Michael Cullen Speech: Notes for presentations to the Trans-Tasman Business Circle Breakfast: the New Zealand Economy
and to the International CEO Forum.
Good morning, and thank you once again for making the effort to get to this early morning briefing on the New Zealand
economy.
Last week I presented my fourth Budget to the New Zealand Parliament. I am sure that it didn’t get detailed attention in
the Australian media, so I will start by sketching out some of its main features. For me, the one thing that stands out
about New Zealand’s 2003 Budget is that it continues the process of fiscal consolidation that the government is
dedicated to.
Right at the start of our term of office we put two stakes in the ground. One was to affirm a commitment to prudent
financial management. The other was to allow the automatic stabilisers to work. In the 1990s, fiscal policy was
destabilising. There was a tendency to dish out tax cuts when cyclical factors generated surpluses. That merely caused
an overheating and provoked the monetary authorities to put up interest rates to reign the economy back in. On the
downside of the cycle, there was an attempt to restore fiscal balance through spending cuts, but they just made a
slowing economy sag further.
It is easy to say that we will let the stabilisers work in a downturn: much harder to let them operate on the upswing
when the rising surpluses tempt the right to offer tax cuts and the left to dust off pet spending projects. The fact
that we have resisted temptations during a period of strong growth in operating surpluses confirms that we are looking
through movements in the economic cycle.
In the year ended June 1999 – the last full financial year before the change of government – the books were roughly in
balance. Revenue was running at 33.8 percent of GDP and spending at around 33.3. Government debt was 35.6 percent and
net debt 21.0 percent. In the year to June 2003, we estimate that revenue will be 33.2 of GDP, spending 32.1, gross debt
27.3 percent and net debt 14.0 percent.
The big picture is one of revenue and spending declining by around one percentage point of GDP, but of debt falling by a
rather large eight percentage points.
On the face of it, the debt reduction is particular is a very large shift, but we have not achieved it by cutting into
core government programmes.
Indeed, over the last four years we have protected the revenue base, and boosted key elements of spending on social and
economic programmes. On the social side we have increased the level of the national pension, reintroduced affordable
rents for low income tennants in state houses, improved access to tertiary education and eased the financial burden of
studying, boosted spending on health and education and restored capacity in the provision of a range of social services.
On the economic front we have returned to a more active partnership with local government and with business around
industry and regional development, increased spending on skills development, boosted research and development,
strengthened biosecurity arrangements and tackled infrastructural weaknesses that we inherited.
We have raised more revenue and spent more money. The important point is that we have done this in a patient, measured
and disciplined way, and expenses have grown more slowly than the economy as a whole. The result is that we have pursued
growth objectives and worked towards building a more inclusive society without increasing the relative size of
government and while overseeing a steady fall in the burden of public debt.
One of the surprising things is that the economy has remained strong despite a deterioration in the economies of the
rest of the world.
Every day we read about turbulence and uncertainty in the global economy. Normally, we would expect that instability to
amplify in the Antipodes. As the old saying goes, when the northern hemisphere gets a cold, we get pneumonia. This time,
it simply didn’t happen. Both of our economies sailed through the storm clouds of the tech-stock and other equity market
meltdowns, the stagnation in Japan, sluggishness in Europe and the USA, 11 September, the Enron and Worldcom debacles
and so on. Despite insurance industry woes and droughts, both economies remain robust.
I am going to give you a snap-shot of our economies circa end of 2002. In the 2002 year our economy grew by 4.4 percent:
yours by three. Our unemployment rate was 4.9 percent: yours was 6.1. Consumer prices rose by 2.7 percent in New
Zealand: by three percent in Australia. Our current account deficit was a little over three percent of GDP, yours
somewhere around four and a half.
On these conventional indicators of macroeconomic performance, we actually outpointed you. I don’t want to get carried
away with the data. The differences are small, and the key point is that they both reflect economies in very good heart
despite a gloomy world economic backdrop. The indicators are also just that: a snap-shot.
They say nothing about what happened before and about the challenges that lie ahead. It is clear that in the decade
between the mid eighties and the mid nineties, New Zealand’s economy slipped steadily and substantially behind
Australia’s, so we have a lot of catching up to do.
In order to do that, the government has adopted a growth framework. It has three core elements.
Firstly, we want to strengthen the foundations that are the necessary conditions for successful economic performance in
an uncertain and ever-changing world. This means we need sound government finances, a competitive economy, a cohesive
society, a healthy and skilled population, sound environmental management, a strong research base and a globally
connected economy.
Last week’s Budget confirmed the governments’ commitment to stable finances, to developing skills and to a cohesive
rather than divisive society.
The second element of the framework is that we will build more effective innovation, through a mix of attracting and
developing talent, creating new venture investment funds, making better linkages between tertiary institutions, industry
and communities and by increasing global connectedness. Finally, we are developing areas where our natural advantages
and aptitudes give us scope to boost growth and innovation. These are biotechnology, information and communications
technology and the creative industries. These sector level competencies have applications across a range of industries.
