Prime Minister Helen Clark Speech: Auckland Chamber of Commerce Post Budget Luncheon

Thank you for the opportunity once again to give this post-Budget address to the Auckland Chamber of Commerce.

The practice for our government has been to deliver well signalled Budgets which avoid surprises. We know that business values certainty and predictability, and so does the broader community.

We have not seen the annual Budget presentation as the place for announcing significant policy or directional changes. Rather, we signal those through election manifestos, and follow through with the Speech from the Throne at the opening of Parliament, the Prime Minister's annual statement to Parliament, and key ministerial speeches.

That's why issues like energy and transport were not dealt with in any detail in yesterday's Budget address. Yet there is significant change afoot, with a major policy announcement on energy next Tuesday, and with major transport legislation working its way through Parliament at present.

Today, let me address what is in the Budget, and its context.

The government has set out in these uncertain times internationally to provide fiscal certainty and prudence. It has been prepared to wait to see if its surpluses are structural rather than cyclical. It wants its Budgets and spending to be sustainable. It believes that no one would thank it for a reckless approach which returned the spectre of long term deficits.

Just over two weeks ago in Paris I chaired the annual Ministerial Council Meeting of the OECD in Paris. Ministers from around the developed world addressed the topics New Zealand set on the agenda: growth, development, and trade. Our economy is among the best performing in the OECD at present - a far cry from the last time a New Zealand Prime Minister sat in the chair in 1983. Many OECD nations are wrestling with high unemployment, budget deficits, very slow growth, and sclerotic economic systems.

Two comments made in that meeting stuck in my mind. The first was that taxes are easy to cut and spending is easy to increase, but unfortunately the opposite is not true. The second was that the best short term policies are also the best long term policies. Both observations are relevant to the design of this Budget and to government policy in general.

We are all familiar with the external factors impacting on our ability to grow.

· Since September 11 2001, international security issues have muted global confidence. The attacks in the United States have been followed by those on Western targets in Bali, Mombassa, and Riyadh. There is no quick end to terrorism in sight. Our government will keep New Zealand engaged in the international campaign against terrorism because of its threat to our interests and way of life.

· Even before September 11, the United States economy had slowed, and the Japanese and some major European economies were sluggish. Those are all major markets for us. In the United States, major corporate governance failures have also impacted on confidence.

· This year's economic and health surprise has been the appearance of Sudden Acute Respiratory Syndrome (SARS) which has made people nervous to travel, will impact severely on some Asian economies, and will impact on us.

· At home, our currency, along with Australia's, has repositioned strongly against the US dollar. Obviously the rate of that appreciation has been a concern to exporters.

· Dairy prices are down from the exceptional levels reached at their peak, although they are still high by the standards of previous years. The decline will be felt, however, and not only by the dairy farmers. Their export returns were around twenty three per cent of New Zealand's total export returns last year.

· And then there's the weather, always a factor in a nation with large primary production sectors and an energy system with currently a high level of dependence on whether or not it rains.

Against all that there are positives in the domestic economy. Net migration has been strong and house prices have been rising. Both support domestic demand. Business and farm balance sheets overall are believed to be in reasonable shape, and monetary conditions are expected to continue to ease over the year ahead.

The Budget forecast is for growth at 2.2 per cent for the year to March 2004. While lower than earlier forecasts, that is around twice the average forecast for the OECD. Growth is then forecast to rebound to 3.2 per cent in the following March year.

As in the immediate post September 11 downturn, New Zealand is in a much better position than many to work through adverse international events.

· The government has maintained a strong fiscal stance, preferring to keep its spending sustainable. We are forecasting continuing surpluses.

· The government's gross debt levels are at the lowest levels since data collection on them began in 1971, at 27.3 per cent of GDP this year and forecast to continue to decline.

So far, so good you might say, but can we do more for growth?

The answer is yes, we can, and we are, consistent with our Growth and Innovation Framework and our broader policy direction. In that there is much in common with the broader agenda issued by the New Zealand Chamber of Commerce in February this year in its document, "Achieving Faster Growth for New Zealand".

