Hon Michael Cullen
3 June 2004
Speech Notes

Speech to Tauranga Business Network Group
Somerset Cottage Restaurant, Bethlehem, Tauranga

Last week’s budget brought a very welcome change in the trend of newspaper cartoons over the past four years. Gone, finally, were the images of me sitting atop of mountain of cash. This time round I find myself portrayed as a Harry Potter-style apprentice magician, and as a kind of mother of the nation holding a baby to a breast full of milk. I am not yet decided whether to be flattered.

Generally the reaction to the Budget was as expected. Health groups, education groups and those who advocate for the poor and for workers were generally strongly supportive of the budget’s policy thrust.

The financial market commentators accepted that the fiscal stance in the budget would be modestly stimulatory but was consistent with the government’s fiscal objectives and would not put any real pressure on monetary policy.

The National Party failed to take the opportunity a budget offers the opposition and outline their alternative policy programme, apart from reiterating their belief (sadly shared by some of the business lobby groups) that business people and investors are not intelligent enough to perform some quite simple calculations and work out that although our headline rate of corporate tax is higher than Australia’s, businesses in New Zealand actually shoulder a smaller tax burden because of Australia’s payroll taxes, worker’s compensation levies and capital gains tax.

It has been said that Budget 2004 is not a Budget for business. While it is certainly true that the bulk of new spending is directed towards improving the living standards of low to middle income families (particularly working families), it is wrong to suggest that there is nothing for business to be happy about.

The Budget continues a five-year tradition of solid financial management of the government’s share of the economy. We have created a platform of stability, and we intend to maintain it.

And that is in spite of a mixed economic outlook. The economy is forecast to grow by 2.8 percent in the year to March 2005, and 2.5 percent in the year ended March 2006. This represents a slow down from the 3.5 percent growth we posted for 2003, although it remains in OECD terms a very creditable performance, and as the recent trend has been for the economy to consistently outperform the forecasts, one might expect any risk around these forecasts to be on the up side.

After 2006 growth is forecast to pick up to 3.4 percent in the following year and return to Treasury’s current assumption of medium term growth of 3 percent.

Throughout last year I was expressing concern about the emergence of a two-speed economy: a strong domestic sector, fuelled by construction, alongside a weak export sector hamstrung by a drop in commodity prices, a weakening global market and a high dollar.

Significantly the next year is expected to bring with it a rebalancing of our economy. On the external side, strong growth in the United States and Japan should underpin continuing growth in our export volumes. Meanwhile a return of the currency to something near its true value and ongoing strength in commodity prices should lead to an improvement in export earnings.

On the domestic side we are forecasting a slow down as the reduced export incomes of the last year work their way through into reduced consumer demand, and as the construction industry reaches the limits of its capacity.

Meanwhile the government’s fiscal situation remains strong as a result of prudent management. Total core Crown operating expenditure, at $42.2 billion, is around 30 percent of GDP – down from 35.2 percent when we took office in 1999 – and even with the new spending announced in the budget this will increase only to 31.6 percent in 2007/08.

One of our key fiscal objectives has been to keep gross sovereign-issued debt below 30 percent of GDP on average over the economic cycle. Since taking office we have reduced that indicator from 33.7 percent of GDP to 24.7 percent, based on the current June forecast.

We are convinced that the current generation of New Zealanders can and should pay its own way by banking surpluses for the future, rather than pushing out a bow-wave of fiscal costs and risks for future generations to wear. Getting debt down to more prudent levels is a key part of that goal, so we have amended the debt target to further reduce gross sovereign-issued debt over the longer term, aiming for 20 percent of GDP by 2015.

Alongside reduction of debt, we are continuing to strengthen the long-term fiscal position through making contributions from our operating surplus into the New Zealand Superannuation Fund. Transfers into the Fund will be $2.1 billion in 2004/05, and at June next year the Fund is forecast to total $6.3 billion. Meanwhile the Fund Guardians are moving from a cash portfolio to a fully invested portfolio by the end of this financial year, and, during the first period of investment, have exceeded their target rate of return.

The Fund will contribute to the reduction of net debt, which including the Fund’s assets is forecast to be down to 8.7 percent of GDP by 30 June this year. What is more by the end of the forecast period this will fall to zero, as financial assets equal gross debt. This will be the first time in decades that the government has been in the black in net terms.

So on this stable platform we are now ready to commit to new operating spending of around $2.4 billion in 2004/05, rising to $3.8 billion in 2007/08.

The bulk of that goes to the Working For Families package, which provides greater income security for 300,000 New Zealand families and stronger incentives for those families to derive their income from the labour market.

