The Letter – Monday, 27 February 2006

The Letter – Monday, 27 February 2006

The Letter Limited - www.theletter.biz

The Haps

Another week when people enjoyed being offended.

What are they reading?

Helen Clark and Michael Cullen have been reading the reports of the think tank, 'The New Zealand Institute'. David Skilling's paper showing most Kiwis have no savings and home ownership is in decline is the motivation behind the Kiwi Savings scheme. Our leaders have spent the summer worrying about the implications of the latest paper called 'Dancing with the Stars? The international performance of the NZ economy.'

We are not dancing

David Skilling and Danielle Boven say it is a myth that New Zealand is a trading nation. Under Labour our exports as a percentage of GDP have declined by a fifth and are currently 29% of GDP - about what it was in 1990. The composition of our exports is similar to what it was 25 years ago - that is land based. It gets worse. 81% of our exports are in categories that are growing more slowly than average world growth. Only a small number of firms are actively engaged in international activity with only 361 firms exporting more than $10 million in 2005.

We are bottom

Only Greece among the small OECD nations exports less as a percentage of GDP than New Zealand.

Why it matters

World trade has been growing faster than world income growth, with world trade growing 9.5% a year between 1970 and 2002. The authors argue that NZ's poor export performance is the prime reason for the worsening annual trade deficit; $7 billion for the year to Janurary 2006. The August trade deficit was $1.1 billion, the highest trade deficit for any month ever. The authors say that we are missing out on what has been a prime driver of international prosperity, growing trade.

Investment down too

The study also notes that direct foreign investment by New Zealand firms is low by international standards and as a percentage of GDP has almost halved from 15% of GDP in 1990 to just 9.5% today. New Zealand is the only developed country to have reduced its direct international investment. Again it gets worse. Worldwide, the average growth rate of international companies has been greater than domestic firms but those New Zealand firms who have invested overseas have had on average lower returns than the firms who have invested domestically. "All developed countries with similar population size to New Zealand have substantially more companies on [the Forbes Global 2000 Index that list the world's largest companies]". "New Zealand is the only developed nation whose overall level international integration has reduced over the past decade."

Why?

The authors are perplexed as to the reasons for the poor export growth. Transport and communication costs have fallen; there have been strong export prices; trade and investment liberalisation. Part of the reason they suspect is that most New Zealand firms are just too small and the scale of the New Zealand market does not allow firms to grow to a size where they can export. See www.nzinstitute.org

Our thoughts

The Letter thinks that an obvious answer is that investing in New Zealand has been more profitable. We think the floating dollar has meant that it's the export sector that bears the brunt of monetary policy. Adopting the US dollar would transform the risks of exporting. The McLeod report, sitting neglected on Cullen's shelf has part of the answer. When entrepreneurs outgrow this market, why stay and pay 39-cent tax when capital is mobile and they can relocate to countries where their real tax rate is near zero? As one very successful businessman put it, "I love New Zealand, but I can live in London paying zero tax on my worldwide earnings, just paying tax on my income earned in the UK." So many of the NBR Rich List are tax exiles that the list is now made up of mainly Kiwis who pay tax to other countries. Cullen repeatedly claims there is no evidence that a high effective tax rate discourages enterprise. The evidence is right in front of him.

Labour's Response

Last year's proposals for taxation on overseas earnings were punitive, designed to discourage; this year's proposal's are designed to be tax neutral. Skilling's report tells Labour that their efforts so far have failed. "Royalty and license fees account for just over 1% of New Zealand's services exports, or about 0.3% of total exports, suggesting that New Zealand is not participating successfully in the global knowledge economy." Clark concludes that Telecom is partly to blame and is looking to regulate more competition. Anderton's picking winners has failed and the subsidies are not expected to survive Mallard's razor gang cuts. Skilling's claim that our companies are too small has made Cullen receptive to an adjustment to the company tax rate, believing this will encourage companies to retain earnings and grow.

The Rorting

There is now a website www.payitbacknow.org.nz quoting Labour's own website "Labour is issuing a pledge card again this election…" If the Police read that, it blows away the claim that it was not an election expense. Clark's next problem, a select committee decides to hold a hearing and summons her to explain. Clark's sudden memory loss won't work in front of MPs.

Dancing with the stars II

We found 74% of Letter readers think Rodney should stick to his day job.

This week's poll

Should the Finance and Expenditure Committee hold an inquiry into Labour's financing its election campaign from taxpayer funds? Vote at http://www.theletter.biz/vote. we will send the results to the members of the committee.

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