The Chambers, like the government, are stressing: · Skills, technology, and innovation; · A growth culture; · Availability of venture capital; · Productivity; · Improved market access, and · The importance of the growth of Auckland's economy.

The Chambers also urge the government to keep its spending under control, as we endeavour to do with good results.

I welcome the Chambers' determination to bring what they term "a practical and pragmatic view to political issues" and to move to develop a practical plan to contribute to growth prospects. We are interested in the Chambers' publications and policy work programme.

Our Growth and Innovation Framework prioritised education and skills, innovation, external connectedness, and enabling sectors, all of which the Budget addresses.

Education and Skills

· Spending on education is up $393 million this year. · Over the next year we are funding an extra 774 primary and secondary full time teacher equivalents. · There is more investment in information and communications technology in schools. · Funding for literacy is up. · Spending on early childhood education is up eight per cent this year. · Tertiary funding is up, and more certainty is provided for students and the institutions with the new fee maxima policy.

Of particular interest to business are the initiatives in the skills area.

· Modern Apprenticeships began in Year 2000 and reached 3,000 by mid last year. They have been funded to double to 6,000 places by December this year and to 7,500 places during 2006. Modern Apprenticeships are aimed at the sixteen to twenty one year old age group which previously was badly underrepresented in industry training.

· Industry training overall is boosted, with an extra $84 million over four years going to the sector. Our goal is 150,000 trainees in 2005, and from there to work to the ambitious goal of 250,000 in 2007.

· The Budget has a range of useful initiatives aimed at getting school leavers into work or further training. Our goal is to have all fifteen to nineteen year olds in work or further training by 2007. At any given time, ten to seventeen per cent of that age group is in neither. That amounts to between 27,000 and 45,000 young people not usefully engaged. We aim to change that so that more young people can benefit from a growing economy and low unemployment.

Well targeted immigration is essential to satisfying the economy's need for a skilled workforce, and the government won't be thwarted by the ill-considered populism which rails against it.

The Budget has new funding for actively recruiting skilled migrants and helping those who come to settle. The Auckland Chamber of Commerce has been working with us in this area with excellent results. The government is shifting immigration policy away from the passive receipt of immigration applications towards active recruitment of the skills and talent New Zealand needs.

Research Development and Innovation

One of the long term concerns about the New Zealand economy has been under-investment in research and development.

Now the tide has turned. While we still have some considerable way to go to meet OECD averages, the trends are very encouraging.

In the past two years, business spending on R & D is up by over thirty per cent, university spending is up sixteen per cent, and government spending is up by fourteen per cent.

In the 21st century, first world nations will be those capable of generating high levels of innovation. We must be one of those nations.

Government policy changes and funding are undoubtedly helping to drive this change. A significant amount of the extra government funding for research has gone to the private sector in grants and through research consortia. The improved tax treatment of R & D has also been a factor.

This year the government's research, science, and technology spend will increase by six per cent, again with significant spin offs for the private sector.

Commercialising New Zealand's innovations has been a priority for the government. We have supported the development of business incubators. There are now fifteen in place, and funding for them increases again in the Budget.

The government's Venture Investment Fund is up and running with private sector partners. While its aim was to provide early stage capital, and it is, there is still a gap.

That gap is being addressed in a new initiative this year: the Pre-Seed Accelerator Fund with $19 million over four years. It will invest in those projects in the public sector which fall between grant-funded research and the seed stage of development, where venture capital and other sources of private sector funding cut in. It is open to the Crown Research Institutes, tertiary education institutions, and their subsidiaries. The private sector pre-seed gap will largely be dealt with by extending eligibility for the Technology for Business Growth Scheme.

Initiatives around incubators, and pre-seed, and venture capital are aimed at start up businesses. But small business needs in general are coming in for a lot of attention this year.

A significant discussion document on tax issues affecting small business will be issued in August. It will contain proposals to reduce the number of tax payments small businesses make to assist cash management and reduce compliance costs. It will also propose many other initiatives, including basing provisional tax on a percentage of GST turnover and simplifying Fringe Benefit Tax calculations.

