“In fiscal terms, I’m so far to the right of Mr Bush’s government that it’s not funny.” Dr Michael Cullen, deputy prime minister and finance minister of New Zealand, is proud of the fiscal surplus he has built up in the three years he has been in his job, a surplus which will give the NZ Labour Party a strong card to play as it faces new elections this year.

The white-haired and bespectacled Mr Cullen works alongside the prime minister, Helen Clark, in the Beehive, as the seat of government is known. The elegant, round building sits at the foot of one of the mountains that girdle the capital city, Wellington.

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New Zealand, a country of no more than four million people, shows every sign of great prosperity. This is bolstered with an attractive sense of style, which is palpable in everyday life – from the modern architecture to cuisine.

Though there is almost full employment, the average citizen is increasingly strapped for cash. The hard financial fact is that New Zealanders are so bad at saving that it seems that the government has to save for them, through Treasury surpluses. Behind the style and the chic is a high level of household and international indebtedness that sustains the otherwise attractive and relaxed standard of life.

As one economic paper states: “Many New Zealanders do not have a meaningful ownership stake in the New Zealand economy.” The median wealth of a household is no more than NZ$68,300 ($50,000) and 800,000 adult New Zealanders own less than NZ$20,000.

FDI reliance

Dr Cullen is the first to admit the excessive reliance on foreign capital – often for domestic expenditure – is having a deadening effect on the economy. By hook or by crook, the country must attract more productive investment from foreign sources yet at the same time stimulate domestic savings. Capital is in short supply. The cost of borrowing is higher than in many other Organisation for Economic Co-operation and Development (OECD) countries. Floating mortgage rates are around 8.75% with fixed rates at 7.5%-8%. That is three percentage points higher than in Australia and often more than 4% higher than in Canada and the US.

New Zealand is alone in the English-speaking world as a country in which household financial wealth has fallen over the past decade. The country clearly has some of the characteristics of a lender’s paradise. “Everyone in this country seems to be hanging on till the next pay packet,” says Josephine, a recent immigrant from Ireland.

Investment impact

Sitting in his office overlooking the capital, Dr Cullen is emphatic about the need for more foreign investment going into new productive activities rather than to fund New Zealanders’ general expenditure.

“There’s an inadequate level of internally generated investment. We do need foreign direct investment, particularly in large enterprises. It brings linkages to international markets and product networks and new expertise. These are difficult to generate in our small market. The takeover of Montana, our largest wine manufacturer, for instance, by a big international wine manufacturer, Allied Domecq, meant that our markets became that much more open.”

He confesses that he has been disappointed at the lack of greenfield investment that the country has attracted. But, he adds philosophically, New Zealand was once attractive for its abundant supplies of cheap power but can no longer offer this and the big energy-dependent schemes of the old days may never return.

The energy sector is vital for a country that produces less than one-third of the oil it consumes, and foreign investment is, again, very important. New possibilities in the already buoyant natural gas sector look good. Dr Cullen explains: “What we are focusing on here are the medium-sized exploration companies. The oil giants haven’t been exploring here in recent times. A year and a half back, we were feeling pretty nervous about gas supplies but we’ve been seeing some success with the smaller players.”

Labour market

But what is the sense in pursuing foreign investment when many employers are finding difficulty in getting the personnel to do the jobs that already exist?

“We’ve got a very tight labour market,” says Dr Cullen. “Unemployment is down to about 4%. And those who are out of a job often don’t have the skills that employers are looking for.” His strategy is to seek to relax the immigration regulations a little to allow seasonal workers to come in from abroad; to encourage older people to keep working; and to tempt women with children back into the workforce by offering them a series of incentives. The proportion of working women between 25 and 34 is well below the average of the OECD countries. “We are doing what we can on child-care provisions at the same time as putting a lot of money into training and industry re-skilling,” he says.

The prime minister, in her statement to parliament on February 1, said that if the proportion of younger women in work could be raised to that of the top five OECD countries, the GDP per capita in New Zealand could rise by 5.1%. She added: “That’s a worthwhile objective and, at this time of labour shortage, it’s a good time to be pursuing it.”

State success

In an economy as small as New Zealand’s, the state has traditionally had to take on the role which in other countries was assumed by private investors. “The SOEs [state-owned enterprises] have had their successes and, indeed, have increased their share of the energy market in recent times,” says Dr Cullen.

He points out that the government has bought back the track from the private company which had bought the railways. “That means we can ensure an upgrade of the infrastructure so that we can maintain a viable rail operator. It’s a competitor to the road, it’s an ecological alternative. If the rail were to fall apart in some regions it would cost a fortune to provide alternative road capacity, especially in the timber-producing areas.

“If you examine this government on the spectrum of economic management from left to right, we are closer to the deregulation and free-market end than to the median position. Regulation here is lighter than in Australia, for instance, and the government plays a smaller role here,” he says.

“This government has a very clear recognition of New Zealand’s place in the world. We have to be increasingly competitive. We’re a small, open economy which has to trade, which has to be adaptive and increasingly has to move into a range of niche markets rather than just being Britain’s offshore farm, as we once were.”