Speech To Forestry Conference

  • Doug Graham
Attorney-General

I am glad to be here today, speaking to representatives of such a significant, and fast growing sector of the New Zealand economy. That growth has been, and will continue to be, an important component of our overall economic performance.

THE FORESTRY INDUSTRY

I note that the forestry industry is continuing its rapid growth to become one of the most significant contributors to the expansion of New Zealand ?s exports, contributing over $2 billion or 8 percent of total exports in 1998.

The volume of wood harvested from New Zealand?s forests grew 70 percent from 1990 to 1998 and is expected to grow another 80 percent by 2010. The New Zealand Forest Industries Council?s Vision 2025 has a target of $14 billion of exports.

Forestry offers this country major opportunities, but will require equally major commitments to maximise the economic benefits for New Zealand. This wood will have to be marketed in the face of increasing competition from Chile and elsewhere.

The Asian Crisis illustrated the vulnerability of an industry to downturns in a narrow range of markets and products.

In an industry with such long time frames and lumpy capital investments, the availability and cost of capital is especially important. I note that statistics based on public announcements as at June last year indicate investments in processing facilities of $423 million in 1998 and $402 million in 1999, with a further $205 million projected for 2000-2005.

The Government no longer plants, grows and harvests trees in competition with the private sector. One consequence is that taxpayers have not been called on to support these processing investments. Another is that needed investment has not been foregone because of other demands on the Government?s resources.

Our strategy is to let the private sector invest in commercial activities. The revenues from sales, however, have allowed Government to reduce debt, with ongoing benefits for the level of taxation and interest rates.

Forestry also benefits from favourable tax treatment relative to many other potential New Zealand-based investments with regard to the costs of establishing trees.

These points raise the inevitable question of what is Government's role in forestry today? The broad answer is much the same as in other sectors of the economy ? to create an environment within which investment decisions can be made and innovation can flourish.

This does not mean guaranteeing a return. No government, no matter what they claim, can do that. Prices are a matter for the international market.

The Government's role is to provide secure legal rights and the best possible economic conditions.

A COMPETITIVE ENVIRONMENT

Whether your business be in agriculture, fishing, forestry, education, manufacturing, tourism or commerce, the Government?s role then is to create a business environment that lets you retain and attract investment, skilled workers and new technology. If the environment is not satisfactory, investment will depart, skilled people will depart and technology will also be exploited overseas.

We want to have a business environment in New Zealand that means our firms can take on the world. We want you to be internationally competitive and want to create a low-cost, competitive economy that benefits both exporters and consumers.

New Zealand Government policies over the last 15 years have generally been aimed at improving the business environment for our exporters.

In forestry, the Government has laid the foundations of an internationally competitive industry:

Tariffs have come off inputs into our production systems Keeping down the cost of inputs in general and particularly the cost of capital equipment and improving our negotiating position in reducing tariffs elsewhere.
Energy, and telecommunications have become competitive These are key inputs to an industry so focused on large capital intensive manufacturing operations.
The labour market has been freed-up - we've just had the lowest number of work days lost in 65 years. A significant contributor to the improved performance of the forestry industry in recent years has been more efficient utilisation of equipment through improved staff productivity.
The transport sector in general, and our ports in particular, are internationally competitive Given the focus on bulk exports of timber and related products, this has undoubtedly been a key factor in reducing costs to maintain the forestry industry?s own competitiveness.
The research market has become output focussed and the Government provides huge funding for public-good scientific research, including currently $23m for forestry Research has been a major underpinning of the industry?s success in getting the most out of natural advantages.
The Reserve Bank Act laid the foundation for an economy where inflation no longer continuously erodes our competitiveness For an industry with such a long time horizon, low stable inflation is one of the most significant contributions Government can make.
Forestry has benefited from all of these reforms as costs have been reduced. And as you know, we are continuing to work on other costs such as ACC.

ECONOMY

New Zealand is, along with every other developed nation, evolving into a knowledge society where those who are well-educated, self-motivated and linked into information networks are the most likely to live prosperous and fulfilling lives.

