Thank you for inviting me to speak to you tonight.

When the fourth labour government took office in 1984, New Zealand had been living in what could be described as a fortress economy for 50 years. A mentality bent on protecting us from the rest of the world reigned supreme.

Symptoms of poor economic performance were largely overlooked. Successive governments failed to tackle the underlying malaise. Even in the supposedly halcyon days of the 1960s, our growth rate was well below that of similar countries.

In the 10 years to 1983, New Zealand's real GDP grew by less than half the average for all OECD countries. In terms of GDP per capita, our ranking in the OECD standard of living tables fell from third in 1953 to 19th in 1975 and by 1982 we were languishing in 32nd place.

In 1953 New Zealand had a standard of living the equivalent of Switzerland's. But while Switzerland has progressed to the point where it now has the highest per capita standard of living in the world, our position has steadily eroded. Our GNP per head is now less than half that of Switzerland's.

In addition, New Zealand has had large and increasing fiscal and balance of payment deficits over the past two decades. There has been a corresponding growth in internal and external debt, a stagnant and often declining productivity, despite investment levels that were quite respectable by international standards and inflation rates generally double those of our trading partners. Taken at face value, this record of mounting economic problems is surprising.

As many of you here tonight will know, New Zealand is a country with substantial natural resources and a well-educated and innovative workforce. In fact, the fault for this poor performance was of our own making.

For years we encouraged a "cotton wool" society where producers were protected from market reality by a raft of price, interest rate and other regulations, and a highly inefficient and complex system of import controls. Risk was shifted from the private sector to the taxpayer. You could say that we socialised losses and privatised gains.

Past administrations responded to the country's economic malaise by shoring up failed regulation with more and more regulation. It became a self-perpetuating exercise. The system grew increasingly extreme. In some areas the degree of regulation equalled or exceeded that of many Eastern Bloc countries.

The weight of such policies was unsustainable. A modern mixed economy cannot be run like a feudal estate. Ultimately there had to be a major shift of emphasis away from day-to-day economic control to a wider vision that respected both economic principles and social goals. This is the path that economic policy has taken since the 1984 election.

Our strategy is clear, rational and simple. It is based on three fundamental principles.

First and foremost is the quality of Government decision-making. We have looked beyond the short-term pressures and factors that can cause governments to lose sight of their goals.

We considered it vital to identify the basic problems facing the economy, and then to deal with their root causes. The medium-term orientation of our policies reflects this. We have followed policies where the best results were not immediate: Rather than ones that might help us politically over the next six months.

The second important principle is that economic policy should help resources flow to where the return is highest, rather than impeding that adjustment. Flexibility is the key to a healthy economy and this means a greater role for prices to reflect the changes in supply and demand.

The third and final principle revolves around equity. Equity objectives and the spreading of the burden of economic adjustment are prominent in our programme of economic reform. Therefore those objectives must be pursued in the most efficient way possible.

This has meant more targeted assistance, including the careful use of direct tax and welfare benefits.

It also required a review of the many ad hoc interventions that had evolved in New Zealand. Here we often found that there was no conflict between equity and efficiency, and reform allowed us to pursue both of these objectives.

In many cases social equity was clearly improved when bad interventions were removed. Tonight I would like to take one aspect of our policy that has interesting Canadian parallels and demonstrate how it fits into our overall economic strategy.

It is a topic that I understand is of considerable interest in Canada at the moment, the thorny issue of tax reform. Taxation reform has played an integral part in the New Zealand Government's economic policy.

There are few more pervasive sets of regulations than the tax system. As a consequence, the potential efficiency and equity gains from tax reform are large. The reverse is also true.

Moves to abolish unwarranted regulations elsewhere in the economy can have implications for the tax system and can make it more difficult to justify tax concessions.

Over the last two decades New Zealand, in common with most OECD countries, has placed increased demands for revenue on its tax system. Total tax revenue as a percentage of nominal GDP rose from 25% in 1970/71 to 31% in 1985/86. This year it is expected to amount to 36%. The period to 1985/86 was also marked by a change in the composition of New Zealand's tax revenue.

Personal income tax increased from 45% of the total tax revenue in 1970/71, to 65% in 1985/86. The brunt of this share was borne by salary and wage earners. Moreover, this increase came from a base narrowed by specific concessions, such as deductions for superannuation and life insurance payments, and a raft of other deductions and rebates.

In addition, some non-cash remuneration - for example, low interest rate loans and the provision of a motor vehicle - fell outside the income tax system. Certain elements of economic income were also not formally included in the tax base. The most notable was capital gains.

The increased reliance on personal income tax was accompanied by a significant reduction in the importance of company tax. This fell from 19% of total central Government tax receipts in 1970/71 to 9% in 1985/86. The decline suggests that the corporate base was being eroded at a significant rate.

Numerous business tax preferences were introduced. However, there was no reason to believe that corporate profitability had fallen substantially in relation to wages and salaries and the income of unincorporated firms.

Moreover, the returns from specific activities, assets and instruments, were effectively taxed on a spectrum ranging across expenditure, real income, historical cost, or nominal income tax bases.

The rise in personal income tax was also accompanied by a decline in the proportion of tax contributed by indirect taxes. The main tax on expenditure was a single-stage, wholesale sales tax which in 1984 covered only about one-third of personal consumption.

Your Finance Minister, Mr Wilson, has described the Canadian manufacturers' sales tax as "the worst tax that a politician could ever devise". That description could have been applied equally to our wholesale sales tax. Numerous exemptions were granted on the basis of classes, uses and users of goods. There were 12 specific and 7 ad valorem rates, ranging from 10% to 60% of wholesale value.

We also levied minor indirect taxes on a narrow range of goods - for example, film hire tax and domestic air travel tax. This narrowness of the income and expenditure tax bases was not by design, but something that had evolved as the result of a continuing series of ad hoc decisions by successive Governments, and a period of sustained inflation.

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