Hon Michael Cullen
25 August 2004
Speech Notes
7.30am Wednesday 25 August 2004

Speech to Cullen Employment Law Firm Breakfast: The Economy and Future of NZ

Level 13, Willibank House, 57 Willis St, Wellington

Two somewhat contradictory events caught my attention last week. The first was an article published in the Australian Financial Review, in which the National Party Leader, Don Brash, launched a stinging criticism of New Zealand, arguing that as a nation we are headed towards being ‘just another Pacific island’, with third-world living standards.

What was most disappointing about this attack was not just that it was factually incorrect, or that he felt it necessary to go across the Tasman to badmouth his own country. What was most disappointing was that the policy prescription Dr Brash put forward to get us back into the top half of the OECD was precisely the set of policies that led to us falling behind in OECD GDP rankings during the 1990s. It seems that there are some who have failed to understand the lessons of history, and seem hell bent on repeating the same mistakes over and over again.

The other event was the publication of the third Social Report. This Report covers 43 indicators spread across ten categories: health; knowledge and skills; paid work; economic standard of living; civil and political rights; cultural identity; leisure and recreation; physical environment; safety; and social connectedness.

The picture that emerges from the report is that compared to the mid 1990s, New Zealanders are on average living longer, they are more highly educated, less likely to be unemployed and enjoy higher real average hourly earnings. We have also being making significant progress in a range of social indicators including:

- Road safety;

- Reducing suicide (which is a good indicator of general mental health status);

- Participation in tertiary education and adult second-chance education;

- Reducing overcrowding in housing; and

- Reducing smoking.

One of the most interesting aspects of the Social Report, however, is that it enables a comparison of measures of social well-being in New Zealand with other developed countries. What this shows is that New Zealand is already in the top half of the OECD for the majority of indicators for which we are able to compare ourselves. These include indicators of life expectancy, a range of education indicators, employment and unemployment, trust in others, and absence of corruption.

We are in the bottom half of the OECD in relation to some other measures, such as per capita incomes, income inequality, rates of child death by maltreatment, suicide, obesity and adult literacy.

These are reasons for concern, although it is important that we see the per capita income comparison in a larger context. If we look at the last thirty years, we see that New Zealand’s economic performance began to fall behind other advanced nations in the 1970s. In other words, it took all of three decades of lacklustre performance to shift us towards the back of the OECD pack.

It will take an extended period of sustained growth (but a lot less than thirty years, I hope) to start to overtake our nearest rivals, and to start to move up through the ranks.

The truth is that in the past five years we have been growing at faster than the OECD average, which means that we are slowly reeling in the pack of nations ahead of us. Since our government came to office, growth has averaged around three and a half per cent per annum, and it reached an impressive 4.4 per cent peak in early 2003. In the five years from the March quarter 1999 to this year New Zealand has achieved growth totalling 21.7 per cent.

If we consider that population growth over the same period was just 5.6 per cent, what these figures show is that living standards for New Zealanders have increased over that period by around 15 percent in per capita terms.

That growth has been shared across the community, and the primary mechanism for that has been growth in jobs. Last week’s Household Labour Force Survey (HLFS) for the June 2004 quarter recorded a further drop in unemployment to 4.0 per cent (down 0.3 percentage points from the previous quarter). This means the total numbers in employment have passed two million workers for the first time.

New Zealand now has the second lowest unemployment rate in the OECD (behind Korea on 3.5 per cent), and significantly lower unemployment than our major trading partners including Japan (4.6 per cent), the United Kingdom (4.7 per cent), Australia (5.5 per cent) and the United States (5.6 per cent).

Indeed, since the government came to office 211,000 new jobs have been created; or 136 more people in work each day since the beginning of 2000.

The statistics also confirm that employment gains are being shared around, with strong growth in the regional economies and with Maori and Pacific people’s unemployment dropping again this quarter.

What the statistics have also consistently shown is that New Zealanders’ incomes have seen steady growth. We are not, by and large, seeing people having to work longer hours to achieve the same level of income.