Enterprises, to succeed, must more than ever be attuned to customer requirements, employ educated workers, encourage innovation through their workplace organisation, and know more and learn faster than their competitors.

Our broad economic framework has allowed innovation and enterprise to flourish, based on five fundamental principles:

An open, internationally competitive economy;
Low inflation and interest rates;
Low tax rates and fiscal prudence;
An open, transparent and predictable legal and business system; and
Flexible labour markets.
What the last 12 months has shown - and what we should not lose sight of - is that New Zealand's economy now is far more resilient than in the past.

It has meant a lot of hard work for our firms and employees, but the country has come through two summers of drought-hit production, and the Asian Crisis, yet is now facing a very bright start to the new millennium.

The Government knew New Zealand was as well-equipped as possible to deal with economic shock.

We had a framework which would allow our economy to rapidly adjust to the testing circumstances.

That wasn't an easy message for people to hear last year. But we weren't taking a blind punt. We had a plan. It was a commitment to a framework which we knew worked.

Much has been achieved by New Zealand since the National government got our economic framework established at the end of 1991.

Growth of 37% (21% in real terms) has created 268,000 more jobs.

The average weekly wage has risen from $542 to $654 and tax cuts are leaving far more of that money in workers' pockets.

As well as having higher incomes, consumers - and all New Zealanders are consumers - are facing much lower prices.

All the economic changes we have made have been about lowering costs, allowing businesses to flourish, and increasing growth as we have sold government businesses, increased competition in areas like electricity, and introduced parallel importing.

No matter what economic scenario eventuates, our framework means that firms are well placed to deal with uncertainty stemming from the global environment - and to take any opportunities on offer.

The economic outlook shows what can be achieved in the new New Zealand.

Private sector forecasters are picking the economy will increase by around 3% this year and 4% next year. The NZIER's latest forecasts were for growth averaging 3.4% over the next four years.
That looks very credible with business confidence sustaining very high levels.
Export intentions and investment are positive and forecasters are picking an increase in exports as the world economy recovers.
The sharemarket is making solid gains and there is very strong interest in the Contact float.
While growth has resumed, inflation is at its lowest level in 30 years.
And interest rates are at similar 30 year lows ? a key factor for a capital intensive industry such as forestry.
As for the Government's books, the monthly financial statements are showing revenue tracking above forecast, and a much stronger overall set of Government accounts than we were expecting - or that we could have expected if the Government had not taken decisive action last year.

One of those decisions was to proceed with the sale of Contact Energy. With Edison Mission Energy by a 40% stake in Contact for $1.2b, three times the book value, and the proceeds of the float still to come, this will have a very positive effect on the Crown's financial and debt positions this year.

Rebuilding our fiscal buffer has become a priority over this current period.

Last year our forecast surpluses disappeared as the Asian Crisis and drought saw an economic contraction through the first half of 1998.

But those surpluses - our fiscal buffer - are what gives the Government headroom to negotiate such international shocks without having to increase debt.

You have seen this government's commitment to repaying debt. We have more than halved net public debt to less than 25% of GDP, and we are committed long term to reducing it below 15% of GDP.

Running surpluses and repaying debt are what allows us both to increase quality spending, and to cut taxes.

This Government will not move into deficit to fund tax cuts. Rebuilding surpluses is therefore also a key to further progress on this front.

You will appreciate, however, that the progress we have made in lowering debt means the fiscal buffer will not need, in the future to be as high as required when we first set conditions for tax cuts at the end of 1995. At 30 June 1995, net public debt was stil 37.6%.

At that debt level, the Government decided that maintaining a 3% fiscal buffer was prudent.

As debt over the next few years approaches 15%, smaller fiscal buffers in the range of 1.5% to 2% will maintain the same level of prudence.

That is why this Government has a realistic, medium-term strategy of continuing to lower taxes. With a return to solid surpluses and further progress in repaying debt we will be able to move on this issue. We will be delivering a very business and people friendly Budget in two week's time. The Government will have a sixth year of healthy surplus, and debt will be coming down further. That means we are playing our part in delivering stable conditions for business, and that we can continue to deliver improved services and opportunities for people.

