The Policy Programme From Here - Speech by Dr Michael Cullen

Business to Business Show, Westpac Trust Stadium

The topic you have invited me to speak to today - "The Policy Programme From Here" - has forced me to do a stock take of what we have achieved and of work in progress. It has also made me take a step back from the minutiae of daily decision making to take a look at the bigger picture. For that, I thank you.

The bigger picture can too easily become the first casualty of office. Ministers can become strait-jacketed by their portfolios and lose sight of how their work intersects with other Ministers' work to create a coherent policy programme.

A second - and related - occupational risk is a tendency to become absorbed in process at the expense of product. Too many of the meetings in the average Minister's day - and certainly in mine - are driven by officials' reports and papers.

It takes a huge and sustained effort not to allow that river of paper to engulf you and to dictate the limit of your thinking but instead to maintain your own perspective and to think outside the frame.

It is essential that the Cabinet keep the bigger picture at the front of its mind because, if it is lost, the second casualty of office is the Government's ability to communicate its vision, mission, call it what you will, to the wider public.

So I welcome the opportunity to talk to you today about the big picture - the policy programme from here. My opening remarks notwithstanding, I actually think the Government has stayed tightly focused on its purpose and has communicated that purpose quite strongly and successfully.

But I am aware that the business community is less sure of where we stand, and of where it stands in relationship to us. At least that is the impression I often get from business audiences. I detect in this a failure to grasp a defining feature of this Government.

This Government does not have a narrow, materialistic, economic focus. We put strong emphasis on restoring a sense of national identity. We want to restore trust in government and thereby to enhance public confidence in the democratic process.

We want to re-establish the legitimacy of government itself. We have clear equity goals: to ensure equality of opportunity and to protect those who might otherwise feel they are outsiders in their own country. The Government has a strong commitment to the environment.

This is a bigger vision. It is a vision that celebrates our sense of community, salutes our cultural diversity and respects our environmental heritage. It is always harder to find a place in a vision that has many dimensions than in a single-minded focus.

Of course within this renewed celebration of our New Zealandness we need to work and consume, trade and exchange, borrow and lend. There is an economic goal that has to be a subset of, and consistent with, these other more metaphysical aspirations.

It is on that economic objective that I will concentrate today, but please remember that it has to seen as part of a much bigger whole.

How do I start to define this new economic mission? Perhaps I can start by defining what it is not.

It is not yet another restructuring around yet another great idea. We were never going to become a leading world financial centre, or the next Silicon Valley, to name but two of the past flights of fancy.

Successful economies transform themselves by building on past strengths. Our new economy will not be like any other country’s new economy. It will be built on the platform created by the old one.

Our vision is not imported. It is no use creating a vision, say, that we can be like Ireland. Ireland is a part of the European Union. It is next door to a large and very rich market. It gets enormous transfers from the EU to rebuild its infrastructure. We are small, far away, members of a very modest common market and get no help from our friends.

Our vision is not money for nothing. Our recent past was built on the myth that we could pump up the economy with consumption financed by borrowing from the savings of the rest of the world. We are still working off the hangover created by that binge. We need to consume, but we need to earn what we consume.

Our vision is intensely pragmatic. It seeks to improve the wellbeing of all New Zealanders. It recognises the realities of the new world economic order. That is an order built around highly mobile capital, rapidly changing technology and accelerating global economic integration.

Under these conditions, a rising tide no longer lifts all boats. Active steps have to be taken to ensure there is broadly based participation in any new prosperity.

Improving the wellbeing of New Zealanders means playing to our strengths. Our strengths are in our natural resources and the resourcefulness of our people. Our people are innovative, adaptive and fleet of foot. Our future lies in innovation, incubation, niche marketing, and frontier technologies.

It is trite but true that the future is in knowledge. But knowledge is not surfing the Internet courtesy of Bill Gates and Telecom. That is renting their knowledge. Knowledge is using the Internet, in conjunction with domestic innovation, to add value to our own human and resource potential.

When we talk about that potential we need to think about agriculture, design and electronics as well as luxury yachts and high profile films: in other words we need to think broadly.

