Speech To Canterbury Manufacturers’ Association
Hon Dr Michael Cullen, Minister of Finance
Tuesday 7 May 2002
Chateau on the Park, 189 Deans Ave, Christchurch
Thank you for your welcome. On the 23rd of May I will be delivering the third and last Budget of the current
parliamentary term. So it is probably an appropriate time for us to be standing back and asking ourselves what has been
achieved in the last three years, and what challenges can we see ahead of us.
In saying this I am not suggesting that the New Zealand economy hangs off the three-year electoral cycle in the way that
it did during some periods of the last century. However, I do have in mind the change in philosophy that the current
government has introduced which has recognised the benefit of government and business working in partnership towards
shared goals, especially the all important goal of economic transformation.
So from this vantage point, I would like to cover two important themes:
ľ First, we have an economy that is very robust relative to where it was three years ago, and relative to where it has
been for the last 30 years. We need to acknowledge this; but we must not take it for granted or ignore the ways in which
we are still vulnerable and need to improve our game.
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ľ Second, I want to argue - as I have many times in the past - that whether or not we secure a higher growth path
depends upon how successful we are in transforming our economy. That in turn depends upon our ability to create a path
of economic and social change which is stable and well coordinated.
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The current economic indicators demonstrate the robustness in the economy. We now have a stronger, more balanced economy
than we have had since the mid 1960s. And the underlying strength in the economy has been demonstrated in how well we
have weathered the impact of the 11 September terrorist attacks and their unsettling aftermath for the global economy.
Immediately after the attacks, the economy was bracing itself for a sharp downturn in global demand. We feared for our
tourism sector in particular, and also anticipated a potentially sharp fall in commodity prices, which were at record
highs. Accordingly, investor and consumer confidence surveys towards the end of last year showed significant pessimism.
In the event, none of these effects proved as severe or as persistent as was feared. The GDP figures for the December
quarter - in which much of the impact of the 11 September attack was felt - show quarterly growth of 0.6 percent,
producing an annual rate for the December year of 2.4 percent.
Certainly the contraction in tourism was a big driver in the December figures, contributing to a 7.3 percent decline in
exported services. However, it is clear now that tourist numbers have bounced back, largely because the composition of
tourists has changed. The Canterbury tourism industry has had one of its best seasons ever.
There were export price falls, but these have not been universal, so the net effect on the tradeables sector has not
been as negative as was feared. Immigration numbers have turned around dramatically, and this has lifted the
construction sector.
The Canterbury economy followed this pattern, with the second largest decline in economic activity of any region in New
Zealand in the final quarter of 2001. Even so, economic activity in the region rose by 4.2% in the year to December.
This result was spread across a broad base, including of course the primary sector, benefiting from good growing weather
and a low New Zealand dollar.
As a result, unemployment in the region is below the national average at 4.9 percent in December last year, and business
confidence has bounced back strongly after a difficult final quarter of 2001, with businesses expressing positive
expectations in terms of staffing, investment and anticipated sales and profits.
Indeed, the picture that is emerging is of a strong bounce back in business confidence. The risk we saw of firms
retreating into their shells and stopping hiring or investing does not seem to be occurring. Indeed, the December GDP
figures showed that business investment grew by 8.5 percent over the quarter. And a recent National Bank Business
Outlook recorded a 41 percent positive response to the “own activity” survey.
In another recent poll, 52 percent of New Zealanders identified themselves as being optimistic about the economy. That
poll also recorded a drop in pessimists to 25 percent. Consumer confidence is holding up and retail spending is ahead of
market expectations.
All of this suggests that steady growth will be maintained through the next few quarters. The economy is estimated to
have grown by around 3 percent in the March year just past, and according to the latest consensus forecasts is likely to
post growth of 2.8 percent in the year just started, but there are uncertainties about how strong the stimulus from
construction, immigration and domestic consumption will prove to be. Forecasts have growth lifting back to something
like three percent in the out years.
These predictions are confirmed by a new OECD report published last Friday, which picked that the economy will grow 2.7
percent this year and 3.5 percent next year. That is a solid performance, especially given the uncertain global outlook.
The balance of payments deficit has fallen to about 3.5 percent of GDP. Inflation is at 2.6 percent. Unemployment, at
5.4 percent, is 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.
In short, today’s numbers reveal a picture of steady growth, 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.
