KEY POINTS:
It is a pleasure to give my first major speech of this year about the economy, in particular to give it to an Auckland business audience.
You have an interest in certainty about where we are going. I would like, therefore, to take this opportunity to update you with how we see where we are and the direction we are headed in.
I am going to argue that our economy has proved resilient and there are encouraging signs. But we need to change the mix of our growth. Our firms and farms need to move into higher value goods and services, through greater innovation and exporting. We need to be saving more and investing more. To set the economy up for the future, we need to continue and strengthen policies to these ends.
I will argue that a fair society underpins a strong economy. We need a societal consensus for the direction of economic growth – if the benefits of growth are shared inequitably, we undermine that consensus.
And I will argue that we need to maximise the potential of our people as part of a globalised world. We need to foster participation and promote skills training at all levels and stages of life. And we need to take advantage of our role in the world, by seeing climate change as an opportunity rather than a risk, and by tapping into the rising Asian powerhouses in our neighbourhood.
But first, the economy.
It's a well used metaphor, but one that describes well what I think New Zealanders expect from economic growth: a rising tide that lifts all boats. This doesn't happen just by itself.
We should all be able to enjoy the benefits of a higher standard of living. That means we need to position our economy for the future, so that the next generation will be able to enjoy that higher standard of living too.
Crucially, we need to see our firms and farms creating higher value products, through greater innovation and exporting. The economic literature continues to emphasise the importance of these activities to productivity. And for a small, distant economy, bulking up by greater exporting is especially important.
I see economic transformation as a continual process to achieve these aims. It's not enough just to put a set of policies in place and pronounce the job finished. We need to adapt and respond continuously to a changing environment. And I don't just mean the changing climate through global warming, though that's part of it. We also face the challenges of an ageing population, globalisation, the pace and impact of technological advance, and changing social trends.
We need to accept change as a constant to keep all those boats rising. Sometimes, indeed a rising tide can swamp and sink some while others rise even higher. That is not the Kiwi Way as this government has defined it.
There's much to be proud of in our record over the last few years.
The early years of this century were the longest period of sustained growth in the last thirty years. The New Zealand economy is a quarter larger today than it was in 1999.
While gains have been enjoyed across the economy, our business sector has particularly prospered. According to company tax returns, profit growth averaged over twenty per cent a year in 2003, 2004 and 2005. By comparison the average for the previous eight years - which is about as long as we have comparable data for - was profit growth of five to seven per cent a year.
Our economy is not only larger, but stronger and better positioned for the long haul. Let me dwell briefly on three aspects.
First, more Kiwis than ever - 2.1 million of us - are in jobs and our unemployment rate is lower than at any time in the last twenty five years. When people become unemployed, they feel worse off mainly because of the loss of work – the loss of social ties and the sense of contribution – rather than because of the loss of income. I'm proud that we have close to full employment for the first time in a generation.
Second, our public finances are sound. Gross debt is approaching twenty per cent of GDP and we no longer carry any net debt at all once account is taken of the New Zealand Superannuation Fund. The Fund's assets stood at just under $12 billion at 31 December showing we are well on our way to dealing with the pension costs of our ageing population. Overall, New Zealand has better public finances than nearly all other OECD countries – a particularly pleasing achievement considering where we stood in the early 1980s.
Third, we have recognised the infrastructure deficit that had built up through the 1990s and started down the road to address it. Or should that be building the roads to address it? In fact, we have started the largest road building programme this country has ever seen, at least since the nineteenth century. New Zealand businesses, especially Auckland's, have and will continue to reap the rewards of this activist government's investment of time and money in telecommunications, electricity, infrastructure and the reform of regulatory systems. With recent legislation and with decisions by the Electricity Commission we can look forward to crucial progress in telecommunications and security of electricity supply.
This time last year doomsayers were forecasting recession. Indeed a slow down was inevitable after such a long period of strong growth. I have never pretended to have discovered how to abolish the economic cycle, something only ever achieved by parties in Opposition.