Broadening the base of what we do well requires the integration of three systems: the science/technology system, the education and training system and the financial system. None of them on their own will allow us to lift our national game.

I will deal with these in reverse order.

The pure market experiment that we are now abandoning assumed that the financial system was all that had to function well in order to get economic results. Free capital would seek out the avenues where returns were greatest and would maximise national economic advantage.

It doesn’t, for a host of reasons. One is that capital has global options. If other countries offer inducements to locate there, a large number of perfectly good local factors will count for little.

If the protections for investors here are seen to be inadequate compared with those in other countries, capital will be hesitant. Then there is the short-term time frame over which many investment decisions are made.

The Government cannot turn back the tides of global capital flows. It can, however, make a difference with the quality of local capital markets. That requires working in partnership with and complementing the private sector.

We are taking a number of initiatives to get a competitive capital market and to improve the investment environment. Some are still in the development stage.

We are improving the takeovers code to protect minority shareholders.

We are working on initiatives to reduce the compliance costs associated with corporate taxes.

Now that we have made the downstream changes necessary to buttress the new 39 cent tax rate, I am anxious to reactivate the Good Tax Policy Process. I have always recognised the merits of the GTPP, and its importance in creating certainty for business planning.

However it is not always appropriate or wise in tax issues to telegraph your intentions in advance. That will remain the case. The assurance I am giving you today is that the Government will in future play by the GTPP rules whenever possible.

We are also developing measures to provide business incubation services to innovators, and to encourage New Zealand's growing venture capital markets.

A diversification of the Government Superannuation Fund, and possibly the National Disaster Fund, will inject more liquidity into capital markets. Once the New Zealand Superannuation Fund is up and running, the flow of funds will increase steadily.

We are exploring ways of overcoming some of the bottlenecks that businesses face in penetrating foreign markets, by, for example, facilitating an export credit insurance scheme.

The point here is not to give you the full list but an idea of the purpose and commitment of the government to broaden and deepen our efforts to earn before we consume.

We can improve the investment environment, but it will flounder if new and growing business cannot attract the right sorts of skilled staff. That is why I put a lot of store by our skills development strategy. The problem with skills strategies are that they take a long time to produce results in comparison with the short time it takes for existing workers to relocate abroad.

There is a lot of catching up to do. We are dealing with a problem that has built up over many years. One of the unintended side effects of the Employment Contracts Act was that it in effect imposed a wage pause on a large sector of our working population. A wage gap opened up between here, Australia and indeed the rest of the developed world. We cannot close it overnight, and even if we did the flow would not reverse in an instant.

My own view is that people move in relation to their perceptions of their long term future. The best way to get them to stay here, or to return, is to nurture a confidence that we are rebuilding a country where the long term prospect is of a quality and rewarding lifestyle, underpinned by interesting and well paid jobs.

In the meantime, the Government has introduced a modern apprenticeship programme and taken some quite expensive initiatives to lower the cost of tertiary education, on both the fees front and on the rate at which student debt builds. We have a strategic reassessment of the tertiary sector being carried out by an independent review group.

This brings me to science and technology. This Government is pro-science. It is particularly pro the diffusion of science and its application to new products and new processes, in the “soft’ as well as the “hard” side of the economy.

We are looking at a meshing of the technological, educational and financial systems to get the rebuilding and rebalancing that this economy needs.

The rebalancing takes place through a Government with an active programme to raise the living standards and life prospects of all New Zealanders.

It grows an open, modern, dynamic, outward-looking and innovative economy. It builds on our unique strengths and our special environment. It encourages and rewards talent; cares for and empowers people. It celebrates both the uniqueness and the diversity of our culture. It makes New Zealand a fairer, cleaner place to live.

Compared with the prescription used by the last three governments this Government:

 Is more activist. We welcome the market but say that government has a responsibility:
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(a) to protect the consumer interest where the competitive disciplines of the market are weak;
(b)
(c) to equip people to engage effectively within markets (and to provide them with an adequate income when that is not possible);
(d)
(e) to assist new businesses to get established, and established businesses to grow, and to access new markets, new technologies and necessary skills.
(f)
 We put our focus on adding value rather than cutting costs
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 We are putting more effort into creating wealth rather than consuming it, and favour “open” growth rather than consumption-led growth.
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Currently, and independently of Government, the economy is going through something of a realignment. It is basically correcting in response to the growth of the balance of payments deficit and the accompanying surge of private foreign debt.

