The squeezed middle
Monday, December 6, 2010 - 13:00

The squeezed middle
Speech at Chapman Tripp, Auckland

Good afternoon

Today I want to talk about the squeeze on middle income families.

I will talk about why the squeeze is getting worse, not better.

And I want to tell you about the thinking Labour has been doing about how to fix it.

We won’t fix it by throwing money at it or by squeezing the middle class further.

But we will operate within tight fiscal constraints and therefore we are going to introduce strong changes to the way the government grows better jobs and higher incomes:

- Reforming the Reserve Bank to help exporters.

- Increasing our savings and making sure we own more of our future.

- Much stronger work to develop our innovation and high value exports, through clean tech exports, and better support for r&d.

- Growing our base of skills.

The squeeze on middle income families is a core issue facing New Zealand today.

Prices are rising faster than wages.

The government has put the recovery on hold.

And families in the middle are missing out.

For most of the people here today, things are going okay in New Zealand right now.

But for a lot of people outside this room, things are not going so well.

We’re not just talking about the struggling poor. For them, times are really tough.

And there is another group in the middle: the forgotten middle income New Zealand families.

They are working hard, but still feel they are going backwards

They drive second hand imports. They are secretaries and travel agents and mechanics, they are process operators and small business owners.

What they have in common - what defines them at the moment, is not their incomes, their jobs or their homes, but the squeeze on them.

They are squeezed by prices that keep rising when wages are stalled.

They are squeezed by stalled growth and threats to their jobs.

They worry they will be the first generation not to pass onto their kids something better than they received.

Underlying these immediate pressures there are serious structural problems that have contributed to the squeeze, along with decisions National has taken in government:

- We need to earn our way in the world. We need to sell more high value goods and services.

- We have had a current account deficit for thirty-eight years.

- We have taken on debt to pay for rising levels of consumption.

The growth in our debt has been in the private sector.

The Labour Government reduced net public debt.

If we hadn’t done that, we might now be in the position of Greece, Ireland, Portugal, the UK, and Spain.

It’s also worth recalling that we were criticised for our responsible fiscal management throughout nine years in government.

National said we were over-taxing to run surpluses, when we were reducing debt.

They called for tax cuts that would have fuelled inflation, debt and asset bubbles.

Labour introduced Working for Families but held off other tax cuts until they were needed in 2008 to counteract the impact of the global financial and economic downturn.

When National took office, they introduced further tax cuts - and 42 per cent of them went to the top 10% of income earners.

In other words, lower and middle income earners are paying a greater share of the total tax paid, and top earners are paying less.

That’s why so many people in the squeezed middle New Zealand are finding things are getting worse not better.

They were promised by John Key that this year New Zealand would emerge aggressively out of recession.

It hasn’t happened, despite the fact we are now through the other side of the global financial crisis and we are now enjoying record terms of trade, good primary produce prices and the advantages of our trade with Australia and China - two of the strongest economies in the world over the last two years.

None of this has fed into better living standards for lower and middle income New Zealanders.

There is yet to be a single initiative that will help them realise their dreams for a better house or car and a bit more to look forward to in the future.

Middle income earners need someone on their side.

They don’t want grand plans and they’re not interested in entitlement.

They want a government that is going to credibly deliver achievable and realistic gains today and tomorrow.

They’re not expecting and don’t want big promises that wouldn’t be believable and I won’t be making them.

I know what it takes to turn things around.

The reality is that the squeeze on hard working middle income earners won’t be solved long term by changes to tax - or by handouts.

It’ll be solved by the party that can grow the jobs, grow a stronger economy and keep the cost of living down.

Next year’s election will therefore place a heavy emphasis on non-fiscal issues.

Economic debate will focus on the enormous contrast emerging between Labour’s active economic management and National’s passive style.

Labour believes in using the power of government to get stuck in to help families, and to grow the economy.

National believes in a smaller role for government, and sitting out the tough times.

It has blind faith that by helping the top, gains will trickle down to middle and low income earners.

I want to comment on this, because most of the debate around economic management has emphasised fiscal issues - tax rates, new spending and so on.

There are differences in fiscal approach between National and Labour - but there is a strongly contrasting difference between our active and their passive styles.

Our broad fiscal strategy will be tighter than National’s.

Labour’s finance spokesperson, David Cunliffe gave an important speech about this two weeks ago.

He announced Labour will pay down net debt including crown financial assets over the business cycle.

This is a strong contrast to National. They have squandered billions on the very top earners, and haven’t cracked down on tax avoidance.

Treasury has costed their spending on subsidising polluters under the Emissions Trading Scheme at $110 billion.

And they are cutting high priority areas like early childhood education that damages the future education and employment success of disadvantaged Kiwi kids.

But they’re maintaining low priority expenditure like the $850 million being spent on new missile systems for our frigates.

