Breakfast Speech to Wellington Directors

  • John Luxton
Associate Minister of International Trade

WELLINGTON WORKING MENS CLUB

Thankyou for the opportunity to speak to you this morning. I want to touch briefly on a range of issues relating to growing New Zealands GDP: the size and role of Government, competition policy, regulatory and compliance costs, trade issues and education.

Size and Role of Government:
Personally I believe the size and role of Government in the New Zealand community and economy is still too big. We need less government, both central and local, and more private enterprise. We often envy our Asian neighbours for their impressive growth. While we have reduced the size of our Government spending from in excess of 40% of GDP to about 33%, our successful Asian neighbours are running their governments at about 20% of GDP.

When we look at this statistic, along with the recently released study by Professor Scully, 20% of GDP seems a more optimal size of government for the good of New Zealand.

But how do we get to this more sensible level?

There are two avenues. Firstly by reducing the size and role of government, and secondly, by growing GDP. I believe if we continue on the first the second will follow. Conversely if we don't, our growth rates will suffer and not be as good as they could be

Firstly, to reduce the size of Government I believe we need to continue the privatisation process. This is to unlock the innovation, the drive, the kiwi ingenuity and investment that private enterprise and freedom from political intervention can offer.

This is not a criticism of the way that the current state corporations are run, - in general they are well run given the constraints they have. Their levels of performance are incredible compared to the old Government department models, pre corporatisation.

But they are required to be risk averse and are restricted in their ability to invest and to take opportunities they may want to take. Their accountability is still foremost to the political market rather than to the discipline of the capital markets.

Local Government should also sell off assets that commonsense says they should not keep. I am pleased that finally the Auckland ratepayers are not going to continue to be asked to invest in and take the risks of owning yellow busses. No doubt the options and overall service will continue to improve if there is more competition.

Perhaps Auckland should look closer at other public assets such as the Port Company, their electricity trust, airport and others. Then Aucklanders might get real transport infrastructure improvement.

I wonder if Aucklanders are that happy to wait in heavy traffic, in order to enable them to experience the warm fuzzies of owning a yellow bus or a great big building.

Perhaps by selling assets, Auckland could then invest more in its internal transport system and also gain the other benefits from reducing their public ownership interest.

Secondly, we need to continue to encourage contestability and contracting out where possible those public sector services in both Central and Local Government. Monopoly providers of services have little incentive to improve performance. I believe Government ultimately only perform the absolute necessary core functions. I again include Local Government in this.

Local government continues to raise rates and charges in excess of the rate of inflation which is one of the key drivers to inflationary pressure. This doesn't help hard working wealth creators in the community at all.

Monopolies in society need to be progressively opened up to competition. The monopolies that government legislation and regulation often impose on its citizens, such as with pharmacies, conveyancing, optometrists, registered teachers, local government and the marketing of primary produce impose costs. We are currently looking at a few of these.

Good competition policy has seen tremendous reform and growth in former public monopoly areas such as airlines, electricity, gas, telecommunications.

In my own portfolios we are doing quite a bit on increasing contestability. Portions of Fisheries, Commerce, and Lands functions are becoming contestable, and some functions have been split to enable contestability in the future.

Government doesn't create wealth, it merely transfers it. Unless business creates wealth and prospers then our standard of living will fall and we will lose the ability to have both a socially cohesive and an environmentally friendly society.

The question must always be asked, why should the government operate in areas which private enterprise might be more successful?

Why should government get involved if all it is doing is imposing a toll and imposing additional total costs on the nation. The opportunity costs of this activity according to Professor Scully are high. And it is important to ensure that private sector innovation and investment is not crowded out by government activities.

Competition Policy
Market monopolies where the barriers to entry can result in a dominant player or players, for example in energy, telecommunications, and tariffs, also need to be closely watched. As Minister of Commerce and Industry I have the responsibility for New Zealand's competition policy across all sectors.

While competition can be uncomfortable to business as it continually seeks to establish a point of difference with branding, service, or quality, it lowers costs and causes innovation. This makes New Zealand internationally competitive.

Recently there has been much publicity on competition issues particularly in the energy sector.

The light-handed regulatory approach has been adopted on the grounds that general competition law, on which it relies, should be sufficient to deal with potential problems from abuse of natural monopoly power.

