Hon Michael Cullen
Speech Notes
Thursday 11 March 2004

Canterbury Employers Chamber of Commerce

Christchurch Casino, 30 Victoria St, Christchurch

The past five years have been a good time to be a Cantabrian. Not only has the region produced the standout Super Twelve franchise, but also the Canterbury economy has been the standout amongst all regional economies in the country. Thankfully there is no sign yet that the recent problems on the sports field are being translated into Canterbury’s boardrooms.

The period of sustained growth in the local economy that began in the second half of 1998 has continued through to the present day. A range of factors can be cited to account for this; such as high export incomes, stronger population growth (including international students), high job growth, house price rises and relatively low interest rates.

The key structural strength of the Canterbury economy is of course that it straddles the domestic and export sectors, and is very diversified in both. The combination of manufacturing (some of it at the high end of the technological scale), pastoral farming in the hinterland, and new service industries such as export education has proved a very stable platform for sustained growth, and one that is proving resilient through periods of short term weakness.

The people of Canterbury have thrived as a result, with stronger population growth (including international students), high job growth, and house price rises. There has been a massive expansion of employment; indeed a 23.5 per cent rise in between 1998 and 2003. This was the largest increase in the country over that period. The labour force participation rate in Canterbury was 68 per cent in the year to September 2003, the fourth highest in the country though down from an even higher peak.

And Canterbury's unemployment rate has fallen to 4.3 per cent in the year to December 2003, well below the previous trough of 5.7 per cent in 1995. The Canterbury unemployment rate has tended to be very similar to the national average, but the past year has seen it fall below the national average of 4.6 per cent.

The good news has continued. Although economic growth in Canterbury eased slightly due to weakness in the external sector, from a peak of 4.9 per cent in the year to March 2003 to 4 per cent in the year to September, that is still the fourth highest growth rate of New Zealand’s fourteen regions.

The Canterbury economy has remained strong due to buoyant domestic demand. In the year to December construction increased 29 per cent and car sales 22 per cent during the same period. Only retail trade showed a slight decline of 1 per cent.

Employment rose by a quite staggering 6 per cent over the same period, driven by construction and services, and partially offset by declines in the primary and manufacturing sectors.

Most forecasters are predicting that economic growth in Canterbury should remain solid in the year ahead, driven mainly by domestic factors.

While Canterbury is certainly the standout performer, the broader New Zealand economy is in surprisingly good heart, given the state of the global economy.

Over the last three years growth in the global economy has faltered, due to a range of economic and political factors. Thankfully, compared to the situation in the first half of 2003 some of these factors have now diminished:

 We have seen an easing of geopolitical uncertainty following the end of war in Iraq;

 Asia has recovered from SARS which saw a dramatic reduction in tourism, retail and service sector activity (and hopefully the lessons learned in that outbreak will be applied to the current concern over bird flu);

 Japan is emerging from its recession, and has posted steady growth in the order of 0.5 to1 per cent per quarter, with recent, better than expected outturns, lifting growth to above 2 per cent for 2003; and

 There has been some recent improvement in European leading indicators, although these have yet to feed into growth rates.

However, there are still significant concerns:

 Prospects for sustained growth in the US are hampered by the rising current account deficit, the government budget deficit, and a weak, though improving, labour market. None of these augurs well for a speedy recovery in the value of the US dollar, which would be very welcome in this part of the world.

 Meanwhile, Australia, our largest trading partner, has seen growth slow over the last 18 months with the combined effects of a rising currency, SARS and widespread drought conditions, all of which have hit exporters and the tourism sector hard. Economic growth recovered in the final quarter to reach 3 per cent for 2003. This is lower than the previous year but growth is forecast to rise again as the effects of the drought wear off and the global recovery takes hold.

So the tentative expectations are for steadier growth in the global economy in 2004, indeed for growth to be the highest since 2000.

As I mentioned, New Zealand has been bucking the global trend in the last three years:

 Our GDP growth rate was 3.9 per cent over the year ended September, which was considerably faster than in the United States, the UK, Europe, Japan or Australia.

