Address Grosvenor Financial Services Group End of Year Conference
Te Papa, Wellington, Friday, 19 November 2010
Good morning and thank you for inviting me here to address this conference.
It is a pleasure to be here today to talk about something which is of growing importance.
Savings and investment is at the heart of the Government's economic agenda.
I am pleased to talk about work the Government is undertaking to promote savings and investment and also about the issues being considered by the Savings Working Group.
New Zealand's track record on savings and investment has not been good.
Households have spent more than they have earned and when we have invested we have invested in property.
The Tax Working Group identified that rental property generated a negative tax base for the Government.
Budget 2010 took important steps to address these concerns.
But much of the ongoing work in the tax policy area is aimed at ensuring that taxes do not get in the way of individuals and businesses making sensible savings and investment decisions.
Successive Governments have considered how best to address savings, but I think we are now making real headway on the problem.
The 2010 Budget contained substantive tax measures to improve the incentives for efficient savings and investment.
These included measures designed to boost savings, investment and productivity, while maintaining the integrity of the tax system such as:
- Lowering tax rates for individuals and increasing the GST rate
Lower personal tax rates encourage individuals to work, invest and save, increasing wealth and productivity.
The GST rate increase funded a large chunk of the income tax decreases so that they were implemented in a fiscally responsible manner.
The switch away from income tax towards GST was all about increasing incentives to save.
This is because, unlike an income tax, a goods and services tax does not tax savings as they are earned.
The reduction in all personal tax rates have increased the incentives for ordinary New Zealanders to work and get ahead.
This is demonstrated by significant increases to take-home pay and lower tax rates on the next dollar earned.
- Company tax rate reduction
The reduction in the company tax rate to 28% will increase incentives to invest.
With more capital goods, labour is more productive so this encourages productivity and growth.
It will also ensure that we remain competitive internationally.
- Changes to the taxation of property
As part of Budget 2010, the Government removed depreciation on most buildings beginning for most people from 1 April next year.
This was a key component of a fiscally responsible, balanced Budget package and helped pay for the tax cuts.
It was also justified on policy grounds as the available data suggested, on average, that buildings were not in fact depreciating over the period measured.
This change, along with the changes to qualifying companies, should go some way towards addressing the Tax Working Group's concerns that the residential rental sector is not paying its fair share of tax.
- Lower PIE tax rates
Budget 2010 also reduced the top PIE tax rate 30% to 28% as well as reducing the lower PIE tax rates to align with the new lower personal tax rates.
This will boost returns to KiwiSaver investments and other long-term savings.
- Greater integrity and fairness
The Budget measures also significantly improved the integrity and fairness of the tax system by removing the tax advantage that could be gained by sheltering income in trusts.
The top tax rate for individuals is now the same as the trust tax rate.
Savings Working Group
We all know that our economy has been unhealthily reliant on offshore borrowing for too long.
As I said before, this is by no means a new problem and one that previous Governments have considered.
To get any sort of traction on the problem, we need new insights and expert solutions.
As you may have noticed, this Government is using 'working groups' in the front-end of the policy-making process.
This is generally achieved by selected businesspeople, private sector advisors and academics working closely together on various policy issues as part of a group.
The Tax Working Group, to my mind, demonstrates how successful the working group model can be.
Academics, practitioners, businesspeople and Government officials came together to consider the direction of New Zealand's tax system.
Their combined efforts not only provided invaluable advice to Government, but also provided a catalyst for public debate on tax policy issues.
The open debates fostered by the Tax Working Group process went a long way to providing the necessary public acceptance that fundamental change to the tax system was necessary.
The Tax Working Group also provided the broad recipe for change - which was largely followed in Budget 2010.
The Government is continuing the working group model with the Savings Working Group - launched earlier this year.
The focus of this group is much broader than just tax.
At the core of the group's terms of reference is to consider ways that New Zealand can move away from its unsustainable reliance on credit.
Until we address that, our economy will continue to be vulnerable.
The Government is concerned that New Zealand places too high a reliance on foreign capital to fund investment and consumption - a reliance that can make New Zealand more vulnerable to foreign shocks.
More specifically the Savings Working Group is looking at:
- the role of Government savings as part of New Zealand's overall savings picture, including long-term savings and debt targets and the interaction of Government and private savings;
- the impact of the tax system on the level and composition of national savings and investment decisions and possible options for reform; and
- the role of KiwiSaver in improving national savings.
