19 April 2005
Hon Michael Cullen Address to Banker and Investment Forum KPMG, 35 Grey St, Tauranga
This morning I would like to talk about the investment outlook for the New Zealand economy, what that means for
professionals working in banking and investment, and also what it means for ordinary New Zealanders planning ahead for
If we consider the recent economic data, there is clearly a compelling case for investment in our economy. However,
there are some difficult challenges, some odd angles to the current pattern of prosperity, that need to be straightened
out if we are to reach our full potential.
One of those challenges which I want to focus on later is the need to boost domestic savings as a way of deepening our
local capital markets, and also broadening the involvement of ordinary working New Zealanders in those markets.
First, to review where the economy is heading. The National Bank recently described the New Zealand economy as “a
‘Goldilocks’ economy”. For the moment, everything is just right. Although one has to expect some difficulty when the
three bears return.
We have completed six years of economic expansion and are well into our seventh. On average the economy has expanded at
a rate of nearly 4 per cent per annum since the last recession in 1998. That exceeds the rate of growth in Australia and
is ahead of the OECD average.
One of the pleasing aspects of the growth has been the extent to which it has spread around the regions. Some of the
strongest results in recent times have been in places like Taranaki and Northland.
The Bay of Plenty has long been a strong performer economically, and saw a welcome rebound in economic activity in
December, with quarterly growth of 1.1 per cent rise after a modest set back in September.
The region remains well positioned on the league tables, with:
the second largest rise in the value of dwelling consents issued in the December quarter;
business confidence the second highest in the country; and
consumer confidence the third highest across the regions.
Employment has rebounded strongly with 2 per cent increase in the quarter, and residential real estate turnover saw an
11 per cent rise.
This kind of scenario is repeated around the regions, so that as a nation we have one of the best sets of macroeconomic
indicators in the world at the moment. We have the lowest unemployment rate in the OECD. We have seen a bull market in
equities, though that has come off a little. And inflation has thus far remained within the Reserve Bank’s target band
of 1 to 3 per cent over the business cycle.
Strong performance has its downside, however. As you know, the persistent weakness in the US economy is keeping the
exchange rate at an uncomfortably high level, with little sign of immediate respite.
Our current account deficit saw a sharp increase in the December quarter, through a combination of weak export data,
strong imports, and strong investment income payments to foreign investors. On an annual basis, the current account
deficit widened to $9.4 billion, or 6.4 per cent of GDP. Further increases are likely over the year ahead.
Meanwhile there are very real concerns that the domestic economy may overheat:
Firms are experiencing difficulty finding both skilled and unskilled labour;
Asset prices, in particular property prices, appear to be inflated; and
A legacy of under-investment in infrastructure during the 1990s means that we are struggling to deliver the capacity the
economy is now demanding and this inevitably will be a constraint on growth.
As a result, inflation expectations have been trending up since the middle of 2003. At around 3 per cent, they are now
pushing the top of the Reserve Bank’s target band. Hence the series of increases in the Official Cash Rate over the last
Looking at the exchange rate pressure, it needs to be said, however, that our economy has shown much more resilience
than it showed when similar conditions occurred in the past. Most forecasters predicted a sudden and sharp downturn in
the export sector, with a rapid flow through into the domestic economy.
The fact that the slowdown is proceeding much slower than that is a testament to a greater resilience in our economy.
The hard work of diversifying markets, developing higher added value products, and, on the government’s side, reducing
debt and creating long-term fiscal stability, is paying off.
That is reflected in business confidence surveys which are showing a net 30 per cent of respondents expecting conditions
in their own firms to improve over the coming year. In the circumstances this is a very strong result.
Most forecasters are picking economic growth to remain strong over the short term, before easing to around 2.5 per cent
It is worth remembering, however, that for much of the 1980s and 1990s, a growth rate of around 2.5 per cent would have
been cause for wild celebration. It has been hard at times, but we have now established a strong set of economic
fundamentals. What I am arguing is that we need a shift in our attitudes towards savings and wealth management to match
the new economic realities.
So today I would like to talk further about savings. This is an issue that will have an important bearing on the future
health of both our economy and our society, and, as many of you are finance professionals of one sort or another, it is
an issue that is familiar to you.
I recently sparked a brief flurry of controversy by remarking that New Zealanders need to become a nation of
shareholders as well as a nation of home-owners. Somehow that modest suggestion was translated in the media into a call
for middle New Zealand to sell out of all property investments and buy into the New Zealand stock exchange.
There followed some spirited defences of property as a form of investment, and dire warnings about the risks of
investing in the equities market, invoking the memory of the 1987 sharemarket crash as evidence. All this in response to
a restatement of one of the oldest pieces of human wisdom: ‘don’t put all your eggs in one basket.’
So today I want to outline briefly where savings policy is heading under this government and what new directions are
likely to be seen in this year’s budget.
Essentially we are aiming at a shift in the savings culture, in which New Zealanders will take a more informed and more
disciplined approach to creating and managing their wealth.
The fact is that, over the past five years, New Zealand households have on average enjoyed a significant increase in
The economy has grown almost 20 per cent in the last five years, which translates in real income per person to an
increase of 16 per cent.
That increase in income is being spread throughout the community. Average weekly income for New Zealanders aged over 15
rose from $442 in June 2000 to $554 in June 2004. Most of that increase was attributable to increases in wages and
salaries. The contribution of government transfers remained static over the period.
If we look across the Tasman at the Australian experience of compulsory workplace superannuation, there is now a greater
level of financial literacy amongst the Australian population, and arguably a greater appreciation of the skills needed
to create and manage wealth.
