The government's strategy for local economies

The Government's Strategy for Local Economies: Investing in Innovation and Reducing Business Costs
Thank you for your welcome. As you know, I will shortly be delivering the third and last Budget of this parliamentary term. Inevitably, this means that my daily agenda is full of discussions about the so-called big picture: the state of the economy at large, and the government’s overall strategy for its own expenditure. I would like to talk briefly about this big picture, but only as the context for my major theme, which is the government’s strategy for moving our local economies onto a higher growth path.
The big picture, in a nutshell, is very encouraging. We have a very positive set of economic indicators, and excellent prospects going forward, as evidenced by a series of recent business confidence surveys and the endorsement of overseas commentators.
Our economy is stronger, and its key indicators more balanced, than it has been for a generation. The economy is estimated to have grown by around 3 percent in the March year just past, and according to the latest consensus forecasts is likely to post growth of 2.8 percent in the year just started, but there are uncertainties about how strong the stimulus from construction, immigration and domestic consumption will prove to be. Forecasts have growth lifting back to something like three percent in the out years.
Meanwhile, the balance of payments deficit has fallen to about 3.5 percent of GDP. Inflation is at 2.6 percent. Unemployment, at 5.4 percent, is close to thirteen year lows. Employment growth is strong, but it has been accompanied by an increase in immigration and a sharp rise in the participation rate which, at 66.4 percent, is the highest it has been in fifteen years.
I think the underlying strength in the economy has been demonstrated in how well we have weathered the impact of the 11 September terrorist attacks and their unsettling aftermath for the global economy. Immediately after the attacks, the economy was bracing itself for a sharp downturn in global demand. We feared for our tourism sector in particular, and also anticipated a potentially sharp fall in commodity prices, which were at record highs. Accordingly, investor and consumer confidence surveys towards the end of last year dipped into significant pessimism.
In the event, none of these effects proved as severe or as persistent as was feared. The GDP figures for the December quarter – in which much of the impact of the 11 September attack was felt – show quarterly growth of 0.6 percent, producing an annual rate for the December year of 2.4 percent.
Certainly the contraction in tourism was a big driver in the December figures, contributing to a 7.3 percent decline in exported services. However, it is clear now that tourist numbers have bounced back, largely because the composition of tourists has changed. The sector is now predicting one of its best years ever.
On the commodity front, there were export price falls, but these have not been experienced across the board. As a result, the net effect on the tradeables sector has not been as negative as was feared. Immigration numbers have turned around dramatically, and this has lifted the construction sector.
Business confidence is rebounding and the risk we saw of firms retreating into their shells and stopping hiring or investing seems to have been unfounded. Indeed, the December GDP figures showed that business investment grew by 8.5 percent over the quarter. And a recent National Bank Business Outlook recorded a 41 percent positive response to the “own activity” survey.
In another recent poll, 52 percent of New Zealanders identified themselves as being optimistic about the economy. That poll also recorded a drop in pessimists to 25 percent. Consumer confidence is holding up and retail spending is ahead of market expectations.
All of this suggests that steady growth will be maintained through the next few quarters, and that this will be accompanied by low inflation, rising employment, moderate unemployment, increasing real wages and share prices, and a current account deficit that is very low by recent standards.
As you will see shortly in the Budget, the government is maintaining its fiscally conservative stance. When we were elected we set ourselves a number of targets in relation to fiscal policy. These included keeping government spending at around 35 percent of GDP, getting net debt below 20 percent of GDP and maintaining an operating surplus across the economic cycle. We have met all of these.
We are operating with a fiscal surplus averaging around one percent of GDP, and forecast to rise to nearer 2.5 percent over the next three years. We have held government spending as a percentage of GDP, and indeed it is fractionally lower than it was two years ago.
Moreover, spending is projected to drop below 33 percent of GDP by 2003-2004, putting it at the lowest level since the late 1970s. Net new spending in this year’s budget has been held within the counting limit set for this term of office.
Net crown debt has fallen from just under 22 percent of GDP in 1999 to around 18 percent now. As a result, debt servicing now costs the taxpayer some $171 million less than it did in 1999. More significantly, financing costs absorbed 7 percent of government spending in 1999, but at the December fiscal update were forecast to command only 5.7 precent in the forthcoming year. That is money freed up for more productive deployment.
In short, the government’s cheque-book is firmly under control. This is important not because a tidy set of accounts is a thing of beauty in itself – although I am sure many accountants would hold to that view – but because stable, predictable, you might even say boring fiscal management is an important way in which a government can maintain the conditions in which economic growth can be maintained.
