Dear Phil Scott
Thank you for your email of 12 May 2008 asking for my views on ways to boost economic growth in New Zealand.
This government is committed to improving the lives and living standards of all New Zealanders. Our economic goal is to deliver sustainable and balanced economic development that promotes high employment, higher real incomes and a more equal distribution of wealth.
Our approach has proven to be successful. We have shown that there does not have to be a trade-off between growth and fairness. Economic growth in New Zealand since 1999 has been stronger than that of many of our key trading partners, including Australia, the United States, the United Kingdom, Japan, and the Euro area. Unemployment has been below 4 percent for nearly four years. Household incomes have risen by 25 percent in real terms since 2000 as a result of stronger employment growth and real wage growth. Child poverty rates have fallen dramatically and health inequalities have finally started to narrow.
Now, however, we are facing a new set of challenges arising from a combination of slowing global growth, rising international oil and food prices, rising credit costs in the wake of the US credit crunch and last yearís drought. These factors are beyond New Zealandís control, and they have put a strain on many household budgets. These external factors have contributed to the economy slowing significantly. Nevertheless, we are confronting this economic slowdown from a position of strength, and New Zealandís medium-term economic and social prospects remain healthy.
This governmentís approach to fiscal policy has been key in strengthening our position during periods of strong growth, focusing on long-term sustainability and balanced economic growth that promotes high employment, higher real incomes and a more equal distribution of wealth.
It is encouraging to know that New Zealandís fiscal position is strong by international standards. The governmentís fiscal strategy, which has received endorsement by the IMF, is to strengthen our fiscal position to help manage spending demands, particularly arising from an ageing population. Our Fiscal Strategy Report for 2008 sets out our threefold approach to maintain a fiscal position that is sustainable in the long-term; that contributes to economic stability; and that advances our key policy priorities. The governmentís long-term objective in regard to gross public debt is to maintain this at around 20 percent of GDP.
Our strategy is particularly pertinent in the face of the global economic downturn; in the context of this slowdown it is even more imperative to press on ahead with what this government sees as the key elements of focus for the transformation of our economy: skills, innovation, infrastructure, international connections and sustainability. All these elements are, in essence, about ways to lift our productivity, which is low by OECD standards.
Statistics show that from 1978 to 2007 labour-productivity advanced at an average rate of 2 percent per year. Lifting long-term productivity growth is a key objective if we are to build a high wage, high value economy and ultimately enhance our standard of living. While this is a major challenge, it is not one this government has shied away from.
We have recently finished consultation on the NZ Skills Strategy, developed in partnership with Business NZ, the NZ Council of Trade Unions, and the Industry Training Federation. This strategy is focused upon enhancing workplace skills: in particular, improving literacy, language and numeracy skills; supporting firms to attract, retain, develop and use skills across their whole workplace; ensuring the tertiary education system skill supply matches the needs of industry; and ensuring young people in work are supported in the continual development of their skills. The NZ Skills Strategy complements our Schools Plus policy to ensure our young people are in education, skills development, or structured learning relevant to their needs and abilities until the age of 18. It is our vision that Schools Plus will lead to more students participating in education or workplace training, and more students gaining higher qualifications.
A further focus on boosting productivity is through innovation. This involves investing in research and development, a quality tertiary sector, and practical support for our globally competitive firms. This government has already put in place a number of policies designed to support economic growth and productivity.
We have lowered corporate tax rates from 33 percent to 30 percent. This was the first time that corporate tax rates had been lowered since 1988. Our package of research and development tax-credits of 15 percent has also come into effect; this is estimated to be worth in excess of $1 billion for business over the next four years. We have also recently launched the $700 million Fast Forward fund; a new research, development, and innovation plan for our primary sector. This has been designed to help our primary industries maintain a competitive advantage in the global economy. Furthermore, this government has also signed a New Zealand-China Free Trade Agreement that opens up a vast new market for New Zealand businesses. This agreement is unprecedented for a developed nation. We are also making good progress on a free trade deal with India.
We have invested heavily in infrastructure over the years, and this was continued in Budget 2008 with the announcement of the purchase of Toll New Zealandís rail and ferry businesses. With the rising awareness of the importance in addressing climate change, rail has become a key component of 21st century infrastructure. Continuing our investment in 21st century technologies, this government has also invested $325 million into a broadband package to boost access to fast, affordable broadband so that New Zealand can better compete internationally.
In closing, this is a government that has a plan for the future of our economy and society, and we are conscious about the challenges we face. We have managed the economy appropriately during the good times; the dividends of this growth in the form of personal tax cuts Ė which come into effect in October this year Ė bear witness to this. Under this governmentís management, New Zealand is well positioned to cope with the current economic downturn, while continuing on its path of sustainable economic transformation into the future.
Hon Dr Michael Cullen
Minister of Finance
Aug 14, 2008, 13:55