Tuesday 28 February 2006

Rt Hon Helen Clark
Prime Minister

Address at EMA Auckland CEO’s Network Breakfast

Crowne Plaza Hotel Albert Street, Auckland

Tuesday 28 February 2006

Thank you for the invitation to address the EMA’s CEO’s Network Breakfast today.

My brief is to expand on the government’s policy programme, with particular reference to the economy and issues affecting business.

In my annual Prime Minister’s Statement, delivered two weeks ago to Parliament, I set out the government’s views on the state of the economy and our priorities for the year ahead.

On the economy, I made it clear that we see the economy moving through a dip in the business cycle after a period of sustained growth.

Indeed the National Bank Business Outlook out today makes the point that “the New Zealand economy has been expanding continuously for the past seven years”, and that “this has been the second longest expansion phase in the post World War Two period”.

The Bank further comments that “if New Zealand gets through this slow patch in 2006, the current economic expansion could become New Zealand’s longest”.

The government’s objective has been to navigate the economy through a soft landing by careful management of fiscal and monetary policy, and by focusing on policies which help strengthen the economy for the medium and longer term.

Quarterly GDP data is still showing growth, but the rates have been slowing since December ’04, and are expected to bottom out in the March ’07 year at 1.7 per cent.

While it’s possible that this Treasury forecast could be revised downward, the medium term view still sees growth moving back up to in excess of 3.5 per cent in the 2008/09 year.

There are of course years in the not so distant past when growth of 1.7 per cent would have been grasped with gratitude – given that the last dip in the business cycle saw growth bottom out around zero or below.

The labour market remains strong, as many employers will testify, with our unemployment rate of 3.6 per cent still the lowest in the OECD. It is forecast to rise a little, but Treasury puts it at barely over four per cent by 2008.

The Department of Work and Income has been proactive in following up the recent announcements of redundancies, and it reports good demand for many of the workers affected.

The total numbers affected by restructurings and closures amount to several hundreds – against a background of 293,000 more New Zealanders being in work now than there were six years ago.

It also helps that the growth outlook for our trading partners is good. Buoyant global growth means that even though the prices received for a number of our commodity exports may fall, they should still remain relatively high by historical standards.

Yesterday’s trade data was disappointing with imports still high, but were consistent with forecasts which have the current account deficit peaking in the year ended March ’06, and starting to come back down in the March ’07 year.

The high exchange rate, which has been constraining export growth, is expected to ease over the coming months. This is happening already with the dollar now well off its December ’05 high, closing at 65.92 US cents at close of play yesterday. This will help restore some balance to our growth profile, which has been driven more by domestic demand over the past couple of years.

It is worth noting that swings in the value of the NZD are not necessarily out of kilter with variations in other exchange rate pairings. For example there is some evidence that the USD/JPY rates and the EUR/USD rates have both fluctuated by similar amounts from their average rate to that of the NZD/USD rates. The issue, of course, for New Zealand exporters is that in our smaller domestic market, the challenge of exporting typically comes much earlier in a firm’s growth.

The EMA has expressed concerns about the burden of high interest rates falling on the tradeable sector. This imbalance has to be acknowledged. The tradeables sector has borne more of the pain of the high dollar relative to the household sector, because much of the household sector has been able to insulate itself from increasing interest rates by fixed rate mortgages.

The high dollar has not been all bad news for businesses – it has helped with domestic business investment to the extent that imports (including capital equipment) became cheaper. This domestic business investment will help spur further productivity gains for the future. In the long run, a higher NZD may well be the desirable outcome of a strong, resilient economy. But this must be based on sound fundamentals – not a short run consequence of monetary policy.

The official cash rate, OCR, is a blunt instrument. While we are not expecting to find a regulatory “silver bullet”, Dr Cullen has asked the Treasury and the Reserve Bank to examine whether there are mechanisms which might be used to help manage inflation, without putting as much pressure on the exchange rate and the tradeables sector of the economy as the OCR has. A broad range of options is being investigated, and officials are expected to report to Dr Cullen shortly.

My fundamental assessment right now is that while the economy is not in crisis, and while it has reasonable growth prospects looking forward, the time is ripe for a number of initiatives to lift our economic performance further.

In the Prime Minister’s Statement two weeks ago, I signalled that we need to move to the next level in the economic transformation agenda. While undoubtedly the economy has moved up the value chain and is more resilient than in the past, we can’t stand still where we are.