It is clearly wrong to suggest that business gains no benefit from these measures. It is first of all a package that will provide mild stimulation to the domestic economy.

More importantly Working for Families and the increases in Vote: Education constitute an investment in the workforce of the future. Given the aging of our population, we need to take this longer term perspective.

The package involves a set of linked changes to the tax and benefit system aimed at achieving three objectives:

- To support people with dependent children to move into work and to remain connected to the labour market;

- To make work pay by creating a much more significant wedge over benefit entitlements for people in paid employment; and

- To ensure income adequacy for families with dependent children, and address issues of child poverty in particular.

It is a phased package, costing $221 million in 2004/05 and rising eventually to $1.1 billion in 2007/08 and outyears. Once it is fully implemented over 60 percent of families with dependent children will be financially better off, with an average gain of $66 per week overall, and a gain in the $25,000 to $45,000 a year bracket of around $100 a week.

The package places workforce participation at the heart of a strategy for the long-term well-being of families. Indeed the majority of the expenditure will be on families who are in work. The package is about altering the factors that make it hard for low-income New Zealand families to remain attached to the world of work.

That is why, for example, improved access to good quality childcare is an important part of the package. Childcare Assistance thresholds will be increased by about 50 percent in October this year, immediately making a large additional tranch of families eligible. The Childcare Assistance rates will also increase, by 10 percent this year, and a further 10 percent next year.

In addition an extra $365 million over four years will be spent on early childhood education, including, from July 2007 an entitlement to 20 hours free education per week for all three and four year-olds. This commitment represents an increase of 79 percent over government spending in 1999.

The package is likely to have a positive effect on the supply of semi-skilled labour. Many manufacturers in particular are saying that it is hard to fill positions which require moderate level skills. Some part of the problem appears to be that people with children currently face very limited gains in income from increasing their labour market participation, say by taking on a part-time job, or increasing their work hours. This package will go some way towards fixing that problem.

It has been suggested that much of the Working For Families package could have been delivered via a cut in personal income tax. That, I am afraid, is simply not true.

Under the Working For Families package a family with four young children and a single income of $55,000 a year will be better off by nearly $150 a week once it is fully implemented in 2007. To deliver that amount of additional after tax income by a rate reduction would be impossible. A 20 percent flat tax rate, which has been suggested, would give that family just $39 for a fiscal cost of some $5.5 billion.

The simple fact which the advocates of tax cuts fail to acknowledge is that tax cuts are an incredibly blunt instrument when one is trying to assist low to middle income families with children. The costs are tremendously high and the gains are meagre. There are much smarter ways of managing the benefit-tax interface, and of improving the rewards that ordinary New Zealanders receive from acquiring and applying their skills.

Nor is there any evidence that deep cuts in taxes would stimulate the kinds of activities needed to get more growth. As I mentioned earlier, a comparison of the tax regimes in Australia and New Zealand reveals that our tax burden for companies is in fact lighter, and our tax system is simpler and better designed. So the total tax take from business and the compliance costs are higher in Australia.

What this makes abundantly clear is that differences in GDP or in rates of growth cannot be explained by the tax rates. What drives economic growth is more complicated than that, and for that reason this government has from the start taken a more active role in economic development.

Budget 2004 announced $500 million of additional spending over four years for economic development initiatives. The new measures include:

- $26 million over four years to enable New Zealand Trade and Enterprise to boost its offshore efforts;

- $35 million over four years to market specialised business sectors offshore;

- $42.6 million to deepen Investment New Zealand’s offshore representation and funding, increasing their capacity to find offshore companies to partner growing New Zealand companies;

- $40 million over four years for the education sector to develop stronger offshore relationships to protect and promote export education; and

- Funding for New Zealand participation in the Aichi Trade Expo in Japan.

In addition, there is extra money to promote collaboration between industry and research institutions and improve the interface between our scientists and our entrepreneurs.

Research, Science and Technology receives $212 million extra over four years, with $50 million allocated in 2004/05. Of that $50 million, $17.3 million is earmarked for the Research for Industry fund, rising to $19.2 million in each of the following three years. This will take that particular fund to around $205 million per year.

Funding increases are also earmarked for the research consortia programme, the international investment opportunities fund, the new economy research fund and funding for environmental and health research.

What is contained in the budget is of course only a small part of what government is doing to encourage economic growth. The business community should not evaluate the budget merely on the basis of whether it delivers a shot of economic caffeine. What is more important is to see new initiatives in the light of the ongoing programme of government.