 Consumer and business spending, and investment in housing in particular, have grown strongly. Real gross domestic expenditure rose 6 per cent over the year ended September, driven by immigration, relatively low interest rates, and rising house prices.

 Steady economic growth has brought jobs. The unemployment rate has fallen from a peak of 7.7 per cent in 1998 to 4.6 per cent in December 2003, in spite of rapid working-age population growth.

 Government debt, at 28 per cent of GDP, is the lowest it has been since the mid 1970s.

 Short-term interest rates are low compared to the historical average, although higher than global rates. The Reserve Bank has not reduced interest rates by as much as central banks in other countries because of the strong domestic demand growth New Zealand has experienced. Most recently, the Reserve Bank actually increased the official short-term interest rate by 25 points, to ensure that the inflation rate remains stable and low over the medium term.

The concern, however, is the imbalance between the domestic and the external sectors. We have a domestic economy at full throttle, where demand has built up momentum, and is expected to continue growing strongly over the short term.

But in the export sector we have seen a reduction in nominal export earnings by 6.4 per cent over the year to September. This is despite an increase in export volumes over the last year, and export incomes which are high compared to the historical average. A combination of the rising exchange rate and falling international prices for some commodities is the major cause of this weakness.

The New Zealand dollar has rightly come in for a lot of attention. Standing back and seeing the bigger picture, we should note that it underwent a protracted decline between 1997 and 2000, and therefore a significant appreciation against the currencies of our major trading partners was inevitable given the stronger than average performance of our economy. So the trade-weighted exchange rate has appreciated by 15.5 per cent since the start of 2003 and is currently around 47 per cent higher than its 2000 low. Overall the TWI is currently around 14.8 per cent higher than its post-float average.

While much of the attention has focussed on the substantial appreciation of the Kiwi against the US dollar, some 25 per cent during 2003, the story is more complicated than that. The New Zealand dollar has actually depreciated against the Australian dollar and appreciated more modestly against currencies such as the British pound and the euro.

Even so, as I have said on several occasions recently, I believe the New Zealand dollar is over-valued given the strength of the New Zealand economy relative to our major trading partners, especially Australia, and given the rising current account deficit. This is my judgement, based on the facts of the case. Unfortunately, the money markets remain irrationally exuberant about the New Zealand economy and are valuing the currency accordingly. To my mind this merely illustrates the extent to which they are spooked by the weaknesses in the US economy. Sadly there is nothing I can do to alter international perceptions around the US economy and fiscal position.

My major concern is that a continued high dollar may discourage investment in future capacity in the export sector. I do not want a situation where our ability to take advantage of a global upturn and a lower dollar has been impaired.

By mid 2004 the impact of declining export incomes should be felt more widely than just the export sector. Currency hedges will have worn off by then, and exporters are likely to cut back their domestic spending. Also a lower number of immigrants is expected to reduce economic growth.

Even so it is important to note that the growth rate is not expected to slow much. There is no suggestion that the export engine will fall off or cease to function; just that it will not run smoothly.

Growth is forecast to “bottom out” at 2 ½ per cent over the next year or so. By 2005/06, it is predicted to return to an average of 3 to 3½ per cent per annum, thanks to a recovering global economy, and some assumed exchange rate depreciation, which will revive export earnings.

Along with the slower rate of GDP growth, the rate of job creation will ease. Nevertheless, employment growth will still be above zero, and the unemployment rate is expected to remain in the 4½ to 5 per cent range.

In light of the short term difficulties, it is no surprise to me that last month’s National Bank survey showed a slide in general business confidence from net 16 per cent negative to net 28 per cent since December, in line with concerns about the exchange rate. However, businesses remained optimistic when it comes to their own activity (which is a better indicator of future economic activity).

Employment and investment intentions are robust, consistent with the economy growing at near full potential. And anticipated export volumes have remained reasonably upbeat at a net 20 per cent, which was the level they fluctuated around for most of last year.

The general consensus among forecasters is that there will be good news for exporters late in 2004, with a global recovery accompanied (we hope) by a strengthening of the US currency and those of our other major trading partners.

