Kia Ora, good afternoon, it's good to be back in Dunedin.
Today, I want to spend a bit of time setting the context for where New Zealand is in economic terms, where the Otago economy fits into that, and where we're going to go with our Budget in a month's time.
It is a really interesting time if you start up at the global level for the economy. All of the global growth forecasts that you're going to see at the moment for the global economy is 3.5% growth. That's very good relative to the last few years.
The US economy is very strong. The Chinese economy is forecasting 6.5% economic growth this year, having had growth rates of up above 7% recently, but still very strong.
From a New Zealand point of view, we've obviously been able to sign the Comprehensive and Progressive Trans Pacific Partnership recently which has expanded some trade opportunities for us with a number of economies that are growing very strongly indeed.
So that overall global picture is good, but that does need to be set against the fact that we live in interesting times. We look at the situation with so-called trade wars between the US and China and we should take that very seriously. New Zealand does not win out of a situation like that, not just because of a potential for tariffs against us by the US but because of the instability that grows from a situation like that. It is bad for trade and as a trading nation we will be on the wrong end of that if it goes wrong.
And then there's the broader geopolitical situation in the world, which anyone who follows the political headlines will know. There's political instability in the Middle East through Syria, ongoing issues in the Korean peninsula as well.
I don't mean to put all of that out to depress you at the beginning of the speech, but just to indicate that when we look at that global situation, while the headline numbers are good, we've got to be aware that we live in a world of many things that can impact on New Zealand.
For a small country, those are external forces that we can't control. What we can do is prepare ourselves so that we're nimble enough to cope with any changes that happen. And one of the main messages that I want to share with you today is that the economic strategy that our Government is pursuing is one that will allow us to be resilient in the face of external shocks.
We will make sure that we manage the books carefully to avoid any problems, should there be major external financial shocks, or indeed natural disasters.
But we are also determined to see our economy become more productive, to see us lift up the value chain. To make sure we're diversified, not only in our exports but also in where we export to. Because if you're facing particular regional geopolitical issues, you need to have diversified portfolios. So those are critical elements of the strategy that we want to pursue.
In terms of the New Zealand economy, it's clear when you look at the headline indicators of the New Zealand economy, we're doing relatively well. Having had growth rates of 3% – 3.5% over a reasonably long period, that's the envy of many countries around the world. Those growth rates are forecast to continue, with forecast growth of around 3% on average over the next five years. We're looking at inflation staying around 2%, unemployment tracking down towards 4% and wage growth around about 3%. These are all good numbers at a high level in the NZ economy and we should be pleased about that.
But the issues that dominated the election campaign last year, are found when you go just one level below those top line indicators. If you take, for example, per capita growth – per person growth, in recent years you're down at just over 1% on average. And that is because we have largely propped our economy up by more people coming to NZ, but we haven't improved our productivity alongside that.
Now I'm not the first Finance Minister to say that the big challenge to the NZ economy is productivity, but I do believe that we have a plan that will start to address those issues.
New Zealanders work some of the longest hours of any country in the world, but the output we produce from those hours is not commensurate with that work. Then you look at a country like Germany, where people on average work 400 hours a year less than a worker in NZ, but it is more productive and has higher output. We need to do so much better and I'll talk in a few moments about the programme that we've got to lift productivity. But those issues are ones that I think are critical to New Zealanders maintaining a standard of living. So there's the issue of per capita growth.
In the aftermath of the Christchurch quakes, about a third of growth came from the rebuild. I don't know about you, but natural disasters and their recovery don't sound like a sustainable economic strategy. And neither does buying and selling houses. And if you put together population growth, recovery from the earthquake and speculation and housing, that's been the underlying features of the NZ economy for recent years. That isn't sustainable. We need an economic strategy that goes beyond that and that's what we're determined to put in place.
The other aspect of looking just below those high level indicators is the share of wealth. And I won't dwell on that too much today, but it'll be fair to say that when I went around NZ, during the election campaign, if I was a smoko room or a board room, I heard very similar things. And that is, that no New Zealander is comfortable seeing high levels of homelessness, nobody is. No New Zealander is comfortable knowing that there are people who aren't able to house their families, or who aren't able to put food on the table. Nobody likes that, it's not the New Zealand that we all believe in.