By paying debt down more slowly, National is pushing more of the total tax load onto future generations.

They’re also putting a greater share of the total tax burden on middle income earners. We won’t.

The squeezed middle will pay a lower share of total tax.

We will crack down on avoidance so everyone pays their fair share.

Overall, our fiscal stance is more responsible.

Therefore it comes with strict limits on new spending.

Any major new social spending will have to create jobs, help to ease the cost of living for families or ensure that children are getting off to a great start in life.

Any other major social spending will need to be paid for by reallocating spending.

This is a big call, but it’s in the interest of our economy today and in the future to pay down net debt over the business cycle and to be disciplined in our spending.

What this means overall is that there will be a much more important debate about active management of the economy for higher incomes and better jobs.

National’s approach is more passive, and more trickle down. They believe the jobs will come if you cut top tax rates.

But the jobs haven’t been coming.

Unemployment is still much higher today than it was in 2008 when New Zealand was hit by the global financial crisis.

When 2700 people applied for 150 jobs at a new supermarket in my electorate you know that the job market is tough and that people breaking their necks to get a job can’t.

You can see a contrast if you look across the Tasman.

Australia felt the brunt of the global economic crunch at the same time as us.

The Labour government there combined more targeted stimulus spending with investment in economic infrastructure.

Australia invested in skills and fast broadband. In New Zealand we are still waiting for the National Government to lay a centimetre of fibre.

They created incentives for research and development that is creating more high value export-oriented export businesses.

And they started out with a deep pool of savings, built up over twenty years.

Where Labour would have followed a course closer to the Australian Government’s, National has produced nothing to change the long-term structure of our economy.

That’s why the wage gap with Australia has widened - the average wage earner in New Zealand is $50 a week worse off than the average wage earner in Australia since National was elected.

They have no milestones along the way to show progress in closing the gap - they just say that one day the gap will be closed.

But unless there are dates and progress targets, then this promise is meaningless because they can never held to account for it.

And as the NZ Institute emphatically pointed out in its analysis - a goal is not a strategy.

Instead of action, we have had gimmicks and false starts.

The Jobs Summit that produced no jobs.

The cycleway that is not going to lift long term incomes or create more than a handful of jobs.

Then they spent nearly two years planning to dig up our National Parks and backed off when the public and other exporters told them what they thought of that idea.

National had nine years in Opposition - all we’ve seen after two years is GST going up and working groups to give National manifesto ideas for 2011.

I don’t agree with Don Brash’s ideological prescription but I do agree with him on this point. This is a Government that has no vision and no plan.

This is more than an issue on which I am critical of the Government’s performance.

It’s a matter of core values. The Government just doesn’t believe in active economic management.

And therefore, when the recovery stalls, they have to accept the responsibility.

The way they are doing things doesn’t work.

It hasn’t worked.

It’s not going to work.

It isn’t working today and New Zealanders are not working.

The economy has stalled.

The deficit has grown.

There are too few new exports and new companies starting up with high value new export products.

There is a lot to do to increase our exports and jobs and Labour has been doing a lot of work on where we need to make strong changes.

That’s why today I want to outline where we are going in our export-focused economic policies.

We have already announced reform of the Reserve Bank and monetary policy to make interest rate and exchange rate policy more supportive of exporters.

We will keep in place the Bank’s operational independence and the current 1-3% inflation target, but widen its objectives to help exporters. We will equip it to intervene more aggressively. It will have new tools to control liquidity.

It is clear persistently high interest rates and a volatile New Zealand dollar are causing deep structural problems for our economy.

New Zealand exporters are at a disadvantage against overseas competitors who are able to fund their activities at a lower cost.

Our exporters have to plan for the value of the dollar changing at great speed and little predictability.

Other countries achieved control of inflation without interest rates staying higher than international averages over time, and so should we.

In addition to reforming monetary policy we need to improve our savings rate.

One of the biggest difference between us and Australia and many other countries, including the Asian tigers, is that we save less.

Two weeks ago Standard and Poors announced New Zealand is going on negative watch for a credit downgrade.

And they singled out our growing net international liabilities. They criticized the lack of diversification in our export base and our persistent savings shortfall.

We have to save more as a country, instead of borrowing more.

That’s why Labour is committing to reducing the government’s net debt over the business cycle and we’ll restore pre-funding of NZ Super. That won’t increase net debt because it matches assets to liabilities.

But we need much greater private sector savings and investment as well.

That’s why we will have a plan to boost New Zealanders’ savings.

National’s strategy to achieve this has been to cut top tax rates.

That won’t change the long term structural problems New Zealand has.

Kiwisaver is an example we can build on.

Labour will use KiwiSaver to make sure families can save more without increasing the squeeze on their incomes today.

Owning our own future means increasing our stake in our own financial future.