It has also been recognised that more heavy-handed regulation, for instance involving explicit price control, can be complex, costly to administer, and may not always produce the desired result. It can slow down innovation and generally increase costs.

However, as the Minister responsible for New Zealand's competition policy, I have recently asked the Ministers of Energy, Communications and Transport to provide me with any reports they have on barriers to entry and other concerns with competition policy in their respective areas of responsibility.

As the responsible Minister I can assure you that I am very keen to ensure that New Zealanders enjoy the benefits of true competition in all sectors.

I note, however, that we as a Government are happy to run very heavy handed regulation in our agriculture sector, while running light handed regulation in most other sectors.

In the meantime, the Ministry of Commerce considers that the Commerce Act's prohibitions are sound but that there may be some enforcement problems. These arise because penalty and remedy orders are not always sufficiently high or strong to deter anticompetitive behaviour.

My officials are undertaking a review of the penalties and remedies available and will report to me on this issue by December 1997.

Regulatory and Compliance costs
Thirdly, Government should reduce its regulation and compliance costs. Since 1987, Government has enacted over 1600 new or amended statutes and over 3,700 new or amended regulations. Business must be allowed to get on with the job of creating the wealth that we need to pay for meeting our social and environment goals, without excessive regulatory and compliance costs holding them back.

The Ministry of Commerce is currently reviewing some of these interventions.

It forms part of a bigger package which includes looking at occupational regulations, the OSH, RMA, Human rights, Building and some other Acts, and the Tariff review. The review, managed by the Ministry of Commerce, will seek to enhance the quality of both new regulation and existing regulation, and to achieve best-practices in policy development.

We already have in place a compliance cost assessment framework to ensure that departments take compliance costs into account in policy development. But we are now also focusing our attention on the wider regulatory costs. Cabinet has now agreed to a broader review of the quality of regulatory interventions.

The review has three components, which are:

Compliance Cost Assessment Framework
evaluate the effectiveness of the existing Compliance Cost Assessment Framework, including its scope. This will include:

assessing the degree to which the Framework has reduced compliance costs from new policies;

assessing the extent to which the Framework contributes to ensuring that regulation effectively meets its objectives, at least cost to the economy; and

examining the merits of extending the definition of compliance costs, to cover a wider range of costs from regulatory interventions.

Best Practice Policy Development
make recommendations on options for improving the quality of regulatory proposals. In developing options, the review will:

assess current strengths and weaknesses of existing practices; and

assess best practice approaches in the policy development process, including, but not limited to, the following:

formalising a set of best practice guidelines for policy-makers;

requiring regulatory impact statements;

increasing the awareness amongst policy-makers of best practice approaches, such as educational initiatives;

legislating quality safeguards for new regulation;

improving stakeholder consultation in the development of regulation (including ongoing processes involving the private sector); and

improving regulatory coordination so that multiple objectives are integrated and related policies are treated coherently.

Monitoring and Review of Existing Regulation
consult with the Ministry of Justice, Legislation Advisory Committee, Parliamentary Counsel Office, and other relevant agencies on ways of encouraging adequate monitoring, evaluation and review of existing regulation. This would take into account a range of exercises already underway dealing with legislative processes.

The private sector has a very important part to play in this process. I have already commenced a series of meetings around the country with the business sector on a range of business issues, including the costs imposed on businesses by regulation.

In addition, I have been consulting with key business organisations, such as Federated Farmers, the Manufacturers Federation and the Employers Federation, in relation to the Review. I also propose to look at other forums to get feedback on the specific options as they are developed.

I expects an initial report by 30 September 1997 with a view to making some material changes in the new year.

Companies Act reminder: In terms of compliance perhaps it is timely that I remind you and other directors that by July the first this year, all companies will have to register under the new companies package, which came into force in 1993. Don't be late.

Public Support required
To reduce the size and role of Government it is important that the general public have an understanding of the issue. I believe New Zealanders now more than ever before want smaller government.

They are more confident of their own ability to make their own decisions. They are not so sucked in by the paternal " the state knows what's best for you" routine of the past. They are cynical about politicians and the political process. Notably, those most critical of the state are those who want more of it with increases in social spending across the board.

The world is changing at an ever increasing rate. Expectations of what technology, market innovation and the globe can provide are increasing. Expectations of what parliament can deliver are reducing. The public know that Wellington will struggle to keep pace with the change.