I will not try to claim that all is rosy, however. There are challenges ahead, for example, in the form of an emerging
El Nino weather pattern later this year. But things could be a lot worse; and most importantly the New Zealand economy -
and the Canterbury economy - is showing that it is increasingly better positioned to weather economic storms as we
become more diverse, more entrepreneurial and more innovative.
This brings me to the question of the future of the New Zealand economy. The challenge before us is easily stated, but
difficult to meet. If we are to achieve the standard of living we want, we need to find our way onto a higher growth
path and keep ourselves there. For this government, the concept of standard of living extends beyond a crude calculation
of GDP per capita. It also includes careful stewardship of the natural world that we value for its beauty and for the
leisure opportunities it provides us. And it includes the way we live as communities and the investment we want to make
in building social capital.
To achieve this we need to transform our economy; and what has distinguished this government from its recent
predecessors has been the conviction that this requires not only a dynamic and relatively unfettered business community,
but also public investment in economic development.
In New Zealand the pendulum has swung wildly over the last 25 years on the attitude towards government intervention in
the economy. We went from the ornate - one might say baroque - style of intervention in the Muldoon era, to the spare
and elegant minimalism that held sway in New Zealand in the late 1980s and 1990s.
These represented extremes. On the one hand, the tilting of playing fields and biased refereeing decisions that
simultaneously molly-coddled businesses and hamstrung them into mediocrity. But on the other hand, we learned from
bitter experience that allowing government to wither away by selling assets, withdrawing from state investment in
economic growth and cutting social spending, is no magic formula for prosperity.
The obvious point of comparison for us is Australia, which has enjoyed some of its best growth results ever in the last
ten years. However, while Australian governments have undertaken reforms similar to New Zealand’s, they have progressed
at a slower rate, and in a more moderate form. Moreover, despite what is widely believed, the impact of taxation on
businesses in Australia - and that extends beyond the simple question of the nominal tax rate - is comparable to that in
New Zealand. The lesson to be learned from the comparison is that there are no guaranteed returns to the kind of
economic purity advocated by the new right in the 1990s.
This government has argued - and, dare I say, is now proving - that there is a legitimate role for government in
investing in the economic future of the country. The important lesson we have learned from the past is that government
intervention must be principled, transparent, pragmatic and - wherever possible - in partnership with the private
sector.
We are now, I believe, firmly set upon a course that differs from both of these styles. It stresses stable and
transparent economic management by government alongside a stable and transparent strategy for economic transformation
undertaken by business and government working in partnership.
In keeping with the first of these requirements, we have been a fiscally conservative government. We set ourselves the
target of keeping government spending at around 35 percent of GDP, getting net debt below 20 percent of GDP and
maintaining an operating surplus across the economic cycle. We have kept these promises.
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. We have held government spending as a percentage of GDP, and it is fractionally lower than it
was two years ago. Moreover, spending is projected to drop below 33 percent of GDP by 2003-2004, putting it at the
lowest level since the late 1970s. Net new spending in this year’s budget has been held within the counting limit set
last year.
Net crown debt has fallen from just under 22 percent of GDP in 1999 to around 18 percent now.
In addition to transparent economic management, our strategy for economic transformation is also transparent. It is
based on extensive research on how sustained growth occurs in economies like ours, and research on the most effective
role for governments in contributing to economic growth.
Some of what we have done involves committing resources to new areas of investment and development:
ľ We committed $332 million over 4 years to business development funding, with an emphasis on export development and
revitalising provincial economies.
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ľ We established the New Zealand Venture Investment Fund with $100 million of seed capital to accelerate the
development of the domestic venture capital market and assist the development of innovative, high added-value
businesses.
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ľ And we have adopted a whole-of-government approach to attracting new businesses to New Zealand, including, for
example, the Ericsson-Synergy high-tech mobile internet applications research centres in Wellington and Auckland. We
have also established the first dedicated offshore investment team in New York.
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Other policies are about doing better with our existing investment programmes. The government’s recent $227 million land
transport package includes a major focus on ensuring - literally - a smoother road for our exporters to move goods to
market. This includes the large portion of the package that is aimed at reducing traffic congestion in Auckland, which
has long been a Gordian Knot, both politically and from a driver’s point of view, and one which it is estimated costs
the country around $1 billion a year. A portion of that cost relates to lost productivity, as goods moving to market
have to pass through the clogged transport arteries of our major urban area and one of our major ports. This is money
well spent, and an investment which, in the final analysis, could only be made by central government.