Over the medium term our strong “economic fundamentals” and flexible economy should allow us to adjust to a changing international environment and fluctuating prices without getting caught in a large economic cycle.

Now to address the question I am often asked on these occasions: what is government doing for New Zealand businesses?

There are sadly those for whom the only acceptable answer is: to cut taxes and abolish regulatory regimes such as the RMA, OSH and the ERA. And even more sadly there are those among my political opponents whose entire economic policy is based upon these responses.

There are two reasons why tax cuts are not part of the recipe for economic growth. First, the revenue loss would endanger the public services that sustain our communities and our economy (services like border control, law and order, education and health).

But secondly, the evidence shows lowering taxes is no magic bullet. Especially since, compared to many of our trading partners and taking into account the total tax burden rather than just headline tax rates, we are in fact a relatively low tax country.

It is folly to believe that some further marginal reduction in tax rates will have the effect of leapfrogging us over our competitors. Instead, the key factors that will drive the next round of growth in our economy have to do with utilising better technology, building and retaining a higher skilled workforce, better marketing of our products and services, and better management practices.

Nevertheless, we are working on making the processes surrounding payment of taxes easier for businesses. Last year we released the discussion document Making Tax Easier for Small Business.

It includes initiatives such as a subsidy for small businesses to use a payroll agent, standardising GST and provisional tax rates to the 28th of the month, and a 6.7 per cent discount for new businesses as an incentive to pay tax in their first year of business. The Government will make decisions on these proposals in coming months and legislation would be introduced later this year.

We are also well down the track towards implementing Inland Revenue’s 5-year e-enablement project. Already SMEs are able to file electronic tax returns, make on-line payments, access tax calculators and receive advisory support. Next steps include enabling all major forms to be completed and submitted electronically and allowing taxpayers to view their account information online.

A key priority on the tax policy work programme in coming months is the tax rules relating to depreciation. For some time I have been concerned about whether the present economic depreciation rates accurately reflect the reality of economic life in a world of rapidly advancing technology and the potential disincentive effect this may have on the level of capital investment.

Officials will be releasing issues papers next month which will look at, for example, better ways of estimating economic depreciation [including the treatment of rapidly depreciating assets] and a number of technical depreciation issues raised by the private sector that cause practical difficulties for business. This will provide an opportunity for further public consultation on these issues.

Turning to the issue of compliance costs, here again, it is important to set aside the naïve view put about by some of my political opponents that the world would be a better place if there were no regulation of business.

The truth is we all benefit from regulation, although we are less aware of the protections it provides than we are of the requirements it imposes. The Resource Management Act, for example, ensures that we have a say in what others may do, where it impacts upon our business or personal interests. And Occupational Safety regulation protects us from the possibility of unsafe work practices by others.

We do not want to jeopardise the benefits that these regulations provide to the community. What we do want to do is to deliver those benefits at least cost, both in financial terms and in terms of management time.

It is important to recognise that the burden of regulation and compliance costs on business in New Zealand is light relative to other developed countries. The 2003 Index of Economic Freedom, published by the Heritage Foundation and the Wall St Journal, noted that “it is easy to establish a business in New Zealand”, and described the regulatory regime as “relatively light” and “transparent”.

And in its 2003 Economic Survey, the OECD commented that “in New Zealand, government regulation is generally of good quality, and compliance costs are not high by international standards.”

On the other hand, as the OECD noted, compliance costs are a source of concern for small businesses, for which they represent a proportionately much larger burden than for larger firms.

That’s why we have already introduced or planned a number of initiatives to cut back the compliance burden:

 In December 2000 we set up the Ministerial Panel on Business Compliance Costs. The panel submitted 162 recommendations on ways of reducing compliance costs, and the Government has implemented, or is implementing 80 per cent of those recommendations.

 Since 2001 the Cabinet has required that a business compliance cost statement be completed for any proposals that have red tape implications for business. This provides a robust, transparent process for considering the impact on small business up front, before any regulation or legislation is implemented, rather than trying to tidy up afterwards.