- We need more globally competitive firms.
- We need higher productivity, business investment, and skills levels, and we need more innovation in the economy.

- We need to remove the infrastructure constraints which are stopping our region here, Auckland, performing to its potential as a city of international scale.

Our policy programme this year addresses those issues in the following ways:

- Major review of the Structure of Business Taxation

Michael Cullen and Peter Dunne have commissioned a ground upward rethink of what arrangements would provide the best incentives for innovation and investment – without opening the door too wide for the tax planning industry. They are looking closely at the Australian reforms, and considering what measures would be logical in light of the changes there.

They expect to have a discussion document on the review’s proposals ready by mid year, and aim to pass legislation in 2007 for implementation on 1 April 2008.

- Review of Regulatory Frameworks

Consultations post-election conducted by me and senior ministers revealed considerable frustration with the quality of regulation in a number of areas – as diverse as energy, transport, telecommunications, health and safety, and gaming.

The Cabinet has asked Lianne Dalziel, as Minister of Commerce, to bring together relevant ministers and officials to take a fresh look at these issues.

While it is true that New Zealand rates well in international surveys on ease of doing business, nonetheless, I am sure that improvements in the quality of our regulation could be made.

- Broadband Issues

I am convinced that we need new initiatives to deliver faster internet access at better prices to New Zealanders.

I see broadband as a critical enabler of productivity, growth, and innovation in the economy. We can’t afford to lag behind. Right now we are – and our businesses are missing out on important applications and advanced services.

The priority the government is giving to this issue has prompted a flurry of media and lobbying responses as participants in the debate each present their version of the “facts”. One fact that is undeniable is that we do need to change the rules of the game in this area. Our country cannot afford to have a regulatory environment that requires the government to bring massive pressure to bear on the incumbent to achieve last minute, minimum required progress. The environment must be such that innovation in products and services flourishes and the sector responds efficiently and effectively to demand.

Urgent attention is now being given to a review of regulatory settings which will lead to proposals for change within the next few months.

- Auckland – leading the way

Now let me focus closer to home and on the role of Auckland, as our leading international city, in the transformation of New Zealand’s economy.

Auckland is Australasia’s fastest growing city at 3.1 per cent per annum – this is two to three times faster than the rest of New Zealand and about the same as Melbourne in absolute terms.

Auckland ranked 8th out of 215 cities in Mercer’s latest Quality of Life surveys. Almost 90 per cent of Auckland respondents to a Quality of Life in NZ survey reckoned that it was good or extremely good.

Auckland is by far our largest regional economy, delivering almost a third of the country’s GDP, with 32 per cent of the population.

In the long run, Auckland’s real GDP growth has been around the New Zealand average, but if it is to truly drive economic transformation, it needs to lead the way. Fundamental to doing this is better infrastructure.

- Transport

Delivering a land transport network for Auckland which works is a key priority for our government. Total investment in Auckland transport was $199m in 2000/01. This had increased to $439m in 2004/05.

Announcements in the past eighteen months will see that investment increase further. As well by 2007/08 across New Zealand, combined central government contributions on transport will virtually equal the income received from RUC, fuel excise duty and motor vehicle registrations.

Last week Transit issued its draft State Highway Forecast, suggesting that a gap of $685 million over ten years had emerged in delivering on its August 2005 programme. That forecast is not acceptable to the government.

A number of reviews are now underway on options to close this funding gap. They will address aspects of Transit’s contracting processes, such as the robustness and optimum size of contracts, control over the costs of inputs, and whether the current State Highway planning process Transit and Land Transport New Zealand are required to go through leads to excessive expectations and poor decision making.

Road pricing could accelerate the delivery of Auckland’s transport infrastructure. The government has already set out in legislation the conditions under which tolling may occur.

Later this month, officials will be engaging with Auckland on the results of a Road Pricing Study commissioned by the Ministry of Transport. This study suggests that it is unlikely that completion of all the roads planned for Auckland will relieve congestion and that a range of other measures will need to be looked at.

Meantime, investment in public transport must also complement provision for private vehicles. Auckland has ambitious goals for public transport. The Auckland Regional Transport Authority will shortly be engaging with the community about its plans.

I’m told that ARTA’s latest six monthly figures show patronage at record levels. Even so we have relatively low PT trips/per person when compared to other internationally competitive cities – around 40 per person for Auckland, against over 90 in Melbourne and over 140 in Toronto.