This is one of the important lessons that we have learned since the mid-1980s. But tidy government is not necessarily effective government; and I think the most important legacy of the current government will be that it brought us back to an understanding that government can and should be part of the equation in building the economy, rather than merely a kind of benign accountant standing on the sidelines.
I want to talk today about the government’s strategy for building strong local economies. Despite the flurry of high level analysis that has crossed my desk in the weeks leading up to the Budget, I have been fortunate to have had opportunities to meet with a large number of business people on their home turf. And not just in the main centres, but also in North Canterbury, the Manawatu and other regions. This has brought home to me how important it is that local economies have – in microcosm – the characteristics that we all believe our national economy should have.
The New Zealand economy as a whole needs to be transformed not just within the next decade but as an ongoing, non-threatening aspect of everyday life. Some important parts of our economy – notably pastoral farming – are currently enjoying good returns due to cyclical factors. These good conditions may continue for a while yet. But the challenge for us when at the top of the cycle is to invest wisely so as to get to the point where cyclical downturns do not threaten long term returns.
Transforming the whole economy means, of course, transforming local economies. We talk of the need for diversification, for innovation, for shifting the balance of our export sector more towards high added-value niche products. These are features that we need to see built into local economies, and not simply concentrated in a few areas.
Similarly, we talk a lot about the promise of bio-technology, of information and communications technology and of the creative industries. But we need to be careful not to think of these as narrow silos, but rather as being about new ways of thinking and of doing business that have applications across almost every part of the economy.
The Marlborough region has a lot going for it. Primary industries remain the backbone of the local economy; but these have for a long time been relatively diversified. Not just pastoral farming, forestry and fruit growing, but also viticulture, and now new and exciting prospects in olives, and aquaculture. The region is heavily focused on export industries, and as such you are more vulnerable than most parts of the country to external weaknesses. The growth in the local tourism industry – which draws primarily on domestic tourism – should help to balance that vulnerability.
It seems to me that the Marlborough business community has caught on to two important principles of the so-called “knowledge economy”.
The first of these is the value of intellectual property. Despite what many townies think, primary industries are “knowledge industries” and need to be understood in this light. This means that for a small country like New Zealand we can supplement our income from the sale of products themselves with the marketing of the technology we develop around the production and processing of those products. You are seeing that in the development of new machinery for wine-making and improved techniques in aquaculture, to name but two examples.
We might speculate that in ten years’ time the licensing of intellectual property and consultancy services could make a major contribution to the Marlborough region alongside what is earned from the sale of products.
The second important principle of the “knowledge economy” is the need for industries that comprise small operators to find ways of coordinating themselves so that, in areas such as research, quality control and marketing, a collection of small businesses functions as if it were one large business. We already see this in the wine industry, which has only a few large players in New Zealand, but functions very effectively through the Wine Institute and alliances with research institutes and training providers.
New Zealanders have always seen the link between smallness and innovation, traditionally of the No.8 fencing wire variety. This is not something we want to lose. But we do need to get better at getting the best value out of what happens in back-sheds and workshops around the country. Being small and well coordinated is usually better than being large and adequately managed; and is definitely superior to being small and uncoordinated.
This is where I believe the government starts to come into the picture. Governments can do things that help kickstart local economies, add value to their products, link local industries into global markets and help businesses maximise returns. Let me mention a few examples.
First, our innovation strategy. This is a comprehensive set of programmes aimed at assisting New Zealand businesses through the practical challenges of innovation. Our approach looks at two aspects of innovation. The first addresses missing or weak links in the “chain” of innovation. Hence we improve our scientific and product development capacity. We nurture ideas through support systems, so that the full range of business disciplines - legal, accounting, financial, logistical and so on – are brought together to convert good ideas into profitable enterprises.
One important missing link that has been recognised for some time is the difficulty that small businesses, and businesses outside of the main centres, experience in accessing development capital. In response to this we have done two things:
vWe committed $332 million over 4 years to business development funding, with an emphasis on export development and revitalising provincial economies.
vWe established the New Zealand Venture Investment Fund with $100 million of seed capital to accelerate the development of the domestic venture capital market and assist the development of innovative, high added-value businesses.
vWe have also established the first dedicated offshore investment team in New York.
The second dimension of innovation involves recognising in what areas innovation in this country is most likely to bear fruit, and working those areas hard. We recognise that there are advantages of environment and national aptitude and attitude that need special attention if we are to deepen our business activity. There is no point in a focus on an area of advantage unless it is also an area where the potential of the global market coincides with the potential of New Zealand to sell into it.