But the downturn seems to be bottoming out with GDP continuing to grow at close to two per cent. Compared with our past cyclical downturns, this is very mild.
So we have weathered the cyclical downturn and we are emerging with some encouraging signs. Business confidence is the highest since mid-2003. The labour market is still tight, with firms hoarding labour in anticipation of a rebound in growth.
Clearly, in fact, we are emerging a little faster from the downturn than the Reserve Bank would like.
Which brings me to what's left to do.
Our current account deficit is nearly 10 per cent of GDP. That tells us in fairly stark terms that the mix of our growth is still excessively dominated by domestic demand.
The picture over the last generation on innovation and exporting is not that pretty. We have one of the lowest rates of business research and development in the OECD. Exports as a per cent of GDP have barely moved in the last thirty years by OECD standards, despite all the economic reforms. The May 2006 DHL Export Barometer found that only two in five of the exporters surveyed had introduced new technologies in the past year and only one in four had a physical presence in export markets.
I see a role for government to help make business work better. I am not advocating a crude picking of winners, not least because, as physicist Niels Bohr famously once said, "Prediction is very difficult, especially about the future".
Part of New Zealand's future could well be to carve out a niche in biotechnology, taking advantage of the agglomeration benefits from critical mass in a particular sector. But that doesn't mean we should back every biotech horse that runs. It does mean, though, taking some well judged risks.
The private sector isn't always perfect at picking winners either. Where I think this leads you is that you have to get your hands a bit dirty, especially when the rest of the world is doing just that.
The proposals in the international tax review are a good example: we had the best international tax system in the world if only the world had followed. Unfortunately we did a kind of reverse Star Trek: we went where no man followed.
The Business Tax Review is deliberately focused on finding measures that will improve New Zealand's productivity and competitiveness. The proposed tax credits for R&D and export market development are cases where I think the government can make a difference.
Such modern pragmatism is consistent with the general direction of the government's moves in the business tax area. We have put considerable effort already into simplification and areas which are designed to lift investment over the long term, such as depreciation.
We have had the courage to change our offshore investment taxation regime which was heavily biased against investment in New Zealand. We will now begin to adjust the headline corporate rate, provide a much more favourable and well understood international tax regime, and provide assistance, through the tax system, to key drivers of growth.
But fairness as well as growth, is always going to be an issue for a Labour-led government. I'd like to talk a bit about the implications of that for managing the economy.
As a starting point, we are all born equal and we should all have an equal chance to participate in society and life in our country. I've been lucky, both in the genetic lottery and in my parents encouraging me and supporting me to get a decent education. Not all working class boys of my generation were so lucky. I took advantage of that luck, but fairness demands that everyone has the opportunity to participate in society, regardless of the hand they are dealt.
The Founding Fathers of America were on the right track with "the pursuit of happiness". But I'm not sure the latest Will Smith movie of that name reflects what the founding fathers were getting at. There, the pursuit of happiness seems to equate to the pursuit of wealth and success is owning a red Ferrari. Particularly if we then go on to believe we can solve social problems by taking the odd poor child for a ride in a red Ferrari.
The happiness literature shows that the things that actually matter to people are time with family and friends, a sense of contribution through work, being part of the community, the ability to trust each other, and having good health, just as much as financial situation.
And although the Business Roundtable may argue otherwise, there is a very, very strong natural tendency in modern societies towards, at best, quite a modest level of trickle down. In fact the tendency is to increase inequality and concentrate on the needs, not just of the individual, but of some individuals, rather than broader social concerns.
And, in the light of recent debate, it is worth remembering that on 1 April this year the Family Support Tax Credit increases by $10 per week per child. Tens of thousands of children will benefit. Mr Key promised in the last election to repeal that increase to help pay for tax cuts to go to you and me.
You will forgive a Minister of Finance whose first major piece of historical research related to the history of poverty if the word hypocrisy springs to mind.
