SOUND ECONOMICS, GOOD POLITICSPrime Minister
Institute Chair Mrs Kerrin Vautier, distinguished guests, ladies and gentlemen.
Thank you for the invitation to share some thoughts with you this evening.
In my invitation to tonight's gathering, I was asked to reflect on 15 years in which economic theory has had a significant influence on public policy.
In responding to that request, I would first note that economics has been at the heart of New Zealand government policy for far longer than 15 years.
The reality is that economic theory has been largely responsible for the best and the worst of public policy in New Zealand and throughout the world.
We may believe that the theories we currently subscribe to are the right ones and that those followed by our predecessors were hopelessly flawed, but it is worth reflecting on the confidence of those who came before that they too were charting the right path to prosperity.
An appreciation for the fallibility of the science of economics and its practitioners is, I believe, a vital part of any successful politician's armoury.
We are perhaps fortunate that there is a greater consensus amongst economists than has ever been the case.
There are many reasons for that, in particular, other approaches failed dismally.
For New Zealand we no longer have either Trade Union leaders, academics or left wing political activists telling us of the glories of the Soviet model of economics.
Evidence of the intellectual, moral and financial bankruptcy of the Soviet style economies, has been instrumental in helping forge a new consensus amongst economists and politicians from both the left and the right.
Evidence of the new consensus is everywhere.
For example, the differences in approach to monetary policy, to welfare and to education between my own Government and that of the Blair Labour Government in Britain are now quite small, I enjoy quoting Mr Blair's recent conference speech to show the close similarity of approach and, let it be said, to upset the left of New Zealand politics.
The international market place is a hard taskmaster.
And while misguided economic policy can cripple the most "lucky" of economies, New Zealand with a small and exposed economy simply cannot afford the policy extravagances that some larger or more economically powerful nations may allow themselves to indulge in.
Indulgences like punitively high tax regimes that none-the-less are riddled with hidden subsidies.
Like transfer payment systems which collectively direct enormous resources to those who simply do not need the assistance.
I am waiting for someone to provide moral justification, much less economic justification, to tax people on modest incomes so as to pay benefits to individuals or families that don't need them.
I will come back to this issue later.
And indulgences like blanket rules about the respective roles of public and private provision of healthcare, that have nothing whatsoever to do with improving health outcomes and everything to do with short term political point scoring.
It was an Australian historian who coined the phrase the "tyranny of distance" to describe the disadvantages stemming from his country's geographic isolation.
New Zealand's position is somewhat more challenging.
We have fewer natural resources, a smaller domestic market and are further from world markets than are our Australian cousins.
Although improvements in global communications and transport have reduced - and will continue to reduce these disadvantages - they can never eliminate them.
We must accept that there are some extra costs, some extra challenges that our situation imposes on us.
Put plainly, we must do better than others just to remain competitive.
I enjoy that challenge.
But if our smallness and isolation make us vulnerable to international trends and forces over which we have limited or no control, and if our position necessitates a disciplined approach to public policy and the need to respond quickly to new trends, new ideas and new ways of doing things in business and in government, our smallness also gives us the facility to do so.
For much of the past decade or so, New Zealand has been at the very forefront of applied economic theory.
Our prudent and transparent fiscal policy.
Our stable and successful macroeconomic policy.
Our commitment to an open and internationally competitive economy.
Our low rate, broad based tax policy - rated by the OECD as the least distortionary in the world.
These are the things that set us apart from other countries, from other Governments.
They're also why the Global Competitiveness Report produced by the Swiss-based World Economic Forum ranked New Zealand fifth of 53 countries on overall competitiveness.
Down from third place last year, but still ahead of every European nation and behind only Singapore, Hong Kong, the United States and Canada.
And we will continue to lead the way, motivated by the conviction that our brand of orthodox economic policies are beneficial to the New Zealand economy.
When I travel around the world, I am frequently asked how it is that successive New Zealand Governments have been able to maintain a programme of orthodox economic policies, despite the dislocation and pains of adjustment that are inevitably associated with any reform process.
My response, based on experience, is that while in the short run it may appear that political popularity is inversely related to the quality of economic policy, in the long run good economics is also good politics.
