Hon Dr Michael Cullen, Minister of Finance
13 June 2008, Te Papa, Wellington
I am delighted to be here today at the 5th Annual Australia-New Zealand Leadership Forum. I welcome my counterparts that have come here from Australia, and business leaders from both countries attending this forum.
New Zealand and Australia can both be proud of the quality and closeness of the long standing relationship between our two countries. We have a special partnership, which is "as close as it gets" to use the words of our Prime Ministers when they met in January this year. This relationship underpins the national interests of both countries.
One of the defining characteristics of our relationship is the depth and frequency of meetings, like this one, which aim to improve relations - from the point of view of government ministers, officials and business people. It is encouraging to see a wide range of people from all of these areas taking part in this Forum over the next two days.
Business leaders, in particular, are champions of the economic relationship between our two countries, and meetings like this offer them important opportunities to discuss the relationship from their perspective.
I will speak to you today about the close economic relationship between Australia and New Zealand, and the difficulties we both face in the current global economic climate.
I'll also discuss our work towards developing a Single Economic Market. In particular I will express my view that we need to address a significant barrier to trans-Tasman investment – the mutual recognition of franking and imputation credits.
Australia/New Zealand Relationship
The relationship between Australia and New Zealand is vitally important, not just to boost trade and investment on both sides, but for the movement of skilled workers, and sharing innovation and best practice within our business sectors.
This year marks the 25th Anniversary of the Closer Economic Relations (CER). We have come a long way over the last quarter century.
We have eliminated almost all of the major barriers to trans-Tasman trade and are now working to reduce the less "visible" barriers to business in order to create a Single Economic Market (SEM).
Although CER was negotiated and signed a quarter of a century ago, it is still regarded by the World Trade Organisation as "the world's most comprehensive, effective, and mutually compatible free trade agreement". This indicates not only the quality of the agreement reached in 1983, but the ongoing work by many to ensure that CER is an evolving, vital agreement.
Total free trade in goods and services, supported by free movement of people, and the mutual recognition of goods and occupations across the Tasman are the pillars on which CER was built.
The benefits are clear - trans-Tasman trade has grown at an average of nine per cent a year since 1983 – more than the growth rates of both economies combined.
Today, Australia remains New Zealand's largest market, taking just over 20 per cent of our total exports, and New Zealand is Australia's sixth largest market.
More Australian businesses export to New Zealand than to any other country, and Australian and New Zealand companies have nearly NZ$100 billion directly invested in each other.
Total trans-Tasman merchandise trade is currently valued at approximately NZ$15 billion, and trade in services is currently worth just over NZ$6 billion annually, and is growing strongly.
Global Economic Challenges
And while we have much to celebrate over recent years – with both our economies growing faster than the US, EU, and the OECD average since 2000 – this year, we are both confronting serious challenge.
Both of our economies have remained largely resilient in the face the sub-prime mortgage crisis and the resulting global credit crunch, but we have been provided with an important wake-up call for business and government that we are not immune to off-shore financial crises.
The rising prices of food and oil also pose a challenge to policy makers on both sides of the Tasman. New Zealand and Australian households are feeling significant pressure at the petrol pump and the supermarket checkout. The effects of these commodity price increases are a major worry for both fiscal and monetary policy makers as we seek to control inflation.
From a more global perspective, the food prices rises are undermining the work done in developing countries to raise the living standards of those who survive on very little.
It is a painful irony that the expansion of prosperity through the developing world – in China and India in particular – which should be a cause for celebration, has been a key driver of growing demand for food and thus rising prices, which threatens to impoverish tens of millions of people worldwide.
Both New Zealand and Australia have reacted to this risk by contributing to global appeals for assistance. Both our nations were represented at last week's United Nations meeting on the food crisis in Rome.
New Zealand will continue to monitor the humanitarian situation closely, with a particular focus on the Pacific region.
Single Economic Market
At this time of global uncertainty, the simple truth is that neither of our economies has a great number of options. We were not responsible for the recklessness that created the subprime crisis in North America. We certainly cannot significantly constrain international commodity prices that are putting pressure on our households and our headline inflation rates.
We can provide some relief via tax cuts as both the Australian and New Zealand governments have done in our recent Budgets. And we can continue to implement stable fiscal policy while our central banks seek to control inflation.
But we must also continue to build on our strengths and continue to accentuate our competitive advantages.
And what we know is that for both our economies, the Australia-New Zealand CER is a vital and enduring asset that we must continue to build upon if we want to not only weather this current economic slowdown, but to continue to work towards the greater prosperity citizens of both our countries deserve.
Now is the time to pick up the pace on the Single Market agenda, not to put it on the backburner.
It has been the vision of both the Australian and New Zealand governments for some years now to build on the close trading relationship created by CER, and work towards this vision of a seamless trans-Tasman business environment.
With most of the obvious barriers to trade, such as tariffs, already eliminated under CER, our vision for the Single Economic Market is to remove any behind-the-border impediments to trade. The SEM aims to find innovative new ways of further reducing any barriers to doing business between our two countries.
This will be a big boost to trade and industry, making it just as easy for business leaders such as yourselves to operate in Australia or New Zealand, as in your base country.
This is particularly important for small and medium enterprises taking their first steps offshore. Often, the first place small and medium enterprises will look to expand is across the Tasman, so it is essential that expansion be supported by the SEM in order to support a brighter future for our companies.
For example, New Zealand is a very important market for Australian small and medium enterprises.