Mr Key says he used to peer in the windows of homes that were materially better off than his own, looking at kids with toys better than his. That took some doing in a society where houses did not front directly on to the street. But, in the end, only the active and redemptive power of the state can address at all adequately issues of serious deprivation, not random acts of charity, however welcome and well-meant. I want to see a better New Zealand, not simply a mini-America with gated and guarded rich communities, fearful of those who have little.
These are moral issues, but they are also pragmatic economic issues that businesses are concerned with too.
We all benefit from a stronger, more cohesive country. One, where all families, young and old, can share in the benefits of economic transformation.
We need a societal consensus for the direction of economic growth. If the benefits of growth are shared too inequitably, we undermine that consensus.
When there are people who don't have the chance to maximise their potential, we are wasting some of our strength as a country and some of our productive power.
When we have more poor families we incur more costs in health care, welfare and crime, because poor families are more likely to be a source of - and victims of - crime.
In short, a fair society underpins a strong economy.
This set of values underpins many of this government's policies. Perhaps the most significant is Working For Families.
We recognise the valuable contribution to society from raising children – Working for Families recognises this explicitly and helps those struggling to make ends meet.
We also think extensive child poverty is a disgrace in an abundant, developed country and we are driving it out – Working for Families will reduce child poverty by as much as seventy per cent. Again we don't just talk, we do.
But there is still more to do.
The ongoing debate on personal tax tends to focus on how much an individual might get. National's tax cut calculator at the 2005 election played on this theme.
I think about tax in terms of how society and the economy benefits. The tax cuts this government have delivered have been focused on the highest priority areas, starting with Working for Families.
Any implications for personal tax out of the current Business Tax Review need to take broader social concerns into account. The direction I would like to see for personal tax changes is where, over time, cuts are shared across the board. This is the best way to let everyone share in the benefits of economic growth.
In the short term, however, any Minister of Finance needs to take into account the current macroeconomic environment. The Governor of the Reserve Bank recently noted "expansionary fiscal policy" explicitly as an inflationary threat. A rate hike in March is increasingly being predicted. It would be counterproductive to provide a tax cut that is simply taken back in the form of even higher interest rates with all that that means for balanced business growth.
It seems increasingly unlikely that large-scale personal tax changes can be foreshadowed in Budget 2007 and introduced on 1 April 2008 without a response from the Reserve Bank, unless accompanied by corresponding cuts in social services. Not least because such a signal would generate increased spending even before a cut came into force.
Some commentators have floated the idea of a non-inflationary tax cut in the form of savings.
Saving is, of course, something dear to my heart, with KiwiSaver taking effect on 1 July this year. Saving is much more important than simply a way to give tax cuts without immediate demand effects.
If we want to make sure we own more of our own businesses, we need to save more. If we want to have deeper capital markets that provide the oil for a well-functioning business sector, we need to save more. If we want to have a better standard of living in retirement than NZ Superannuation alone, we need to save more.
It's not quite all paths lead to Rome, but saving is certainly some kind of spaghetti junction. And we have, of course, greatly improved that too in Auckland!
It's another example where the government needs to get its hands a bit dirty to help the market produce the sort of outcome New Zealanders need.
The government has already backed up its intentions on savings with the $1000 up-front contribution to KiwiSaver and a subsidy of up to $5,000 for a deposit on a first home. We've abolished the overtaxation of savings by those earning less than $38,000 a year. We've also made employer contributions in part tax exempt. When we talk about developing a savings culture, that probably applies to employers as well as employees.
And we will look for further opportunities to promote savings as an investment in the wealth of New Zealanders that also helps build the pool of assets for business investment.
There is little point in complaining about increasing foreign ownership of the New Zealand economy if we are continually saving far less than our investment needs. And if we can grow savings sufficiently then we can also look to increase our ownership of offshore assets, which will assist in more balanced and secure growth in the future.
I particularly want to encourage savings by those of modest means, difficult though that is for many. That is because inequalities in income translate into much greater inequalities in wealth over time.
