Speech To Remuera Men’s Probus Club
Hon Dr Michael Cullen, Minister of Finance
1200, Thursday, 21 March 2002
Remuera Golf Club
It is a great pleasure for me to return to Remuera for the second year in a row, and to address the Remuera Men’s Probus
Club on the state of the economy.
Your President, Frank Muller, has suggested to me that this might become an annual event, in the same way that a former
Minister of Finance delivered an annual state of the economy address to the Orewa Rotary Club. I can only say that this
sounds to me like a terrific idea. Of course, the best way to make sure it happens is for you all to get out on the
streets of Remuera and work to win the seat for Labour for the first time in its history. But I Recognise that would be,
as the sports commentators say, a big ask!
There are - at least - two ways to talk about the state of the economy. One way, favoured by most economists and almost
no-one else, is to present an array of statistical measures of such things as inflation, unemployment, trade,
investment, government spending, debt and so on. Having amassed a sufficient pile of these statistics, one can stand
back and assess whether the pile presents a picture that is good, bad or merely confusing.
I don’t mean to decry the use of statistics, and I will shortly update you on the important indicators. However, as a
former expert in the history of statistical methods I can assure you that statistics can be honestly interpreted in
completely different ways. They do not necessarily provide as much insight into the economy as they promise. The great
Cambridge economist, Bill Phillips - who, by the way, was a New Zealander - built an elaborate teaching aide consisting
of pipes and valves and meters, in order to explain the economy to his students. He would pour coloured water into
various parts of the model, and it would flow through the maze of tubes as he turned taps off and on to show, in a
rudimentary way, the complicated inner workings of the economy.
The contraption still exists. It has been brought back to Wellington and sits in the foyer of the NZ Institutue of
Economic Research. Recently, I suspect their computers have crashed and they have been forced to crank up Professor
Phillips’ machine to prepare their economic forecasts.
My point is that, just as we would not think it sufficient to talk about our blood pressure and cholesterol level to
someone who asked us how we were, so we need to go beyond the statistics to talk meaningfully about the state of the
economy. The current government works hard to take a broader view of what the New Zealand economy is. In particular, we
refuse to separate social development and environmental health from our view of the economy. These are not luxuries that
we will allow ourselves once our economic statistics match some ideal. They are part and parcel of making a sustainable
future.
So today I want to begin by surveying the economic indicators, but then move on to talk about the government’s
strategies and the partnerships between government, business and communities that will shape our broader economic
future.
The New Zealand economy awoke to the new millenium with a more than slight hangover from the 1990s. During that decade,
the growth rate improved, but it was heavily dependent on expanding private domestic consumption. That in turn was
underpinned by a dramatic increase in private foreign borrowing, and to some extent by rounds of tax cuts. A strong -
some would say overvalued - currency put a lot of pressure on export industries.
The end result was that we closed out the century with high private foreign debt, a balance of payments deficit of
around seven percent of GDP, and an export sector that was both demoralised and operating with weakened balance sheets.
Two years into this century, the picture is a lot brighter. The hangover is a memory. The Aspro is back in the medicine
cabinet. The economic indicators are stronger, and more balanced, than they have been since the mid 1960s.
- The economy grew by 2.6 percent in the 2001 March year, and is forecast to grow by 3.1 percent in the current year. It
is likely to taper in the next year to around 2 percent before lifting again to something like a three percent rate in
the out years.
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- Inflation is at 1.8 percent.
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- The balance of payments deficit has fallen to about 3.5 percent of GDP.
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- Unemployment, at 5.4 percent, is at close to thirteen year lows. Employment growth is strong, but it has been
accompanied by an increase in immigration and a sharp rise in the participation rate which, at 66.4 percent, is the
highest it has been in fifteen years.
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The government for its part is living within its means. We have held government spending as a percentage of GDP, and it
is fractionally lower than it was two years ago. We are operating with a fiscal surplus averaging around one percent of
GDP, and forecast to rise to nearer 2.5 percent over the next three years. Net crown debt has fallen from just under 22
percent of GDP in 1999 to around 18 percent now.
