26 September 2003
Hon. Michael Cullen - Minister of Finance
7pm Friday [NZ time]
Australia NZ Chamber of Commerce, London
Thank you for coming in for breakfast this morning. As you know, New Zealand has a very special relationship with the
United Kingdom. Our historical connections, our common traditions and, for many of us, close family ties all make for a
community of purpose and of viewpoint that survives in spite of our vast geographical separation.
As time has gone on, both of our economies have tended to refocus on where the new opportunities lie. You have become
much more focussed on Europe, and we have tended to focus more on an Australasian future. The fact is, though, that the
UK remains vastly important to the New Zealand economy. You are still our fourth largest export market, and our largest
market in Europe.
Traditional relationships change slowly, and the export trade is, as ever, dominated by the supply of primary based
product. While lamb, apples, cheeses and butter are what New Zealand sends to the UK, we like to think that these
products have improved in quality and range in line with the increasing sophistication of consumer markets globally. One
little indicator of this is that New Zealand wine is now the second most valuable export product into this market.
Even with the distance between us, you are the source of the second largest flow of tourists to New Zealand. Labour
flows between the two countries remain significant, particularly for young people, and especially with teachers. I will
come back to investment later, but as we move to improve the performance of our economy, it is important to note that
the UK is still the largest source of new investment into New Zealand.
The closeness of our traditions is reflected in some similarities in the goals we set for the management of government
finances. My briefing papers for this trip tell me that the UK operates a cautious fiscal policy: the detail suggests
that we are even more cautious than you. I understand that fiscal policy in the UK is built around two basic rules: a
balanced budget over the economic cycle and net debt below 40 per cent of GDP.
We aim to run surpluses over the economic cycle, sufficient to cover transfers into a dedicated investment fund that
will help to ease the pension costs associated with the transition to an older demographic structure, and to meet some
of the costs of maintaining and improving our infrastructure. This second requirement is associated with meeting our
debt target, which is to keep gross sovereign guaranteed debt below 30 per cent of GDP, on average, over the cycle.
Despite our close relationships, I am sure that the state of the New Zealand economy continues to receive little
coverage in the British media, so I hope I am not telling you things you already know when I give you a brief overview
of how the New Zealand economy is performing.
In historical terms, my message is unusual. Typically, our small, trade dependent economy followed the international
business cycle. If the larger northern hemisphere economies were slowing, the New Zealand economy was depressed: if they
were depressed, we were in serious trouble. The state of global engine economies were critical to our short-term
During the last three years, I have been relaxed as I have moved through the various international finance ministerial
fora - IMF, World Bank, Commonwealth Finance Ministers, and son on. The fact of the matter is that our economy has quite
atypically not been impacted by international uncertainty and stagnation. Not only has performance been much more stable
than that in most other countries, but it has been stable at the upper end of relative international economic
The New Zealand economy is in good heart. It has been one of the best performing economies in the OECD in recent years.
The headline numbers tell the story. The economy grew by 4.3 per cent in the year to March 2003. Employment has grown in
each of the last twelve consecutive quarters, so we now have an unemployment rate of 4.7 per cent, which is the lowest
since 1987 and is very low by OECD standards.
To give you a benchmark, the unemployment rate was 6.3 per cent when this government took office at the end of 1999.
Inflation is well under control. Consumer prices rose by a very modest 1.5 per cent in the year to June.
This strong performance has not be a result of any fiscal stimulus. We are running strong surpluses, and spending and
debt are falling as a per cent of GDP. In the 1999 fiscal year spending in the core Crown sector was 33.8 per cent of
GDP. In the current financial year it is expected to be 31.1 per cent. Gross debt was 33.8 per cent of GDP. This year it
is forecast to fall to 25.7 per cent.
These amounts do not take account of the financial assets that are accumulating in the New Zealand Superannuation Fund:
a fund that has been set up to help cover part of the pension costs associated with a transition to an older population
structure. Those assets are expected to be close to 3 per cent of GDP by the end of the current financial year.
Our economy – like any trading economy – has always been vulnerable to divergence: either the domestic economy moving
ahead when the tradeables sectors are under pressure or vice versa. In the period between 1999 and last year, our export
sectors experienced very strong income growth as a result of a coincidence of supporting influences: a depreciating
exchange rate, strong commodity prices and good climatic conditions. In 2002 the exchange rate started to appreciate
quite strongly – and this has continued into 2003, although at a slightly slower rate.
The effect on the export sector has been slow to emerge, partly because many export contracts were expressed in New
zealand dollars, partly because an appreciating currency lowered input costs, and partly because exporters held currency
hedge contracts. Those factors are now fading and export incomes have come off their peaks by about 5 per cent. I stress
come off their peaks, because their growth in the three previous years was very strong and incomes are still high by
While the export sector has shifted from an accelerant to economic activity to a brake on it, the domestic economy has
picked up and remains buoyant. A large part of that is the strong turn around in net migration, driven by fewer New
Zealanders leaving, more returning from abroad and more foreigners seeing New Zealand as an attractive destination for
study, work and living.