We are also sharpening up the strategy for investing in skills and research. Our tertiary education reforms are
particularly important in this regard, and are beginning to bear fruit. The 1990s saw sustained growth in participation,
and some important advances in terms of the number of Maori and Pacific students and the frequency with which those who
have spent some time in the workforce are returning to tertiary study in order to improve their skills and launch second
or third careers.
What was lacking, however, was a detailed understanding on the part of tertiary institutions of the needs and
requirements of the customer, and the right incentives to deliver on those, consistently exceeding expectations. New
Zealand business is the major customer of our tertiary institutions. I am not attempting to detract from the autonomy of
those institutions; but I do want to make it clear that we do not have the luxury of maintaining an ivory tower
mentality where it exists.
So one of the things we are setting out to do is to improve the interaction between the tertiary education system and
the world of business and innovation. We are doing this across the spectrum of skill levels. We established the Modern
Apprenticeship Programme to provide employment-based training for young people.
Our tertiary reforms are aimed at moving our institutions away from a focus on competing with each other for students
and funding, towards collaborating with each other and with businesses to play a pivotal role in driving the so-called
“knowledge economy”.
I have recently visited one of the new technology parks being established by one of the universities in partnership with
high tech businesses. It was very exciting to hear how much energy is generated from the creative interaction between
the worlds of business, research and teaching. And the energy is generated both ways.
Applying business skills to the planning of research and human capital development focuses attention on recognising and
seizing opportunities. The technology parks and business incubators are giving the lie to the notion that academics are,
by definition, lacking in entrepreneurial flair.
At the same time, there is immense value in businesses being exposed to leading edge thinking which may not yet be
bankable, as it were, but will in time be the crucible for new products and services. This applies to the sciences, but
also to the humanities, in terms of understanding and anticipating the social trends that influence the direction of
global markets and the preferences of future consumers.
This kind of cross fertilisation between business and tertiary institutions creates true “learning organisations”, to
use a piece of jargon which originated in the business sector. At present, this kind of partnership occurs at the
margins. Our goal is for it to become commonplace, and for our tertiary institutions to be much more closely integrated
into the economy in which they function.
The public-private partnerships exemplified by the technology parks and a range of other initiatives indicate that we
are in a new phase of economic development, where government and business can work together without either party feeling
any urge to acquire ownership of the other’s assets.
As part of its innovation strategy, the government recently released a set of plans for establishing and funding
partnerships between government and business. What the research showed us was that as a nation we are well placed to
develop in the areas of bio-technology, information and communications technology and the creative industries. In line
with this, we are looking for proposals for partnerships in these areas, and we are defining them broadly.
We are particularly interested in developing ideas which apply these disciplines to the primary industries which will
remain the backbone of our economy for the foreseeable future. We recognise that one of our key challenges is to find
ways of altering the product cycles that are typical of primary industries, through applying technology and marketing
expertise to position New Zealand produce in high-value niches in a diverse range of markets.
If we can develop and maintain this kind of mature relationship - and harness the respective strengths of business and
government - it will be a great help in creating a stable path of change.
We learned in the late 1980s and early 1990s that rapid, disruptive change often leaves people stunned. Perhaps it is
sometimes necessary to shake people out of lethargy; but when business people are struggling to keep up with the pace of
change and feel threatened by it, the result can be that they overlook genuine opportunities and merely follow the crowd
or the latest fads.
Rapid change is not guaranteed to foster creativity. Nor is it a way of maintaining social cohesion. Some of my
predecessors as Minister of Finance believed in the philosophy that you sometimes need to destroy the village in order
to save it. My philosophy is to save the village, educate its young, retrain its workers, and build it into a town.
Destruction need not enter into the picture.
What is needed is a stable path for change, one which provides the environment in which businesses can learn how to be
innovative and individuals can adjust their skills and ambitions in line with new economic realities. This is what my
government is committed to doing over the remainder of this term, and the next.
Looking forward, I believe I have very sound reasons for optimism about the New Zealand economy. These include the
latest economic results and medium term forecasts; but more broadly I am optimistic because I believe there is now a
better understanding in New Zealand of how growth will occur and be sustained within our economy, and of the nature of
the partnership between business and government that is needed to give ourselves the best chance of success.
Thank you.