In short, today’s numbers reveal an economy that is growing steadily, with low inflation, rising employment, moderate
unemployment, and a current account deficit that is very low by recent standards. Real wages and share prices have both
risen. Government spending is at prudent levels, with healthy fiscal surpluses, and manageable public debt.
All of this at a time when confidence in the world economy has been badly knocked by the events of September 11 last
year.
After September 11, all optimism must be cautious. However, when the government published its economic and fiscal
updates a week before Christmas there was some comment that the central forecasts were overly optimistic. Commentators
pointed to a number of short term risks:
- commodity prices were at record highs, and so if there were a global downturn there could be a long way for them to
fall;
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- investor and consumer confidence surveys showed significant pessimism;
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- there was a risk of an emerging drought, which would not only impact on agriculture but risk a repeat of, or even a
worsening of, last year’s power crisis;
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- the September 11 attacks meant that tourism was particularly exposed, and this was a key component of good recent
economic performance.
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In the event, these concerns have largely evaporated, and if anything the very short-term outlook is more positive than
it was in December. Immigration numbers have turned around dramatically, and this has lifted the construction sector.
Consumer confidence is holding up and retail spending is ahead of market expectations. Tourist numbers have bounced
back, largely because the composition of tourists has changed. It is raining - so much that we are all lamenting the
summer that never was. Tax returns are even slightly ahead of forecast. And there has been no real meltdown in the
global marketplace.
I am happy to concede an element of good luck in these results. One could speculate that there some relationship between
economic stewardship by a “wet” finance minister and increased rainfall. But, I cannot claim to have engineered the
coincidence of good weather and good prices with a rather large drop in the value of our currency, meaning that we had a
competitive exchange rate that allowed other exporters, and the tourism industry in particular, to join in the good
times.
Good economic management is nevertheless an important part of the picture. One of the first things that the new
government did was to renegotiate the Policy Targets Agreement with the Governor of the Reserve Bank. It confirmed that
the primary objective of the Bank was to control inflation, and that was good for confidence. But it also required the
Bank to be more sensitive to the impacts of its monetary management on output in the real economy. The objective is to
keep inflation within the target range, but to seek to smooth monetary policy changes where feasible so that they do not
create unnecessary turbulence for New Zealand businesses and households. Part of this is recognising that there will be
brief periods where headline inflation moves outside the band for good reason, and this should not be stamped on in the
interests of maintaining a perfect track record. The basic framework - a focus on price stability and the independence
of the Governor in making decisions on monetary settings - remained unchanged.
The government’s approach to its own spending has supported monetary policy. Wherever this government has agreed to
extra spending on social and economic development programmes, it has raised the extra money required, rather than
borrowing it. And it has introduced a scheme to partially pre-fund tax-funded pensions, so that when our demographic
structure acquires the inevitable older age profile, there is a cushion to assist in the transition.
This Superannuation Fund will also have three important macroeconomic effects. Firstly, it will require governments to
be disciplined in their tax or spending plans, and to avoid spending commitments or tax cuts that are impossible to
sustain, but painful to reverse. Secondly, it will increase the level of national savings. And finally, it is likely to
provide a more stable setting in which New Zealand firms can seek long-term capital investment.
The government has also moved away from a passive role in the economy. The late 80s and 90s was the era of the “neutral
referee” model of government. Government moved around the field - which was always scrupulously level - enforcing the
rules of fair play, but avoiding like the plague any suggestion that it was truly involved in the game. This was
preferable to the crude attempts to rig economic results that preceded it; but as a neutral referee government
increasingly found itself presiding over a series of tepid nil-all draws. The playing fields were level, but the stands
were emptying.
This government is developing an “active promoter” approach, characterised by smarter activism. To continue the sporting
analogy, what will ultimately fill the stands again is fitter players, systems for developing young talent, good
teamwork, clever strategy and better promotion. Neutral referees are still essential; but that is not the only way that
government can be usefully involved in the economy.