INTERNATIONAL ENVIRONMENT

As well as focusing on improving the resilience of the domestic economy and improving the fiscal position, the Government is also working on the international front in ways that will support the growth of the forestry sector.

Two key areas are APEC and the WTO, and SPS and Biosecurity.

The international free flow of capital has also been, and will continue to be, vital to the growth of the forestry sector. The major international involvement in the sector provides greatly improved access to capital, knowledge and markets. The long-term benefits will be significant. International SPS and Biosecurity

An important change on the international front has been the WTO Sanitary and Phyto-Sanitary agreement which deals with protecting animal and plant health, and protecting people on food safety issues. Along with this goal, the SPS Agreement stopped countries using phoney science to establish fake SPS barriers. These developments were overwhelmingly positive for New Zealand.

The agreement means that SPS measures have to be based on science, with harmonised standards, equivalent treatment and transparency. SPS measures must be applied only to the extent necessary. WTO members can't discriminate against foreign suppliers compared to local ones. Sanitary measures are not to be applied in a manner which would constitute a disguised restriction on international trade.

Consistent with the SPS agreement, the Government has three key roles on biosecurity:

co-ordination;
as a partner in pest management; and
ensuring robust systems are in place for managing the biosecurity risks associated with the increasing movement of people and goods.
Biosecurity continues to be, a priority of this Government. Our animal and plant health status is an important attribute of this country and an important basis for our economic well-being.

International ? APEC and the WTO

New Zealand's policy initiatives for 1999 can be grouped around three themes:

expanding opportunities for business throughout the region;
strengthening the functioning of markets; and
broadening support for APEC.
Having recently returned from a trip around the financial capitals, I can say that the world and regional outlook is vastly improved from last year. Of course that doesn't mean there are no international risks, they will always be there.

But general expectations are for our key trading markets to strengthen rather than deteriorate this year.

Korea and Thailand are expected to recover quite rapidly from their strong economic contractions last year, and China's commitment to enter the WTO framework is a very positive longer-term sign.

In the United States, official growth forecasts of around 2.5% this year are now expected to be bettered, and Europe is looking at steady if unspectacular growth.

Continued growth in these markets is very important in helping the Asian region regain its feet quickly. The key country missing from this equation is Japan, where there seems acceptance that the Government is now resolved to dealing with the underlying problems, but which has few levers left to stimulate activity. It is very difficult to cut interest rates when they are already at close to 0%.

Your industry has already noticed an upturn in trade with some of these troubled markets.

APEC's work is vital in ensuring trade continues, that barriers to trade are reduced, and that the cost of doing business across the region is lowered.

The APEC process encourages member economies to take initiatives to facilitate trade and investment.

But we must ensure we keep APEC focused on these first principles, and that is what New Zealand will be doing this year as it takes the Chair, and we bring our leadership to the leaders' meeting in Auckland this September.

The gains of making markets work more effectively and reducing the costs of doing business within APEC's member economies are enormous.

But trade liberalisation is a key step toward sustainable economic growth in our region. It is now 5 years since the Bogor declaration saw APEC countries sign up to zero tariffs for developed countries by 2010 and developing countries by 2020. I sense there is an opportunity now for fresh initiatives to show some progress towards this fundamental commitment.

You are probably aware that at the 1997 APEC summit in Vancouver, the New Zealand Government supported an agreement to fast-track the removal of import tariffs in the forestry and fisheries industries. The agreement aims to have forest products tariffs, which range up to 11.5 percent, removed by 2004, ahead of the 2010 deadline suggested in the GATT Uruguay round.

Our major markets for forestry products are in the APEC region and our role as Chair will give us some scope to address problems in market access. I can assure you we will be working through both APEC and the WTO to reduce barriers to trade.

To conclude, I hope you have had a successful conference and enjoy the final sessions.

The Government has worked hard to create an environment in which investors feel confident and secure in developing long-term the huge potential from New Zealand?s growing timber resource.

We have already seen benefits from that work and look forward to you industry reaching new heights over the coming decade.