21 August 2002

Hon Dr Michael Cullen
Deputy Prime Minister and Minister of Finance

Address to Bayleys Cocktail Function

Level 14, The Todd Building, Lambton Quay, Wellington

It is a pleasure to be with you this evening. I am honoured that you should invite me to be your guest speaker, especially as you sent the invitation in March before my promotion to Deputy Prime Minister. To ask for the Finance Minister and get the Deputy PM says a lot about Bayleys’ ability to identify an asset of rising value.

Whether it is significant that I should make my first speech as Deputy PM to a cocktail function is, I think, an issue better not explored. Much more worthy of exploration is the election result.

I was interested in the NBR-Compaq poll in last week’s NBR which showed that MMP has risen sharply in popularity since the election and is now at its highest level of support since the system was introduced. NBR – as careful readers of the newspaper will know – is not a big fan of MMP. And NBR – as careful readers will also know – tends to let its attitudes lead its analysis.

So it was with no great surprise that I read that NBR expects the sudden boost in support for MMP will be shortlived. NBR was drawing on the experience of 1999 when support for MMP rose to 45 percent in the immediate aftermath of the election only to slump back to 35 percent the following month.

And that may well occur again. But the same poll showed that there is significant public support for the post-election arrangements that the government has made and I think everyone interested in political stability can take comfort from that.

If you look at the basic structure of the government, not a lot has changed. Labour again leads a minority coalition with the party led by Jim Anderton.

As you will know, we have entered an agreement with United Future to support the government on confidence and supply over a full three year term. In exchange for this, we will consult United Future on policy issues and will appoint a Commission on the Family.

The Greens threat to bring down any government which did not extend the moratorium on GE effectively ruled them out of contention as a coalition partner. However we will establish a cooperative working relationship with the Greens as a party of the centre-left and because they do agree with, and will support in the House, many of our initiatives in the social policy, environment and conservation areas.

The government should be in a slightly stronger position in the House because the agreement we have with United Future is stronger than the understanding we had with the Greens on House management. Peter Dunne certainly understands how Parliament works and the need for support on procedural matters so the government should be able to operate reasonably effectively.

I hope that we will also be able to negotiate a little more use of urgency than the Greens were prepared to allow us last term. Urgency is poorly understood outside the confines of Parliament. It is not a perversion of the democratic process but a necessary function of it as the regular sitting hours of Parliament are simply not sufficient – and were not intended to be sufficient – to get a legislative programme through. Extra hours are needed and urgency is the mechanism for securing them.

The government already has a very large backlog of around 100 pieces of legislation carried over from the last term. Parliament gets back into business next week and as Leader of the House I am already working on how we can start pushing those bills through.

Let me now canvass with you briefly the economic picture as the government sees it. The Pre-election fiscal and economic forecasts have growth slowing a little from where it has been but continuing to average around 3 per cent over the next four years, unemployment remaining at its current low levels, employment increasing steadily and wages growing ahead of inflation without triggering an inflationary spiral.

The downside risks to those forecasts have increased since late June when the Prefu was published as the outlook for the international economy has become more uncertain. The scandals surrounding Enron and WorldCom have dented investor confidence in the US. Company valuations were already undergoing a correction as the hype from the 1990s bull market dissipated and the combined effect of both these developments has been a sharp fall in US equity prices.

The consequent loss in wealth is likely to flow through to reduced consumer spending, and to lower growth. But housing - which accounts for the major part of US household wealth - is providing some offset. House prices are rising as interest rates remain at 40 year lows.

The fall in the US sharemarket has precipitated smaller – but still sizeable - falls elsewhere, particularly Europe and Japan. New Zealand equity prices have also been affected although the impact has been much more muted and here, as in the US, the housing sector is continuing to hold up.

It is too early to judge the extent to which events in the world economy will affect New Zealand. However the resilience shown by the New Zealand economy through the global downturn in 2001 is a useful reminder against mechanically extrapolating external developments through to New Zealand.

