Hon Bill English: Treasurer
MP for Clutha-Southland

Speech to Canterbury Manufacturers' Association,

Christchurch, 5.30pm 9 August 1999

Can the New Zealand economy make it in the next millenium?
The answer is yes and I want to tell you why.

We are all concerned about the brain drain, about other economies that are doing better than us, about uncertainty over whether 15 years of economic change has delivered the jobs, the incomes and the sense of security New Zealanders want.

Today I want to tell you where the economy is up to and the Government's view of the outlook.

Then I will outline some of the long term forces changing our economy and finally I will outline the Government's economic strategy for the next chapter of the New Zealand story.

I became associate Treasurer almost a year ago, and every one had one view about the economy - it was going downhill fast.

The Asian crisis had wiped out important wood and tourism markets. One drought had knocked around half a billion dollars off farm income and we were heading into another drought. And there were real fears of a world wide recession.

The Government responded to its own shrinking income by knocking out $750m of planned spending.

The country went into recession.

We shouldn't be surprised that people lost confidence in the economy and more than usual left the country - that's the effect recessions have.

However, just a year later the economy looks better. We have had nine months of solid, if unspectacular growth. Unemployment is dropping and the Government's books will show a surplus - the sixth in a row despite the economic downturn.

The prospects for growth are good. Over the next three years the New Zealand economy will grow by 3% per year, creating $3 billion of new activity each year and over 600 new jobs per week. Unemployment will fall, the number of people on benefits will fall, and tax revenue will rise.

History tells us how a similar set of circumstances impacted on New Zealand.

In the 70's the oil shocks set us on the slippery slope to carless days, borrowing and hoping. The Government ran a deficit for 17 years. In 1987 when the share market crashed, the economy stalled and unemployment rose for four years, hitting a peak of 11%.

In 1998 we went through the bottom of a recession with just six months of negative growth. We still saw an increase in jobs over the past year and 26,500 new companies were started in the last 12 months.

More importantly, our exporters showed the skills to change markets, to batten down and see it through. They have been rewarded by a start on recovery.

That's the value of 15 years of change. We've now got an economy that can take a hit and bounce back quickly without the policy crisis, and massive costs of adjustment, that characterised our recent recessions.

How an economy handles the bad times possibly tells us more than how it performs during the good times. There will always be cycles. Good economic policy protects New Zealanders from the social costs of recession without complicating the process of recovery.

So where is the economy up to now?

In the first half of this year the domestic economy has driven growth. We've seen strong import growth, while export volumes are still suffering from drought and export values are suffering from low commodity prices.

However, the outlook for exporters is better than it has been for a long time. Interest rates are low and stable, the exchange rate looks competitive, and our trading partners are looking to grow faster than everyone had anticipated. The Government has maintained pressure on costs with the ACC changes, saving small businesses thousands of dollars and large businesses millions.

Some aspects of the recovery are surprising. Parts of our manufacturing sector have continued to grow, with exports of ETM's (elaborately-transformed manufactures) growing by 6 %. Investment in plant and equipment has been increasing despite the recession, recording double digit annual growth. Tourism has bounced back strongly as have exports of timber products.

So we can expect a stronger export kick to come, as signalled now by rising exporter confidence. This means a more balanced, more sustainable recovery in the next 12 months.

I want to make one point that is so obvious no-one makes it. If everybody was leaving, and all the good businesses were going to Australia, there would be no growth - but there is and it is strengthening.

There are businesses growing and earning and making a profit. There are manufacturers staying in New Zealand and doing alright. There are smart people starting businesses here. There are overseas and local investors who see an opportunity for an acceptable return.

Our challenge is to break through our current long term potential of 2-3 % growth to sustainable levels of growth of 4-5%.

One constraint is the current account situation. At 6.5 % of GDP it attracts the attention of overseas investors concerned about exchange rate risk.

We don't propose a short term fix because there isn't one.

We can work to improve savings in New Zealand so that we finance more of our own growth from New Zealanders' savings. And we can work to build confidence and capacity for export growth.

In both cases lower taxes matter. Lower taxes encourage people to save. Lower taxes encourage businesses to invest as they will reap more of the profit. Putting taxes up when we need more savings and more business profits discourages both.

We have moved recently on two major issues for exporters. The changes to ACC are intended to ensure safer workplaces and less losses from accidents. A small business I know is now paying $14,000 ACC rather than the $40,000 it paid last year. Across the board the ACC savings equate to a 2c reduction in the business tax rate. Nationalising ACC will put those costs back up - that would hit exporters just when we need them to succeed.

