Speech To Wellington Chamber of CommerceFinance
Thank you for the welcome. As you know, I will shortly be delivering the third and last Budget of this parliamentary term, and so I think it is an appropriate time to discuss both the current economic outlook, and the state of the intellectual debate on the role of government in the economy.
On this latter point, it is clear that the present Labour-Alliance administration represents a significant watershed; a change in both the style and the substance of government. We went from the ornate – one might say baroque – style of the Muldoon era, to the spare and elegant minimalism that held sway in New Zealand in the late 1980s and 1990s. We are now, I believe, firmly set upon a course that differs from both of these styles.
But first, to the economy. You might say that, as Minister of Finance, it is my job to be an optimist about the New Zealand economy. That is true; but it is gratifying to have good reasons for optimism, in the form of a good set of economic indicators, and good company in that optimism, both domestically and from an overseas perspective.
Nor is my perspective simply that of the 7th floor of the Beehive. It is also informed by my recent visits to Auckland, Christchurch, Dunedin, the Manawatu and other regional centres. Overall the picture is very good. And if anything Wellington’s economy is drifting towards the back of the pack, as some of the more exciting developments happen elsewhere.
The latest economic and fiscal indicators show the New Zealand economy to be stronger, and more balanced, than it has been since the mid 1960s. What is more 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 showed 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.
There were export price falls, but these have not been universal, so 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 does not seem to be occurring. 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, I suspect roughly the number of New Zealanders whose sense of well-being is derived primarily from the game of rugby. 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. 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.
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.
In short, today’s numbers reveal a picture of steady growth, with low inflation, rising employment, moderate unemployment, and a current account deficit that is very low by recent standards. Real wages and share prices have both risen.
The government for its part is keeping to its promise to be fiscally conservative. We set ourselves the target of 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 kept these promises.
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 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 last year.
Net crown debt has fallen from just under 22 percent of GDP in 1999 to around 18 percent now.
The government’s economic and fiscal management recently received a vote of confidence in the form of a healthy credit rating given by British-owned rating agency, Fitch Ratings.
Fitch – which is on a par with international ratings agencies, Standard and Poors and Moodys - has rated New Zealand AA for long term foreign currency and AAA for long term local currency ratings and has put us on a stable outlook.
Their report notes that we have among the strongest public finances of any country Fitch rates and that public debt levels have more than halved since 1993. It also compliments us on our “undisputed reputation for liberalised markets and policy transparency” stating that it is “largely unmatched among rated sovereigns.” This represents a very solid endorsement by anyone’s definition.
You will no doubt be aware that the Wellington regional economy is bucking the positive trend somewhat, suffering the largest drop in economic activity in December. The latest edition of the Wellington Regional Council’s Regional Outlook noted that economic growth in the Wellington region has slowed over the past 18 months from between 3 – 4 percent to between 0 – 1 percent. The story that lies behind these figures is the impact of two opposing forces: on the one hand, slower population growth and the flow-on effects from business contraction and relocation out of Wellington; and on the other hand the development of new industries – such as film, television and information technology – but at a rate where they have not yet achieved the size and economic impact needed to offset the decline in traditional industries such as finance, insurance, manufacturing and utilities.
Despite this, Wellington consumer confidence is higher than the national average, and the retail and tourism sectors are enjoying a bonanza. Clearly Wellingtonians believe that the transformation needed in the local economy is well on track.
These generally good economic results have created some breathing space in which to get on with the important task of investing for future prosperity, in particular by diversifying our economy, both nationally and regionally, to make us even better positioned for cyclical changes and external shocks. This is where the intellectual debate on the role of government becomes important, and I will argue that it is a debate that this government has essentially won.
We have long buried the notion of the “dead hand” of government intervention; the hand that tilted playing fields and made biased refereeing decisions. But equally, we have buried the notion that allowing government to wither away by selling assets, withdrawing from state investment in economic growth and cutting social spending, is somehow a magic formula for prosperity.
The obvious point of comparison for us is Australia, which has enjoyed some of its best growth results ever in the last ten years. However, while Australian governments have undertaken reforms similar to New Zealand’s, they have progressed at a slower rate, and in a more moderate form. Moreover, despite what is widely believed, the impact of taxation on businesses in Australia – and that extends beyond the simple question of the nominal tax rate – is comparable to that in New Zealand. The lesson to be learned from the comparison is that there are no guaranteed returns to the kind of economic purity advocated by the new right in the 1990s.
This government has argued – and, dare I say, is now proving – that there is a legitimate role for government in investing in the economic future of the country. The important lesson we have learned from the past is that government intervention must be principled, transparent, pragmatic and – wherever possible – in partnership with the private sector.
Some of what we have done involves committing resources to new areas of investment and development:
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.
vAnd we have adopted a whole-of-government approach to attracting new businesses to New Zealand, including, for example, the Ericsson-Synergy high-tech mobile internet applications research centres in Wellington and Auckland. We have also established the first dedicated offshore investment team in New York.