We have identified three areas where there is a good fit: biotechnology, information and communications technology, and creative industries. It is important to stress that we are not trying to pick individual industries as winners. Instead, innovative advances in these areas have the potential to complement each other and to thicken value added in a number of industries that use or could use these technologies. In other words, they are sectoral competencies that have multi-industry applications.
The first part the strategy is about clearing the path for young plants to grow; the second is about creating that essential “hybrid vigour” by applying new technologies and ways of thinking across both old and new industries.
This imperative also lies behind our reform of the tertiary education system, which is designed to ensure that, instead of competing with each other to attract enrolments, our institutions of higher learning develop close links with business and with their communities to guide the way that they teach skills – both to young adults and increasingly to people in mid-career - and the way they undertake research. In the future – and I mean the relatively near future – the government sees tertiary institutions participating directly in business initiatives with a research or skills development component.
I want to touch finally on the government’s role in minimising compliance costs for businesses. Over 95% of New Zealand employers have fewer than 20 employees, 84% have fewer than five. I imagine – although I have no figures to prove it – that most of the businesses represented here today fall into these categories. The government recognises that compliance costs can be a major irritant and impediment to small and medium enterprises who generally do not have access to the economies of scale larger companies have in dealing with regulatory and taxation issues. Hence reducing compliance costs for small businesses is good for economic growth because it releases money and time for growing New Zealand’s companies.
Last May we released a discussion document entitled “More Time for Business” aimed at reducing the stress, uncertainty and risks small businesses face in meeting their tax obligations. The discussion document contained a number of proposals relating to small businesses, including provisional tax, and ways to benefit from information technology.
The tangible outcome of that discussion document is a set of new provisions in a taxation bill introduced into Parliament in December for passage this year. These include:
vRemoving the need for companies to file multiple imputation returns in order to receive refunds of income tax;
vReducing the number of provisional taxpayers who are exposed to use of money interest by increasing the threshold under which a provisional taxpayer is not subject to the use of money interest rules from $30,000 to $35,000 of residual income tax;
vMaking it easier for banks and other interest payers to communicate resident withholding tax information to their customers; and
vNot requiring small businesses to value and make adjustments for small amounts of trading stock ($5,000) at the end of the year.
In addition there are a number of other measures that are still under consideration for possible inclusion in future legislation. These include:
vAllowing small businesses to align their provisional tax payments to their GST payments, which will help relieve cash-flow problems and remove risk of exposure to use-of-money interest;
v Allowing employers to transfer PAYE obligations to intermediaries such as payroll firms; and
vPossible pooling of provisional tax payments, also with a view to eliminating the risk of use-of-money interest charges.
There will always be a limit to how simple we can make the tax system. However, the government is committed to an ongoing and open process of reviewing tax issues from the perspective of the small and medium sized businesses that make up such a larger portion of our economy.
Looking more broadly than taxation, in July 2001 the government received the report of the Ministerial Panel on Business Compliance Costs. This report contained 162 recommendations aimed at reducing compliance costs incurred by New Zealand businesses. Our response has been to focus on a number of key themes from the Panel’s report:
vImproving the use of information and communications technology to reduce compliance costs for business. Our goal is that by 2004 the Internet will be the dominant means of enabling ready access to government information, services and processes.
vMaking compliance easier by, for example, integrating the billing for ACC levies into one invoice from one source from 1 April 2002, and improving the ACC 45 form – the form filled out at the doctor’s when an ACC claim is made. This can now be lodged electronically, reducing the kind of errors that adversely affect employers.
vWorking with local government to help improve the quality and implementation of regulations, in particular the Resource Management Act, which is of concern to people involved in primary industries. An accredited councillor scheme is being developed, in conjunction with Local Government New Zealand, which will promote formal training amongst councillors with a view to better decision making.
vInvolving business earlier in the policy development process, in the overseeing of the implementation phase of legislation and the review of the policy outcomes. This will help to produce better quality regulation.
vIntroducing a new requirement for a business compliance cost statement to be published as part of all new legislation that has compliance cost consequences. This will counteract the creeping build-up of compliance costs by ensuring that Parliament is alerted to the compliance costs that legislation would impose on businesses. It will also give businesses the opportunity to have a say on those costs as part of the select committee process.
To sum up, the government’s strategy for local economies involves policies aimed at reducing the cost of doing business and at increasing the returns to businesses by linking them into the innovation cycle. The key to success on both counts is a sense of partnership between government, businesses and local communities. This is something that was lost during the 1990s, and it is something that I believe we all must work hard to re-establish. At the end of the day, we are all on the same team, and though we may have differing visions on the detail of the work ahead of us, the important thing is that we engage enthusiastically and intelligently in completing the important work of transforming local economies and thereby transforming New Zealand.
Thank you.