We have also moved to change the law for trading producer boards. The dairy industry makes up 17% of all goods exports. That industry has developed a sense of big ambition about how it can add value and add income. This experience shows that this Government can successfully work with major industries on how to get more growth. I regard it as a model for the future.

The Government has taken the political risks of working with the boards to make changes which will improve export performance and help turn around declining rural incomes.

It has been a brave move for both Government and the industry, and it is a lot more significant than a few cash handouts to selected exporters.

We can also do more for saving in New Zealand. The Government and the savings industry have worked to make New Zealanders more aware of the need to save.

The Government's tax policy is to make the middle income tax rate 20c to $40,000. But that means savers who earn between the old high income rate of $31,000 and the new rate of $40,000 will find their savings income is taxed at 33c. And that's now the wrong rate for thousands of smaller savers, so we will work to correct that anomaly.

These are recent moves. The question is whether they are enough. Before I outline the Government's policy framework, I want to stand back and look at how New Zealanders think about creating wealth. Economic policy can't just run on theory. It works better if it ties in with the thinking of the people who actually make the economic decisions and whatever the pressure of elections, its important to take a long term view.

We compare ourselves with economies which are doing better than us now. Australia and the US, Finland and Ireland are all doing better than us now. We did better than them in the early 90's and on current predictions we will grow faster than Australia, the US and Finland in 2000. But looking back over several decades, we used to be up the top five , and now we are just in the top 20.

The uncertainty is about how we are going to create wealth and opportunity and incomes in the future. Can we get back up the list ?

In my view some of the uncertainty now is not because economic reforms have failed, but because they have worked.

The traditional New Zealand recipe for accumulating wealth is to buy real estate and wait. Inflation fixed the mortgage. If we couldn't do so well on income, we would certainly pick it up on capital gain.

If we had some money in the bank it seemed to make good interest returns - 15, 12, 10%. And if we ran a business, inflation kept the customer in the right frame of mind to expect price increases.

Long term low inflation means these tried and true methods don't work as well. House prices might not rise much - interest at the bank is under 4% and customers expect prices are as likely to go down as go up. 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, and some have opted for overseas markets for now. It spreads their risk from a small country while they wait and see.

These pressures are bearing down on big organisations too.

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.

A whole generation of New Zealanders are starting out their working life with a different concept of how to create value and wealth. Eighteen-year-olds are doing a more sophisticated economic calculation than many of us have done - they are calculating the value of investing in their own intellectual capital. They are borrowing for their education , and they don't have a house to show for it.

Students paying back their loans want interesting well paid jobs so they can do it. That means we have to set our sights high for the New Zealand economy, because if we don't they will go elsewhere.

New Zealanders are changing how they think about jobs, opportunities and wealth.

15 years of change have lifted New Zealanders expectations, and at the same time made us more realistic. No-one believes economic success will just come as of right, but through all the hard work we have earned the right to grow.

So what is the Government's framework?

It is determined by what we want to achieve.

I want an economy where our children will stay and build their future.

That's a tough test.

We will continue to lose some businesses, and some people and capital to other markets. But we aim to create an environment which grows the new businesses, turning backyard brilliance into jobs and incomes, and makes the existing economic activity more profitable.

The knowledge economy brings a lot of new ideas and products, but New Zealand can't walk away from its traditional commodity based economy where so much of our capital and so many of our people are employed. Creating the new economy will be easier than transforming the existing economy. That's where the harder work will be done.

So how will the Government go about the job?

First we will maintain the sound economic framework that has served New Zealand well over the last decade - a flexible labour market, low inflation, prudent fiscal policy, low broad based taxes and debt repayment.

We can't take these for granted. This election sees Labour proposing a less flexible labour market, whereas the Government wants to extend the flexibility of the Employment Contracts Act, particularly for new employees. Confusion among Labour's leadership has raised the possibility of an exchange rate target for monetary policy. Their fiscal calculations show they will stop debt repayment, and they support higher taxes.

This Government intends to build on the foundations, not undermine them.

Consistent policy has helped achieve a lower interest rate structure, with cash-flow benefits for every borrower whether business or household.

Second we will invest in the knowledge economy. This will involve active participation from Government, and a closer relationship with business.

Next week the Government will announce a series of specific policies designed to underpin the new ways New Zealand will create jobs and opportunities, through technology, intellectual property, new products and businesses. We will bring business, education and Government together and really put Government's weight to the wheel.

The Government is heavily involved in New Zealand ideas machine. We intend to use that involvement to demonstrate leadership and direction. Over coming months we will be setting out to refocus the Government's role as an investor and purchaser of higher education and research and development. In the next 10 years what's in our heads will matter as much as what's in our paddocks, so the package will focus on building the capacity of our people and on turning ideas into jobs and incomes.

