Cullen Address to Remuera Men’s Probus Club

Cullen Address to Remuera Men’s Probus Club

It is good to be back in Remuera once more, and have the opportunity to reflect upon the events of the past year.

You may recall that last year you broached with me the possibility of making this an annual event at which I put forward my view of the year ahead for the New Zealand economy, just as a certain former National Finance Minister presented his ‘state of the nation’ address to the Orewa Rotary Club.

I pointed out that the best way to achieve that was a concerted effort to win the Remuera seat for Labour. Clearly we didn’t quite achieve that in 2002. However, the renewed mandate the government received in last year’s election does illustrate that New Zealanders want sound economic management, coupled with social investment policies that improve the quality of life for all the community, and are willing to support any government which delivers on that, regardless of its political stripes.

I am happy to say that 2002 was a very good year overall. It was a year in which the New Zealand economy performed exceptionally well in face of the offshore adversity. We were enjoying the positive flow-on effects of the high commodity prices in 2001, and the economy was still at that stage insulated by low interest rates and by a favourable exchange rate. Of course, many of these conditions changed during the course of the year. Dairy prices have come off their peaks, our interest rates are somewhat high in international terms, especially compared with those in the USA, and exporters have started to feel the effects of an appreciating dollar. Despite this, other engines of growth have kicked in to keep the momentum going. Firstly, there was a sharp turnaround in immigration. Despite the political rhetoric about the so-called ‘brain-drain’, the figures show that the biggest impact on net migration flows was fewer Kiwis leaving and more of them returning. Immigration has stimulated both house construction and the purchase of consumer durables. Consumer confidence is high, and domestic spending has remained strong. Tourist numbers remain high. The strength of the Australian economy has meant that exporting has not fallen away as quickly as might have been the case. All of these things mean that the economy is still growing strongly, even if the drivers of that growth have mutated somewhat over the last three years.

So in the year to September 2002 we posted a very healthy 3.9 percent growth rate while our major trading partners achieved only 3 percent on average. Indeed, our growth rate has now been running ahead of our trading partners since the beginning of 2000.

All the indicators show that we face some turbulence ahead in 2003, and there is not much we can do in the short term to avoid it.

To begin with, the so-called Southern Oscillation Index indicates a weak El Nino pattern, and there is a risk that farmers may have to manage stock levels around the impacts of a cold spring, which has delayed grass growth, and the prospect of a dry summer and autumn. All of this will put pressure on stock feed for the winter.

Meanwhile late frosts and hail have compromised potential yields of kiwifruit, apples and grapes in some of our key fruit growing districts, such as the Hawkes Bay and Nelson.

Prices for agricultural commodities are a mixed bag, with those for wool and kiwifruit better than many forecasters expected, but those for dairy, beef and venison falling below expectations. In the case of the dairy industry, the National Bank recently forecast that average dairy company results for the 2002/03 season would fall to $3.60 to $3.90 per kilogram of milk-solids, down significantly on the $4.20 to $4.60 range forecast earlier in 2002.

Looking to the global economic outlook, we face some risks from the prospect of a double-dip recession in the United States. There are signs of a weakening in the US labour market, and meanwhile retail sales have softened, which may augur poorly for the US manufacturing sector. These disappointing results, plus the ongoing struggle with creditability issues in the wake of the Enron and Worldcom debacles, have meant that confidence in corporate America has been shaken.

The Dow Jones fell around 34 per cent from its high in May 2001 to a low in October 2002, and has not shown any sign of recovery. The Nasdaq fell 50 per cent over the same period.

This slump in asset prices has stripped wealth from many pension funds and household investors, impinging upon the spending habits of the very consumers that we in New Zealand are targeting for key export industries such as tourism.

Nevertheless, we should not over-estimate the current weakness in the US economy. Despite the drop in consumer confidence, consumption activity is still holding up. And we should not forget that the current problems come at the end of a prolonged period of remarkable growth. The fundamentals of the US economy remain sound, and it will remain the linchpin of the global economy for the foreseeable future.

What we are seeing is the working out of distortionary impacts created in the late 1990s by the bubble in the US stock markets. The question is: how long, how widespread and how painful will this process be? Most forecasters agree that recovery will come inevitably, but that we will not begin to see an improvement until late 2003 at the earliest.

The situation in other parts of the global economy is similarly patchy, at least for the next two quarters. In the German economy, the cornerstone of the Euro territory, the indicators are firmly in negative territory, with unemployment rising, manufacturing production down and confidence levels poor. European equity markets have suffered as a result.

In Asia, Japan continues to struggle to restart its moribund domestic economy, due in part to the staggering levels of debt which hang over the major Japanese corporates and the banking sector. Outside of Japan, Asian economies are suffering from the drop in US consumer spending, and are holding back on business investment. On the upside, however, is China’s entry into the World Trade Organisation which promises major positive changes in regional trade.

Most importantly for the New Zealand economy, Australia has also managed to sidestep the worst of the global downturn, and is forecast to maintain growth of around 3 percent in 2003. This will no doubt be countered by the effects of the prolonged drought.