The examination of the tax system will be far-ranging and will include:
- whether the tax system should be indexed for inflation to reduce tax biases between different forms of saving;
- whether certain forms of capital income such as interest should only be partially taxed as was suggested in the Henry Review in Australia to offset the way in which inflation can lead to this income being overtaxed;
- whether New Zealand should adopt a Nordic tax system with a low flat tax rate on capital and higher progressive rates only on labour income;
- whether or not taxes on profits accumulating in retirement savings accounts should be taxed; and
- whether or not the current capped tax rate for PIEs should be removed (as suggested by the Tax Working Group) or extended to other forms of passive investment income.
At the same time, it is crucial that any changes in this area are responsible and fiscally affordable.
New Zealand's low level of public debt has been important in sustaining New Zealand through the recent great financial crisis.
These are complex and important issues which the Savings Working Group is currently debating.
It will recommend policy options in January next year.
The deliberations of the Savings Working Group and the open debates that this process engenders will be critical in helping the Government come to decisions in this important area.
Tax focus on savings and investment
As people interested in the health of the retirement system, you will well appreciate the need to think about the long-run impact of policies.
Government has been busy in this area, with significant pieces of legislation passed.
You may remember that the tax rules on savings that previously applied operated very unevenly.
Managed funds were taxed at a flat 33% thereby overtaxing lower income investors on a 19.5% tax rate.
This created a significant tax disincentive for lower income earners to save.
In addition, investment in some countries was favoured over investment in others.
New tax rules for savings came into force during 2007.
These rules consist of the new portfolio investment entity (PIE) rules for managed funds and the fair dividend rate (FDR) rules for offshore portfolio share investments.
The new rules addressed the long standing problems with the taxation of managed funds.
In particular, they have created a much more level playing field between those who invest through managed funds and those that invest directly.
Moreover, as I have already mentioned, the reductions to PIE rates in this year's Budget will further encourage long-term savings in vehicles such as KiwiSaver.
KiwiSaver is a success story for New Zealand.
Its success has exceeded Government expectations.
We have now passed the 1.5 million enrolments mark - a third higher than a year earlier.
It is clear that KiwiSaver has been a very successful policy and has proved to be very attractive to New Zealanders.
KiwiSaver also seems to have raised people's awareness about saving in particular for retirement.
Three years after its introduction, enrolment growth continues to be strong.
KiwiSaver is a major Government programme, and any such programme can always benefit from improvements in the way it is delivered.
We continue to refine the administration and legislation for KiwiSaver to improve certainty and efficiency for savers and providers.
For example, legislation has recently been enacted which clarifies the rules around enrolling under 18s.
As to its future role in the debate about compulsory retirement savings, I await with considerable interest the report from the Savings Working Group in January.
A reality of life in New Zealand is the ease with which people move between New Zealand and Australia for work and travel.
Many people cross the Tasman each year for work and settle there long term.
However when they want to retire to their homeland, they encounter a problem.
Currently, Kiwis who work in Australia must contribute to an Australian complying superannuation fund.
The savings are locked into the Australian scheme until the saver reaches retirement age.
It has been estimated that Australia's Tax Office holds as much as A$13 billion (NZ$16.6 billion) in "lost accounts" in the Australian superannuation system.
Much of this could belong to New Zealanders who have returned home and these new rules will allow these funds to be brought back to New Zealand.
Reflecting the Government's interest in the area of savings, legislation enacted in September improves the portability of retirement savings, and removes an impediment to movement of labour between New Zealand and Australia.
The new rules allow a person who has retirement savings in the Australian complying superannuation funds and New Zealand's KiwiSaver funds to consolidate them in one account in their current country of residence.
This is an important step forward for our wider Single Economic Market programme with Australia, particularly in helping the free movement of labour between the two countries.
The legislation was enacted in New Zealand in September, but the arrangements will not come into affect until Australia has completed its legislative process, which we expect will be in 2011.
It is a good outcome for New Zealanders and the retirement and savings sector.
There have been important reforms to the tax treatment of savings and investment over a number of years.
But now reform in this area is at the front and centre of the Government's economic reform agenda.
The Government wants open and well-informed debate in this area.
New Zealand is hugely fortunate in having people with a breadth of skills and knowledge willing to work together on these issues to get the best policies for the country as a whole.
Budget 2010 introduced landmark changes following the recommendations of the Tax Working Group.
By reducing personal tax rates and raising GST from 12.5 per cent to 15 per cent, aligning the personal and trustee tax rates, reducing the company tax rate and the top tax rate on PIEs and other savings vehicles and making property less attractive as an investment, we've led the charge and tilted the economy away from consumption and towards saving and investment.
The Savings Working Group is the next step in the process.
It encapsulates the seriousness with which the Government views savings and investment.
Its deliberations will be crucial in the decision-making on whether further changes are necessary in this area and, if so, what they should be.
I believe that the work we are doing now is going to pay off for New Zealanders in saving and investing for a better future.
Thank you very much.