Already some potential mitigating factors are operating. The pressure on interest rates has eased considerably and the dollar has fallen on a TWI basis.
The dollar decline takes the exchange rate back below the level assumed in the Prefu and, if sustained, will reduce some of the downside risks to the Prefu growth forecasts – particularly the impact on export earnings. Commodity prices, however, are not likely to provide the same cushion they did in 2000 and 2001.

The government’s response will be as it was to the economic turbulence we encountered in our previous term. We will concentrate on the medium and long term structural changes necessary to achieve our growth objectives and will allow the automatic stabilisers to work.

Clearly there will be a high level of continuity in terms of the essential policy directions of the government.

The government’s long term economic policy objective is well-known and widely supported – to restore New Zealand to the top half of the OECD. As a first step toward achieving this we need to raise the sustainable growth rate to 4 percent.

This is not an easy target but it is not impossible either. To get there we need to increase the total factor – that is capital and labour – productivity growth rate from an historical level of just over 1 percent to 2 percent. Changes of that magnitude or to that level are not that rare and have recently been achieved by Australia, Ireland and Finland – all advanced economies as is ours.

Experience has shown us that silver bullets don’t work. Our strategy is to pursue incremental improvements across a broad front. I know it doesn’t sound glamorous but I’m not interested in glamour. I’m interested in results.

So we will continue with, and deepen, the current policy mix.

We will increase the productivity and skills of the workforce by improving the access to and quality and relevance of tertiary education, by investing in industry training, through the Modern Apprentices programme, and through attracting skilled migrants to New Zealand.

We will continue to support research and development and will seek through the innovation and growth framework to strengthen the connections needed to convert a good idea into a commercial success.

We will continue to expand New Zealand’s connectedness to the global economy by developing our trade agreements with other countries and by attracting foreign investment to New Zealand.

We will assist new businesses to get established and established businesses to grow through the plethora of business and regional assistance initiatives run by Industry New Zealand. Much of the first term was spent getting Industry New Zealand up and running and in programme design. I would expect, now that the programmes are bedded in, that we will begin to see a much sharper return on that investment.

Any growth strategy has to have regard to the fact that the vast majority of New Zealand businesses are small. Reducing the compliance costs to small business will receive renewed focus this term. On the tax front this includes: clarifying over- and underpayments, reducing the number of taxpayers exposed to use-of-money interest and allowing the pooling of tax payments.

We will also be examining whether current legal forms available to small business are appropriate, and developing ways of reducing the tax impact on businesses during different phases of their life cycles. And we will review the existing rules to see whether income can be calculated on a cash rather than an accrual basis for small taxpayers.

Looking more broadly than taxation, the government is actively considering a range of measures to reduce business compliance costs, including:
Making the Internet the dominant means of accessing government information, services and processes.
Simplifying ACC levies and claims processes.
Improving the quality and implementation of regulations, in particular the Resource Management Act.
Introducing a new requirement for a business compliance cost statement to be published as part of all new legislation that has compliance cost consequences.
I don’t want to raise expectations too high because compliance costs are the product of living in a civilised society to a significant extent. Where you have no compliance costs it is because you have no rules.

But we do want to get a strong focus on this area because it is important psychologically. If small business believes the government is serious about trying to help, that really changes attitudes. If they feel we are trying to make things more difficult, that obviously is a drag factor.

I want to get some of our officials – particularly in Commerce and IRD, the two big compliance organisations in government – out there in clusters of small businesses doing the compliance work for them so that they can see what it is like from the other side of the equation.

Expect close cooperation this term from the economic ministers – myself, Jim Anderton, Pete Hodgson and Paul Swain, particularly - on how to make life easier for the small business and across the whole range of economic policy issues.

In our first term, we redefined the role of the government in the economy and developed a range of tools to realise our vision of a smart, active government working in partnership with the private sector. This term, we will build on that platform.

I look forward to your cooperation in the task ahead. Thank you.

ENDS

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