A small and medium sized business summit will be held next February.

In addition, we are expecting a progress report before the end of next month on the progressive, implementation of the recommendations of the Ministerial Panel on Business Compliance Costs, and the Department of Labour is developing best practice employment information for SMEs.

Export and Trade Issues

The Budget has a range of spending initiatives supporting exporters, trade missions, and off-shore export platforms.

The big play in trade, however, is what is happening in the Doha Round. Progress there is far and away our top trade policy priority. We have allocated more than $14 million to increase our trade negotiating capacity over the next four years.

The gains to New Zealand from the Uruguay Round are conservatively estimated at more than half a billion dollars a year. Even greater gains are forecast if the current Doha Development Round succeeds.

So far the Round has missed a lot of deadlines, raising doubts about its prospects of success. The OECD ministerial meeting which I chaired was seen as a critical meeting on the road to the WTO Cancun ministerial in September.

In the event, the big players at the Paris meeting committed to a high level of ambition for the round. Equally, what the major developing economies' representatives made clear was that a round which doesn't adequately address agriculture will fail. The European Union is under considerable pressure to move in this area, and if the European Commission succeeds with its proposals for reform of the Common Agriculture Policy in the next few weeks, it will be able to move. The proposed CAP reform is moving in a direction long advocated by New Zealand of decoupling EU subsidies from production, with the effect of making them less trade distorting.

The Enabling Sectors

The joint public-private sector taskforces set up by government last year to address the ICT, biotechnology, design, and screen production sectors have all presented substantial reports to government, except for design which is about to.

We will be responding to the reports formally in the coming months. There are many issues to respond to. The Budget sets aside $110 million over the next four years for that purpose. As has been previously stated, these sectors have not only considerable growth potential in themselves, but also have growth enabling and multiplying effects across the whole economy.

Overall the aim of the Budget is to build capacity for sustainable growth and innovation while managing the country's finances sustainably.

The focus is consistent with where the Chamber of Commerce policy contribution is pointing.

It is to be expected that some will want us to go further and faster, and others will want more social spending than we can sustain at this time. It is our job to balance the competing priorities.

I came away from the OECD meeting in Paris convinced that our focus on education, training, skilled migration, and innovation was essential for growth. Innovation, including the use of ICT, has been identified as the main driver of productivity growth in the US economy, explaining its longer term higher growth levels than Europe's.

I also appreciate that there is a careful balance to be struck in regulatory arrangements. That is being taken into account in the ongoing review of the Employment Relations Act, compliance costs, and the Resource Management Act, as well as in Tuesday's energy announcements.

Our goal is to lift New Zealand's ranking back into the top half of the OECD, but, as signalled since the launch of the Growth and Innovation Framework, that will take time. Half a century's decline is not reversed in a decade.

What we are focused on in this parliamentary term are infastructure constraints. It is not acceptable to have an unreliable energy supply. Whatever the merits of an energy market, the one we have does not enable us to have standby generation for use in dry years. The proposals for change we will release on Tuesday address precisely that issue.

In land transport, the legislation before Parliament brings new flexibility in funding infrastructure improvements. We are studying the submissions to the Bill carefully to see if improvements can be made. Funding for land transport has increased substantially, and making congestion a key criterion for funding allocation is of great benefit to Auckland. The traffic problems here are the outcome of long term under-investment in Auckland's infrastructure, and that is going to change.

There are many aspects of the government's programme and the Budget which I have not addressed today.

Our vision is to see New Zealand as a dynamic, confident, more prosperous 21st century nation which offers fairness, opportunity, and security to all its people.

That means creating the opportunity for all to work, to be educated, to build their business and/or to contribute their talents through the social and community sectors.

We have placed a very high priority on the values of participation, tolerance, and inclusion and on maintaining and improving our unique quality of life.

We look forward to continuing our dialogue with New Zealand's Chambers of Commerce on how to meet these objectives.

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