My message is that we are not resting on our laurels or leaving our fate to the whims of economic fortune. The trouble
is that we, like you, face an uncertain future.
We face a future dominated by the longest global bear market in fifty years, weak investor confidence, uncertainty about
the post-Iraq war reconstruction, pessimistic forecasts about returns to dairying, SARS, questions about the cost and
supply of electricity, worries about the exchange rate, and the effects of dry conditions in parts of the country and
frosts in other parts. Because Australia is such an important market for New Zealand, there is also the uncertainty
about how things like your drought will impact on trade volumes and the prices we get for our exports.
It is the length of that list, and its complexity, that leads me to say that this is one of the most unpredictable
environments that we have encountered since the stagflation and Third World debt crises of nearly twenty five years ago.
As we face an uncertain future, it is very important to take comfort in the fact that we have significant policy
headroom and a range of policy options. This is not simply fiscal headroom. The monetary authorities have room in which
to move. Our interest rates are relatively high compared with those in the rest of the developed world. Fiscally, there
is scope to respond on both capital and operating fronts. If the economy does slow, we enter a slowdown with much more
scope to absorb the labour market downside than we have had since the start of restructuring in the late 1980s.
Corporate, farm and household balance sheets are in a reasonably healthy state – although as an aside, we need to keep a
eye on growing credit card debt which has risen by over fifty percent in only the last three years. We did not have the
tech stock or even stock market asset bubbles that other countries did in the 1990s, so there has not been quite the
same degree of wealth loss to shake consumer sentiment. We have taken steps to expand trade opportunities, to plug some
of the gaps in the venture capital market, to upgrade our training programmes, to align immigration policy more closely
with skill needs and to rebuild the infrastructure: all factors that will make it easier for New Zealand firms to find
their way in troubled times.
We can approach the immediate future with a lot more confidence than many other OECD countries.
It is important not to get too pessimistic, and even more important not to act precipitately. That is one clear lesson
from our patient response to the post September 11 environment.
I want to stress that the future we face is uncertain, rather than uniformly negative. By way of example, a post war
reconstruction may well see commodity prices rise and petrol prices fall as Iraq pumps more oil and buys the items it
needs for reconstruction. Equally, continued instability could have the opposite effect. The world economy could remain
subdued, or it could finally get some traction now that there is more certainty about Iraq. SARS may slow Asian tourism
here, but other tourists may divert from Asian destinations to New Zealand ones.
These uncertainties mean two things. Firstly, we have to accept that there is going to be less confidence about the
economic forecasts that we make than would be ideal. Secondly, regardless of the overall performance of the economy,
there is likely to be much more variation in growth between sectors, industries and regions. The average will mask quite
major internal differences.
The uncertainties also mean that we must make extra efforts to strengthen the Trans-Tasman economic relationship. It is
precisely because we have avoided the worst effects of global economic malaise that we can use each other as a buffer by
trading in a relatively robust common market.
As you know, this is the twentieth anniversary of CER. Treasurer Costello and I do not see the relationship as mature,
and we both think there are mutual economic advantages in breathing new life into it.
We had a very useful meeting in Wellington in February, and have agreed to make these meetings regular. Regular meetings
often have somewhat intangible benefits. They send signals to officials that the Australian – New Zealand relationship
is a co-operative, not an adversarial one. They open up channels of communication and improve attitudes towards sharing
information on policy analysis and development. On a more concrete level, we can expect progress to be made in improving
Trans-Tasman business in four key ways.
We have made some progress in recognising tax paid on the other side of the Tasman for imputation purposes. At this
stage we have stopped short of full recognition by the New Zealand tax collector of tax paid in Australia on the profits
of Australian companies in which Kiwis own shares: and vice versa. We have agreed to recognise tax paid where there is
what is known as “triangulation”. This is where an Australian company pays tax in New Zealand on profits made from its
operations in New Zealand. The New Zealand shareholder can claim an imputation credit for that part of the tax paid pro
rata with his or her shareownership: and again vice versa.
We might also make progress in the taxation of venture capital, where we are examining a relaxation of the rules that
surround limited partnerships.
The second area where we want to make progress is with competition policy. If we really do have a common market, theory
suggests that the appropriate jurisdiction for competition law is the Tasman market. In practice this is not always the
case: there will be competition issues that are significant for one of our countries but not the other. We do recognise,
though, that businesses face extra costs and complications if they need competition authority clearances from two
separate authorities.
An example would be the Air New Zealand/Qantas strategic alliance. The companies face two sets of applications, they
need to understand two sets of process, attend two sets of hearings, and at the end of the day could even get two
different sets of conditions imposed if the proposed alliance is to be cleared. In theory anyway they might have the
alliance vetoed even if one authority approved it!
Peter Costello and I have agreed that our countries should seek to co-ordinate more closely in the development of our
respective competition policy regimes. In this respect the Dawson Review of Australia’s Trade Practices Act has been
very constructive. After Dawson we should see a much greater alignment in our regimes on merger assessment procedures
and civil penalties.