I intend to prove that again in 1999.
In my view, a large part of the reason for this is that New Zealanders have experienced first hand the economic and social costs of well-intentioned but bad policy.
There is a generation of New Zealanders who know how their life savings were destroyed by high inflation.
How every year brought more borrowing, higher debt, higher unemployment and less hope.
We have as a consequence a relatively good understanding of the workings of a modern economy, and of the inevitable trade-offs that must be made in modern government.
But even so, the changes over the past 15 years are so great that I think we all are sometimes guilty of forgetting just how significant a shift has occurred over that time.
A lay observer, having listened to the complaints about the Coalition Government's three year, $5 billion, limit on new policy initiatives would be forgiven for thinking that the Government was guilty of reckless fiscal extravagance
Indeed, this thought might have been confirmed by reading a recent article in The Economist which charted Government spending as a percentage of GDP in 17 leading industrial countries and incorrectly reported New Zealand's current spending to GDP ratio as being about the middle of the pack at 47.1 per cent.
They were wrong.
In fact our current ratio of 35 per cent was bettered in the survey only by the 33 per cent figure registered by the United States.
Moreover, of the countries examined, New Zealand was one of only five which had managed to reduce spending as a percentage of GDP since 1980.
Of the other four, only in Ireland is the Government spending less than 40 per cent of GDP.
So too with the wider economy.
It is true that the March quarter of this year broke our remarkable streak of 17 consecutive quarters of growth.
But put that in the right perspective.
The simple fact is that we have grown more in the past four and a half years than we achieved in the previous 15 and a half.
Over that same time frame inflation has averaged around two per cent as against over ten per cent in the earlier period.
On September 26, the Statistics department released figures showing that after negative GDP growth in the March quarter - the economy grew by a full 1.2 per cent in the quarter to the end of June.
Net public debt which stood at 52 per cent of GDP in 1991 but now stands at 27 per cent.
Unemployment, which peaked at 10.9 per cent in 1991, is now at the low point of the current economic cycle, 6.7 per cent, and is forecast to fall to 5.6 per cent by the year 2000 - despite a growing labour force.
The most important message I can give tonight is that we must retain this sense of perspective, of history, if we are not to repeat the errors of the past.
As often said: "Those who forget the lessons of history are condemned to repeat them."
That is a very important message for a Parliament which has 47 new Members.
For the future we can do better.
On Thursday evening and Friday all Ministers will meet to begin preparing for the 1998 Budget.
Every Minister will come determined to further enhance New Zealand's growth rate, but to achieve that will challenge even the brave.
I remain optimistic because we start with a conviction that New Zealand can do better.
This comment on the future is not just political optimism.
On September 18, the Reserve Bank released its projections for the New Zealand economy and its prescription for monetary policy.
The news from this independent source was all good.
Continued low inflation, positive and increasing growth, lower unemployment, a lowering of the current account deficit, higher productivity.
And earlier this morning, the latest CPI figures were released which show inflation well under control.
The CPI for the September quarter was one per cent higher than in the September 1996 quarter, the smallest annual increase recorded since March 1993.
Our achievements are no accident and nor are they to be taken for granted.
That's the risk in a political marketplace where many are tempted to offer more by taking from our children's and grandchildren's future.
Labour and the Alliance are already promising to do that.
Rational, coherent and reformist social and economic policy have got us to where we now are.
The challenge now is to maintain these policies in a new environment and build on them.
No matter what the popular polls say, New Zealand needs to stand firm against those who argue that higher taxes and bigger government will improve economic or social outcome.
The question I pose to those who advocate such policies is: why would higher taxes and bigger government work in people's interests now when they failed in the past?
My view is clear.
We must continue with the reform programme that has won international praise and respect.
In that regard I want to say a little more about the defining characteristics of this Government's approach to economic and social policy.
A large part of government's role stems from a long accepted view within New Zealand society that the Government has a legitimate role in redistributing resources to those in need of assistance.
That is not a difficult concept to master.
But more difficult is the probability that well intentioned government policies may be part of the problem.
Increasing taxes to redistribute in an indiscriminate manner slows economic growth, and thereby penalises those it seeks to help.