During a period of correction, the economic indicators will be lumpy over the very short term. Rates of change, particularly in comparison with the highs and lows of the immediately preceding quarter can appear very high or very low. We need to take a slightly longer term view of underlying trends; looking at them in terms of annual averages or even moving eighteen month averages.

Taking that longer term view, I think we can see some very positive features emerging. I admit that things like good world prices and good climatic conditions help, but even allowing for those, my view is that this economy now faces very good opportunities.

On the external front, the trend rate of growth in imports is slowing noticeably and the trend rate of growth in exports is rising. This for the first time in a very long time.

With retail sales, the import heavy part of consumption – like imported cars - seems to be declining and the exchange and employment rich part – based on the spending of tourists – seems to be growing.

There is quite a bit of importing of new equipment and machinery. Company profits are good, farm debt is falling. There are no apparent inflationary pressures on wage or price fronts. Interest rates are, for now anyway, stable. The exchange rate is competitive.

Of course there are some negatives. The ever increasing price of petrol is obviously debilitating, but international oil prices do tend to be cyclical and we should not be too pessimistic about this. The skills flow is a worry as I have said, but a positive outlook rather than a short-term attempt at a quick fix is the way to deal with it.

It is important not to sell ourselves short. Let me go through some recent positive indicators because they do need attention. Too often the good news is glossed over and the negatives accentuated.

 Tax receipts for the month of July were 7.7 percent up on July last year. Corporate tax was almost 14 percent up. The increase reflects higher company profits than a year ago.
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 Exports rose 12.8 percent in the first two quarters of this year.
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 Preliminary retail sales figures for July were up 1.1 percent on the previous month, 1.7 percent if motor vehicles are excluded. If this carries through to the final figures, it will be the strongest monthly increase since December.
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The Sunday Star Times ran a handy collation of company results in last week's issue under the headline "Profits a confidence booster."

INL's profits up 18 percent, Lyttelton Port up 13 percent, CDL Hotels up 63 percent, Natural Gas Corp up 32 percent, Sky City up 32 percent and Montana Wines up 97 percent. Since then Ports of Auckland has reported an increase in net profits of almost a third over last year.

Exxon Mobil has announced that it will be basing its customer service centre in Wellington. That means 125 jobs, 80 of them new jobs. It chose Wellington ahead of Adelaide, Brisbane or Melbourne because New Zealand is more economical.

Heinz Watties is closing its Australian factory in November to shift 39,000 tonnes of production to Hastings. It transferred 30,000 tonnes from Japan earlier in the year. Total output from the Hastings plant will rise to 200,000 tonnes, making it one of the largest canneries in the Southern hemisphere.

The company director, Nigel Comer, said they were expanding their operation here rather than in Australia because the business environment here was "more favourable."

The ACC changes the Government has introduced will sharpen that edge. We have heard a lot about the small minority of employers who are paying more with the return to ACC provision but the fact is that more than 70 percent are now paying less.

The Wanganui media reported recently a local businessman who is paying $12,000 a year less under ACC than he did under the private insurance model. There are many other stories out there like this one.

Meanwhile, the innovative and the enterprising continue to find new markets, new products and new successes. Auckland software designer, Genie Systems, for example, has just sold an electronic procurement system to a division of the US retail giant Toys 'R' Us.

The economy is not quite at the legendary crossroads, but I do sense a fork in the road.

There is one path that leads to continued mediocrity: more of the stop-start inwardly focussed short termism of the last decade.

There is another that accepts the challenge and maximises our massive but special national advantages. The underlying fundamentals tell me that there is an opportunity that, if lost, may be a long time coming again. It is a confidence thing. But now, it is not so much a confidence in the Government that matters.

Governments can only do so much. This Government will do what it can and what it should to strengthen and integrate the technological, educational and financial systems that business relies on and prospers from. The challenge is to the business community.

The times are good. Take advantage.

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