13 November 2000 Speech Notes

Michael Cullen to New Plymouth Labour Party

Thank you for coming along this evening. I want to do two things: give a broad review of where we are at in terms of the economy and then, more specifically, say a few things about superannuation.

The New Zealand economy is at a crucial stage in its development. For much of the year, the Government has been involved in a debate with a good part of the business community over some of the key policy changes we have introduced.

That debate has not been very constructive from the perspective of either business or Government. More importantly, it has served to obscure really significant issues of economic policy that we face.

This is a situation which I believe is rapidly changing. The uproar over ACC seems to be settling down, and that will be encouraged by the fact that I will soon be in a position to announce significant overall reductions in ACC levy rates. Moreover, the horrible situation of multiple year payments in one year, created by decisions we inherited, will be behind us.

The Employment relations Act has got off to a pretty quiet start and I am hopeful that before long many business people will realise they were subjected to a scare campaign which did not have a lot of basis in fact.

In any case, there is a real desire by a large number of key business leaders to move beyond these issues and get down to working with the labour-led Government on real issues of common concern. The positive atmosphere and outcomes of both the Auckland Business - Government Forum and the E-Commerce Summit were strongly indicative of this.

It is now over to the Government to follow up on this change of mood and to reinforce the messages we have been conveying about where it is we intend to go in terms of economic development.

The general direction we must move in is clear. New Zealand must be in the first division of knowledge–based producers of high quality added-value goods and services in the world. We must use the new sciences and the new technologies to overcome our traditional disadvantages of size and distance.

We must produce much higher levels of human capital and retain and invest that capital in the generation of wealth.

We must, therefore, lift our performance in skills development, science and technology, research and development, design and marketing to international best practice standards. We will find much of our success in niche industries and markets, exploiting our traditional excellence at short-run production. We will need to build the infrastructure to support this new economy.

And we will need to attract new businesses from overseas into greenfields development in New Zealand, build new businesses in New Zealand, support rapid growth and reward excellence and enterprise while protecting New Zealand’s unique heritage of our environment, our multicultural society, and our innate sense of fairness.

What is clear is that some of the most important reasons for our relative under performance relate to deep-seated structural problems which predate not just this government but the start of the radical structural reform process in 1984 and even, in at least some respects, predate the start of our long relative decline over the last 40 years.

The Business - Government Forum identified key areas for action as being
savings, investment, research and development, immigration, skills, compliance costs, and infrastructure.

First, savings. Clearly, we need to produce more of our own savings. I make no apology for emphasising that this government has put before the public a long-term structure for New Zealand Superannuation which will result in a strong public savings stance over the next twenty years or more. I want to come back to that issue a little later.

But it is crucial that this is accompanied by a clear message that private savings remain essential. That means we must have an intelligent national conversation about how best to facilitate private savings in a way which is fiscally and economically sound, but produces better results than we have had hitherto.

And we have to ensure that those savings are more in a form which makes them available for investment in growth and development rather than locked up in real estate.

Which brings me to investment. A positive programme of investment attraction is crucial but government and business need to talk further about how far that programme can go in a realistic way. Interestingly, some of the successes that Jim’s Ministry has had already have been less reliant on financial inducements than on clearing away obstacles and facilitating processes.

But certainly we need a much more proactive stance if our small nation is to get its fair share of the sort of investment which will create new businesses and dramatically grow existing ones. Further discussions are now being held about the best means to get a vigorous foreign direct investment strategy underway.

Strengthening our capital markets has many dimensions. The takeovers code is one aspect. I firmly believe the New Zealand and Australian sharemarkets getting together is another. But let us be open to further suggestions on this matter.

With respect to research and development, we have already substantially increased state support for the private sector. The question of taxation has remained crucial.

The government is preparing a discussion paper for wider consultation which proposes that the tax laws be brought into conformity with Generally Accepted Accounting Practice in terms of what qualifies as research and development expenditure.

If a company is able to tell its shareholders that research and development expenditure is not in effect the same as the purchase of a saleable asset, that expenditure will be able to be immediately deducted.

Currently the stage at which an idea is judged to have become an asset and to no longer automatically qualify for immediate R&D deductibility as a business expense is a grey area in tax law.

The definition for accountancy purposes is much clearer, and tends to occur further on in the product development process. Development expenditure not creating an asset will be immediately deductible.

The application of the same regime across both accountancy and tax treatments will bring greater clarity and should reduce compliance costs for many taxpayers.

The Government plans to introduce this as a voluntary option to ensure that no-one will be disadvantaged. Those who are happy with their current arrangements will be allowed to continue with them.

Research and development is intimately related, especially in our universities, to skills development. The new Tertiary Education Advisory Commission will have a crucial role in this matter to ensure the creation of a far better coordinated system.

The mechanisms are there to produce a much more strategically focused tertiary education sector in place of the rather odd mish-mash of competition and state support that we have at present. And that will be vital to our ability to maintain tertiary education in the provincial centres.

