Economic Situation

  • Bill Birch

In the last week there have been some very interesting headlines from a country which, through Asia's economic slump, has been hit by the biggest external shock since the oil crises of the 70s.

From Wellington came the news that Peter Jackson had landed a contract to make a movie in New Zealand which could see up to $200 million spent domestically and hundreds of jobs created.

Trade figures last Wednesday showed New Zealand's businesses adjusting well to the Asian economic crisis with exports for the month up 7.7% on July 1997 and up 4.2% for the year. An extra $500 million of goods was sold to the US in the 12 months to June.

And on Friday the National Bank's August business outlook showed a net 40% of firms expect general business conditions to improve in the next 12 months. That is very important because it means firms were expecting to invest and export more, and not lose jobs.

None of those things changes the fact that our economy has been hit hard by the Asian economic crisis. Exports make up 30% of GDP in this country, and 40% of our exports go to Asia.

Output in Asia has plunged in Korea, Malaysia, Thailand, Hong Kong and Indonesia. It has softened in Singapore, and turned negative in Japan, the 2nd largest economy in the world. Figures from South Korea and Malaysia show that their economies shrunk by 10.5% and 9.6% respectively in the first half of this year.

The financial crisis in Russia is just another ingredient in a fragile world view. The direct impact of the collapse of the rouble will be felt by the dairy industry - it's sales made Russia our 17th largest export market last year. What remains unclear is what effect Russia will have on Europe - particularly its banks - and a world where investor confidence has already been hit hard by Asia.

With several of our key markets experiencing severe economic downturns, it is hardly surprising that this should effect exports, tourism, and growth.

In this part of New Zealand you will be well aware that last summer's drought also had serious effects.

Both public and private sector forecasters are now expecting the next official statistics to show that our economy shrank in the first half of the 1998. While they are also expecting the economy to pick up in this second half, over the year as a whole we will be lucky to see positive growth.

But I would like those of you with long enough memories to think back to what happened in the 70s, or even in the late 80s when our country was hit by external economic forces.

In the 70s oil shocks there were carless days and a move into a cycle of Budget deficits, increased spending and increased debt that government did not get out of for 17 years. In 1987 following the sharemarket crash unemployment climbed steadily for four years to peak at 11%.

In 1998 this Government's economic policy framework has allowed our economy to adjust to the Asian crisis without the type of dislocation we have seen in New Zealand in the past.

We have not had the shocks of sudden currency devaluation, sharemarket and business collapse, rapidly escalating unemployment, and high inflation.

Instead, our open economy has seen an orderly adjustment in the value of the dollar, which makes our exports far more competitive, and we are now also seeing a steady fall in interest rates.

Even more importantly, our businesses are far better placed to react to challenges and opportunities and to create jobs as the trade figures and export intentions I mentioned show.

There is nothing magical about these business and market-led reactions.

Since the 1980s, we have come to recognise that no country can stand against the trends and pressures of world markets.

Instead of putting our heads in the sand and thinking that governments can provide all the answers, we now have as the foundation of economic policy a framework that allows New Zealanders and their firms to make sensible decisions and adapt.

For the last 15 years the world has seen increasing moves to freedom, politically, and subsequently in trade.

People have a choice where they do their business and where they put their money. That is what the "markets" are about - providing people around the world the information to make rational economic decisions.

That is not something to be scared of. What it provides is a very transparent guide to the quality of both government and business decision-making - and that there is a real incentive to get these decisions right.

That is why we have seen huge changes in our economy as businesses, free from government interference, are actually producing what they can sell and what consumers want.

An example of this is the growth of the wine industry nationally and in the Wairarapa. The number of vineyards in New Zealand has more than doubled since 1990 - down the road in Martinborough the land planted in grapes has nearly quadrupled - and exports of wine have increased from $18 million in 1990 to $97 million last year.

Similarly, we have seen the development of the Juken Nissho factory nearby, an example of foreign companies locating and investing in New Zealand because of the business opportunities available. Juken Nissho have invested $405 million in New Zealand processing forestry products. They have over 800 employees nationwide and an annual wage bill of $30 million.

The other dramatic change is the growth of the service industry. Even in smaller towns like this one, you see the range of cafes, restaurants and tourist activities. In the cities, where some of your children are probably working while at university or polytech, there has been a huge growth in jobs in the sector. There are now 1,147,300 people working in services and the sector accounts for two-thirds of all jobs.

These economic and social changes are occurring throughout the world.

It isn't surprising that in rural areas in particular, and for those who are older or more set in our ways, this change can be unsettling. It can be unwelcome. It can even be frightening.

But the alternative, not changing and not adapting, is far more so.

New Zealand had far too many years in which successive governments tried to deny this reality to the population. They acted like the parents who kept the teenager at home and kept on paying the mortgage, food and electricity bills so they were protected from the world.