Hence, aspects of the Working For Families package sit alongside our ongoing investment in education and industry training and our immigration policies as instruments for building a higher skilled workforce. We are working to make tertiary education more affordable and to encourage better quality and focus in the system to ensure that the qualifications that students gain bear a close relationship to the competencies that employers are looking for.

Similarly our science and technology spending sits alongside a recurring theme of all budgets in the last five years, which is the uptake of new technologies and creating better international linkages through investment and trade.

The additional spending on the operations of the Ministry of Foreign Affairs and Trade - $19 million initially, rising to $28 million in out years – will assist that organisation with the very significant work load they will carry in securing trade access with some of our key trading partners. There is a very full agenda in reducing the remaining barriers to trans-Tasman trade and investment. As most of you will know, we have just released a discussion document on mutual recognition of securities offerings. This proposes a model under which an issuer, having complied with the substantive requirements of one jurisdiction’s fundraising laws, will be able to extend an offer of securities to the other jurisdiction with only minimal further requirements.

We are also considering a proposal for mutual recognition and harmonisation in prudential regulation of our banking systems; we have established an Advisory Group on Accounting Standards whose task is to propose a single set of accounting standards to operate across the Tasman; and we are also working on coordinating trans-Tasman competition policy.

Our goal is to arrive at the point where a properly constituted New Zealand company can function as a company in Australia as of right, and vice versa. It is, if you like, a sort of de facto common citizenship for companies. There are significant gains to be made if we can achieve this, and I think you will find that more symbolic gestures such as the notion of a common currency will fall by the wayside.

Beyond the relationship with Australia we have very real prospects of a free trade agreement with China in the medium term and last week formally began negotiations with the signing of a Trade and Economic Cooperation Framework.

New Zealand’s small size, and the fact that we have relatively few areas where tariffs currently operate, offers China an opportunity to take its first steps on an FTA with an OECD economy that would involve a less complex negotiation than it would face with larger developed economy trading partners. The Chinese also recall that New Zealand was the first developed country to sign off on terms for China’s accession to the WTO.

If the current WTO round fails to deliver, an FTA with China would provide us with some insurance against the possible creation of free trade blocks in the Americas, Europe and Asia. It would mean we are not locked out, if this eventuates.

Alongside CER and China, we are also actively pursuing and FTA with the ASEAN nations after their economic ministers recommended initiating discussions with Australia and New Zealand on free trade. ASEAN is a region of some half a billion people with increasingly sophisticated economies and very fast growing middle classes.

Improving trade access is only part of our work agenda on behalf of New Zealand businesses. We are continuing to work on our infrastructure problems, none of which is amenable to simple solutions. Later this year we will be announcing a package of measures to create an environment that is conducive to oil and gas exploration. This is one element in a raft of issues around securing our energy supply.

We are also reviewing the Resource Management Act, not to revisit the ideas that underpin the RMA, because they are fundamentally sound, but to get greater certainty and efficiency in the way the RMA operates. The review will focus on some areas where we believe there is room for improvement.

One example is the need to achieve the right balance of national and local interests. This is particularly important for transport and energy infrastructure where local authorities are increasingly being asked to consider projects that raise issues of national significance using an Act that provides little or no guidance on how competing national benefits and local costs should be weighed. There is no need for the Act to be silent on such matters, and I am confident we can find a way of expressing some straightforward principles in this regard.

The review will also look at improving the consent decision making process, to ensure more consistency between councils; reduce delays and costs; provide greater clarity and certainty for applicants; and largely eliminate opportunities for abuse of the process for personal gain, trade competition, or other vexatious reasons.

We will also be considering measures for building capacity and promoting best practice among the 86 councils who decide approximately 50,000 resource consents each year. While local authority practice has steadily improved, the performance of some councils could still be better.

We will be looking to introduce proposed RMA amendments to the House in September 2004 and those amendments should be passed in this term of Parliament.

So Budget 2004 confirms that there is no fundamental clash between prudent financial management, proactive social policy and an active role for government in supporting business and investing in economic capacity. Indeed the boundaries between these are beginning to blur. Adequate incomes, high quality education from early childhood onwards, good housing, and assistance to families with children are all good social policy, but good for businesses too. The National Party vision is to create dynamism within the economy by widening the gap between rich and poor. All that would do would be to create an underclass sunk in despair.

What we need to realise is that the most successful economies and also those with the highest levels of workforce participation, the highest levels of average workforce skills and the smallest gaps between rich and poor. That is where this government and this Budget are heading.

Thank you.

ENDS

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