AUSTrade recently reported that more than 17,000 Australian businesses exported to New Zealand in 2005-2006, almost double any other destination. Developing the SEM can only build on that solid export base and expand it even further.
The SEM continues to be a priority for the New Zealand government, and I am extremely pleased to see the enthusiastic commitment of the Rudd government towards it, clearly evidenced by the number of Ministers here at the Leadership Forum.
I am particularly looking forward to continuing my dialogue with Treasurer Wayne Swan at our upcoming bilateral meeting in July. I hope this meeting will allow us to make significant progress on our current priorities for the SEM.
SEM – work so far
We’ve already come a long way in developing a Single Economic Market. Positive steps forward this year have included:
- A Treaty on the Mutual Recognition of Securities Offerings, which entered into force this morning following the requisite legal steps being taken by Senator Sherry and my colleague and Commerce Minister Lianne Dalziel (more details to come)
- A new Cooperation Agreement by the New Zealand Commerce Commission and the Australian Competition and Consumer Commission.
- Sharing information between the New Zealand Companies Office and the Australian Securities & Investments Commission.
- Bringing New Zealand's corporate insolvency regime closer into line with the Australian regime.
SEM – work currently underway
At the moment, officials in both countries are focussing their work on three key SEM initiatives:
- Investigating ways to improve the portability of retirement savings between Australia and New Zealand:
Currently workers with savings held within Australian savings accounts cannot transfer their savings to New Zealand, so officials are working to improve portability arrangements, which will allow the free flow of savings between the KiwiSaver Workplace Savings Scheme and Australian retirement savings accounts.
- The re-negotiation of the Double Taxation Agreement:
Officials began talks on this just last month, investigating the current levels of non-resident withholding tax. Another area of tax that could be a huge boost to both countries is the mutual recognition of imputation and franking credits, which could be a huge benefit to investors on both sides of the ditch – but I'll have more to say about that in a moment.
- Negotiating a CER Investment Protocol:
Historically, we've had a strong investment relationship under the CER trade agreement, but agreeing specific screening thresholds around investment will build even closer economic relations in this important area.
I look forward to discussing the Investment Protocol as a matter of priority at my upcoming meeting with Mr Swan.
SEM – the future
There is plenty of work still to do in the future to further enhance the Single Economic Market. Of particular interest to business leaders here today will be our work to enhance the trans-Tasman business environment to make it easier for you to work between countries, including:
- Working to align the New Zealand and Australian approaches to financial reporting to help streamline accounting operations.
- Concluding a Treaty to provide a legal framework to help resolve trans-Tasman disputes with greater efficiency and at a lower cost.
- Increasing co-operation between Australia and New Zealand on banking crisis management arrangements, and removing barriers to providing banking services.
The future of our Single Economic Market will also focus on using our strong relationship with Australia regionally and internationally, by:
- Reducing barriers to regional trade through APEC.
- Advancing the ASEAN-Australia-New Zealand Free Trade Agreement.
- Working together to combat climate change – a key part of this will be emissions trading between our countries and making the New Zealand Emissions Trading Scheme compatible with the one currently being developed by Australia.
- We should also continue to work closely together as a post-Kyoto agreement develops, to advance areas of mutual interest in climate change negotiations.
Next Steps in a Single Economic Market
So where to from here?
I would now like to turn to an issue that will be of interest to a great number of you in business – the issue of imputation and franking credits between New Zealand and Australia. I acknowledge that some of you have been making a case for this for a long time. It's a problem that I look forward to solving creatively with my new Australian Ministerial colleagues.
To re-state the problem, under current arrangements investors on both sides are being double-taxed. And investment flows between us are distorted in a way which doesn’t sit well with wider moves towards a Single Economic Market.
I realise that this is a complex issue, but one approach which we think merits close attention is a mutual recognition system under which Australia and New Zealand each provide tax credits to their resident individuals who receive company distributions from across the Tasman, to compensate for tax paid in the other country.
Any solution to this problem has to be win-win. We think that under our mutual recognition proposal, cooperation between New Zealand and Australia in this area would see both countries better off. In effect, both countries would remove a barrier to trans-Tasman investment flows, which would encourage investment from New Zealand into Australia, in exchange for Australia encouraging investment into NZ.
This would boost the efficiency of capital allocation in the combined trans-Tasman economy and increase productivity and growth for both our countries.
There would, of course, be some loss of revenue to both countries, as it would relieve one level of tax from what is now double taxation of trans-Tasman investment. In this sort of area, governments have to make judgements.
For the Single Economic Market to have benefits to both countries, and to remain relevant to business needs,, we believe it makes no sense to deny imputation credits when dividends are paid across the Tasman.
After all, the wider logic of a Single Economic Market is to make it no more difficult for investment to flow between our two countries, than within our two countries.
I do acknowledge that Australia has significant concerns that mutual recognition could create a precedent that would need to be extended to other countries.
But I believe a way forward can be found by limiting mutual recognition to countries with essentially identical regimes. If that were possible then in each of our cases the other is the only country that would meet such a test.
I encourage all you as business leaders to look at this area and consider the benefits, and I urge you to also be involved in the dialogue. With creativity and goodwill we should be able to make good progress on the issue and it's in that spirit that I will look forward to engaging with my counterparts in Australia in the coming months.
As you can see, there's a huge amount of work going on to contribute to the development of a Single Economic Market between Australia and New Zealand and today's meeting gives us the opportunity to discuss how we can build on this solid base to improve our relationship even further, particularly given the international economic uncertainty.
Thank you for your time and thank you for your dedication to the economic relationship between our two nations.