Speech to NZ Employers' Federation National ConferenceTreasurer
Thank you for inviting me here today.
I've got some good news for you. New Zealand is going to grow faster than the Australia and the United States next year.
And unemployment could be down to 6% by the end of next year.
Those figures are on the back of forecasts just last week from the Reserve Bank and the National Bank.
Over the past few weeks we have seen increasingly positive views emerging about the economy and where it's heading.
At first the reports, from the likes of AMP and the BNZ were of signs emerging of a return to more balanced growth. Now we are seeing concrete forecasts of a pick-up in exports and a continuing improvement in tourism pushing us up to 4% growth next year.
Deutsche Bank's latest forecasts also confirm this path, with 3.3% growth forecast to next March, and 4% growth after that.
This is, of course, the same sort of picture presented in the Budget. It forecast export growth to pick up further from the end of this year, and to average 4.8% over the next three years.
But Treasury also said that the lingering effects of the droughts and problems in world markets would constrain exports for the first half of the year and that growth of 2.9% this year would be maintained by strength in residential investment and associated consumer spending.
That, by and large, is what we've seen. The domestic economy has been driving growth, creating a strong increase in imports, while exports are growing more slowly because of weaker agricultural production and prices.
The Reserve Bank says this mix of effects is likely to lead to slightly eaker growth in this June quarter. The mild winter, while useful for farmers rebuilding stock levels, means there has been less stock killed hence ess economic activity. The mild winter has also seen less retail spending.
However the Bank says that the economy is trending at around 3% growth this year and any slowing in growth in the last couple of months is likely to be made up in the September quarter.
The domestic indicators we?re seeing support this story. Business confidence s still positive and consistent with growth of around 3%, the number of job ads continues to increase (by 1.1% in July, the 11th consecutive monthly increase), consumer confidence remains positive, residential building consents are rising strongly and retail sales, while bouncing around on a monthly basis are 4.9% up on a year ago. New Zealand will also see activity boosted by the series of events from next month on ? APEC and the leaders visits, the America's Cup, the Youth Soccer Cup, the world netball champs, and the Millennium Events.
As for the export picture, tourism keeps on doing very well (something that doesn't come through in the trade figures) and manufacturers are showing new heart. The Westpac Manufacturers Opinion Survey showed a net 17% of exporters increasing exports in the June quarter, a net 23% reporting an increase in new orders, and a net 45% expecting exports to increase over the next three months.
Manufactured exporters' expectations are now the highest they have been since 1992. Internationally, the continuing improvement in the health of the world economy has seen some hope that commodity prices may pick up. ANZ's commodity price index rose 1% in July, and the trend line has been rising since the beginning of the year.. In June prices rose for beef, lamb, and sawn timber.
And the Meat and Wool Economic Service is also predicting that farmers can expect an increase in profitability this year from a mix of higher production and improved product prices. The Service says farm profits will be up 10% before tax, when averaged across all classes and regions.
At the moment, of course, these improvements are only expectation. They are, however, encouraging signs, and what we would expect given the continued improvement in outlook for the world economy. Growth in our top 10 trading partners is now picked to be 2.9% this year, up from 2.1% in April and 1.4% in November last year.
If world growth is good and commodity prices are up, that makes a huge difference to our export receipts and the wealth in the provinces.
If commodity prices are low and if there is drought, it makes it tough.
The huge impact of last year's Crisis on some Asian economies saw them stop buying imports while very large devaluations in currencies around Asia gave those countries' exporters an edge.
Similarly a lower New Zealand dollar is behind the better outlook for our manufacturing exporters.
Meanwhile, the return to growth in the Asian economies has seen demand for mports increase, and improves the prospect for higher commodity prices. It's worth remembering that up to the onset of the Asian Crisis two-thirds of the growth in demand for New Zealand commodities was from that region. What all of that means is the country is moving forward ? and is likely to do so increasingly quickly. If there has been a patch of lower growth, it's behind us already in the June quarter.
Last September, no-one thought we would be where we are today. And I'm sure 2 months ago any one of us would have been very happy to settle for what New Zealand's achieved.
We know for sure that since June 1998 we've had three solid quarters of growth, so that we're now better off than when the Crisis and drought hit. Unemployment, which climbed slightly through the middle of last year, has fallen to 7%.
And the forecasts are for growth to improve ? the National Bank says to 4.3% next year ? and unemployment to drop under 6% in the near term.
Now that's not bad. In light of what we were facing last year collapsing log and tourism markets, drought knocking around $500 million from farm-gate returns, and plummeting confidence - it's good.
That is the measure of the worth of the changes that have been made since 1984. In the 70s when we were hit by the oil shocks we had carless days and governments started on the slippery slope of borrowing and deficits that took 17 years to turn around.
After 1987 when the sharemarket crashed, the economy stalled and unemployment kept rising for four years, until it hit nearly 11%.
In 1998, the Asian Crisis and a severe drought cost us two quarters of negative growth, and not much more. Since then, we've had another summer in which drought has impacted on agricultural production.
But the economy is still growing. It's growing at around 3% this year and, I repeat, forecast to grow as much as 4% next year ? which is better than Australia.
This government has a policy framework which focuses on things that matter.
We want low inflation, flexible labour markets, quality fiscal policy, an open and competitive economy, and low tax rates because they help create growth.
This isn't some academic exercise. It's about the real world. Low inflation, keeping interest rates low, makes money cheaper for investment. Flexible labour markets help create jobs ? 280,000 so far under the Employment Contracts Act, about 700 a week. Lower taxes lower your costs and make work more worthwhile for people.