The Review as also provided us with a number of “stepping stones” that we can consider using as we explore improved
Trans-Tasman integration of competition policy.
These are:
Improved information sharing agreements between our Commerce Commission and your ACCC.
A single Trans-Tasman application process for clearances and authorisations for mergers and restrictive business
practices.
Cross appointments to each others competition Commissions.
These measures would reduce costs for businesses involved with competition issues in both countries. Ministers are
expecting reports from our officials on progressing the suggestions.
The third area where we can make progress is with the Trans-Tasman Mutual Recognition Arrangement. The TTMRA came into
effect in 1998. It requires each jurisdiction to legislate for the mutual recognition of goods and occupations. If we
get mutual recognition we remove the need to re-test goods and re-certify the competence of service providers. That will
remove barriers to trade, improve workforce mobility and reduce the regulatory cost of doing business across the Tasman.
The TTMRA is under review. The review will look at how the arrangement is working and at prospects for extending its
scope. It will set the agenda for further economic alignment of our regulatory regimes. The report for public comment is
due by August and a final report is scheduled for October. As you can see, we are not letting things drift.
The other area I want to mention today is in capital raising. At a speech in Auckland, Peter Costello defined the
ultimate objective as being to enable Australian and New Zealand companies to raise funds in both jurisdictions using a
single disclosure document that complies with the requirements of the relevant home jurisdictions.
I am sure we can work towards that. In a related area we also plan to explore the potential for extending mutual
recognition arrangements to other areas of corporate regulation, such as company registration and insolvency that may
also impose significant costs on cross-border activity.
From time to time the issue about a common Trans-Tasman currency arises, and while interest has been dormant for a
while, whenever our currency appreciates strongly against yours, rumblings can be heard from some parts of the
manufacturing sector.
I have never been a fan of a single currency. I have often said that from a political point of view it is an idea whose
time has not yet come. I can see that particularly for mid-sized firms, costing and pricing in two currencies in a
common market is irritating, confusing and expensive. However, ultimately the rationale for a common currency has to be
economic: does it add to or detract from the effective macroeconomic management of both economies as opposed to does it
lower business compliance costs.
The strong appreciation of our dollar against yours in recent times has again focussed attention on the economics of a
common currency. I want to draw your attention to a recent study done by Westpac economists. They developed a model to
test the factors that might drive variations in the Kiwi/Aussi cross-rate. Now almost by definition all models are
wrong: it is just that some are useful. We also have to be careful not to select only those models that produce results
that confirm our personal instincts and prejudices.
Those reservations aside, I took some comfort from the results of the Westpac study. They tested variations in the
cross-rate against some fundamentals that would logically drive change. They identified five such fundamental factors:
differences in our productivity growth rates, relative domestic inflationary pressures, interest rate differentials,
commodity price movements and current account balances - which reflect our relative savings rates.
Interestingly, the variations in our exchange rates were explained by differences in the performance on four of these:
productivity, inflation, commodity prices and savings. They could be called the economic fundamentals.
This suggests three things.
There does not seem to have been an exchange rate impact of what might loosely be described as speculative flows. A
common currency would therefore not insulate us from what some see as a potential source of Trans-Tasman
destabilisation.
Differences in interest rates did not have an observable effect on the Aussie/Kiwi cross. The implication here is that
we are able to maintain separate monetary settings, each geared to the circumstances of our economies at different
points in time, without worrying about exchange rate effects distorting production and trade.
Finally, because the exchange rate is driven by those economic fundamentals, it seems to be acting as a natural buffer.
When our fundamentals deteriorate relative to yours, our dollar goes down and vice versa. Relative prices adjust to
reflect relative economic performance.
A side result was that when there was a deviation between actual exchange rates and the – shifting – equilibrium rate
that the fundamentals are driving, the correction was quite quick. The rate returned to the equilibrium within a few
quarters.
What does this tell us about recent trends in our exchange rate?
There are four possibilities.
One, the model is wrong, so we really don’t know what will happen next!
Two, the model was right historically, but things have changed, so we really don’t know what will happen next!!
Three, we are in the middle of a deviation from the equilibrium exchange rate, so the Kiwi will depreciate against the
Aussie in the very near future.
Four, we have been outperforming you on productivity, inflation and savings, and have encountered better commodity
prices than you, so the appreciation of the Kiwi simply reflects the fact that we are in a better shape than you!
I am not going to speculate on which of those four possibilities best explains recent experience.
I am going to say that the study confirms my basic instincts that a common currency would not be a good idea, certainly
at this stage of our comparative economic development.
With all the doom and gloom around in world stock markets, it is a pleasant change for us to sit down and compare our
comparative success stories. We are not out of troubled waters yet, but we have come a long way through them with our
ships in good condition and our crews in good heart. {Comments about our America’s Cup defence boat would not be
appropriate at this stage, thank you!}.
I am optimistic about our prospects, and you have every reason to be optimistic about yours. If we wring a few more
benefits from our mutual interest in the Trans-Tasman market, those prospects will look brighter still.
Thank you.