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Inland Revenue

Tax Policy

PUBLISHED 3 May 2007

Finance Minister on Budget tax package

In a pre-Budget speech today to the Canterbury Manufacturers Association, Finance Minister Michael Cullen outlined the aims and structure of the Budget's business tax package. The government will not be proceeding with tax credits for export market development and investment in skills, he said, although those areas would be "strongly targeted" in the Budget. Other issues covered in the speech include supplementary stabilisation instruments and the tax treatment of employee relocation expenses. For more information see the speech.

Hon Dr Michael Cullen
Deputy Prime Minister
Minister of Finance
Minister for Tertiary Education
Leader of the House


Budget 2007: towards a stronger and fairer economy

Speech notes for address to Canterbury Manufacturers Association luncheon, Latimer Lodge, Latimer Square, Christchurch

Ladies and Gentlemen

On 17 May I will present my eighth Budget. We face very significant challenges, only some of which can be dealt with directly in the context of the Budget.

To begin with I think it is helpful to pause and reflect on the progress we have made. I want to observe that in recent years we have considerably strengthened the base of our economy:

  • Average growth rates since the Labour-led government took office in December 1999 have been over three per cent - faster than the average of developed countries, faster than Europe, Japan, the US and the UK and as fast as Australia.
  • Company tax returns show profits grew at an average of twenty per cent a year between 2003 and 2005 - up from growth of around five per cent a year in the nineties.
  • More Kiwis than ever - 2.1 million of us - are in jobs. The last time there were as few on the dole, Hamish Hay was the mayor here in Christchurch, Gliding On was winning the Feltex television award for best entertainment …and many of the current All Black team hadn’t been born.
  • Job growth and rising incomes have clearly boosted household wealth. Families, young and old are healthier, wealthier and more secure than they have been in a generation. Working for Families is making a real difference to the lives of 360,000 households every day, helping to lift 70,000 children out of poverty.
  • New Zealand has better public finances than nearly all other OECD countries – a particularly pleasing achievement considering where we stood in the early 1980s. Gross debt is approaching twenty per cent of GDP and we no longer carry any net debt at all, if you include the assets of the New Zealand Superannuation Fund.

Indeed, the OECD in its annual review of the New Zealand economy released last week described our economy as one of the most resilient and flexible in the club of developed nations, praising our policies as consistent with international best practice.

The international recognition is gratifying. We have put in a place a responsible, forward looking strategy to transform this economy – one that seeks to place the economy on a sustainable footing so we can be even more resilient and flexible to meet the challenges to come.

The pleasing measures of progress are accompanied by signs that last year’s slow-down has bottomed out and growth is picking up again.

But too much of that growth is demand-led. And that demand is borrowing-led. This is leading to an unvirtuous cycle in which inflationary pressures are met by tightening monetary policy, higher interest rates, and, therefore, upwards pressure on the Kiwi dollar.

As I have been saying for quite some time now, the exporting sector has been called on to take too much of the strain of macroeconomic management by way of monetary policy.

The simultaneous announcements last week of a further increase in the O.C.R. by the Reserve Bank and the outsourcing of manufacturing by Fisher and Paykel has led to much more public discussion about this point.

I welcome that discussion. It is a pity it did not occur on a more rational basis at the time it was revealed that I, Trevor Mallard and the National Party leadership had been in discussions on how to make monetary policy work better.

That led to both a media frenzy and a sabotaging of those discussions by Bill English against the clear wishes of his leader. Again, last week, Mr English said he saw nothing wrong with the current framework and all that was needed was more tightening and a slashing of government spending.

In both cases I believe he is wrong. Government spending at the moment is below forecast. The Government is in fact still running a large cash surplus so that it is taking more demand out of the economy than it is putting in. I cannot sustain such surpluses indefinitely. They have been the subject of intense criticism, most notably from the National Party.

In fact, given the latest Budget forecasts, I expect National to revert on Budget night to criticising me for running excessive surpluses – that is, too tight a fiscal policy.

But nor can we be satisfied with a monetary policy framework and operation which so heavily penalises the export sector. Mr English needs to wake up and smell the grass; especially in his home electorate.