 Last year we launched the Biz portal that allows businesses access to a range of information and Government agencies through one Internet site. That means accessing the information needed to comply is much quicker and easier.

 On the Resource Management Act in particular we are addressing the long waiting times on resource consents by working with local authorities to improve the level of skills amongst those who make decisions.

We are actively dealing with the compliance issues, but this is only one side of the ledger.

What then would I point to as the key things government is doing for businesses in New Zealand?

First and foremost, we are running a stable macro-economic policy, based on low inflation (although not obsessed with it) and on firm management of government expenditure within a general fiscal approach of running operating surpluses on average across the cycle, while meeting capital pressures and priorities, and managing debt at prudent levels.

This is a key contribution to creating an environment conducive to longterm investment by businesses. It does not take a very long memory to recall a time when we did not have this kind of settled policy environment.

We are of course an activist government, and this means that for the last five years we have been actively engaged, in partnership with businesses, in creating a more productive economy based on higher-value goods and services.

For example, we need to build a more highly skilled workforce. The government is contributing to that through schemes such as the Modern Apprenticeships which, along with other initiatives, has increased the number of people engaged in industry training by more than 25 per cent since 1999.

We are also reforming the tertiary education system, making it more affordable for students and encouraging better alignment between the training that tertiary institutions provide and the skill needs of regional businesses.

We also continue to have an immigration policy aimed at attracting skilled and motivated migrants who can contribute quickly to our economy.

We need to shift our economy away from a commodity basis to a value-added basis, and one of the key imperatives is to appropriate new technologies at a faster rate and to develop our own technological expertise, in particular in the area of biotechnology.

The government’s response has been to set up the Biotech Taskforce. The taskforce recommended an ambitious 10-year vision of increasing the value of biotechnology exports from the current $250 million to more than $1 billion a year. The government has taken all but a few of the taskforce’s specific recommendations on board. For example:

– A new $12 million fund will be established to support trans-tasman joint ventures in biotechnology. This will offer partnership funding to New Zealand and Australian companies working together on biotechnology development, manufacturing and marketing.

– A $2.3 million programme will support best practice in commercialising biotechnology research, to support the flow of good ideas from our laboratories to our farms and then to our markets.

– We will also be spending $1.2 million over four years to get better statistical information on the biotechnology sector, to track its growth; since, as we all know, accurate information is the lifeblood of a growing economy.

We have been actively involved in creating a more vibrant venture capital market, so that New Zealanders with new ideas and ambition to expand their businesses can access the capital they need.

We established the $100 million New Zealand Venture Investment Fund in 2001 with a mandate to accelerate the development of the local venture capital market and boost the level of venture capital available to New Zealand businesses. Of that $100 million, $25 million is earmarked specifically for biotech investment.

Finally, we are actively involved in reducing barriers to trade and investment. Trade liberalisation is a notoriously slow and protracted business; but sustained effort is paying off. To cite two examples from last month:

 Biosecurity Australia issued an Import Risk Analysis for New Zealand apples which should open the way for New Zealand’s apple access into the Australian market; and

 Years of hard work by officials and industry representatives have achieved year-round access to French markets for New Zealand venison, which represents a significant break-through for our exporters and an opportunity to develop the market potential for a high quality New Zealand product.

Closer to home, I have for the past few years been working with the Australian Treasurer Peter Costello to develop a single economic market by harmonising business regulations between Australia and New Zealand. We are making significant progress on areas such as competition laws, accounting standards, taxation and banking.

I could go on, and talk about our investment in our transport infrastructure and in extending broadband internet coverage to the regions. The point I want to stress, however, is that a strategy of tax cutting and deregulation – for all its appeal to business people – is short-sighted and not in the best interests of the economy.

Certainty we need to find efficiencies wherever they exist and reduce the cost of doing business as much as we can. But what matters more is that we invest in a high-quality workforce, an efficient infrastructure, first-class management and the best technology available. That is where this government is placing the emphasis in partnership with New Zealand businesses and communities.

Thank you.

ENDS

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