How will a fuel tax and minimum wage affect investment

Monday, 23 April 2018, 11:07 am
Press Release: Milford Asset Management

How will an increased fuel tax and minimum wage affect investment?

Milford Asset Management Senior Analyst Frances Sweetman describes the moves in Auckland to increase the fuel tax on top of an Auckland City Council levy as a two-edged sword.

“What the Government is trying to do is to raise revenue and change behaviour,” she told Ian Fraser in an online interview this week. “In a sense those two are conflicting, because if it manages to change behaviour and push people onto bikes and public transport, then they won’t raise much revenue and that may slow spending or even slow saving, when we already have a very high household debt level.

She also issued a caution about the Government’s apparent taste for reviews and working groups, such as the tax working group chaired by former Finance Minister Sir Michael Cullen.

“When businesses are uncertain about the profit they can make from their investments, you’d expect that these reviews would be negative for business investment levels. In terms of our share market, it’s quite a large issue. At the moment, we have Government or Commerce Commission reviews across the telecommunications sector, the electricity sector, Z Energy and the fuels sector. That’s a large proportion of our market and share prices have underperformed in those sectors, partly as a result.

“We also have a very high proportion of overseas ownership here in the New Zealand equities market. The risk is that should a negative review come out across one of those industries, people expect the worst about the reviews across the rest of them. And then, do those offshore investors start to put a bit of political regulation risk discount into our market?”

According to Frances Sweetman, the recent rise in the minimum wage could be yet another two-edged sword.

“When we talk to all the New Zealand listed companies, a lot of them have a very small proportion of workers, if any, that are paid the minimum wage at the moment. So, the first couple of rises, like the one we’ve seen implemented very recently, actually make very little impact on their cost of doing business – and they have the ability to pass that through to prices quite easily.

“It’s the later moves, when they move it up to $20 and $21, that start to impact a greater proportion of workers – I’m thinking about the retail industry in particular, telecommunications call centre workers, some of the agriculture shares – then the message we’re getting is that while they’ll try to increase prices to offset that, a lot of these businesses are prepared to invest in new technology to replace labour to some extent.”

Commenting on how these considerations are affecting Milford’s investment strategies, Frances Sweetman said, “although a lot of these changes, I think, in the longer term are for the better and they’ll push productivity growth in New Zealand companies, they’ll push us into industries where we can pay our workers higher wages and they’re growth industries.

“But in the shorter term, it does make investing in New Zealand a little bit harder, so for us, we are investing more offshore. We see other global markets like the US as more attractive in the near term.”

For more from Frances Sweetman on the impact of Government policy changes on investment – please click here.

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