, that all firms in the forestry sector, or in some parts of the state sector, or within the science community face; regardless of where they are located. The second dimension is the regional one: all of the participants in some regions face similar challenges, regardless of the industry or sector they work in.

We have had some moderate success in addressing sector specific issues, but obviously need to expand the coverage of sector level structures. Although Ministers meet with groups of unionists in the different centres from time to time, we have not really put together a structured cross-portfolio forum in any one region. It was Steve Maharey who took the initiative following on from the November forum to suggest that the Manawatu might be a useful starting point to develop regional level dialogue. I understand that local CTU officials responded positively, and Margaret Wilson got in behind to give the goodwill some momentum. My thanks to all concerned. Without that enthusiasm and initiative, there is no way that what seemed like a good idea in November would have been rolled out into the first regional forum as early as March.

I want to go back and briefly summarise what I said to the November forum.

The government puts a lot of store in lifting the sustainable growth rate.

We do this because that is the only way that we can improve living standards and expand the tax base in a way that allows us to fund our broader social programmes.

The economy has grown steadily over the last fifty years, and living standards are incomparably higher than they were for our parents and grandparents. But if we do not match the growth rates of other countries – like Australia – skills and finance relocate to access the even higher living standards achievable there, and our economy and society “hollow out”.

There is pretty well universal agreement about the necessary conditions for sustainable growth: stable public finances, inflation under control, clearly defined property rights, a well functioning legal system, and transparent and corruption free administrative systems in both the public and private sectors.

There is disagreement about what more is needed to achieve and sustain higher growth. I reject the standard neo-liberal solution of deregulation, a minimalist state and tax cuts for the rich. There is no evidence that that formula works, and it goes without saying that it is a model that is in direct conflict with our legitimate objectives of equity and sustainability.

Increasingly, the evidence is growing that there are two extra features that are associated with successful growth stories. These are the energetic investment in collective goods and a national consensus for growth.

Our programme for growth is therefore based on sound fundamentals, a commitment to energetic investment in collective goods and on the need to build and maintain a broad social consensus around not only the need for growth, but on an acceptance that contributions to and rewards from growth are fairly shared.

It also rests on a belief that economic growth does not simply happen. It has to be nurtured. While the government does not deliver economic growth, it both makes a contribution to growth and fosters and facilitates growth by coordinating and supporting the actions of private sector players.

That role was specified in the growth and innovation framework that was published earlier this year.

I am not going to describe the whole framework, but want to give some overview of it. We get to a higher growth plane by lifting the quantity and quality of our labour force, by increasing the capital stock, and by improving productivity.

Productivity will improve if we lift our game in four key areas: skills, new investment, improved infrastructure and broader export opportunities.

It will improve further if we do two things well: strengthen the foundations of a modern economy and work on our natural advantages and aptitudes. The framework identifies three areas where this competitive advantage needs to be developed: biotechnology, communications and information technologies and the creative industries.

All very well, you may say, but what is the role of trade union delegates from the Manawatu in that very generalised and somewhat abstract overview? I don’t have the answer. That is precisely the issue we want to explore tonight.

We need to start with an overview of the role of unions in a modern social democracy.

The CTU is articulating a vision of union relevance beyond the level of negotiating collective agreements. That means relevance on a broader range of issues, and relevance at different levels of the policy process: firm, industry, region and central government.

At the November forum I identified one of the big challenges as being how to make that exercise of relevance consistent. By way of example, how does a union input into the content of a collective bargain line up with the requirements to remain an attractive destination for inward investment, and contribute to the longer-term goal of raising productivity?

There is neither an easy answer nor a single formula.

I am acutely aware of the need to avoid designing a regime that expects a contribution from unions – let us say in the form of collective restraint of some sort – that is backed by rather intangible payoffs in return.

Unions don’t control many of the other levers that lead to investment, new jobs and new work practices. Of course we can meet and talk, often and at many levels. But that equally can lead to mounting frustrations – on both sides of the equation.

Towards the end of last year I raised the issue of developing some sort of social compact. At the November forum I went through what that might involve in some detail, and I am not going to repeat that here.

Suffice it to say that after the Forum the CTU prepared and circulated a response. That response welcomed Government initiatives to build a consensus around a growth strategy. It recognised that this involved engagement with a range of stakeholders, and not only unions. The CTU argued that it implied a much deeper level of direct engagement between the government and workers through the trade union movement, and tripartite initiatives involving the social partners of unions and business.

The CTU felt that the engagement should, on balance, be more issues based and bottom up rather than institutionally based and top-down. It should also have a problem-solving focus.

The document went on to list issues and suggest processes for dealing with them. It is the nature of that sort of document that nothing gets left out in case it is misinterpreted as indicating that the CTU doesn’t really care about it. But I have to say that the total package is an extremely heavy agenda. Tackling all of those issues would be inordinately demanding on the resources of the trade union movement, and, may I add, the time of Government Ministers. The sorts of issues raised also carry an implicit price tag for both the government and employers that can look rather daunting.

Tonight we need to talk through these two issues: capacity to engage, and expectations about how much money can realistically be available to address a long list of economic development, industrial relations, and social policy issues.