We will present an integrated package - not as a final answer, but as a first step. No-one is quite sure how the knowledge economy will evolve - we do know policy will have to evolve with it.

Third we will pursue lower taxes. Lower taxes are better than higher taxes because they let people keep more of their hard earned reward from work and saving.

Our first priority is a lower middle rate of 20c to $40,000. This recognises the large number of middle income New Zealanders who take a chance work hard and want reward for their effort.

Our next priority is to lower the top tax rate and the corporate rate.

These tax changes are an important signpost for the road ahead. On our road, we value enterprise and reward for effort. Down our road is Government that is careful with your money, rather than gobbling up the proceeds of growth to fund its own good ideas..

Lower taxes are crucial to a culture of innovation and enterprise.

What sort of signal is it we send skilled young people if we tell them higher taxes on their efforts are better?

I am determined we maintain our tax advantages over Australia and that lower taxes are available to all New Zealanders. Where is the logic in increasing taxes on workers to fund grants and incentives for business ?

Fourth we will drive to make the New Zealand economy more competitive. This year we have moved on producer boards and ACC. Ahead of us are the big infrastructure issues - roading management, water and wastewater management, local government, and business compliance costs.

The Government has a match-fit team that's used to dealing with the short term political pressures to get the long term gains. And the long term gains are crucial to our traditional industries. We will be producing meat and milk and wood for some time yet, and the prices for them will tend to drop over time. We need to push for every cost and efficiency advantage we can get for our producers, so jobs and incomes can grow.

Cost reduction won't be enough. These industries all need the benefit of the new technologies. We have a biological economy and biotechnology will provide us with knowledge-based tools. New Zealand has a stack of intellectual capital around animal and plant production which we can exploit much better.

As it happens, the Government owns a lot of that intellectual property.

Adding value by the injection of new ideas in our resource based industries requires plenty of capital. Efficiencies matter, so these industries can generate the profits they need to invest in change, and attract outside capital with reasonable returns.

Do not underestimate the determination it takes to see these harder issues to their conclusion. Bureaucratic cash handouts for a few businesses are no replacement for the nitty gritty of good policy aimed at results for every business, not just a selected few.

Fifth we will consider just how Government, which accounts for 35% of the economy, is contributing to productivity growth and the knowledge economy.

I want to ensure public investment focuses on the cutting edge of the economy. Throughout our history, governments have traditionally invested where they think it will take the economy forward - at different times railways, roads, dams, electricity reticulation.

I want to see that tradition continue, as we invest in the future in education research and technology development. This is the purpose of public investment, but much of what we own no longer reflects that purpose. We will be examining our current public investments to see which investments meet the requirement to take the economy forward, and which are products of past needs.

We will also be looking at how the forces of e-commerce, which are changing business so dramatically, apply to Government's activities. Government supplies a wide range of services to the whole population and we run most of the regulatory activities. Any other large organization running similiar services or functions is thinking hard right now about how the internet fundamentally changes the way they do business. So must the Government.

Because we provide the regulatory backbone for the country, how we do business affects everyone. How we deliver our services will affect everyone. I want to see the New Zealand government online so we can provide better quicker cheaper service.

Finally, health, education, welfare, justice and police represent 78% of Government spending. We have committed ourselves to spending more. But taxpayers also expect all the spending will make a difference. We have put in place principles of devolution, local decision making, and integration on a small scale. The next phase is to mainstream these concepts, so we can break the cycles of disadvantage and so we can offer more choice and flexibility to everyone who uses public services. Compulsory education in particular is ready for further improvement on Tomorrow's Schools.

We have learned some lessons from other economies. In addition to the policies I have talked about already, the Government is putting together the tool kit we can use to hustle for New Zealand.

By that I mean Government using its status, its capacity to open doors, and its international network, to get benefits for New Zealand. I'm confident we can sell ourselves to companies on the cutting edge of the new economy.

This was recently endorsed by Ron Nissen, Vice-President and General Manager of Motorola, who was reported recently as saying:

"The low corporate tax rate, no capital gains tax and lower basic salary costs with fewer extra labour costs such as Australia's payroll tax and fringe benefit taxes, also make New Zealand attractive to start-up information technology and telecommunications companies. .... New Zealand will be pretty cost effective without the special incentives offered by the Australian Government such as tax breaks for R & D". (Infotech Weekly, 26 July 1999)

Our framework is in step with the wider New Zealand economy as we enter the new millenium.

It is consistent with the way wealth creation in New Zealand is changing.

It drives a vision for an economy where our children will stay and build their future.