Speech to the Economic Development Agencies of New Zealand National Forum

Thank you for the opportunity to address this gathering, and thank you to Nigel Kirkpatrick, chair of EDANZ for your introduction.

I also wish to acknowledge Samantha Seath, executive director of EDANZ.

I would like to acknowledge the valuable efforts of economic development agencies in fostering regional economic development that will help strengthen the economy.

As some of you might recall, a year ago this month I delivered the opening address to the 2009 EDANZ conference.

In that speech I outlined the first details of the government’s economic growth agenda.

Twelve months on, it appears that the worst of the global crisis has now passed.

We have weathered the economic storm better than many other developed countries.

Our banking system has not suffered major stress.

Nor are we experiencing a debt crisis.

However, I’m more than aware that things are very tough out there, and business needs all the support the government can give.

Today I want to talk about the government’s economic growth plan, and in particular my role as Minister for Economic Development, leading work to maximise the potential of established and emerging business sectors

We have a sound plan built on six drivers of economic growth.

They are:

1. A growth-enhancing tax system

2. Better, smarter public services

3. Lifting education and skills

4. Boosting productive infrastructure

5. Cutting red tap and regulations

6. And, of great importance to me, better use of science for business innovation and an ambitious trade agenda

We’ve already made good progress.

Tax – at a time when many other countries are being forced to consider income tax increases, we have delivered across-the-board personal tax cuts that will leave the average household about $25 a week better off, even after the GST increase to 15 per cent from 1 October this year.

The average wage earner will be about $15 a week better off.

From the 2011/12 income year, our company tax rate will fall to 28 per cent – lower than Australia and ensuring that we remain competitive. This rebalances our tax system favouring saving, growth and exports.

Better, smarter public services – we’ve reviewed the performance of major departments and agencies; we’ve capped the bureaucracy and moved nearly $4 billion of spending into frontline public services such as health, education, and law and order.

And we’re reviewing longstanding issues such as welfare dependency and pressures on social housing.

Lifting education and skills – we’ve introduced national standards in literacy and numeracy; we’re investing a record $12 billion in education services; we’re introducing the Youth Guarantee and trades in schools; and we’re focusing tertiary education on achievement by improving the quality and relevance of qualifications. We have made significant moves to improve the business skills in our economy.

Cutting red tape and regulation – just last month, we outlined a package of employment law reforms to give businesses the confidence to invest and take on new staff.

We’ve simplified the Resource Management Act to reduce costs and make the process clearer.

Further RMA reforms are underway for water, infrastructure and urban design.

And we’ve progressed aquaculture reforms and building regulations, and electricity market reform.

Infrastructure – before the 2008 election, we promised to unclog the economy’s arteries and address how New Zealand provides its infrastructure.

First-class infrastructure is an important enabler of higher productivity and economic growth and we’re delivering on that in roading, broadband, schools and in other vital areas of the economy.

Better business innovation and an ambitious trade agenda – six key actions have been taken under the business innovation and trade areas for which I’m responsible:

1. We’ve launched the Primary Growth Partnerships; the first three projects have been announced, for the forestry, arable and wool sectors. And recently, successful business plans from the dairy and red meat sectors were approved.

2. We’ve made a major investment in science, with $321 million over four years boosting science, research and technology.

3. Free trade negotiations are progressing at great pace; we’ve signed agreements with Malaysia, Hong Kong and ASEAN, and we’re in talks with India, the Gulf States, Trans-Pacific Partnership countries, Korea and Russia.

4. We’ve committed more money to tourism, with $20 million of new spending in the 2009 Budget and $30 million this year. We are investigating how we can grow our share of business and convention visitors.

5. We’re committed to responsible mining, and will undertake a significant aeromagnetic survey of land in Northland and the West Coast of the South Island to learn more about which areas have high concentrations of valuable minerals. We also remain committed to expanding the petroleum sector.

6. And we’re helping the food and beverage sector research and commercialise high-value processed products with huge export potential by investing $21 million into a nationwide network of food development facilities.