So, to sum up, the weak economic outlook in Europe, the United States and Japan means the New Zealand economy may find itself flying through dead air for the first half of 2003. The global situation should improve in the third quarter of the year, with a positive impact on the prices paid for New Zealand products. However, the possibility of a further appreciation of the New Zealand dollar may counteract any price rises into 2003/04.

Most forecasters expect growth in the New Zealand economy to fall to around 2.5 percent in 2003, and then bounce back to over 3.0 percent in 2004. My own view is that the short-term risks are on the downside to these forecasts but, correspondingly, on the upside for the medium term.

I have avoided saying anything about the war in the Gulf. It is difficult to predict how events will unfold, and then what impact they may have on the global economy and our own. Most likely scenarios involve negative impacts in relation to:

Lower demand for New Zealand exports (largely tourism); Lower export prices, compounded by higher oil prices; A drop in confidence, leading to a pullback on domestic consumption and investment; and More volatile financial markets and a retreat in equity markets. It needs to be said, however, that the New Zealand economy is well placed to absorb some of these initial impacts. Firms’ balance sheets are in good shape, and apart from petrol companies, most other firms should be able to absorb rising input costs within their margins. So too the government’s balance sheet, where our debt level is very low. What is more, a key driver of economic growth in the past year has been the momentum in the domestic sector, and that remains strong. There should be enough internal demand to see out any further short-term weakness in the external sector.

Of course, we will all benefit from a resolution of the conflict and a reduction in geopolitical uncertainty, since these are likely to lead to some rebound in global growth. The key question remains, how long will the conflict go on, and – perhaps more importantly – will it prompt further acts of terrorism against perceived Western interests.

In case it is not clear, let me stress that my outlook on the year is not a doom-laden scenario by any means. There are considerable challenges and some major uncertainties, and our options in the short term are limited. However, the government is not about to lose its nerve and alter fiscal or monetary settings. I am confident that the economic management regime we have put in place, along with the set of long-term strategies for investing in New Zealand’s productive base, will stand us in good stead.

There is no reason for panic. We are in the relatively advantageous position of having some headroom to work with if some of these negative global and climatic influences depress economic activity too much. I would stress that at the moment the economy is still buoyant and there is no case for any stimulus.

But remember that unlike Japan and the USA, our interest rates are still modestly high. It is not as if we have reduced rates close to zero and eliminated the scope for any monetary stimulus. Public debt has fallen further and faster than we planned or forecast, and the government is running strong and rising fiscal surpluses, so there is scope in the public finances to ride out a downturn if one arrives. Unemployment is at a fifteen year low, so any slackening of activity will not be aggravating a socially devastating starting position.

In particular there is no reason to entertain the kind of policy U-turns which the opposition parties seem to feel are the necessary response to the unstable global situation. It is simply not true that difficult times require extreme initiatives. Sticking with policy settings that are known to be sound is much more likely to work.

A recent speech to the Orewa Rotary Club by Dr Don Brash, the National Party finance spokesperson, reminded me of the danger of the kind of thinking that advocates radical solutions to any social or economic problems that appear difficult to solve. Dr Brash claims that we were at risk of becoming like Argentina, Papua New Guinea or Fiji. He draws a comparison between the current economic climate and that which prevailed in the early 1980s – itself a very contentious assertion – and on that basis alone advocated a return to the kind of radical changes that occurred in New Zealand in the late 1980s.

I do not dispute that many of the reforms enacted back then were necessary to free up a heavily regulated economy and stop the country’s slide into stagnation. But I do not think 2003 in any way resembles 1983, and besides, just because the patient needed major surgery in 1984, it does not follow that all future ills should also be solved by wielding the scalpel.

Interestingly, the only specific proposal that Dr Brash makes, outside of his carping comments about a basically sound economy, is the abolition of the unemployment benefit and its replacement by a kind of Depression-style town square spot-market for labour. The benefit should be abolished, Dr Brash says, and instead local governments should become “employers of last resort – offering a job to anybody who turned up at, say, the local post office at 8 a.m., with payment for that day’s work at the end of the day, in cash. ”

This is an astoundingly bad piece of policy thinking. Not only would it place enormous financial pressure on local authorities and endanger those businesses which currently contract with them to perform services, it would also invite widespread abuse, create a class of impoverished internal migrants, and undermine the wages of many New Zealanders in low-paid and low-skilled jobs. Dr Brash is essentially arguing that we should import a little piece of the Third World into all of our communities.

It is equally disheartening to find Dr Brash perpetuating the fallacy that social and environmental programmes are inimical to economic growth and hence should be suspended during any economic downturn.

Dr Brash suggests that, if only New Zealand businesses were released from the chains of regulation, they would immediately increase their output and reach their full potential. He cites as impediments to business a range of initiatives including local government reform, occupational health and safety provisions, and the ratification of the Kyoto protocol. All of these, he says, are luxuries we can ill afford.

Again, this argument has an intuitive appeal to those who want to believe it. But it reflects a naïve understanding of the link between social and environmental policy on the one hand, and economic growth on the other. And it also reflects a dangerously narrow view of what actually are the factors which support business growth over a long period.