New Zealand families have already benefited from a reduction in the size and role of Government with increased choice of cheaper goods in areas such as whiteware, children's toys, and in services such as telecommunications, air travel and banking.

Like my colleague Simon Upton, I believe there needs to be more debate about just what the role and size of Government should be and how small it needs to get.

New Zealanders need a light footed, light handed, agile Government, that can move quickly and keep pace with the times in relevant areas of Government activity, while letting New Zealanders get on with their lives without intrusion and interference. This means Government doing less but doing it better.

It means giving greater responsibility back to the community. The Government's movement into social welfare over the last 60 years seems to have largely created welfare dependency rather than solved it.

Growing GDP:
The other part of the equation is to grow GDP. I believe if we continue to move on the above issue we will contribute to growth. However, we have a few other things to do as well.

Firstly, it is vital for New Zealand that we maintain an open internationally competitive economy. Key platforms for this are:

deregulated, competitive and open markets
stable macroeconomic policies
continuing the current policy of tariff reductions
where required, quality public services provided as efficiently as possible as previously mentioned
and the lowest possible tax rates
The success of our Asian neighbours has generally been in the industries that have been exposed directly to the pressures of the international market place, rather than those that Governments have tried to pick as winners.

There is plenty of evidence of formerly highly protected areas of NZ industry and commerce becoming internationally competitive only when local protection has been withdrawn. (eg textiles)

Import licensing and high tariffs have gone and we will continue to reduce and eliminate remaining tariff protection.

These changes although not always comfortable, force NZ business to continue to innovate and be internationally competitive. An open economy allows New Zealand industry better access to ideas, products, investment and markets

Trade issues
Another dimension for Government is ensuring that New Zealand traders are able to operate effectively in international markets, both exporting and investing.

There is a role for government in promoting open and competitive international markets, for example through APEC where the Commerce Ministry is taking a lead in such areas as competition policy and standards and conformance, the WTO and CER.

A significant initiative in the latter area where my Ministry has responsibility, is the Trans-Tasman Mutual Recognition Arrangement, which will further open up the trans-Tasman market for both goods and registered occupations.

Recent Government initiatives by my colleagues Don Mckinnon and Lockwood Smith in this area include possible trade arrangements with both North and South American countries, more open skies initiatives, and progress with APEC, CER and WTO and moving forward New Zealand's market access around the globe.

Education:
Finally, if we as a nation are to compete in the international market place and continue to raise our standard of living, it is vital that we have the skills to do it. Our education system plays a vital role in this.

The reports that come through too regularly for comfort that indicate our performance levels in maths and science are not up to scratch, are a real concern - we need to make sure our policies, designed to address these subjects are achieving the desired outcome - better maths and science in New Zealand.

I can't help but observe that the education sector is still highly constrained by the activities of the two major unions.

Like another important sector, agriculture, politics rather than performance dominates. The inability to innovate and pay teachers for performance or specialist experience in education, is a major barrier to the future of the economy.

In fact in education we run the risk currently of being captured by the teacher unions and not being able to keep the education of our children up with a changing world. Like other costly monopolies, they need to go. They have, as the Evening Post noted recently, become the boilermakers of the 90's.

The rapid change in the deregulated Early Childhood Sector of Education shows just what is possible in an open education system. Quality teachers get paid more, innovation occurs, the sector responds to the needs of parents and children, and quality improves. The hours have doubled since 1990. Today over 20 different philosophies compete to improve early childhood education

Our children should not be let down. Not only do they personally deserve a proper education, but the future of New Zealand demands it. The skill levels of our people must be as good as our competitors.

Conclusion:
I have touched just briefly on a few issues. If we are to get the growth that we need to have an improving and successful society we need smaller Government, less regulation, more competition, and more private enterprise.

As well as stable policy, it is vital that we maintain an education sector that strives for the best, not the mediocre. An education system that is flexible and innovative ie not dominated by outdated regressive unions.

New Zealand has come a long way over the last decade both economically and socially. As a nation we have matured and grown. But if we are to continue to succeed in the ever changing world we cannot stand still. We must keep progressing. If we don't, we will fall behind and our standards of living will decline.

Thankyou for listening to me this morning. These are exciting and challenging times for New Zealand, I hope that you all have a successful and enjoyable year. Thankyou.