7 February 2008 Speech Notes

Hon Dr Michael Cullen

Hello and thank you for that introduction and to the Auckland Chamber of Commerce for organising this event.

I have come here today to give my first major speech on the economy in the year ahead.

New Zealand at the start of 2008 is still enjoying the longest period of economic growth since the end of World War II. That is a remarkable achievement and the people in this room and in the business community throughout New Zealand deserve a great deal of credit for it.

And while I am proud that I start my ninth year as Finance Minister with this period of expansion continuing, there is no denying that our economy faces considerable uncertainty in 2008.

The serious issues facing the United States are of concern to the global economy. Rapid rises in global food and transport costs are seeing many nations – not just New Zealand – face serious inflationary pressures just as the global economy appears to be slowing. Here at home, these global factors are a strain on household budgets, as are the high interest rates employed to address the imbalances in our economy.

I will not downplay these uncertainties, even in an election year. Doing so would undermine the economic credibility that has been one of the linchpins of Labour’s record of success in office.

But on the flipside, those who seek to talk down our economy for political gain can expect a vigorous response from the government. And they can expect to have their credibility and responsibility called into question. It is ridiculous, for example, for Mr Key to blame the government for the global increase in petrol prices.

The reality is that New Zealand is uniquely well-placed to weather any clouds on the horizon. For the reasons why, we need look no further than the successes of 2007.

2007 was not just another year in a historic period of economic expansion – it was another year in the strongest period of expansion since at least the early 1970s.

Another year where we set yet another record for low unemployment;

Another year where a Labour-led government delivered tax cuts, this time to businesses and savers;

Another year where our firms had higher profits and were affected by fewer work stoppages;

Another year where the government, workers and businesses worked together on the vital issues for the future of New Zealand;

Another year where the government continued to strengthen the Crown accounts.

The truth is that over the last eight years, businesses, workers, and the Labour-led government have worked together to rebuild our economy from the stagnation of the late 1990s. And we have been remarkably successful.

Our economy has grown by nearly a third since 1999.

We have seen our growth rate outpace the OECD average, and stay slightly above that of Australia.

Over the last eight years, household incomes are up by 25 per cent.

Wages have increased by 15 per cent in real terms and profits are up by 13 per cent in real terms.

These are considerable achievements, and they are collective achievements we should all celebrate.

But in 2008, we cannot afford to pat ourselves on the back and say we have done enough. There are always new challenges and the Labour-led government is serious about addressing them.

Today I want to focus on what our success over the last eight years says about the economic debate that has polarised opinions in this country for the last quarter century.

For too long, our economic debate has seen policies for growth pitted against policies of fairness. But together over the past eight years, we have shown that this competition was false. We have shown that fairness actually makes our economy stronger.

And if we will allow ourselves to put that old argument behind us, we can move New Zealand to a new phase of growing, fair, and sustainable prosperity.

Growth v fairness

New Zealand’s response to the fiscal disaster of the Muldoon years was to position growth above all as the guiding tenant of economic policy. Gradually, our economic debate came to see growth and fairness pitted against each other in a zero-sum game.

This became especially true in the 1990s. The mantra of growth above all was used as political cover for cuts to benefits, to introduce charges in public hospitals, to penalise students, to cut superannuation, and to sell-off 13,000 state houses.

The impact of this period of misguided economic fundamentalism was recession and stagnation. But it was also much more.

It was child poverty rates peaking at 1 in 3.

It was disease and overcrowding becoming a reality in our communities,

It was unemployment hovering near 10 per cent,

It was health services crumbling,

And it was inequality increasing dramatically and shamefully.

Labour entered office in 1999 determined to prove that we could work with business to grow the economy substantially. And we were determined to prove that the steps we would take to make our economy fair would not jeopardise growth, but would actually reinforce it.

We cut taxes for families, raised superannuation rates, reinvested in state housing, reformed welfare, and recommitted the government to strong public services.

The results are clear. As we have enjoyed rising profits for firms and the longest economic expansion since the Second World War we have also seen:

- 360,000 more jobs created, giving more families a stake in our economy
- Unemployment fall by more than half
- Over 100,000 fewer people relying on an unemployment benefit
- Child poverty rates fall dramatically
- Inequalities in health outcomes finally start to narrow

The list goes on.

We have shown is that there is no trade-off between growth and fairness. And by demonstrating that we have shown the way towards the prosperity we all deserve.

The debate of the last quarter century is settled on the evidence.

It is my hope that this year, after eight years of expansion and success, we can have a new debate. The time is now for a national discussion on how to have a growing, a fair, and a sustainable economy and in the process how we can achieve a new period of unprecedented prosperity for all New Zealanders.