Old fashioned left wing economists never acknowledged the possibility, but they no longer hold centre stage.
More importantly, today's mainstream economists accept the problem exists but cannot precisely define it.
However some things are clear.
A strong economy is more likely to benefit the bottom 20 per cent of the population than is the most generous of transfer systems.
Since the New Zealand economy started growing in the second half of 1992, almost 250,000 extra New Zealanders have gained a job and are no longer dependent on welfare.
We should celebrate that because it's great news.
The size of government, namely the number of MPs and where their offices will be, has been in the news lately.
The size of government, as it relates to how much of the economy the Government controls, is in fact a far more important issue but it's more complex and therefore doesn't register in the opinion polls.
Until relatively recently, the amount of government spending seemed on an ever increasing upwards spiral.
Between 1960 and 1990, government spending as a percentage of GDP went from 26.9 per cent to 41.3 per cent.
It is difficult to argue that this increase brought with it a marked increase in national and personal welfare.
Indeed it may not be entirely coincidental that, our relative wealth fell from 80 per cent of the United States level in 1960 to only 63 per cent in 1992.
As I outlined earlier, some considerable progress has been made in reversing this seemingly relentless increase in the size of the State.
The Coalition Government will work to limit the extent of State intervention where it makes sense to do so.
But it is not, as some would prescribe, a simple case of cutting expenditure across the board.
Modern government, responsible government, dictates that those activities that do remain with the State - either because there is no workable alternative or because the electorate has mandated the State to retain an involvement - are undertaken competently and effectively.
Personal and business decisions, on whether to locate or invest in New Zealand, will balance the costs of that decision against the services and other benefits that this country offers.
In a world of capital - and increasingly labour - mobility, it is not just tax rates that influence location choices, but also the state of our social, economic and governmental infrastructure.
Does our justice system operate effectively in protecting people's property and personal rights?
Are our schools producing students with the skills, the attitudes and above all the adaptability necessary in the modern age?
Are our transport, energy and communications networks well managed and regulated?
The bottom line, then, is that while we must control the level of government spending we must ensure that what we do do, we do well.
What's called for here is a targeting of government attention and resources, to the areas of greatest benefit to society.
Like any business, we must continually re-examine where our comparative advantage lies.
What activities currently undertaken by the Government could be done better or more cheaply by the private sector or by some greater involvement of the voluntary sector?
Many studies have compared the performance of public and private providers of similar services.
The evidence is overwhelming that for a given level of service, private firms are more efficient than their public counterparts.
In one summary drawn to my attention, of 50 different studies from across the world - in only 2 studies was public production seen to be more efficient.
Exiting from commercial and other activities where Government ownership is not essential has benefits not only in terms of the performance of the economy, but also in terms of the ability of the Executive to focus on its core business, on what really matters.
As I said in my speech to the Auckland Chamber of Commerce earlier this month, busy Ministers are not the right people to run property companies, airports, coal companies and television stations.
These conclusions should be neither surprising nor controversial for the majority of New Zealanders.
The more difficult, more complicated, issues are in the area of social policy.
New Zealand's social policy programmes and services absorb around 72 per cent of all Government expenditure.
The proper, and moral, rationale for this expenditure is to prevent the locking in of gross disparities of living standards and to give all groups the opportunity to participate as productive members of society.
But our history and experience tells us the policies that have had their genesis in this vision have had more complex, and in many cases unintended, outcomes - both at the individual level and for the economy as a whole.
Those countries which prosper are those that are capable of producing a workforce that is skilled, adaptive and productive.
Our interventions in education, in social welfare, in employment and in immigration must reflect this basic reality.
This is where the real hard choices on policies have to be made.
Meeting the legitimate expectations of society on social policy in a way that does not overburden the growth capacity of the broader economy.
I sometimes feel that it is forgotten or conveniently overlooked that all welfare systems, yesterday, today and tomorrow, operate within a fundamental fiscal constraint.
No Government, even one willing to tax more or borrow more, can avoid setting limits to the extent of its social support, whether those limits are on the number of people eligible for support, the level of the subsidy or the quantum of services available.
The health sector is a case in point.
