 By John Walley, chief executive,
NZ Manufacturers and Exporters Association
2009 could be considered the year of the advisory group with the new Government seeking ideas to reform New Zealand's failing economy. There was a lot of talk during the year about imbalances between the tradeable and non-tradeable parts of the economy, but little happened to correct the problems. 2010 must be the year where advice turns into action if we are to see the increase in business investment that is needed to ensure that the slide down the OECD rankings is halted.
The reports of the Tax Working Group (TWG) and the Capital Market Development Taskforce (CMDT) are likely to form the basis of any reform. The creation of the two groups was an acknowledgement by the Government that the lack of access to capital and the skewed incentives in the tax system are major inhibitors of business growth.
The TWG recognised that the tax system is broken as investment decisions are influenced by tax advantages rather than simply on the returns expected. Their report started to recognise the need to incentivise investment in productive industries rather than unproductive assets. Currently there are tax breaks available to asset holders through the lack of a capital gains or land tax. Tax advantages for rental properties have already cost the country billions in lost tax revenue and the poor investment incentives created by the tax free status of property have been even more damaging and inflationary.
There was some debate from within the group on the best way to tax property. A comprehensive Capital Gains Tax would be the fairest way, but any move to level the playing field is welcome. The majority of the group seemed to favour a land tax which they argued would be easier to collect. The trade-off is that it would not have as much affect on properties bought and sold for investment purposes.
New Zealand relies heavily on personal and corporate tax for its income, so reductions in this area, made possible by the broadening of the tax base, are necessary. The reductions in the corporate tax rate suggested by the TWG would enhance New Zealand’s international competitiveness.
The TWG has also recommended that the GST rate be raised to 15 per cent to discourage consumption and encourage saving. This change in the balance of incentives is welcome.
The CMDT focused on both improving the quality of products available to investors through better disclosure regulations and encouraging more listings, particularly from Government owned businesses. They also recommended measures to improve firms’ access to capital. These measures would complement the shift towards investment in productive enterprise rather than unproductive assets.
The glaring omission from advice sought by the Government was any effort around stabilising the New Zealand dollar. As the dollar has become increasingly volatile over the past decade investment intentions and business confidence in the tradeable sector has slowly ebbed away. A more even-handed tax system and better credit availability will help to incentivise further investment, but while export returns remain uncertain, firms in the tradeable sector will remain wary of further exposure. The situation we had last year where the Trade Weighted Index appreciated over 20 per cent in only a few months is untenable for exporters.
How the Government responds to the advice it has received in the Budget this year will largely determine its success in this electoral term. The reports from the Tax Working Group and the Capital Market Development Taskforce are a good place to start the rebalancing process, however, the need for international competitiveness extends beyond fiscal policy, and the impacts of monetary policy on exchange rates must be part of the rebalancing equation. Economic surveys are showing that things are getting a little better off a very low base but there is a huge hole to fill; revenue is still down around 20 per cent from the peak and jobs are still down around 13 per cent. There remains an urgent need for economic reform.
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