That has two problems. The children are stifled and have no idea of what life is about. And it's very costly to the parents, especially if they're borrowing to pay for this lifestyle.

New Zealanders and their governments recognised these problems. The whole nation would be bankrupted if we didn't start to get debt back down. We had to live within our means, and from there start repaying debt.

For our businesses it meant working in the real world. It wasn't that they didn't have the ability. We always knew our farmers, for example, were the best in the world. But government was taxing people in the towns and cities to give them money to breed sheep no-one wanted to buy.

What is portrayed by some as 15 years of "New Right experiment" has been an attempt by successive governments, including Labour, to help New Zealand adjust as best possible to the real, modern world.

Labour made some good steps removing subsidies, industry assistance and import controls. They moved to put the public sector on a more business-like footing, sold businesses the government shouldn't have been in, and introduced the Reserve Bank Act.

In the early 1990s there was still a large government deficit, very rigid employment laws, and very high unemployment so National moved to balance the budget and pay back debt, free up the labour market, and most importantly have a framework for growth and jobs.

New Zealand has made huge gains from an orthodox economic framework designed to improve international competitiveness and growth.

The economy has grown by 37% since 1991. At the end of 1991 our GDP was $71.8 billion. In March this year it had reached $98.5 billion. Up until the Asian crisis, we had 20 out of 21 quarters of economic expansion under National's economic framework.

Even with the recent drop in employment, there are now 267,000 more jobs than at the end of 1991. That is an increase of 18%.

After 17 years of consecutive Budget deficits, this Government has now delivered five surpluses in a row.

Net Government debt has been more than halved from 51.5% of GDP in 1992, to under 25% this year.

National put the Government's balance sheet into the black in 1995 - net worth is now $9.1 billion after years of virtual insolvency.

Marginal tax rates for most working people have reduced from 28 cents to 21 cents in the dollar.

In June 1990, net foreign currency debt was $15.2 billion - $4,470 for every man, woman and child. Net foreign currency debt became $0 after the sale of FCNZ in 1996.

$2.5 billion more is being spent on health than in 1990. 50% more people a year are getting elective surgery than 10 years ago - 123,801 compared with 82,283.

There are $2.7 billion more education dollars than in 1990, and 73,000 more students in tertiary education.

Tax cuts and increased family assistance have increased weekly take home pay by $98 for a parent on $35,000 a year with three children.
Notwithstanding these huge benefits, moving our country into the modern world has not been an easy adjustment. This is particularly so in rural and provincial areas where there are no longer the number of agricultural jobs.

But we should not lose sight of how far we had to make up. New Zealand was not the United States where the public see government as a barely necessary evil, or even Australia with its more-market mix.

The government was in every facet of our lives, running businesses, moving money from one sector to another, and taxing workers more and more while increasing numbers of people ended up on welfare. Paid most people's money in either jobs or welfare.

That's no way to get ahead. That comes from growing the economy as a whole, and having the private sector being competitive internationally and creating jobs.

It's important to understand that's what this government's policies have been and will be about - the thriving wine industry, the growing computer software industry, based not on government subsidy and protection, but on the quality of their product.

This is New Zealand, where there will always be a welfare state. We all care about those who are in a less privileged position, and that's where government resources should go - to those who need them.

What National also knows is that "government" money comes from taxpayers.

The more government spends, the more it needs to take from working New Zealand.
difficulties created for us by the present crisis in Asia.
That's why we need to continually ensure the quality of the $35 billion we spend each year and why we have to get away from taxing low and middle income people simply to give resources to the wealthy.

As we move into the 21st century it is crucial to have policies that let us compete with the rest of the world.

Micro-economic reforms such as in electricity, car tariffs and parallel importing are designed to improve competitiveness by lowering costs - and they have. The lower input costs are for businesses, and the lower their product prices, the better it is for New Zealand consumers - and the better it is for our exporters.

Similarly we need to look to improve areas like ACC which impose costs.

That programme is not only good for New Zealand on a long-term basis. It is also ideally suited to help the nation to manage its way on an sound basis through the

Further, especially at this time of world economic uncertainty, we need to keep focussing on what government does best. We need to be running quality education and health systems, not trying to run businesses with the risks that involves.

We don't want to be losing value from our businesses, nor want them growing at the expense of the private sector. Selling businesses where appropriate to get good private sector shareholding and repay debt is a far better use of taxpayers' money.

This Government isn't embarrassed by common-sense policies which work for New Zealand. We need the public to know that.

New Zealanders might enjoy criticising the government. They might even get upset by it. But they also know that government has to govern, it has to take the hard decisions, so they want the Government to keep its eye on the ball.

The impact of the Asian crisis means now, more than ever, it is vital to ensure the quality of our economic and other policies.