Providing universal free access to some services through 100 per cent subsidy to the provider, increases the total cost of that service to the health budget and therefore prevents other important health needs being met - like, say, elective surgery.
In my view, the solution lies in ensuring that our social spending is well directed in terms of what services are provided, and the extent to which services will be targeted based on income or other criteria.
It is the last of these points that I want to turn to now.
Part of the reason for the very high cost of Government provided social services has been the well documented phenomenon of "middle class capture", whereby the benefits of programmes tend to be diverted in various ways away from the most needy and towards middle and higher income groups.
A recent British study showed that the richest fifth of the population received 40 per cent more public health spending than did the poorest fifth.
In secondary education they got 80 per cent more and in university education the difference was as high as 500 per cent.
Studies for other developed countries will doubtless show slightly different results, but the overall picture is clear.
It may not always make sense to target a particular programme.
Targeting can entail complex and costly administration and there may be good public policy reasons for wide coverage.
There is a risk too that an accumulation of targeted programmes can impact in an unintended way on the incentives facing individuals and families.
However, in my view, there is a moral as well as an economic imperative that we adopt a more focused approach based on the simple premiss that help should go to those who need help.
You can expect the left of politics to sharply reject such a notion, despite the fact that, as the quoted British study showed, many universal payments give as much or more to the rich as to those in need of support.
There are hard choices to be made in this area and opinion polls won't provide the answers.
But we all know that a strong society cannot be built in the real world on soft choices.
Much has been written and spoken about New Zealand reforms over recent years, but in truth necessity has been a main driver of New Zealand's reforms since the mid '80s.
The previous command economy approach wasn't working, various controls had to be removed and the market given a more substantive role in the allocation of resources.
Granting independence to the Reserve Bank to run monetary policy brought New Zealand's very high inflation back to sustainable low levels.
The Employment Contracts Act freed up the labour market and is a major reason for our lower unemployment.
The Fiscal Responsibility Act was based not so much on economic theory but on the anger felt by the incoming National Government in 1990 at the scale of the cover up by the outgoing Labour Government of New Zealand's true fiscal position, not to mention the imminent crash of the Bank of New Zealand and its commitment that such a cover up would never happen again.
Reflecting on the past 15 years reminds us of the many far reaching changes, many of them controversial at the time but now seen as mainstream.
Tomorrow's agenda must reflect a modern approach to issues.
First we must challenge monopolies, whether they exist in the economic or social policy area.
A significant issue here is introducing competition for no fault accident cover.
ACC has not been a successful monopoly.
We must continue to review the State's continued ownership of various assets.
If China, which officially still describes itself as a communist country, is privatising State assets then it's not radical or extreme right to review State ownership in New Zealand.
It is in the social sector that the hardest questions remain.
The good news is that new approaches are appearing.
For example the concept of integrated healthcare where the primary and secondary sectors and the public and private sectors bring together all their resources to improve healthcare in a region.
An important additional benefit would be bringing the decisions back to the local community.
Let me annoy the left again by suggesting that a larger role by private and integrated schools might actually promote new initiatives in education and deliver better outcomes for our children.
There are other options and possibilities in all areas and we will find them by keeping the innovative spirit of the last few years alive.
For example, one area which theoretical economists have only recently begun to address is crime.
Yet the cost of crime to the nation is enormous.
I invite you to reflect on it and make suggestions.
There have to be better options than just building more jails to hold ever more people.
We must find something more constructive and beneficial to society than that.
Think about it.
Think also about how we can deliver on the great challenge of the new century which is to devolve more authority to individuals and communities.
To build the social capital of the nation we must seek greater community involvement in and greater ownership of issues especially in the social policy area.
Answers to the general unease that the values that traditionally underpin our communities have slipped away will not be found through economic policy or big central Government.
They will be addressed only by communities being given the opportunities to have more say in their lives.
I have often spoken of creating a decent society.
British Prime Minister Tony Blair put it this way:
"I tell you a decent society is not based on rights. It is based on duty. Our duty to each other. To all should be given opportunity, from all responsibility demanded."
I invite you to all join me in pursuing the goal of building a country that will be seen as a model for the 21st century.