The world’s first truly sustainable economy

In previous speeches, I have talked about building the world’s first truly sustainable economy.

Most of my comments have focused on seizing the enormous business opportunities that will be created by growing consumer awareness of environmental issues.

But sustainability is about more than just the environment. For the Labour-led government, a commitment to sustainability is a commitment to policies that will endure and policies that will deliver a more prosperous and fair New Zealand into the future.

This year, my Cabinet colleagues and I will outline the new direction we will take to deliver true economic sustainability.

Skills and productivity

Last week the Prime Minister made a very important announcement about an increase in the leaving age for school, training, or structured learning. This followed an extensive, detailed policy process over the past year and more announcements will be made in the months and weeks ahead.

It should be seen as just one part of Labour’s fundamental reform of the education system which has had the dual goal of allowing all young New Zealanders to realise their full potential, regardless of their background, and making sure businesses have the skilled workers they need.

This work has not had a narrow focus – it encompasses everything from the delivery of free early childhood education to three and four year olds right through to the revitalisation of industry training. It has been a busy agenda for Labour in government and it will get busier this year.

In addition to the changes to the training or education leaving age, we will propose major new steps in raising the skills of our entire workforce in partnership with Business New Zealand, the Council of Trade Unions and the training and education sectors,. This will be about a New Zealand workforce that can compete in a global economy.

Our unified skills strategy will also be about delivering lasting productivity gains to drive lasting economic growth. We need to raise our game still further. Improving skills will be just one part of our work on productivity. Last week’s announcement is a crucial part of that. It will mean major changes in the approach to secondary schooling so that young people do no start disengaging at thirteen or fourteen, but maintain a thirst for education and skills acquisition.

Wages

We will talk openly and honestly about the steps needed to boost incomes in New Zealand. There has been a 15 per cent real increase in wage rates since 1999, but we should be talking about how to drive faster increases while we raise productivity. Yes, we should aim to close the wage gap with Australia, but we should do more than talk about cutting taxes to help us get there. The government can only do so much – business must also pick up the challenge.

Innovation

My colleague Pete Hodgson will lead an exciting work programme on innovation.

We already have strong links between public and private research institutions. We are already seeing increases in investment in research in both the public and private sectors. But we want New Zealand to be an ideas leader and we know we have to do more.

This year the Labour-led government will focus our efforts on identifying areas where New Zealand can lead on innovation, including environmental and pastoral research and technology. We will focus not just on strategy, but on the practical steps we can take to advance New Zealand innovation today including our support for the Auckland Innovation Precinct.

Exports

We need to do more to build on the announcements made last year about the development of new sustainable export markets. We will make progress on trade agreements this year, but we also will continue to help our exporters through market development assistance grants announced in last year’s Budget. This will be particularly important against the backdrop of the high New Zealand Dollar.

The truth remains that despite the resiliency of our exporters in difficult conditions recently, we need to lift our game still further if we want to deliver the prosperity New Zealanders deserve.

Savings

We will make further progress in embedding a renewed culture of savings in New Zealand. Today I can announce that the KiwiSaver scheme continues to defy expectations.

As at 25 January, over 414,000 people have joined the scheme.

On 1 April this year employer contributions will begin and the government’s tax credit to help cover the cost of these contributions will be rolled out. I realise this is requiring a significant amount of work for businesses and I want to thank you for your efforts. If we can get this right and build a large pool of domestic capital through the scheme, we will all be winners from KiwiSaver.

I am pleased that New Zealanders have continued to embrace KiwiSaver even as turmoil in financial markets have created headlines over the past few weeks. The reality is that managed funds are likely to report significant losses for January as well – and this will affect KiwiSaver accounts and the New Zealand Superannuation Fund.

But we must keep our eyes on the long-term and with a high Kiwi dollar and low asset values over the next year or so it is a good time to be investing for the long term.

Infrastructure

We will also talk about new ideas for further investment in infrastructure. You will all be aware that the government has made massive investments in public transportation and roading projects – since 1999 central government spending on roading has doubled, our land transport investment in Auckland has increased by 330 per cent, and our total public transport investment is almost 12 times higher.

You will also know that we have a large work programme around our Digital Strategy and efforts to increase broadband access. All of this work will continue to gain momentum.

In 2008 our approach to infrastructure will be about more than investment – it will be genuinely innovative.

Today I am announcing that the government will actively explore the use of Public Private Partnerships for major infrastructure projects. Existing legislation allows us to pursue these partnerships, but we have yet to have a project of adequate scale to consider refining and using our legislative tools.