So when you see high levels of growth, but the OECD is calling us out for having the worst homelessness in the OECD, we know there is a disconnection about how growth is shared and who gets to be able to achieve their potential and take up the opportunities that are out there.
And for us, that's the other core dynamic of the way we want to run the economy, that it's got a place for everybody. That the economy itself, the numbers on the spreadsheet are not the end point. It's the life we create for New Zealanders with that economy. Don't get me wrong, we absolutely need to make sure that economy is as strong as possible, that businesses are able to grow, develop and be profitable. But as a society we have to say to ourselves, what do we do with that? How do we make sure that every person in our country gets to benefit from that?
So our economic strategy, if you want to boil it down, is for our economy to be more productive, more sustainable and more inclusive, and it's those three elements that you'll see us working on over the next 3 years.
If I look at Otago and Dunedin, you as a region have a lot to be proud of. As a former Dunedinite, I look closely at what happens down here. And over the last couple of years there has been some excellent work done in this region, be it in the tourism industry, advanced manufacturing, getting greater relationships between the University and other businesses in the region, that have seen the economy do relatively well here. So with overall growth, if you look at it over the last 5 years, Dunedin's actually outstripped the countrywide average, that's great work.
In recent years, the trend has been that unemployment here was below the national average but it has started to creep up to the national average. That's a little to do with the population and population growth, but it's also to do with the mix of businesses that are here and the relationship between the skills and the people that are here and the needs of businesses here. But overall I think the Otago economy is going well. It covers a wide region, it's not just Dunedin and you can be very justly proud of that, but there is more work to do to ensure that continues.
The idea of a more productive economy is built for me on about 3 or 4 core areas. The first of those is making sure that we get all of the investment signals right in our economy. We've set up the Tax Working Group with a specific mandate to look at the balance of taxation in our economy. At the moment we have a tax system that actually supports speculation in the housing market. We believe, if we are going to thrive and be more productive, then we have to change some of those investment signals.
We've given that mandate to Michael Cullen who's chairing the Tax Working Group along with 8 or 9 others to come back to us with recommendations about how we create a better balance in our tax system.
We are doing our best to make sure that the system remains one that's easy to understand and is fair. I've always said that my favourite type of tax system is one that's simple and collected, and so we're making sure that we focus on that – on getting fairness into the system particularly in terms of multi-nationals and the way that they interact with our tax system as well as the day-to-day taxpayer. Getting those investment signals right is an incredibly important base for improving our productivity.
And then there's a series of initiatives that Governments can take that I think will make a dramatic difference. And the biggest one of those is getting our heads around the challenge of the future of work. I lead a study for the Labour Party in opposition for a couple of years on the impact of technological change on work. All of our experiences of work are changing, and changing rapidly. There's the involvement of artificial intelligence or robotics, all the way through to the impacts of globalisation.
As a country, if we want to be producing high paying jobs, we need to get ahead of the curve in terms of that change that's taking place. I know for a lot of chief executives that I talk to, understanding how they harness the value of that technology is one of their biggest challenges and we are committed to working on that.
To that end, we've got a plan to increase the Government and private sector spend on R&D development to 2% of GDP within a decade. That might not sound like a lot, but at the moment NZ spends around 1.28% of GDP on R&D. The OECD average is 2.38%. So we're missing out because we're not putting the investment into R&D that we need to.
In a city like Dunedin, the message won't be lost on you that there is a huge opportunity for us if we harness the talent that we have in our Universities, in our Crown Research Institutes and draw that together with the private sector. We will actually be making a big difference to our productivity. We're going to have something to say tomorrow our R&D tax credits which will be at the core of our policy to lift our investment in R&D.
The other hugely significant aspect of preparing ourselves for the changes in the future of work that are relevant to productivity are around what we do with skills and training and understanding that, actually, every single person in this room, and indeed in our country, will train and retrain in their lives. The old concept of leaving school at 17 and working in the same place for 50 years and then leaving with your gold watch is over. I think we all know that. But actually understanding how we prepare people for that world is the important bit.