I will go into each of these in more detail shortly, as each have a strong regional economic development aspect which I’m sure will be of interest to you, but first I’d like to provide some context for what the government is doing.

Our economic challenges

Some commentators have suggested our economy was in good shape before the global recession hit in late 2008.

That is incorrect: in fact, our average annual growth was less than 1 per cent a year in the three years leading up to the global financial crisis in late 2008 and we went into recession several months before just about every other developed economy. Every quarter of 2008 - GDP went backwards.

At the same time, inflation reached a high of over 5 per cent in the September quarter of 2008 and mortgage rates had hit double digits.

The recent history of the New Zealand economy shows sluggish and unbalanced growth driven by debt, consumption and government spending, rather than savings and exports.

The bottom line is that we need to rebalance our economy to create the sustainable growth, jobs and the higher incomes Kiwis deserve.

There are two main indicators of New Zealand’s economic under performance.

First, the tradeables sector – the internationally competitive part of our economy comprising exports and import competing industries – actually shrank in the five years from 2005 to 2010.

Even more alarmingly, there have been no net new jobs created in manufacturing and agriculture for the best part of a decade.

Second, by contrast the non-tradeables sector – the spending side of the economy – has grown by 15 per cent since 2005.

We have a big task to turn this economy around and rebalance it towards savings and growth.

Early signs of progress

But we’ve been encouraged by some early signs of progress.

After experiencing five quarters of recession, the economy is growing again.

It expanded 1.9 per cent in the past year and growth of about 3 per cent a year is forecast for the next few years.

More importantly, the tradeables sector grew 3.4 per cent in the nine months to March 2010, compared with just 1.2 per cent in the non-tradeables sector.

This is the largest positive gap between the two sectors over a nine-month period since December 2002.

So we are seeing signs of a fairly orderly, if quite slow, rebalancing of the economy.

To assist this rebalancing we have a strong plan to develop and expand the potential of various sectors our economy.

The economic growth agenda – maximising opportunities for growth

This year’s Budget was focused on looking ahead – building on the recovery so that we come out of the downturn in a better position to create jobs, build productive firms, and attract investment.

The reality is that government cannot decide better than the private sector, how to achieve business growth and innovate.

However government affects what business does, through regulation, incentives, investment and other policy settings.

So we have closely examined 18 sectors of the New Zealand economy to understand what impact the government has.

We've looked and where we can help, and where we should get out of the road.

I believe there is a growing consensus that the government’s economic growth agenda is the right approach for ensuring New Zealand’s future economic prosperity.

For example, the New Zealand Institute’s new discussion paper, outlining many of the key challenges for achieving export-led economic growth, largely reflects the economic growth agenda actions that the government is proactively pursuing.

The paper concludes that, “efforts to improve economic prosperity should focus on improving the drivers of labour productivity, growing exports of differentiated goods and services, and helping firms overcome the barriers to internationalisation.”

We are in strong agreement, and I’ll now go into some sector-by-sector detail of what we’re doing to achieve that.

I will touch first on the activities that cut across all sectors.

Encouraging innovation and R&D

Science and innovation are enormously important drivers of New Zealand’s economic growth.

I know my colleague, the Minister for Research, Science and Technology, Dr Wayne Mapp, addressed EDANZ in March about many of these issues.

Let me reiterate a number of the points he raised.

There is a strong correlation between increasing business expenditure on R&D and economic growth.

Innovation is essentially about turning new ideas into commercial returns.

Compared to similar-sized developed countries, business expenditure on R&D in New Zealand is low, and in particular many of our large firms under-perform.

But it is these large firms that have to make the most significant contribution to improving our economic performance.

The cornerstone of Budget 2010 was a boost in support for business R&D of $321 million for new initiatives over the next four years.

The focus is on supporting R&D intensive firms, increasing the take-up of research by companies and enhancing firms’ capability to conduct R&D.

We are also implementing recommendations from the CRI Taskforce which will enhance their contribution to New Zealand’s economic growth.

This will be the biggest overhaul of the system since its establishment 20 years ago.