My colleague Annette King, the Minister of Transport, is announcing today that the Labour-led government has decided to take the next steps on what will be the largest roading project ever undertaken in New Zealand – the Waterview Connection to complete Auckland’s Western Ring Route. The government’s preference is for a deep tunnel option, which should minimise disruption for the community.

We want the project completed by 2015 and we are announcing today that we will actively investigate completing the Waterview Connection as a Public Private Partnership.

Doing so makes sense. This is a huge project, with a potential cost of $2 billion. It is a project that will have significant benefits for the entire Auckland economy. We believe that the private sector has much to gain from Waterview and that the entire community – and the taxpayer – could have much to gain from involving the private sector in its construction.

A steering group will be appointed in the next few days to consider the feasibility of progressing Waterview as a PPP. The group will have an independent chair and representatives from the public and private sectors. Consultation on the Waterview project will begin on 26 February and I hope the Chamber will contribute its views in that process.

This announcement shows that the Labour-led government is serious about maintaining our investment in major infrastructure projects. And it shows that we are willing to reach for innovative ideas to accelerate our economic transformation.

It is that willingness to innovate, to seek new approaches, and to be willing to make major strategic investments that will be required if we are going to raise our level of economic performance once again. That is what Labour will be talking about in 2008.

Four planks of our economic platform – four tests for tax cuts

But we will also keep our eyes on the uncertainty we face this year.

As I said earlier, as we face challenges we should take comfort from the depth of our economic success in recent years. But above all else, we should take confidence in our ability to weather any global storms from the strength of our economic platform.

Over the last eight years, Labour has focused on building a solid economic platform for growth and fairness. It hasn’t been headline grabbing work, but it has been, I believe, our most important economic achievement.

There have four central planks to that platform: a commitment to lowering debt, strong investment in public services, taking inflationary pressures and economic imbalances seriously, and taking steps to reduce inequality in our economy and society.

In this year of uncertainty, we can be glad that the government has lowered crown debt from 35 per cent of GDP to less than 20 – this provides a degree of insulation and it means we have the room to employ a fiscal response to a downturn if it eventuates.

In this year of challenges, we can be glad that the services New Zealanders rely on – especially in hard times – have been rebuilt and modernised.

In this year where we have seen countries overseas learn about the dangers of loose fiscal and monetary policy and ignoring imbalances, we can be relieved that balance and stability has been a central goal of business, government, and the Reserve Bank here in New Zealand.

And in the face of any global slowdown when low-income families are most vulnerable, we can be glad that over the last eight years we’ve seen more people enjoying the benefits of work, fewer trapped in poverty, and fewer having their health predetermined by their ethnicity or bank balance.

It is no surprise then that these four planks in New Zealand’s economic platform mirror the four tests I have announced for the delivery of personal tax cuts.

After delivering $4 billion in tax relief per annum from 1 April this year to families, business, and savers the ongoing strength of the economy and our surpluses means that we can now deliver personal tax cuts. Most people here today know that I am not convinced by the tax cut evangelism of my political opponents. They may talk up the transformative power of tax cuts, but underneath that spin what you will really find is a long-term goal of undermining the role of government in society and winning elections.

Labour will deliver tax cuts because it is fair – money that we do not need to meet our obligations to New Zealanders should not be held indefinitely in crown accounts.

We will lay out a programme in relation to the next three year term in office and the longer term direction of change beyond that.

But we will not borrow to pay for tax cuts.

We will not cut services to pay for tax cuts.

We will not exacerbate inflationary pressures when we deliver personal tax cuts.

And we will not allow tax cuts to lead to greater inequality in our society.

In the months leading up to the Budget, I will expand on each of these four points in individual speeches. They are Labour’s tests for tax cuts because they are our platform for a strong, fair economy.

Conclusion

I believe the New Zealand economy is in an unprecedented position to prosper. By working with business and with workers, the Labour-led government has shown that our economy must be fair to be genuinely strong.

In 2008 after eight years of expansion, we can now have a new debate. We can talk about reaping the rewards of a truly sustainable economy – an economy that is innovative, that sees quicker productivity gains and higher wages, a balanced economy that saves for its future success.

But I will assure you all that this government will fight strongly to defend our economic platform in the year ahead. We will ask the hard questions of those who would undermine our fiscal strength. Of those who do not share a genuine commitment to fairness and equality.

Of those who seek to talk our economy down for political gain and to minimise the significance of our economic imbalances.

This is a year of economic uncertainty – of that there can be no doubt.

But there can also be no doubt that this will be a year where the Labour-led government once again works with New Zealanders to take our economy and our country towards the greater prosperity we deserve.

Thank you.

ENDS

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