It's actually what motivated our policy of 3 years' free post-secondary school training and education. This year, around 80,000 people will benefit from that policy. Only 30,000 of them will be people going to University. The other 50,000 will be people doing trade qualifications and industry training. We have to do so much better at supporting people to train and then retrain while they're in work.
So, the benefit of that policy is available to anyone who has never trained post-school before, as well as those who are school leavers. And we think it's an important start to helping understand that that is how we lift our productivity.
If you look around the world, the economies that do the best are those that invest generously in education and training. The link is obvious, and we haven't always done that in New Zealand. This policy is only one of many.
The other one which we were having a conversation about up the front – and I'll just divert on to slightly – is, what happens to students when they're finishing high school and going onto the workforce for further training. We don't do enough for the kids that aren't going to university. So 70% of school leavers don't go on to university. But the whole end of the secondary school system is built around all of them going. We need much improved career advice and guidance that is professionalised and that involves business and training providers going into schools, creating pathways for people into the workforce.
I know great work has been done here in Dunedin in that space, but it's very very ad hoc. It just depends what school you go to. At Kings High School we had a wonderful careers adviser who was also a cricket coach, he'd been the school's Latin teacher for 30 years, he was a lovely man, but he didn't know that much about things other than Latin, cricket and teaching, all of which are great things I might add.
But unfortunately, 28 years on, that situation still exists. There's a large secondary school which I won't name, where I met the careers advisor who was a teacher who was given 5 hours a week release time to support 700 boys to decide what they're going to do next. It's not good enough. We can do so much better and it's a critical element in getting our productivity puzzle right.
Beyond those issues around R&D and skills and training, I want to touch on trade and the importance of good quality trade agreements to our productivity. We've now got CPTPP sorted. We had a few issues with it, but we were able to deal with those, and that opens up huge opportunities for our exporters into Canada, into Japan, massive markets for meat, kiwifruit, wine, things that will be really important to our success in the future. But we can't rest on our laurels. The next agreement that is the most important one in line for us is with the European Union, the Prime Minister has been pushing in France and Germany in the last few days. Pushing forward on that agreement will be really useful and important for New Zealand. And now, we get the opportunity for a separate one with the UK as well. I like to think of it as an opportunity and one that will build on some historical ties.
It fits with the idea that we need to diversify on not only the products we create, but also the markets that we work in. In the interest of time, I won't go into more around the productivity, but suffice to say, it's a critical part of our agenda.
I want to talk briefly about the other two elements of the strategy and how they'll fit into the Budget, and that's the sustainability element. And I do think sometimes this is misunderstood. There are two aspects to a sustainable economic approach. The first of those is fiscal sustainability. And I make absolutely no apology for the fact that we have gone into Government with a set of Budget Responsibility Rules that require us to not only generate a surplus – which I think is a good sign of good economic management (not a manufactured surplus but one that once you've met the needs of Government that you're able to generate) – but also that we manage and control our debt.
We've said that we will pay down debt slower than the previous Government because there are a number of areas that need significant investment, now.
And that's areas like housing, because we simply have not built enough affordable housing in New Zealand in recent years – that's what the KiwiBuild programme is all about - but also so that we can invest in those critical public services like the health sector, which you've seen so much about in the headlines. I know these are very familiar to Dunedin people in terms of the hospital as well.
We will continue to manage our debt, and we've set the target of within 5 years of getting net debt to 20% of GDP. That's lower than most other countries in the world, but as a small country, prone, as I say, to those external economic shocks, and also, as we've seen, to natural disasters, we need that buffer in the economy.
Our judgement is that by slowing down the debt repayment track, by reprioritising within the expenditure of what the Government has, and by some additional revenue sources such as expending the bright line test on homes that are sold – other than your family home – we can create revenue space to make the investments we need to make this Budget, as well as stick to those rules.
Fiscal sustainability is important to us, but so is environmental sustainability. And there is absolutely no way that New Zealand can be a productive economy in the 21st Century unless we take seriously putting the environment and the economy alongside one another.