At the same time we will protect our asset base by running New Zealand in the interests of New Zealanders.

As I announced in September, we welcome foreign investment that works for New Zealand - but instead of the indiscriminate sale of farm land and strategic monopoly infrastructure, we are going to require new investors to show a benefit to New Zealand.

We won’t sell assets that belong to New Zealanders - instead we will keep them and we will leverage their strength.

The huge success of Kiwibank is an example.

The greatest factor in its success is that it is owned by the people of New Zealand.

National’s desire to privatise Kiwibank is doomed because it would undermine Kiwibank’s main public attraction.

National wants to get out of ownership of state assets because it doesn’t believe in a strong public sector, and active government.

Labour believes we can grow our public assets to help grow jobs and incomes.

But the real answer for a country that has been held back by its size and remoteness is to ensure a New Zealand Inc approach - getting the government, the private sector and the academic sector to work in close collaboration.

The new Labour-funded Institute for Innovation and Biotechnology at Auckland University epitomises this.

The centre incorporates university scientists, private companies and government agencies.

They share expensive capital equipment and facilities.

But it is the sharing of ideas and sparking off each other over lunch and morning tea which is most valuable.

We will work in partnership with the private sector.

I’ve made a priority out of growing our clean tech sector.

Clean tech is based on the premise that new, innovative technology can reduce the impact of human activity on the environment and reduce climate warming gases and can do so economically.

Price Waterhouse Coopers put the business opportunity for New Zealand at between $9 billion and $22 billion.

We have huge clean tech potential in New Zealand.

New Zealand’s ‘100% Pure’ brand positions us to take advantage of the merging opportunities.

We have Firms like Lanzatech which converts exhaust from steel mill smoke stacks into ethanol, Aquaflow which converts algae into biofuel and Flotech which uses smart digesters to convert solid waste in landfills into gas.

But Government is dragging the chain on working with the private sector to full realise the potential of a clean, green, clever economy.

So there is wide potential for innovation.

There are a number of tools we can make more use of to grow our high value sectors.

Labour is going to focus on more support for innovation, science and technology so that we grow more exporting, high value businesses.

When National axed the tax credits for research and development - at the same time as Australia introduced tax credits - it set back even further our pathway to higher incomes and better jobs.

Just last week the CRIs said they have received less private sector investment, so the incentives are not right.

Labour is going to focus strongly on the expansion of innovation and our New Zealand R&D.

There is much more to do with incubators, venture investment funds and beach-heads to help small and medium businesses take off.

When you compare New Zealand’s economy to other developed countries, our minuscule savings rate stands out - but so too does our shortfall in spending on research and development.

We spend a third of what similar sized countries such as Denmark, Finland, Singapore and Israel spend on R&D.

Our savings shortfall has starved our innovative tech companies and exporters of capital.

Labour will create the environment and incentives for the private sector to invest.

We will need to invest in our base of skills.

I can give you the example of expanding Maori trades training to support the new Maori-owned asset base.

There are forestry and aquaculture businesses that are becoming large assets, requiring sophisticated management and operational skills. Maori-owned businesses are the country’s largest meat exporters.

If a Maori-owned business invests in planting large new forests on their land, that not only helps the climate, it is also an economic development asset.

It will need skills ranging from land management and wood processing, through to international marketing and business management.

And all this in some of the most deprived parts of New Zealand.

What an opportunity we have to unlock employment potential, better jobs and higher incomes, and at the same time reduce unemployment bills for the whole country.

We can implement a skills strategy that brings back apprenticeships and equips our young people with the skills for the future that will help to grow our economy.

There is a lot more we can do to unlock economic development partnerships with business - including iwi owners of emerging high value assets.

Government can be a much more active economic manager.

Growing better jobs and higher incomes is the best way to reduce the squeeze on middle New Zealand.

Labour knows we will have to build our future prosperity within tight fiscal constraints.

The National Government has left us with a stalled recovery.

It’s made things worse by cutting in the wrong areas, seeing the answer in cutting workers’ incomes rather than increasing productivity and not collaborating in areas where we have a competitive advantage.

Labour will strongly change direction to bring relief in prices and wages in the near future, and long term activity to build jobs and increase incomes.

National has spent heavily on tax cuts for the top, and then told everyone that there is no new money.

Labour will take the pressure off some areas of family expenditure, like food and power.

We won’t be using power company dividends as a surrogate for taxation.

You can zero-rate GST on some items like fruit and vegetables without creating undue complexity or high compliance costs - and with huge benefits from promoting health and reducing obesity and the human and economic costs associated with that.

But we won’t be going into the next election promising to tax and spend.

Instead we’ll go in offering a strategy that will help middle New Zealand by creating higher incomes and better jobs in the future - owning more of our future, partnerships and skills to unlock our potential, and investment within a framework of reducing net debt.

ENDS

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