Other policies are about doing better with our existing investment programmes. The government’s recent $227 million land transport package includes a major focus on ensuring – literally – a smoother road for our exporters to move goods to market. This includes the large portion of the package that is aimed at reducing traffic congestion in Auckland, which has long been a Gordian Knot, both politically and from a driver’s point of view, and one which it is estimated costs the country around $1 billion a year. A portion of that cost relates to lost productivity as goods moving to market have to pass through the clogged transport arteries of our major urban area and one of our major ports. This is money well spent, and an investment which, in the final analysis, could only be made by central government.
We are also sharpening up the strategy for investing in skills and research. Our tertiary education reforms are particularly important in this regard, and are beginning to bear fruit. The 1990s saw sustained growth in participation, and some important advances in terms of the number of Maori and Pacific students and the frequency with which those who have spent some time in the workforce are returning to tertiary study in order to improve their skills and launch second or third careers.
What was lacking, however, was quality – not in the sense of the competence of the teaching and research in tertiary institutions, but quality in the sense the term has in business: that is, understanding the needs and requirements of the customer, and delivering on those, consistently exceeding expectations. The major customer of our tertiary institutions is New Zealand business. So one of the things we are setting out to do is to improve the interaction between the tertiary education system and the world of business and innovation.
We are doing this across the spectrum of skill levels. We established the Modern Apprenticeship Programme to provide employment-based training for young people. And we are increasing the Industry Training Fund by 35 percent from $70 million in 2000-2001 to $94 million in 2202-2003 to enable more New Zealanders than ever before to participate in formal structured workplace training.
Our tertiary reforms are aimed at moving our institutions away from a focus on competing with each other for students and funding, towards collaborating with each other and with businesses to play a pivotal role in driving the so-called “knowledge economy”.
I had the privilege recently of being briefed on the new technology park being established by Otago University in partnership with a number of high tech businesses in Dunedin. It was very exciting to hear how much energy is generated from the creative interaction between the worlds of business, research and teaching. And the energy is generated both ways.
Applying business skills to the planning of research and human capital development focuses attention on recognising and seizing opportunities. One of the criticisms of academics has always been that they value new ideas only within the bounds of their own discipline, and are not alert to potential commercial value. The technology parks and business incubators are giving the lie to the notion that academics are, by definition, lacking in entrepreneurial flair.
At the same time, there is immense value in businesses being exposed to leading edge thinking which may not yet be bankable, but will in time be the crucible for new products and services. This applies to the sciences, but also to the humanities, in terms of understanding and anticipating the social trends that influence the direction of global markets and the preferences of future consumers.
This kind of cross fertilisation between business and tertiary institutions creates true “learning organisations”, to use a piece of jargon which originated in the business sector. And this is the direction in which the government’s tertiary reforms are heading, where tertiary institutions as a matter of course enter into partnerships with businesses to provide specialised skills, undertake applied research and foster innovation. At present, this kind of partnership occurs at the margins. Our goal is for it to become commonplace, and for our tertiary institutions to be much more closely integrated into the economy in which they function.
The public-private partnerships exemplified by the technology parks and a range of other initiatives indicate that we are in a new phase of economic development, where government and business can work together without either party feeling any urge to acquire ownership of the other’s assets.
The fact that the ground has shifted was confirmed in some of the recent announcements by the Leader of the Opposition and the Opposition Finance Spokesperson who undertook to review the government’s economic development programmes if elected, and retain those that are working while discarding or modifying those that are not. This endorsement is flattering; but, since the government intends evaluating its programmes in exactly the same way, one has to ask how this statement presents the electorate with an alternative worth considering.
The clear alternative is, of course, on taxation policy. The Leader of the Opposition is on record as saying that the drivers of wealth creation are many and varied, and that the jury is still out on whether tax cuts are a reliable strategy for economic growth. Nevertheless, the temptation to offer tax cuts as a magic bullet is very strong, despite what it would mean in terms of the impact upon savings and the need to make severe cuts in sensitive areas of public expenditure.
Looking forward, the government remains committed to our goal – and it is an ambitious goal – of returning New Zealand to the top half of the OECD in terms of GDP. To do this we need to engage with some old verities as well as the new realities. Our economy will continue to be heavily weighted towards primary, land-based products and services. This means that we need to recognise the cyclical profile of commodity prices, and plan for a growth track in these industries which accelerates and slows according to international trends.
It also means that one of the key challenges is to find ways of altering the product cycles that are typical of primary industries, through applying technology and marketing expertise to position New Zealand produce in high-value niches in a diverse range of markets. There are, we all know, 1,001 profitable things to do with a dead sheep. We just have to find out what they are.
We know that we do not have the ability to catch every wave in the global economy; but there are some that we are well positioned to ride. These include bio-technology, information and communications technology and – one which we cannot overlook for the Wellington economy – the creative industries. They will be the primary focus of the government’s investment and innovation strategies.
As I said at the outset, I have very sound reasons for optimism about the New Zealand economy. These include the latest economic results and medium term forecasts; but more broadly I am optimistic because I believe there is now a better understanding in New Zealand of how growth will occur and be sustained within our economy, and of the nature of the partnership between business and government that is needed to give ourselves the best chance of success.