Our GDP growth rate has dropped off in the last year, with the impact of the higher dollar especially. Even so, 3.6 per cent for the year to March is an excellent result, especially given the turbulent international environment. In fact, in the March 2004 quarter our economy grew at over twice the rate of the OECD average.

We seem headed for growth in this calendar year of between 3 and 3.5 percent, with some forecasters suggesting that 4 percent is not out of the question.

The only reason for concern over this growth performance is the question of whether the economy is at risk of overheating. The tight labour market, especially in the areas of construction and manufacturing, is creating some quite severe skill shortages and is contributing to inflationary pressure. The heat in the domestic economy, and especially the housing market, has led some to question the quality and sustainability of our recent growth.

My assessment is that those fears are exaggerated. The housing and construction sectors are the main areas of worry. Outside of that, many key indicators (including CPI inflation, wage growth, household debt, the real exchange rate and the current account) suggest an economy in a period of strong growth, but not the kind of growth characteristic of a boom and bust cycle. The rise in oil prices during the first half of the year should dampen demand and take some of the heat out of the domestic economy.

Set against this are a number of indicators that suggest strong future growth prospect. These include the recent rise in business investment, the improving terms of trade, and export growth, particularly in manufactured export volumes.

The larger question of course is whether the current expansion can be sustained so that it induces a shift in the long-term capacity of the economy, particularly through increased productivity. What we want to engineer is a step-wise increase in trend growth.

The task we as a government have set ourselves.

This is not something that can be done overnight, or even within a five year period. Our focus has to be on the medium term, and on the real drivers of productivity. That means things like improving the skills of our workforce; improving innovation in our economy through the uptake of new technologies; linking ourselves better to world markets and investment flows; and building an infrastructure with the capacity to support a higher level of growth.

In education, we are pursuing ambitious goals in industry training and in the Modern Apprenticeships programme, and we are on track to meet those goals. That may not solve the immediate shortages of labour, in areas such as construction and manufacturing; but it will have an increasing cumulative impact over the next few years.

So too our reform of the tertiary education sector, which is addressing the need to bring tertiary providers closer to the needs and priorities of the economy. The reforms will encourage tertiary provision which produces graduates with skills and competencies more closely matched to those that employers need, so that there will be a shorter transition to full productivity for those graduates.

On innovation and technology uptake the Growth and Innovation Framework has spawned a wide variety of initiatives including expanded public-private collaboration in research, and a range of specific measures in biotechnology, communications, and assisting export-oriented businesses to attract foreign investment partners and access global marketing and distribution networks.

On the major infrastructure issues we face, we have addressed the problem of short-term threats to electricity supply through our actions on reserve generation. And we are advancing on several fronts on the issues of securing baseload supply over the long term.

Last week Genesis Energy announced that it will build a 385 MW combined cycle gas turbine plant, e3p, at Huntly. The new plant will support economic growth and enhance New Zealand as an investment destination by bringing significant new generation on stream to meet medium term demand.

You will be aware that we recently announced a package of taxation changes relating to oil and gas exploration. These should make it attractive for the exploration companies to invest in testing the significant number of promising geological formations around our coast.

These issues are among the major items on the government’s agenda; but they are not simply matters for government. They are also areas in which strong partnerships with the business sector are essential, in terms of developing viable strategies and in financing investments.

One of the key lessons of the past five years is that sustained economic growth requires concerted action by government and business. Each has its own patch, as it were. But in a small economy such as ours there is a significant area of overlap, where government and the business community need to work in partnership to replicate some of the features that larger economies take for granted; things like an active venture capital market, and sufficient critical mass in research and development.

That sense of partnership is what is being debated in the political arena at the moment. A return to the rather extreme laissez-faire economic policies of the early 1990s is only likely to return us to the stop-start pattern of growth that occurred during that decade.

Equally, undermining the social gains we have made in the last five years will end up merely as an exercise in taking from Peter to give to Paul. What New Zealanders want – and what they have essentially got – is a regime of growth in social well-being alongside sustainable economic growth. One might argue that sacrifices in social well-being are justified if they spur GDP growth. To my mind that proposition is highly debatable.

There is an important symbiosis between a growing economy and a healthy society. It is a link that we sever at our peril.

Thank you.

ENDS

© Scoop Media