Immigration is an issue which has really come to the fore over recent weeks from the perspective of how to generate economic growth. We must produce far more of the skills we need. But some of that is very long term indeed. In the meantime, we have got to get much more proactive in the world competition that now exists for people with skills.

On compliance costs, the government is adopting a much broader-based approach than we have seen hitherto. A Business Compliance Cost Panel comprised largely of private sector representatives is to be set up. Originally that was to happen by 1 July next year but, as a result of the Business - Government Forum, that timetable is going to be rapidly accelerated.

Business test panels will be set up to assess the likely compliance costs and the workability of proposed new regulations. Paul Swain is due to report back to a Cabinet Committee by the end of next month on an implementation plan for these panels.

Finally, a few brief words on infrastructure. Our traditional approach has been ad hoc, and often overly influenced by crude political considerations. Part of the framework for the new New Zealand Superannuation scheme will require us to develop a much more strategic approach to capital expenditure.

This will be no easy task, but one that it is important to carry out. At the same time, we need to integrate that strategic approach with better integration of infrastructure planning and development.

Most important of all is the new infrastructure. That leads us into the area of e-commerce where Paul Swain is leading a highly focussed approach on which we need strong business buy-in to make work as well as it should.

Now I want to finish off with a little further discussion of what we are proposing to do on superannuation. This is, for me, the most important task for the next six months.

The proposed New Zealand Superannuation Fund is one of the coalition Government's most significant initiatives but we cannot make it a reality without strong popular support.

To win that support, people must be convinced that the proposal is sustainable on every level - political, fiscal and economic. I am confident it is. My job is to persuade the public of that.

Some commentators have tried to generate alarm about the scheme by describing it as a "monster." In fact, its scope is quite modest. It is to sustain the pension at current levels through the cost bubble created by the baby boomers as they retire.

Both coalition parties promised in the election campaign to restore the wage floor for the married couple rate to 65 percent of the average net wage, and to maintain entitlement at age 65 on a universal, non-means-tested basis.

We are determined not only to honour that commitment for today's retired but also to secure it into the future because we believe that a decent society looks after its elderly. The net cost of NZSuper is now 4 percent of GDP. By 2050, it will be 9 percent. Therein lies the policy challenge.

Our solution is to smooth these costs by building up a capital fund for investment. A dollar saved now, earning net interest at 6 percent a year, will be worth $4.30 in 25 years.
Unless this money is built up, the choices available to future governments and future generations will be stark: either cut the value of the pension, means-test it, raise the qualifying age, raise taxes on the working population or introduce some or all of these in combination.
I would argue that none of these options is either politically or economically sustainable. The electorate has shown it will punish governments which meddle with NZS. The National Party has acknowledged that its decision in 1998 to reduce the wage floor to 60 percent cost it support in the last general elections.
Now 16 percent of voters are aged 65 and over. By 2024-25, that will have risen to 25 percent or one voter in four. They will be a hugely influential voting bloc which no political party or government could afford to ignore.
Any attempt to reduce the value or availability of the pension would be reversed through the ballot box. Conversely, if the cost burden was thrown completely on to the workforce through much higher income tax rates, workers would vote with their feet and leave New Zealand for more forgiving tax regimes overseas.
Some have wondered about whether Fund can be sustained fiscally, and whether the surpluses it relies upon will be achieved. Some of this scepticism relates to the period from the end of the Muldoon era to the early 1990s when the country ran persistent deficits.
But this was the exception rather than the norm. By and large, except in extraordinary circumstances like the 1930s depression, New Zealand governments have run surpluses.
And the numbers the costings are based on, although they look large in nominal terms, are not so scary when looked at as a proportion of GDP. The highest anticipated annual contribution, scheduled for 2010, is $2.4 billion in today's dollars. But that is only around 1.7 percent of projected GDP in 2010, and it is pretty much the peak.
By 2016, the annual contribution is less than $2 billion in today's dollars. By 2019 it is less than the equivalent of one percent of GDP. By 2026 new injections cease.
Overall, then, there is a tight period from 2005 to 2010 during which something like 1.7 to 1.8 percent of GDP has to be put into the Fund. That tightness reduces gradually over the following 15 years. It is a useful fiscal discipline. It is not the straitjacket some are portraying it as.
The last test is whether it is economically sustainable and - again - I am satisfied it is.
The bald advice from Treasury is that the Fund will not have significant macroeconomic effects. My own view is that the effects it will have will be positive.
The most obvious effect is that it will build New Zealand's national savings rates, reducing our reliance upon overseas borrowing and taking pressure off the current account.
It will also create a source of investment capital for the sharemarket and the productive sector in general. The Fund will be managed on an arms length, commercially prudent basis. The government will not be directing investments into ventures that do not stack up commercially. This is no soft loans facility.
But it will generate a better flow of funds through both bond and equity markets which can only be good for growth and for jobs.
The scheme has been launched. I am proud of the design, and would like to congratulate everyone – from inside the government and from the savings industry – who has contribute to it. I do not rule out fine tuning some details about how it might operate, but basically I think the framework is sound.
We have a real chance to put behind us an issue which has been a festering sore for 25 years. I am determined to do that.

ENDS

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