We live in a global labour market, and so have to both attract and retain skilled people. This means, among other things, ensuring that the working and living environment in this country has to be comparable to that in the other countries with which we compete. This is not simply a matter of remuneration levels. It also encompasses the provision of quality public amenities, quality health and education systems, safe working environments, and so on.

There will always be a debate over what level of expenditure we can sustain, and what is best practice in administering regulatory functions. And this government has worked hard at eliminating wasteful duplication in health and education, and at reducing compliance costs for business.

However, there can be no arguing that these things are luxuries to be dispensed with at whim.

Dr Brash also turns his attention on policies aimed at improving the economic well-being of Maori, National is moving dangerously close to the fringe of New Zealand political life currently occupied by New Zealand First. It is also, ironically, casting aspersions on the ground-breaking work of your former local MP, the Hon Doug Graham, in making progress towards putting Treaty grievances behind us. Treaty claims are inherently complex and fraught, but attempting to hurry them along will get us nowhere. Equally, policies aimed at improving the social and educational outcomes for Maori have an irrefutable logic, as well as being central to the vision that most New Zealanders share of an inclusive society. Each Census confirms that the New Zealand population will become progressively less white. Maori will comprise an increasing proportion of the future workforce, and so it is essential that their educational and health status is improved relative to current levels or our overall averages will fall. We also need to see our commitment to ratify the Kyoto Protocol on Climate Change as a strategic investment for the future. There are compelling reasons for New Zealand to support international action on climate change. For us climate change is an issue of bio-security and ultimately economic security. The potential impacts of global warming on our land-based industries would be severe: More frequent and extreme floods and droughts; Bio-security threats from subtropical pests and diseases; Saltwater intrusion and infrastructure damage from sea level rises; and Water supply and infrastructure damage from higher rainfall in the west of the country and drier conditions in the east. We are aware that the Kyoto Protocol has its limitations, and saddened that some countries, notably the US, have chosen to walk away from it. However, it is the only functional international mechanism we have for reducing greenhouse gas emissions. Doing nothing is not the low-cost option. New Zealand is committed to showing leadership, but is acting in step with — not ahead of — a broad consensus of western countries on the Kyoto Protocol. We will now be one of the last Western countries to ratify. And Kyoto coming into force will depend on Russia ratifying, which is yet to happen. We have no intention of implementing the Kyoto provisions ahead of our major trading partners, and hence disadvantaging New Zealand businesses. Indeed, we are putting in place provisions for major affected industries, such as agriculture, which will smooth the transition and also assist businesses to take advantage of the opportunities that the Kyoto Protocol offers in terms of the sale of environmentally sound technology. This government is committed to developing greenhouse policies consistent with economic growth and with our policy of minimising compliance costs on business. We have absolutely no interest in adopting crude or extreme climate change policies that would run counter to that goal. The international evidence, and our own experience here in the last three years, suggests that economies that grow are characterised by a partnership between government and business focused on the quality of investment in economic fundamentals such as infrastructure, research and workforce skills. This is what we have begun to create over the last three years: Partnerships with business in the key areas of biotechnology, information and communications technology and creative industries, aimed at better coordination and the attraction of investment capital into those sectors; A skills strategy based on a tertiary education system that is responsive to the skill requirements of New Zealand businesses; A complementary immigration policy, aimed at attracting skilled migrants with the ability to fill the immediate and longer term skill gaps; Investment in infrastructure – in particular in the area of roading – as one of the essential pillars of productivity growth; and Stimulating an entrepreneurial ‘infrastructure’ connecting ideas and innovations with the capital and specialised advice that will grow them into successful businesses. Inevitably, it takes time to make these kinds of investments. Partnerships are not created overnight. Nor do we have unlimited resources. As a government we were adamant that we would maintain a careful fiscal stance – keeping government debt at manageable levels – and a conservative monetary policy. Nevertheless, we have managed to free up significant resources to invest in building our productive capacity, while making provision for the extra superannuation costs that we know we will have to meet when the baby boomers start to retire. It will be some years before these investments begin to bear fruit. But when they do the benefits – like a higher quality workforce, better roads, and reduced environmental risk – will flow to New Zealand businesses and to the rest of the community alike. We have to design policies that are good both for business and for the quality of life of ordinary New Zealanders. And we cannot walk away from the major issues facing the world, such as climate change. Nor as New Zealanders can we walk away from the issues relating to the settlement of legitimate Treaty claims and ensuring a better future for Maori. We all have a stake in these things. As a government, we do not believe that these interests are always at odds with each other. Certainly it is important to keep compliance costs in check and to take whatever steps are necessary to simplify the tax system and improve important processes such as resource consents. But this is not where the major economic gains are to be made. It is more important for us to pursue balanced long-term growth through careful investment of resources. This, combined with conservative fiscal management, is the best set of policies to see us through difficult times like the next six months. And it is the only set of policies that will underpin the kind of economic prosperity and social wellbeing that New Zealanders, of all races and creeds, want for themselves and their children. Thank you.