Access to capital

Increased investment is crucial to driving the commercialisation of R&D produced by our best entrepreneurs, firms, research organisations and universities.

Access to growth capital is critical to firms wishing to expand into offshore markets.
New Zealand’s capital markets are very shallow compared to other small developed economies.

There is also evidence that our regulatory environment can be improved to reduce compliance costs and improve investor confidence.

Key recent initiatives include:

• A review of the Securities Act, with the potential to both lower the cost of some forms of capital raising, and increase investor confidence;

• $200 million more in trade guarantees through the government’s Export Credit Office to increase opportunities for New Zealand exporters; and

• a $40 million underwrite for the New Zealand Venture Investment Fund's venture capital programme to encourage more private investment into new venture capital funds.

There are also other encouraging signs.

For example, the New Zealand Superannuation Fund and other investors have supported recent fund-raising by mid-market fund managers and are providing expansion capital for established and growing SMEs.

This is a trend I hope will continue.

These interventions, along with implementing the Capital Market Development Taskforce recommendations, all have the potential to provide sufficient impetus for developing capital markets in the short-to-medium term.

Building business skills

We need strong leadership across the business community, if we are to achieve our economic goals. A number of initiatives are already underway to address gaps in business skills and capability in New Zealand firms, including:

A pilot $1 million Prime Minister’s Business Scholarships scheme to boost the capability of New Zealand businesses, particularly those with a focus on exporting. To take on the world, we need internationally capable managers

And implementation of a Regional Partner Network to provide easier, coordinated access to business training and research and development funding and support on behalf of NZTE and the Foundation for Research, Science and Technology.

The new Regional Partner Network model in particular represents a significant change for delivering business training and advice to firms across the country.

The new model will see increased competition amongst training providers, and a voucher-based scheme for firms to purchase business training will provide more choice.

I would like to thank EDANZ for its vital contribution to a working group of government and private sector representatives established earlier this year to get stakeholder input into the policy design the Regional Partner Network.

Increasing internationalisation and trade links

New Zealand needs stronger and deeper international connections as the flows of people, trade, capital, and ideas between us and the rest of the world help drive productivity and economic growth.

New Zealand is open, but less well connected offshore than some small advanced economies.

We are completing or have signed trade deals with Malaysia, Hong Kong and the Gulf Co-operation Council in the Middle East.

In addition, we have taken the first steps toward entering free-trade negotiations with the United States, India and Korea.

These trade deals bring clear benefit.

As we all know, China is the biggest engine of growth the world has seen for a long time – a rapidly growing economy, with a rapidly growing middle class that is increasingly demanding safe, high-quality food.

Our firms have a limited period in which to take advantage of New Zealand being the first country to have a free trade agreement with China.

The government is currently working on a number of China-focussed initiatives in collaboration with specific sectors and industries.

High priority sectors

We have spent considerable time over the past year examining specific sectors that we think could make a greater contribution to the economy.

We have decided to prioritise and focus on industries with some combination of current or potentially high areas of productivity, a distinct competitive advantage, significant existing or potential scale, high rates of export growth, and where government action has the best chance of success.

Food and Beverage sectors

The food and beverage sector remains the linchpin of New Zealand's prosperity, generating $22.7 billion in 2009, or over half our annual merchandise exports.

New Zealand’s processed foods and dairy sectors have significant growth potential based on historical performance and when compared with similar countries.

The food and beverage sector employs one in five of the population.

We already have a reputation for producing goods and services that are safe, secure and sustainable.

New Zealand industry has recognised that our biosecurity status, food safety track record and brand image, coupled with our food production industry, provide the platform on which to grow the added-value food industry.

The government has already taken some bold steps to partner with the private sector to initiate a step change in the food and beverage industry.

That's why last year we committed $21 million over the next five years for the establishment of New Zealand Food Innovation – a national network of four food innovation centres.

I know that a number of economic development agencies have played key roles forging local partnerships between the industry, research and education providers and local government around these regional hubs.

For example, in the case of the Manukau Food Innovation Centre, the local agency in that area, Enterprising Manukau, has played an important role in developing this initiative.