The government’s method is pragmatic and case-by-case, as evidenced by the consolidation of the dairy industry on the
one hand, and the deregulation of the apple industry on the other. There is no hard and fast ideology here, Each was a
considered response to the global marketplace.
Another example of this “smart active” style is the government’s reform of the tertiary education system. During the
1990s, participation in tertiary education rose, but increases in quantity were not accompanied by improvements in
quality and focus. The reforms are designed to ensure that, instead of competing with each other to attract enrolments,
our institutions of higher learning develop close links with business and with their communities to guide the way that
they teach skills - both to young adults and increasing to people in mid-career - and the way they undertake research.
There are obvious links between our tertiary education strategy and our innovation strategy. The recently released
report on Growing an Innovative New Zealand sets out a comprehensive programme aimed at lifting our game, and raising
our sustainable growth rate through innovation.
The growth and innovation framework blends what I would call the vertical and horizontal dimensions of innovation. The
vertical dimension is about addressing missing or weak links in the “chain” of innovation. Hence we improve our
scientific and product development capacity. We nurture ideas through appropriate support systems, so that the full
range of business disciplines - legal, accounting, financial, logistical and so on - are brought together to convert
good ideas into profitable enterprises.
We recognise that there are advantages of environment and national aptitude and attitude that need special attention if
we are to deepen our business activity. There is no point in a focus on an area of advantage unless it is also an area
where the potential of the global market coincides with the potential of New Zealand to sell into it.
We have identified three areas where there is a good fit: biotechnology, information and communications technology, and
creative industries. It is important to stress that we are not trying to pick individual industries as winners. Instead,
innovative advances in these areas have the potential to complement each other and to thicken value added in a number of
industries that use or could use these technologies. In other words, they are sectoral competencies that have
multi-industry applications. One part the strategy is about clearing the path for young plants to grow; the other is
about creating that essential “hybrid vigour” by applying new technologies and ways of thinking across both old and new
industries.
The report is a “what” document. A lot of the “how” is already being rolled out or is in an advanced stage of
development; but more of the how will unfold as work that has been commissioned by the government is completed.
The way ahead clearly requires good economic management and a business culture that rewards innovation; but there are
some other realities that will always impact on our economic well-being. Chief among these, I believe, is our
relationship with Australia. Given the inescapable influence of distance from global markets, New Zealand and Australia
have a strong mutual interest in extracting the most from our common market.
This came through quite strongly in my recent discussions with political and business leaders in Australia, who are also
becoming aware of the untapped value in our combined economy.
The increased awareness of this in Australia is partly a response to September 11; but also to the acquisition of some
major Australian companies by foreign interests. The prospect of becoming a branch economy of the United States is
something both Australia and New Zealand now share. Part of the answer is to build a web of Trans-Tasman companies with
a firm base in our common market, and the continuing task of making CER work is a part of making that happen.
CER is not scintillating stuff to the average New Zealander, or, for that matter, to the average New Zealand Cabinet
Minister. We have done a lot to open up trade, labour and investment flows, but there is more to be done. The government
is working with the Australians on a number of key areas where better coordination will benefit ordinary New Zealand
companies and investors. These include:
- Cross recognition of companies;
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- Mutual recognition of share markets;
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- Resolving a number of taxation issues;
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- Aligning our Takeovers Codes;
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- Recognition of intellectual property rights;
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- Consumer issues; and
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- Competition law.
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From my point of view the important thing is to recognise that there is still significant unrealised potential to be
gained from better trans-Tasman coordination. In global terms, Australia is a very small player while we are
Lilliputian. When we work together, two things happen: we become more visible as a closely integrated economic unit, and
we become more able to sustain growth and weather the normal - and not so normal - variations in global economic
conditions.
One part of my job - and it is an enjoyable part, by and large - is to be an incurable optimist when it comes to looking
at our future economic prospects. I was very pleased therefore to read in the latest Colmar-Brunton poll that economic
confidence was up to 52%, with pessimism down to 25%. It is very heartening to find that I am not alone. The news is
getting through to ordinary New Zealanders: business people, professionals, workers, investors and the community at
large. And the news is good.
Thank you.