That is a goal worth pursuing in New Zealand, since parallel to the changes in our economy our society is moving into a
phase in which families are juggling a more complex portfolio of income sources and investment decisions. Hence their
long term well-being will depend to a greater extent upon their appreciation of how to create and manage wealth.
What we want to focus on are the positive side-effects of having a larger proportion of the population with significant
financial and other assets. We acknowledge the important link between asset ownership and meaningful participation in
society and the economy. Assets provide households with greater security, particularly in terms of their ability to cope
with changes in employment or business failures or poor health. They also increase their ability to access
opportunities, such as buying a house or financing an education, and encourage more of an orientation towards the
We are encouraging savings not just because they benefit individuals, but also because of the macro-economic benefits of
domestic savings to an economy like ours.
New Zealand has one of the lowest rates of domestic savings in the OECD. That is clearly not a reason to panic, since,
as I have just pointed out, New Zealand has sustained one of the best growth rates in the OECD in the last five years.
However, my belief is that the New Zealand economy is moving into a phase of development in which the rate of domestic
savings will become increasingly important. I believe it will be particularly important in deepening our capital markets
and attracting the type of investment needed to extract maximum value from the shift, which is well under way, from a
commodity-based to a knowledge-based economy.
A concern that is commonly voiced regarding the current foreign investment in the New Zealand economy is that it is
focused on companies involved in the domestic economy, rather than our export industries, and that it tends to involve
the purchase of shares in existing companies, rather than greenfields investments. What this means for the venture
capital market is that it draws its funds largely from domestic sources.
That leaves us with two options for increasing the flow of funds into the venture capital end of the market:
Encourage foreign investors to acquire a greater degree of familiarity with the growth sectors in the New Zealand
economy, and in particular the opportunities in the export sector; and
Increase domestic savings, with their inbuilt ‘home bias’.
The agenda Peter Costello and I have been pushing for the last few years towards reducing the barriers to trans-Tasman
investment flows, should go some way towards achieving the first objective. Harmonising taxation, business law and
securities law, and bringing our key regulatory regimes closer together, will ultimately create a single Australasian
‘domestic’ investment market.
While we are moving towards that goal, my government will also be taking measures to increase the propensity of New
Zealanders to save.
That means understanding the dynamics of the life cycle, and to appreciate how they change over time. We need to
understand how saving serves the needs of real families in the real economy. That is, how foregoing current consumption
at one point in their life-cycle enables them to fund assets (property, financial assets and human capital) which can
support their chosen lifestyle through the various phases of life.
It means taking account of changes to patterns of work and family, changes to the economy, to consumption patterns, and
changes to where and how wealth is generated.
Saving is not what it used to be. Over the course of one generation, the financial life of the average New Zealand
household has become considerably more complex, with dual-earner households making a much greater investment in
education, changing jobs and even careers over the course of a working life, with multiple sources of income, children
who seem to linger around home into their twenties, and so on.
Savings now serves a broader range of purposes in the lives of today’s families, and both governments and the savings
industry have to come to terms with that and design policies and products that serve a new configuration of financial
goals and financial means.
So how might we achieve an increase in domestic savings? Not easily, is my first response. The history of government is
littered with failed attempts to do what might appear a simple thing. We are treading carefully, and seeking a path that
does not rely too heavily on either the notion of compulsion or the manipulation of the tax system.
My concern with compulsory systems is that they can negate some of the economic benefits of saving (for example, if they
end up involving regulations which stipulate a particular kind of investment policy) and also some of the social
benefits (if there is not sufficient choice to promote education and wealth management skills).
Tax based systems can lead to dead weight losses and distortions between different savings options. By sequestering
retirement savings in a special category, they can also make it difficult for households to take an integrated approach
to all of their assets, including housing, education, and perhaps a business.
So what might we see in the budget regarding savings? In general we will see a savings package that is designed to
facilitate rather than to coerce and to “be there” through the individual’s full life cycle: through the establishment
of a household, the acquisition of a first home and the build up of an asset base through to retirement.
What we are focusing on is a range of measures aimed at shifting our savings culture, creating a better basic
infrastructure for saving and ensuring that we have a retail savings industry that delivers good results.
We believe the workplace is the ideal context in which most New Zealanders can arrange long-term savings, and so you can
expect a set of measures aimed at rebuilding strong work-based superannuation schemes. Following on from the
recommendations of Peter Harris’s report last year, there will be a number of mechanisms through which the government
will encourage participation amongst employees and minimise the transactions costs for employers.
We are moving to resolve the anomalies in that taxation of savings and investment, in light of the recommendations Craig
Stobo made in his report released last November.
We introduced a mortgage insurance pilot in September 2004 as a first step toward assisting people into homes. We are
looking at further cost-effective ways of assisting home-ownership amongst New Zealanders who would otherwise struggle
to get these important first runs on the savings board.
Outside of the budget, as many of you will be aware, the Taskforce on the Regulation of Financial Intermediaries is due
to report mid year. This will address many of the concerns raised about the retail savings industry such as problems of
conflicts of interest through commission-driven agents, transparency around fees and around the roll up of savings
products with insurance products.
Clarifying the situation and taking action if necessary is an important priority, since a corollary of encouraging New
Zealanders to save more is ensuring that we have a high quality retail savings industry. That means an industry that
provides a range of products suited to local conditions, that operates transparently and applies a high level of
expertise while charging competitive fees.
I do not see any of these measures as a magic bullet. Rather they are a set of converging forces, some of which may
prove more significant than others, but all of which should encourage a greater awareness of saving in the context of a
broad understanding of wealth creation and management, and a savings industry that is more in tune with both the
priorities of savers and the opportunities in the economy.