In some ways, engagement at the industry and regional levels might be easier for unions to resource. The government itself has the institutional structures operating through its industry and regional development programmes. Local governments are increasingly setting up economic development units. Employer’s organisations are much closer to the ground in terms of dealing with practical issues like training when we move down to industrial and regional level activity. And of course unions bring that practical relevance to the table.

The capacity exists for effective union participation. The problem is realising that potential. It is a matter of who does what next to set an agenda and get the parties talking about it. It certainly won’t be driven by Ministers. They are simply too far away from local issues to lead on this. This is, though, a topic that needs to be raised in the workshops tonight.

The second issue is expectations. I readily acknowledge that the CTU report does not envisage everything unions ever wanted being delivered in the next year to so. It is a marathon, not a sprint. We do the labour movement no favours by self-destructing in blaze of socially pure glory.

I firmly believe that steady progress within a fiscally prudent and economically manageable framework is the only way that we can make lasting gains for our constituents and supporters. Just what pace of progress can be maintained, what is fiscally sustainable, and what is economically manageable are legitimate areas for debate. But raising these constraints as an argument should not be seen as a fob-off. Recognition of the limits of what is achievable is a constructive dimension of the social democratic agenda.

I am going to conclude these scene-setting comments by sketching out where I see those limits applying in the area of the government’s own finances.

You will be aware that the latest forecasts show that the government is operating with substantial and rising surpluses, and debt is falling faster than had been forecast at the time of last year’s Budget. This has led the CTU and other social policy groups to propose that more be spent to reduce what they describe as the social deficit

This raises the question of what a social democratic government should do when the numbers look a lot better than forecast. The answer is that it should respond as any large and complex business would respond: with caution. Past experience suggests that a number of things can happen. Some of the revenue boost may turn out to be associated with timing: taxpayers paying early to avoid penalty interest. These early payments will reverse out in due course. Equally, some of the forecasts – especially in the outyears – may overstate emerging surpluses as a result of the technical assumptions that are used in making them. Some of the extra money may be a result of cyclical factors: at the end of a longish period of economic expansion the public finances are better than average. And some may reflect structural changes. It may just be possible that we are starting to see a lift in the trend rate of economic growth.

To be frank, at this point in time, we simply do not know what is driving the numbers. We do know that relatively small, but strategic, changes in underlying economic conditions – the exchange rate, commodity prices, trade flows, immigration, wars, petrol prices, even drought – can have both large and rapid impacts on the revenue. Caution advises that we should keep some fiscal insurance in place during these times of intense global uncertainty. Caution also advises that, at this early stage, we should respond very carefully to any indication that the extra revenue may be of a more permanent or structural type. It is simply too early to move with confidence to a substantially higher spending track, because our experience is that these structural shifts in spending are very difficult to claw back if later evidence suggests that we need to.

Let me give you an example. In my first year as Minister of Finance I had a courtesy call from a group from the United States General Accounting Office (their equivalent of our Treasury). They were going around surplus countries looking at what happened in finance markets if governments paid off all public debt. That was because the US was looking at extremely large surpluses emerging in future years. Currently they are facing a deficit of 3.5 percent of GDP. Things can turn that much that quickly.

Remember that when we are looking at surpluses, we are talking about small differences between large numbers. The December fiscal update forecast a surplus of $2.5 billion. If revenue is down by only one percent on forecast, and expenses up by only one percent, that surplus is cut by 33 percent.

I have said that I will revisit our fiscal strength next year and if the structural surplus looks strong enough to meet our debt targets with some confidence, I hope to do quite a bit overhauling family income assistance measures.

What I can say with confidence is that we must avoid the temptation to spend the cyclical element of emerging surpluses. In the 1990s, fiscal policy was decidedly pro-cyclical. The government of the day tended to dissipate emerging fiscal surpluses through tax cuts. This gave a short term stimulus to activity, eventually requiring the Reserve Bank to apply the monetary brakes. When drought and the Asian crisis slowed the economy and the revenue flow, the response was to cut spending, thereby deepening the contraction.

In 2000, the new government made it clear that it was abandoning this approach. It declared an intention to look through the economic cycle and to allow the economic stabilisers to work. It is absolutely essential, both for the sake of sound fiscal management and for establishing credibility, that they be allowed to work on the upside, not only on the downside. In fact it is probably fortuitous that the first time we really let the economic stabilisers work, it is in good times rather than bad.

Fiscal cynics would say that everybody wants the fiscal stabilisers to work – but only during depressions! We want the best of both worlds: to go to the well in a drought, and also to draw off surplus water in the wet years. Fiscally, if we allow the balance to automatically contract when the economy does, to moderate the contraction, but do not bank the surpluses in an expansion, debt simply ratchets up. Banking fiscal windfalls will be a big test of the political will of this government.

If I can summarise, patience is the watchword. That means that must have a careful assessment of priorities and discipline in advancing special interests. I look forward to hearing from you what your experiences are of the real strengths and weakness of our economic and social programmes, and where you think fine-tuning can best make a difference to the lives of your fellow workers.

This is an important evening. I know the CTU has high hopes that it will be the first in a series of regional and industry level engagements. My colleagues and I are ready to answer questions and to listen to contributions. Please don’t hold back. We value your input.

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