We have a two-paced economy, but the net effect is that the economy overall is still showing satisfactory growth.
Looking forward, we do expect the economy to slow in the year to March 2004. It has hit a soft spot as a result of the
combination of a number of temporary factors. These temporary factors include the dry weather conditions that impacted
on some parts of the agricultural sector and on electricity generation, the slowdown in tourism and export education
that accompanied the SARS outbreak in Asia, weaker dairy product prices and, of course, continued uncertainty and
sluggishness in the global economy.
Our best estimate is that these are in fact temporary, and current indicators are that they are abating. The effect is
that we expect growth to slow to between 2.25 and 2.5 per cent before picking up again in the 2005 financial year. More
recent indicators suggest that the soft spot has not been as bad as was originally estimated and the dip in the growth
rate is probably going to be less than we built into our 2003 Budget forecasts.
Every time a new forecast comes out the downside risks arising from the temporary factors recede and the estimate of
their short-term impact is reduced. Even the world economy seems to be lifting, although results are patchy and it is
dangerous to draw too many firm conclusions on its prospects just yet.
As I have said before, whenever I come to meetings like this, I comment on how relaxed I am about the performance and
prospects of the New Zealand economy, compared with my more anxious counterparts in Finance Ministries in other
But I am quick to add that while our performance is good, we can and must do better. New Zealand slipped behind
developed world growth rates in the latter part of the last century, and if we do not regain some of that lost ground we
will struggle to attract and retain skilled and productive workers who might otherwise prefer to take their chances in
higher per capita income environments.
The government has therefore constructed a framework within which we can pursue higher sustainable growth through and
emphasis on innovation.
This growth and innovation framework 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
I think that you will find that even on existing foundations, New Zealand is a very attractive inward investment
destination. We have a very stable macroeconomic environment, clear and relatively light handed regulation, a foreign
investment friendly inwards investment framework, a skilled, hard working and - by international standards - cost
effective workforce and by no means least, a safe domestic security climate.
We will build on that.
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.
There are clearly areas within this growth framework from which New Zealand and the United Kingdom can both benefit in
terms of investment and trade.
Before I close and invite you to raise questions with me, it might be of interest if I spelt out some of the political
philosophies and aims that out government has, because these shape the refinements we make to the way we manage the
There are seven pillars.
The first is leadership and partnership. We have rejected highly intrusive regulation, protection and subsidy, but we do
not leave either economy or society to the fortunes of the market. We believe in as much market as possible and as much
government as necessary, but we go beyond that Clintonite expression of the role of the state. We feel that the
government is uniquely placed in terms of responsibility and authority to take certain initiatives and to carry certain
risks. This leadership and partnership role is expressed in our industry and regional economic development programmes.
Second, we are pro growth and pro innovation. We don’t want to restrict our vision to a redistribution of an existing
economic cake. We recognise that many of our basic economic strengths have emerged from our natural and national
capacities and advantages, and that they are the foundations of a brighter future. We see no problem with applying
biotechnologies to traditional land based industries and seeing ourselves as a great centre for fashion and film making:
both are natural components of an innovative and growing New Zealand.
Three: equity. We have a strong tradition in fairness and security for all and make no apology for keeping that at the
forefront of all of the decisions we make. We are encouraged by the emerging research and analysis that concludes that a
cohesive and inclusive society is not only valuable in itself but improves the performance of the economy by improving
the effectiveness of networks, reducing litigation, and lowering transaction costs.
The fourth pillar is opportunity. Opportunity exists at many levels and can be unleashed from many sources. Creating
opportunity improves skills, increases flexibility and adaptability and releases the incredibly inventive nature that
resides deep down in the New Zealand psyche. Individuals, as well as regions and industries, must be given the
opportunity to develop their potential and to follow their destinies.
The fifth pillar is a strong public service. One of the global lessons of recent years, from the smallest state to the
largest corporate, is that strong ethics and good governance matter, are easily taken for granted, and take a long time
and a lot of money to repair if they fall from grace.
Next, we will build a confident nation. Confidence is infectious and uplifting. For us, confidence is deserved. We are a
small country a long way from the power centres of the world but we have led in many fields of human endeavour, from
democracy to peace, from environmental respect to the forefront of scientific achievement.
Finally, we must respect our deserved reputation for being clean, green and sustainable. That means that some of the
hard decisions on matters that we sometimes take for granted - like things we do on global warming – can not be put off
or watered down.
If I run my finger over that list, it is a list that makes me comfortable within myself, but it is also a list that
spells out where the world wants to go. New Zealand is the future.