What we're always concerned about is not what the theory is, but making things work. Take the ECA, for example. We support it because it helps make businesses work and creates jobs. It also means we no longer have unnecessary strikes. With the ECA, Air NZ pilots weren't out in sympathy with Ansett last week.
The CTU-sponsored Workplace Relations Bill lays out in considerable detail Labour's industrial relations policy. It includes the provision that only "unions" - as defined in the Bill -can seek to negotiate and be party to a collective agreement negotiated under that Bill. Unions are afforded "pride of place."
This is at odds with the Leader of the Opposition's view that a collective contract will be able to be negotiated by a bargaining agent, not just unions. She also suggested today that agreement of employers and unions would be required for multi-employer collective agreements. In the proposed Bill, employers have no such rights.
As a country we need policies that work for growth, and we need, in business and government to continually work to improve our performance and deal with a changing world.
That requires us to get the basics right, and add our own solutions something this government has been consistently working on, and of which last week's announcements are another step.
Good policy remains good policy, just as basic economics don't change.
Flavour of the month fads, be they the Scandinavian countries in the 80s, the Asian tigers before the crash, or now Ireland's performance, can teach us some things, but they should be the right lessons.
Having well working markets, low inflation, quality industrial relations, good fiscal policy, and good tax policy is far more important than the latest fashion. If we don't have those core things right, no amount of add ons are going to help. That's what we know from our experience and from countries like the UK, Australia and the United States.
I have every confidence in your capacity and that of the economy as a whole to continue to adjust and improve.
As I have said recently, in a low inflation environment, the traditional New Zealand recipe for accumulating wealth of buying real estate and waiting for inflation to do the rest no longer works.
Producers can't rely on capital gain on their assets to offset poor profits on their business.
People are having to think about new ways of using their investment.
Over this decade businesses have done tremendous work in getting viable, competitive, and on producing goods and services people actually want to buy.
The wine industry has thrived through the government getting rid of tariffs and looking internationally. Mussel exports have more than tripled since 1990 and seafood exports overall increased 15% to $1.2 billion in the past year - not because of government intervention but through developing products and markets.
It's no surprise that these are gains from our primary industries. We're good at growing things. And that's where much of our development will come too. But the real gains come from that natural advantage coupled with our bright ideas.
Our economy has transformed, and is transforming. It's estimated our high-tech industry - intellectual property and information systems - reached total sales of $5.6 billion during 1998. IT exports were up 30% in 1998.
In recent months three of New Zealand's biggest businesses have all announced important strategic changes in direction. The dairy industry, Telecom and Fletchers represent 20% of New Zealand GDP. Each has its own story, but each has recognised that it has to fundamentally change the way it does business and creates value if it is to grow over the next 10 years.
Telecom is becoming an internet company, bringing to New Zealand the best partners in the world for that business. The dairy industry wants to grow profit as well as production, so it is looking at a quite different business structure where shareholders equity is given a value and there's pressure to grow that value. Fletchers has reached the limits of growing off a capital intensive low performing resource base, and is pruning back to where it can grow from.
All these changes have come about through the enterprise of our businesses and their employees.
What the government wants is for our businesses to be able to take the next steps. We won't tell them where. We didn't tell people to look at sauvignon blanc grapes, greenshell mussels or hoki, or spreadable butter.
What we want is to ensure the ideas that are generated have a better chance of turning into products and jobs, and that costs to business are kept to a minimum. You certainly don't need more government.
In an era of more and more rapid change, you have to be allowed to be light on your feet and know that the rules aren't going to change.
To help maintain stability, a National-led government will continue to run surpluses, to lower public debt, and to cut taxes.
The Government will do much more, however, than simply manage the books well. We want businesses to succeed and we want work to be rewarded. That's why over the past few months we have continued to address significant issues which are of huge benefit to our progress.
Opening ACC to competition will save employers $500 million or more over the next two years - equivalent to two cents coming off the corporate tax rate. What's more, employers now have a real incentive to make their workplaces safer.
The Producer Board reforms will focus our huge agriculture industries on taking far better commercial advantage of their opportunities in the next century. That means more value-added production. It means the opportunity for those who can develop new products and markets to get the rewards. The Dairy industry alone has a plan to lift its turnover of $8 billion a year to $40 billion in ten years. That would increase the size of our economy by more than 30%.
Legislation amending the Resource Management Act has been brought to Parliament. We demand high environmental standards, but the interpretation of the RMA should not hold people back from developing their businesses and ideas.
The APEC Trade Ministers meeting New Zealand hosted saw an agreement from the group to include fisheries and forestry products referred to the WTO for the next round of negotiations. Removing tariff barriers in these industries would add around $130 million a year to our trade in these products.
I have announced National would introduce a further cut in the middle rate of income tax to 20c, from 21c now, and that this would apply to income up to $40,000 a year. It's a signal that middle New Zealand deserves more for its work. As we can afford it, we will bring all taxes down further.
And we have released the Bright Futures package to help our progress towards a more modern, skilled, knowledge-based economy and to remove roadblocks to development and ideas.
The Labour Party wants to reverse, oppose, or bad-mouth all these moves. We just want to get on with things.
I'm with the optimists who think New Zealanders can continue to foot it and even beat the rest of the world.
It takes hard work; it requires us to keep thinking and adapting and keep moving the nation's resources into more productive uses. But there are plenty of New Zealanders who want to move ahead, and this Government wants to help them.
With this National government's policies the first three years of the new millennium would provide:
· 10% economic growth
· 100,000 new jobs
· stable inflation - and low interest rates
· lower public debt, and
· lower taxes
at a minimum. That's the benchmark we are setting ourselves, and it's what you can measure our political opponents against.