Michael Cullen Address to Four Winds Communication Breakfast President’s Room, Wellington Club, 88 The Terrace,
The Labour-led government has just passed its fifth anniversary, and as Finance Minister for all of that time I have to
confess I am now getting well down the “To Do” list that I compiled when we were elected.
We now enjoy one the fastest growing economies in the OECD. Economic growth in the year to June 2004 was well above
forecast, at 4.4 per cent. While much of the impetus has been a strong domestic economy, growth over the past six months
has broadened, as exports and business investment pick up.
The labour market is very strong, with the unemployment rate falling to 3.8 per cent in the September quarter, from
around 7 per cent in 1999. More people in work means increasing household incomes. Total gross labour income increased
7.5 per cent between June 2003 and June 2004. Private consumption expanded 5.7 per cent and residential investment 13
per cent in the year to June.
Amongst the important drivers of this sustained growth is, I would argue, the regime of stable, predictable fiscal
management that we have instigated in the last five years. This has seen significant reductions in net public debt, and
slight reductions in the ratio of government expenditure to GDP.
New Zealand has a set of government accounts that is envied throughout the world, and that has been achieved by careful
management rather than by an excess of taxation. Tax rates on businesses in New Zealand are lower than in Australia,
once the total picture of state and federal taxes and payroll levies is taken into account. And they compare very
favourably with other developed nations.
Government debt and spending, as a proportion of GDP, are low by OECD standards. Core government operating spending was
32 per cent of GDP in the 2002/03 fiscal year, and declined further to 29.7 per cent in the 2003/04 fiscal year.
What is more we have set the scene for future fiscal stability by establishing the New Zealand Superannuation Fund in
order to partially pre-fund the cost of the state pension at the height of the demographic bulge towards the middle of
the century. This fund will provide future governments with a significant hedge against the rising cost of
superannuation, and will also have the effect of placing the Crown in a position of eliminating its net debt within the
next decade. Few countries are able to boast of that, and it is a factor that will strengthen our credit-worthiness and
our economic stability going forward.
In that light the National Party caucus’s decision to support the continuance of the New Zealand Superannuation Fund is
an important victory. Contrary to popular belief, the greatest gratification in political life is not winning the clash
of personalities. It is winning the battle of ideas.
The real winners, of course, are the future retired people of New Zealand whose long-term income security will be
strengthened, and the future taxpayers who will not face the kind of unpalatable choice that population aging would
inevitably force upon them – the choice to pay sharp increases in tax or to impose severe cuts on the value of the state
So having created a platform for stable economic growth, what challenges are left for the next five years?
The answer is: there are many and varied challenges.
We have embarked upon long term developments in areas such as improving trade access, building the skills of the
workforce, developing our capacity for growth and innovation, attracting foreign investment, and investing in key
economic infrastructures. As a government we need to sustain this progress.
So too the advances we have made in social objectives, such as improving health services, increasing participation in
early childhood education, fighting crime at both its roots and its branches, and protecting our environment.
One immediate challenge for me as Finance Minister is to increase fiscal literacy.
This time next week the Budget Policy Statement will be released. That is a document that spells out the parameters for
next year’s budget.
I have to say I am regularly disappointed by the inability of many in the media to grasp some quite simple concepts in
fiscal management. In the recent past this has led to widespread confusion on the actual state of the government’s
Without giving away any of the detail, there are three aspects of next week’s statement that need to be clearly
The first is that an operating surplus should not be confused with a pile of ready cash. As with any set of business
accounts, a number of non-cash items – such as depreciation and the retained profits of SOEs – need to be taken out of
the Crown accounts to arrive at an accurate figure for the sum available for new core Crown expenditure.
The operating surplus also includes commitments to capital spending. So while it is true that our revenue streams more
than cover our costs, we are also investing in the future, through capital spending and through strengthening our
financial position to meet future expenditure pressures. These commitments include:
net purchase of physical assets including major investments in roading;
net increases in advances (chiefly student loans);
net purchase of investments (including hospitals and housing); and
purchase of marketable securities and deposits by the New Zealand Superannuation Fund.
These have accounted for the bulk of recent operating surpluses. For example, in the 2003-2004 financial year, the
operating balance was $7.4 billion, but this was reduced to $520 million of net cash flow from core operating and
So those who advocate use of the surplus for their own pet project (be it a tax cut or increased expenditure on health
or law and order) need to indicate which part of the capital or operating budget should be forfeited to pay for it.
The second aspect of the Budget Policy Statement that needs to be understood is that there are important cyclical
elements that underlie the current trends in revenue and expenditure. To cite the obvious example, company tax receipts
fluctuate across the business cycle and are notoriously hard to forecast. Simple prudence tells us that we cannot base
important long-term decisions on what is happening at either extreme of the cycle. Businesses come to grief from time to
time when they mistake a cyclical movement for a steady trend. That is not something we can afford to risk in
Thirdly, it needs to be understood that fiscal forecasts are predictions of what will happen. They are not normative
descriptions of what should happen. The growth path of some areas of government expenditure is clearly unsustainable.
Health expenditure has been growing at something like 4 per cent per annum in real terms, even after the impact of
population aging has been taken out of the equation.
This is a worldwide phenomenon, so it is not unique to New Zealand. However, simple mathematics tells us this cannot go
on indefinitely, otherwise the entire economy will consist of nothing but the health system.
My government – like many others in the developed world – is seeking ways to change the cost structure of health care so
that it remains affordable in the long term.
All of this supports a cautious approach to revenue and expenditure, rather than the enthusiasm for profligacy that a
healthy operating surplus seems to engender.
We need to ponder what the impact of a loose fiscal stance would be, given that the economy is already running close to
capacity. To see a recent example, we need look no further than the National government’s tax cut package of the late
In that instance, looser fiscal policy led to a tightening of monetary policy in order to control inflationary
pressures. That left the economy weaker, and constrained the government’s options at the time of the Asian financial
Those who are advocating looser fiscal policy today need to show how such a move would create any more traction on the
real drivers of economic growth. Would it increase the productivity of the workforce? Would it reduce the cost of
capital to businesses? Would it increase investment in technology?
The answer to all these questions, I would argue, is: no.
Loose fiscal policy is a kind of ‘boy racer’ approach to better performance. The engine revs faster, the wheels spin,
and there is a pungent aroma of burning rubber; but in reality we are just going round in circles.
The approach my government has taken, and will continue to take, is considerably less sexy. Nevertheless, it is our
commitment to stable, predictable, long-term fiscal management that has underpinned economic growth for these past five
years. That same approach (alongside careful investment in growing the productive capacity of the economy) promises to
extend that run of good performances into an established trend of higher growth.