Speech notes to NZ Herald "Mood of the Boardroom" survey launch

A Martian invited to Earth and asked to read the Herald’s survey would no doubt be astonished to learn that the New Zealand economy has averaged 3.9 per cent growth per year between 1999 and 2004 against an OECD average of just 2.5 per cent.

Employment growth has been exceptionally strong with the result that New Zealand now has the lowest unemployment rate in the OECD. That is good news for New Zealand workers but also reflects the strong growth New Zealand businesses have enjoyed under Labour.

Our Martian would be even more astonished to learn, given the dour mood in the survey, that capital has had the lion’s share of the economic growth dividend in the last five years. Corporate profits are up 60.5 per cent on average since 1999 compared with a 36.4 per cent increase in compensation of employees over the same period. In other words, business and the people represented in this room have been doing very well.

As you may have gathered already, I intend to be very frank in my comments today. There is a lot at stake here for New Zealand and it is important that people are fully informed about all the implications of their decision before they cast their vote.

The policies the respondents to the survey advocate – lower taxes, less regulation – stem from a persistent series of misperceptions and one big lie.

The misperceptions are that New Zealand is highly taxed and highly regulated by developed world standards. We are not.

The latest OECD data show that New Zealand ranks 12th lowest of the 30 OECD countries in terms of tax revenue to GDP and, although the recent Australian tax cuts have brought their income tax system more into line with ours, they still have higher marginal rates at the top end to which must be added a Medicare levy of 1.5 per cent, a generalised capital gains tax and significant stamp duties on the purchase of items like houses and cars.

Similarly with the business sector. The Australian headline rate is lower but they pay a welter of payroll taxes and other imposts which do not apply here.

Australian business is also more highly regulated in many areas of activity than is New Zealand, a fact which is creating something of an issue as we move toward a Single Economic Market. And the World Bank Doing Business in 2005 report ranked New Zealand first in terms of ease of doing business.

Our opponents may be tired of hearing these facts because they do not fit with their prejudices or with their agenda but that does not make the facts go away. Consistently impartial, international agencies give New Zealand high marks for the quality of our regulatory framework and for our economic and fiscal management.

Now for the big lie.

Over the next four years, the Treasury is projecting surpluses of $23.4 billion but all of this money is committed. In fact, the Treasury is forecasting a cash deficit over this period of $4.16 billion.

First we have to remove the non-cash items from the surplus projections. These are estimated at $4.82 billion and include the profits SOEs do not pay out to the government as dividends but use to maintain or grow their business base – much as any private sector business does. They also include depreciation of Crown assets.

Second, there are the contributions to the New Zealand Superannuation Fund, a fund National says it is committed to retaining. The contributions total $10.12 billion.

Remove these two costs and the $23.4 billion becomes $8.4 billion. And wait, there’s more.

We still have to deduct $7.09 billion for the purchase of essential capital assets such as defence equipment, roads, schools, computers for government departments etcetera, etcetera. That brings us down to $1.3 billion.

Other expenses financed from the OBERAC are $3.28 billion of loans, the majority of which are student loans, and $1.02 billion in capital injections to build hospitals and State housing.

The final item is $1.2 billion to the Reserve Bank to enable it to intervene in the foreign exchange market should that become necessary to maintain financial stability.

Factor all those in, and the $23.4 billion has become a deficit of $4.2 billion. This small rise in borrowing is consistent with gross debt falling to just under 20 per cent of GDP by 2009. This is a good set of government accounts by any standard and reflects the huge and often painful progress that has been made in redressing the devastating legacy of debt left by the borrow and hope policies of Sir Robert Muldoon.

But it is not enough to pay for the extra $7 plus billion of tax cuts proposed by National. That means an extra $3.5 billion of borrowing above what a Labour government would borrow and slashing existing spending intentions by a further $3.5 billion to finance its tax programme.

To give you some indication of the size of the spending cuts National is envisaging: it is roughly equivalent to this year’s entire law and order budget and defence budget put together.

A government taking on more debt is not good for business and neither are spending cuts which compromise the quality of public infrastructure as the current tragedy in the richest country in the world demonstrates.

The fact is we have a very strong set of economic fundamentals, and the last thing we should do in the current environment is put any of those at risk. The government’s economic strategy is focused on investing in those things that will increase our capacity to grow once the current cycle ends. Those are things like workforce skills, infrastructure and free trade agreements.

They are not quick fixes; but we should be very careful about anything that claims to be the simple antidote to chronic boardroom blues. My opponents see tax cuts as a kind of all purpose economic remedy, promising an overnight cure for investment, for labour shortages and whatever else ails the business community.

The fact is that the risks to the economy start to stack up pretty quickly; and the benefits are so nebulous as to be illusory. Whatever you might say, this is certainly not a good platform upon which to build an entire economic policy.

Labour’s economic policy focuses on six strategies:

1.fiscal and economic stability;

2.boosting savings and investment, particularly investment in public infrastructure;

3.lifting productivity;

4.supporting growth and innovation;

5.strengthening international economic relationships, especially through free trade agreements and closer integration of our economy with Australia’s; and

6.improved corporate governance, alongside a fair and efficient tax and regulatory system.

I appreciate that, alongside Mr Keys’ simple and elegant Ferrari of a tax cut, this looks like a rather plain Honda Accord. The difference is: the Accord has got us to the strong economic position we are now in and is capable of carrying us through the next phase. Mr Keys’ Ferrari looks good and may prompt a temporary feeling of euphoria in the boardroom. But it guzzles gas, requires borrowing well beyond our capacity to sustain, and can’t fit in all the family. And until we actually build the better roads, it will not be able to get us to our destination any faster. The question for the electorate and for the business community is, what form of transport has proven most reliable?

Thank you.