For its part, this government has already committed $280M in equity, capital and loans to Auckland rail. Only a few months ago, rail ownership in Auckland was restructured to provide clearer accountability between ONTRACK and ARTA. This arrangement leaves the Crown, via ONTRACK, responsible for ‘below track’ investment. This investment will amount to hundreds of millions of dollars in the coming years.

Officials are also about to engage with Auckland and other regions on improvements to the public transport procurement regime, aimed at enabling larger and longer contracts, which will in turn provide greater service certainty and allow operators to increase investment in new vehicles.

- Energy

Just as critical for Auckland’s growth and development is secure supply of energy. There is pressure on that part of the national grid, which brings power to Auckland.

This pressure used to occur mainly in winter, but is now a summer phenomenon as well, with increased use of air-conditioners in cities, irrigation pumps in rural areas, and issues like the Genesis plant at Huntly having to shut down when the temperature in the Waikato river gets too high. (The new cooling tower at Huntly will help to address this).

For supply into Auckland, the Electricity Commission is currently testing both its shortlisted transmission alternatives, and the Transpower 400KV proposal, through the grid investment test. This will allow an objective assessment of the alternatives against Transpower’s 400 KV proposal.

A draft decision from the Electricity Commission is expected in late March, to be followed by formal consultation, and a final decision mid year. Only one outcome is acceptable: an adequate and secure power supply for Auckland.

Let me mention in brief other top priorities in the economic transformation agenda:

- Skills and Talent: The government has a strong record of investment in education and skills as many present know. Funding for skills training in industry has virtually doubled, and many more places will be created in the next three years.

As well the immigration system has been continually fine tuned to focus it on the skills needed to drive the economy.

- Science, research, and development: The spend by both government and the private sector is up, but we both need to do more. This term we are looking for more collaboration between government funded researchers and industry, to help get more commercialisation of our innovations.

- 2007 has been designated an export year: Ministers and officials will need to work closely with business stakeholders in the coming months on a programme of events and initiatives for the year.

- Sector strategies: Good work is being done by the Food and Beverage Taskforce, on how to lift the value of key parts of our primary sector production. This is critical. While a successful WTO Round may lower the barriers to our commodity trade, that in itself won’t guarantee prosperity.

In the future we will not be able to compete on volume and price with mega producers like Brazil, and others like Argentina and Chile. We will have to compete on innovation, quality, and branding. The same applies to the forestry sector, and in many ways to sectors like tourism too.

- The trade agenda: This is huge. We are putting a lot of resources into the WTO Round, and into the FTA negotiations with China and Malaysia. We believe in an open competitive economy and in opening doors for our exporters. The Ministry of Foreign Affairs and Trade and New Zealand Trade and Enterprise are also mandated to raise awareness of the new opportunities being created through FTAs for our businesses.

- The climate change issues: I definitely see addressing these as part of the economic transformation agenda.

Last week former President Clinton told a large business audience here that climate change concerned him more than any other issue confronting the world today.

Only last month, President Bush in his State of the Union address said that the United States must end its addiction to oil.

I believe that New Zealand too must be at the forefront of the new, cleaner technologies and biofuels, and of sustainable development.

I believe too that we need to think bigger and bolder about what we can achieve.

Earlier this month at the Progressive Governance Summit I attended in South Africa, the Swedish Prime Minister told us that he has appointed a commission to advise on how to eliminate oil from the Swedish economy in twenty years.

The Brazilian President told us of his country’s plans for biofuel production, and the production of cars which can run on three fuels. He says 25 per cent of the content of fuel for cars in Brazil now is alcohol.

We too can reduce our consumption of oil and our production of greenhouse gases with smart strategies.

We are looking for win:win solutions, which enable our economy to be more sustainable and energy efficient, and our businesses to be more profitable too.

Further policy proposals for meeting the challenge of climate change are due to be discussed by Cabinet in the coming months.

Today I have sought to share with you the government’s thinking about the current state of the economy and the priority areas we have for action this year and this term.

We believe New Zealand has done well during the last six years, but that where we are should only be regarded as a new platform from which to reach higher.

We know that getting higher levels of sustainable growth is dependent on industry, government, and other actors all playing their part. We look forward to a constructive relationship with the business community here in Auckland as we pursue our growth agenda.

ENDS

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