For the last quarter of a century in most developed countries, unlike the previous three quarters of a century, inequalities of income rose and inequalities of wealth rose even more. Contrary to some claims, this was not either an inevitable consequence, nor necessary driver, of economic growth. It was the result of a sharp shift in public policies.
We're getting our hands dirty while National is busy hand-wringing. In fact, with all this dirt flying around, Nicky Hager may write a book about it. Let me save him the effort. This government is engaged in a conspiracy to produce a stronger economy and a fairer society!
Financial assets are important, but the biggest asset a country has is its people. Which makes the level of human capital absolutely critical. It is not entirely coincidental that I hold both the Finance and Tertiary Education portfolios.
This government has reliably invested in funding to upskill the workforce, increase research and development, and build an innovative economy.
One of the Labour-led government's great resuscitations since coming into power in 1999 was to breathe life into skills training with the Modern Apprenticeship Scheme and greatly expanded Industry Training. We saw the importance of building the skills of our workforce; New Zealand workers want to invest their skills and knowledge on the job, and New Zealand employers want to see the immediate and longer term benefits of creating a more skilled workforce.
Since its inception in 2000, over 2,300 Modern Apprentices have completed their qualifications in crucial industries. The government annually funds $146.5 million for workers in industry to participate in structured workplace learning.
To support New Zealand's human capital, we are currently undertaking a revamp of the tertiary education sector. This face-lift is well underway, but there is still plenty more to be done to ensure that we have a sharper focus on quality, relevance and value for the $2.6 billion we invest in the tertiary sector every year.
From 2008, the government will be investing in priority areas of tertiary education, and shifting resources to education and training that better matches skill and learning needs. Industry and employers will have a greater role in defining the competencies that graduates need to have. Students will be determing what and how they learn. Tertiary institutions will determine what their distinctive contribution will be and invest in capabilities and staffing around these priorities.
We need to invest in the skills of all New Zealanders. Not only do we need more sparkies and chippies but some of the industries that hold the key to our export growth are also facing severe skill shortages, such as tourism, food and beverages and hi-tech manufacturing.
The 'Upskilling the Workforce' package I announced as part of Budget 2006 is part of the government's ongoing investment in skills which will continue for many years to come.
Finally, let me touch on two issues we are facing as part of the global community.
Globalisation is a word that too often is accompanied by the word "risks". Instead, we should absolutely see the rise of China and India in our backyard as opportunities.
Some activities will be performed better offshore, much as Icebreaker is doing by manufacturing in China while retaining the intellectual property and the design and marketing expertise here. With close to full employment, fewer low-skill jobs in New Zealand means more labour available for higher skill jobs.
Climate change also undoubtedly presents a challenge. A big one. Those Kyoto goalposts have shifted some way from when we signed up in 1997. But, unless we want to see more icebergs floating off the coast of the South Island and more extreme and costly weather events, we need to play our part in reducing emissions.
A sustainable economy is an achievable goal. And, without mincing words, it will mean that in some way or another the cost of carbon will have to be reflected in the workings of the economy.
Again, there's an opportunity here. The 'food miles' argument in the UK, although spurious, does suggest there will be demand for products produced sustainably. New Zealand is better placed than most to achieve this if we start making the right decisions. We have to stop pretending they are all easy ones that can be dealt with by a smile, and a bumper sticker, and a lot of naughty little boys saying words like fart tax.
Today I've focused on some of the critical issues facing New Zealand – exporting, savings, and skills. I could give a whole speech on infrastructure alone. I often have, but even more, I've put the government's money where our mouth is.
I'm proud to be a New Zealander, if one of the 880,000 New Zealanders born elsewhere.
I note the recent survey saying our quality of life was fourth best in the world. I am proud of the reductions in unemployment and poverty this government is achieving. I'm proud of the fact that by a margin of nearly two to one New Zealanders approve of this government's economic management.
Above all, I'm proud of the fact that we deal with issues of substance, not issues of spin. And that means recognising honestly the economic challenges we face and addressing them with seriousness and effectiveness. It is an honour to continue to be able to do so.
Thank you.