That is why the Treasury and the Reserve Bank have been working on supplementary instruments for some time. We need to look for means of translating monetary policy more quickly and effectively than happens at present.

We also need to look at other factors, which have contributed over three successive cycles in the last twenty years to the kind of outcome, you and I both find unacceptable.

But the answers are not easy ones. There is no pain free way of reducing demand when the economy is overheating and so causing inflationary pressures.

The kind of remedies proposed by the OECD a couple of weeks ago are so laughably undeliverable politically, and wrong socially, they need not detain us.

Any changes will require a broad consensus in Parliament. We need to examine the objectives of monetary policy, the mechanisms to achieve them, and the obstacles to effective monetary policy. The aim should be to do the minimum collateral damage to the exporting sector and to confidence in investing in the future – for in doing that monetary policy does affect long term growth despite the endless repetition to the contrary.

Now we can expect much guidance or help from many in the financial sector who have large vested interests in the current methods of operation. And, sadly, I have to report; too many Kiwis now no longer understand the importance of exporting.

When the stuff hit the fan over the mortgage interest levy proposal one senior press gallery journalist said to my press secretary effectively “who cares about exporters – they get millions already.”

I believe the most effective way to try to explore and create a consensus for change is not by trying to rescue confidential talks, but through an open process in the Finance and Expenditure Select Committee. I have written to Shane Jones, suggesting that such an inquiry would be very helpful. The terms of reference, of course, are a matter for the Committee.

What is important, I believe, is for people not to get trapped into ruling out discussions in advance.

We are bad at explaining ideas in New Zealand and very good at killing them before they even occur. If there is to be a select committee enquiry it must be allowed to look at ideas without an immediate frenzy that something is about to be introduced. The stakes are too high.

In a way I am pleased that last week’s announcements have brought matters to a head for I have been dissatisfied for some considerable time about the impact of monetary policy on the export sector.

Nevertheless, we need not go into some kind of blue funk. Over the past six years employment in the manufacturing sector has grown 14 per cent. Since 2006 the number of New Zealand manufacturers has increased seven per cent.

The challenge for us is to ensure that people, and our productive capacity, move into higher value areas given the inevitability of increased labour cost competition from Asia and other emerging economies which are no longer miles behind in terms of labour productivity.

The answer is not to try to preserve the past but to create the future. While in the short term we all want a lower exchange rate to be more competitive, over the longer term we should want to see a slow appreciation of the equilibrium rate as we move up the value chain.

Budget 2007 seeks to address some of the underlying issues by the emphasis on business tax reform, investment, and skills.

The business tax package is very much focused on strengthening the drivers of growth.

The package aims to improve competitiveness, encourage investment and raise productivity. Very simply we want to lift the speed limit of the economy. Raising productivity reduces inflationary stresses, reduces pressure on interest rates and makes our currency less attractive to foreigners.

Ultimately we want to improve the resilience of business to prosper at times when the dollar is stronger.

I have been listening very carefully to briefings from the business sector about the package. I felt some very valid points were made about the structure of the business tax package. Many in the business community have emphasised that a system of tax credits to facilitate investment in skills and export market development was not the preferred mechanism.

As a result we won't be proceeding with those tax credits - however, we will strongly target skills and exporting in the budget.

These advances will come on top of considerable effort that's already been put into simplification and areas designed to lift investment over the long term, such as depreciation.

I have also been listening to the concerns some of you have regarding the tax treatment of employee relocation costs. This may particularly be so in relation to attracting skilled workers from areas such as Auckland or overseas. Officials from Treasury and Inland Revenue are currently working through the relevant issues, and will be happy to discuss any concerns that you may wish to raise with them. They will report back to my colleague Revenue Minister Peter Dunne before the end of the year.

The other crucial component of an economic strategy that looks towards the long-term is lifting the level of our household savings.

The government has significantly increased the level of public sector savings in recent years through our fiscal surpluses and the New Zealand Superannuation Fund. As I mentioned, including the Fund’s assets, the government has no net debt.

But our household savings record remains very poor by international comparison.