Aquaculture and Fisheries

New Zealand produces $390 million in revenues from 5,700 hectares of water.

There are 16,000 hectares of marine space suitable for aquaculture where there is no current activity, and NZTE’s investment team is working to deploy new projects in this space.

In April 2010, the government funded $1.69 million of a $5.67 million shared aquaculture research facility on the Cawthron Institute’s site near Nelson.

One of the key economic issues facing New Zealand in many sectors is the need to develop new, higher value products.

This facility will help the aquaculture sector investigate and pilot high-value species and products.

I know that the Nelson Regional Economic Development Agency has also played a supporting role alongside these organisations in developing the project, and I applaud their involvement.

The government will introduce legislation later this year to change the regulations governing the aquaculture industry.

With a new and improved regulatory regime the aquaculture sector will reach its goal of being a $1 billion industry by 2025, or maybe sooner

Petroleum and mineral resources

New Zealand's natural resources such as oil, gas and minerals could make a bigger contribution to our economy over and above what they do already.

We have considerable estimated resources in our unexplored petroleum basins, and we also have significant known but undeveloped mineral resources and potential.

Oil is now a large export earner for New Zealand.

In 2008, oil was New Zealand's third largest export earner at $2.8 billion, a 100 per cent increase on the year before.

In fact, New Zealand was ranked in the top 10 countries worldwide for petroleum exploration activity in 2009.

The government is reviewing its ability to manage our petroleum estate in a way that will attract exploration and provide flexibility for government to receive a fair and equitable share of its value.

A low-impact technical investigation of Northland will also be undertaken (in strategic alliance with Northland Regional Council, the Far North District Council and Enterprise Northland), the West Coast and various other highly prospective areas in the South Island – excluding any Schedule 4 areas.

I have also recently released a Petroleum Action Plan that sets out seven actions the government is prioritising to ensure New Zealand is a highly attractive global destination for exploration and production investment, such that we can maximise the gains from our petroleum resources.

High Value Manufacturing and Services

New Zealand's high value manufacturing and services industries also have vast potential for growth that is not limited by natural resource constraints.

These industries include medical technologies, which is already a billion dollar industry, precision instruments, niche electronics, GPS-related businesses, ICT, materials applications, software development and engineering services.

They are built on skills and knowledge, creative thinking and the ability to combine different technologies to meet market needs, which are the areas where New Zealand is often strong compared to other countries.

I note that your next speaker today, Ray Avery – scientist, inventor, social entrepreneur and recently voted New Zealander of the Year – has made a significant contribution to medical technologies field.

I look forward to hearing his views about the issues around innovation and commercialisation in this area.

There is much work to be done, but I hope these initiatives provide a clear signal to business that the government recognises the enormous growth potential in the New Zealand economy, and that we have a cogent and well formed plan to capitalise on that potential for everyone’s benefit.

Rugby World Cup

Finally, as well as being Minister for Economic Development, I am also Associate Minister for the Rugby World Cup.

This event is a key economic development opportunity for us at both a regional and a national level.

The estimated 85,000 visitors will create demand for products and services, and offer us a unique opportunity to show off the best of New Zealand to the world.

NZ 2011 and NZTE are working together with industry groups and yourselves, our regional economic development agencies, to promote New Zealand business capability to international audiences, and to create opportunities to bring local businesses together with international visitors.

I would like to thank you for the work undertaken already in this area to leverage local events through the Rugby World Cup – by the Canterbury Development Corporation, for example, which is working with NZTE to develop an agricultural field day in Christchurch; and Auckland Plus, for their support for the marine sector.

I hope you have all signed on to the NZ 2011 Business Club.

This is a great opportunity to gain considerable economic benefits by strengthening our trading relationships,

Conclusion

We have the opportunity to get the best from our resources, both limited and abundant, by being smarter.

The country has considerable economic potential.

This government is committed to ensuring that we can make the most of that.

We need to refocus and rebalance our economy.

We can export more and lift our incomes.

This government will work with you, with our shared goal of a stronger economy.

Thank you for your commitment to our economic development.

ENDS

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