That's why we've set a goal by 2050 of a carbon neutral economy. That a huge challenge and a huge shift. And you've seen some of the first steps in that in recent weeks. It is difficult for some of the people in those industries, I know, to be able to understand what we're doing. But this is about creating a just transition to that low-carbon economy. Take the oil and gas sector: all of the existing permits will continue, some of them out to 2040. What we're buying ourselves is the time to start transitioning our economy to a lower carbon footprint. I am a child of the 1980's; I've seen what happens when you run through that economic change without that plan – without having a just transition – that's what we're trying to avoid, by doing what we're doing at the moment. So the environmental sustainability challenge, particularly around climate change, is critical, and you'll see some moves around that in the Budget.
What's also important is understanding the opportunity that comes with environmental sustainability. We've traded in the world on our clean green brand. And we have to actually live up to it. So, by actually investing now to make sure that happens, I think we'll protect those brand values on the world stage.
There's also a huge opportunity in New Zealand in the technologies that that lie behind clean energy, that lie behind the better use of natural resources. And we, as part of our Confidence and Supply Agreement with the Green Party, have included a Green Investment Fund, which will actually be there to help leverage funding in the private sector to develop those new technologies. So, we're actually at the forefront of being able to show that we actually can be a competitive economy that's also environmentally sustainable.
Finally, is the issue of a more inclusive economy, and by that I don't just mean issues around a socio-economic difference. Clearly, when the Government came into office before Christmas, we reversed the National Government's tax cut package and took that money and invested it into a Families Package to try and lift the incomes of low- and middle-income New Zealanders. That, to us, was a much higher priority than an untargeted tax cut.
The inclusivity message I want to talk about today in finishing is actually around the regions of New Zealand. Because, if New Zealand is going to grow sustainably and well, the regions of New Zealand have to grow, too. And I feel like when I look around New Zealand, we are still missing opportunities in our regions and hence this why we have the Provincial Growth Fund. This is what we agreed with New Zealand First – a $1 billion annual fund to support high-quality growth in our regions. I know the Regional Economic Development Minister Shane Jones has been here and discussed the waterfront development. But there are many other opportunities as well for you and for this region to interact with that growth fund. Because, what it's saying is we cannot afford for all of our growth to happen in Auckland – it's not good for Auckland to begin with, but it's also not good for the rest of New Zealand.
This is a different set of priorities than the previous Government. It's a more hands on approach, but it's not a top-down one. I'm not interested in coming to Dunedin to tell you what you're good at and what you should invest in. The ideas have to be generated from the ground up, it's the only way it will work. So, the Provincial Growth Fund is there to create much more inclusive growth in NZ. And we wanted it to be targeted, not only around good infrastructure, but also the industries that lift us up the value chain.
To give you a non-Dunedin-based example, we want to make sure in the forestry industry that we add value to the logs that we're cutting down. We will always export some raw logs – it's inevitable – but at the moment in New Zealand we miss out on a huge part of the value chain. We're putting money into wood processing plants up on the East Coast of the North Island because we believe we can actually generate higher-wage jobs by having that connection. It's investment that, at the moment, the private sector has nervousness about undertaking. We can be there as a partner to help develop those industries and give us a much better chance of creating those high earning jobs.
So in Budget 2018, you're going to see the movement towards these issues. We have to rebuild our public services. Some of our critical public services, especially in the health sector, have been drastically underfunded over the 9 years, and that will be a core focus in our Budget. But, in addition, we want to start building a modern economy, one that is more sustainable and more productive and more inclusive. Because that is what will deliver New Zealanders the quality of life they're looking for.
We are going to measure our success differently as a Government. GDP is one important measure of economic growth, but we also need to measure our success in terms of how we lift our people, how we protect our environment, and how we build stronger communities. I won't go into that too much today, but Budget 2019 will be New Zealand's first Wellbeing Budget where, as the Minister of Finance, I stand up and talk about not only how we're doing financially, but how we are doing with what's called human capital, natural capital and social capital; how we're improving the lives of our people, how we're lifting our living standards. That will be a big change for New Zealand, but I think it will give a more accurate picture of how the economy should work, and who it is actually for.
Because, in the end, it is actually about the quality of life of individuals in New Zealand.
Thank you for listening to that today, and I look forward to the questions that you have.