The OECD acknowledged this last week, saying household debt has climbed sharply to around 160 per cent of disposable income, higher than most other OECD countries.

Statistics New Zealand figures show that last year the average New Zealand household spent $1.15 for every dollar earned. Alternative measures of household savings are less negative, but still show a disturbing downward trend over a long period.

We have an appetite for debt when we should be hungry for savings.

Increasing our national savings is good for families, good for businesses, good for the economy. It helps secure our retirement dreams and our future prosperity.

Savings build the wealth of New Zealanders and help build the pool of assets needed for business investment.

If we want to make sure we own more of our own businesses, we need to save more. If we want to have a better standard of living in retirement than New Zealand Superannuation alone, we need to save more.

If we want to have deeper capital markets that provide the oil for a well-functioning business sector, we need to save more.

Our large current account deficit underlines our excessive reliance on foreign savings to finance consumption and investment in New Zealand.

If we save more domestically, we are less reliant on foreigners to finance consumption and business expansion here. Foreigners end up owning fewer of our assets and we become less vulnerable to rising interest rates if international sentiment towards New Zealand changes.

Help is coming on 1 July with KiwiSaver. It's a simple, voluntary workplace-based savings scheme. KiwiSaver aims to make it easy for people to start taking care of tomorrow, today. It makes it especially easy for young people starting out in the workforce.

I am confident KiwiSaver will make a real difference to the ability of many to look forward to a retirement that meets their dreams.

And KiwiSaver will be very positive for businesses. A deeper stock market and corporate debt market lifts business growth and productivity. It takes the pressure off our balance of payments, interest rates and the dollar.

We are reminded of this every time an Australian private equity firm crosses the Tasman to invest in our companies. They have the cash because of active policies in Australia encouraging saving for some decades.

Consider this: the Australian economy is five times the size of ours, yet some trillion dollars are now under management there, compared with just $64 billion dollars in New Zealand.

But we have to keep looking forward; KiwiSaver is the best tool our economy has to ensure we invest more rather than simply spending more.

I was not surprised last year when the economy slowed - we had experienced five consecutive years of growth and no one has yet worked out how to abolish the economic cycle.

But I was also not surprised the slow-down was mild. Commentators who warned of a recession were wrong.

The unexpected strength of the recovery has produced higher tax revenues than we predicted in December.

It has also coincided with higher levels of investment in infrastructure - more roads, rail, schools, hospitals, prisons and so on.

To put in perspective the scale of investment, this year just over $2.1 billion worth of large state highway projects are either under construction or being completed across New Zealand.

At the end of the nineties just $323m worth of large state highway projects were under construction or completed. Investment has increased nearly seven-fold.

We have begun to address the infrastructure deficit that built up through the nineties. Choices have consequences and by the end of the nineties infrastructure was badly run down. As a result, we have had to catch up.

We will continue the catch-up in the budget because this government is committed to building the world-class infrastructure that is needed to drive economic transformation.

And can I briefly don my other hat as Minister for Tertiary Education? You may have read about my announcement on Monday concerning the new funding framework for institutes of technology, polytechnics, wananga and industry training organisations. I plan a similar one next week for the university sector and further announcements on the tertiary education over the next few months.

The new tertiary education system being put in place allows a far more strategic view to be taken. We want to fund tertiary education organisations in a way that ensures the education and training needs of a wider range of stakeholders, including business and the government are being met.

This shift in focus is important if our tertiary education system is going to offer taxpayers greater value for money while at the same time ensuring the system produces the right mix of skilled graduates you need to help build a more dynamic economy.

So, in summary, my eighth budget will continue the strategy that has strengthened the foundation of our economy in recent years without unduly adding to domestic pressures.

Again it is all about raising the speed limit of the economy. What the Government can do to help is:

  • Running prudent fiscal policy
  • Building world class infrastructure
  • Encouraging investment
  • Promoting savings
  • Developing a highly skilled workforce

The budget continues our progress in building a solid basis for the future by providing solutions for the challenges of today and tomorrow.

We have a smart and active economic strategy and I am confident the choices the government is making will help all of this generation and the next, to share in a stronger and fairer economy.

Thank you.