John Key MP National Party Finance Spokesman
23 June 2006
Kiwi meets Kangaroo - the single market challenge Speech to Trans-Tasman Business Circle lunch
Earlier this year I committed to giving a series of speeches exploring some of the issues in the finance portfolio. The
first of these, in February, was a retrospective look at the six years of this Labour Government.
In the second, which was delivered to the National Party's Auckland Regional Conference, I drew out some of the lessons
we could learn from the amazing transformation that has happened in some Asian countries, particularly in Singapore.
Today I want to embark on the third speech in this series, and explore some aspects of New Zealand's economic
relationship with Australia from the perspective of the National Party. In particular I want to look at some issues
which relate to capital markets in New Zealand.
Australia and New Zealand, as we all know, have the sort of relationship brothers have. We come from the same stock, we
look pretty similar - at least to outsiders - we do a lot of things together, we have a lot of respect for each other,
and we fight like cats and dogs, especially when it comes to any form of competition or sporting event.
Like brothers, we also argue over each other's possessions. And, just to make it perfectly clear, Phar Lap, Crowded
House and pavlova belong to us. But that said, we are not greedy. If Australia wants to claim Russell Crowe as a true
blue Aussie then don't let us get in your way.
Notwithstanding these minor turf disputes, our relationship is, as my colleague Gerry Brownlee once described, like a
hillbilly wedding - so close that even if we got divorced we would still be cousins.
Getting close to Australia, in an economic sense at least, has certainly been very beneficial to us in the past.
Despite initial misgivings by many people, CER has been a great success, and has developed far and beyond what even the
most optimistic supporters ever dreamed. New Zealand and Australia now enjoy almost unrestrained reciprocal border
access of goods, services and people. Regulatory cooperation has also been advanced, for example in competition law and
through the formation of the Australia New Zealand Food Authority.
Australia is our main export market, taking 20 percent of our total merchandise exports, with a value in 2005 of $5.9
billion. The value of our imports from Australia over the same period was $7.7 billion, which makes up 21 percent of our
total merchandise imports.
Australia is also our most important source of overseas visitors, and our most common holiday destination.
So far, so good. However, I think there are potentially significant gains to be made by getting even closer to
Australia.
What does getting closer to Australia mean, though?
In part, it means continuing negotiations with the aim of bringing into line the various rules that govern business on
both sides of the Tasman, and of advancing the development of the capital markets in both Australia and New Zealand.
But, in part, getting closer to Australia involves doing a bit of housekeeping on our own, with no necessity to involve
our neighbours. Getting better competitiveness between our company tax rate and that in Australia is a good example.
Working with Australia towards a single economic market has been traversed pretty well in the past.
It is important to try to reduce the transaction costs New Zealand businesses face when exporting to Australia. This
will benefit existing New Zealand exporters. It is also likely to encourage more businesses here to branch out over the
Tasman. In practical sense, Australia's geography, culture and border access inevitably make it the first port of call
for New Zealand companies seeking to expand their markets overseas.
For these reasons, working to eliminate the barriers and harmonise the rules in company law, securities legislation and
general business regulation just makes sense.
I want to add a few more points, though, to those which are usually made around the single economic market.
First, reading speeches from Labour ministers might give you the impression that the road to this market is wide, flat,
and free of traffic, like the road from Darwin to Alice Springs.
I have to tell you I am not at all convinced, and that it currently seems more like the road from Auckland Airport to
the middle of town.
I recently asked Michael Cullen in Parliament why he wasn't going to be attending the Australia New Zealand Leadership
Forum in Auckland, along with other Ministers from New Zealand and Australia, chairmen and CEOs of leading businesses,
and heads of government departments.
In response, Dr Cullen made an extraordinary outburst where he claimed the forum had turned into "a wailing wall of
people pushing their own barrows". That alone tells you the Government is far from fully supporting the process.
This snubbing of the leadership forum should concern both New Zealand and Australia. From the point of view of New
Zealand, though, let me tell you that if the process is allowed to wither away, we will become increasingly less
relevant, in a commercial sense, to Australia.
Our countries are both internationally focused, but Australia's size and scale inevitably means that we are less
important to them than they are to us. It has been noticeable for some time that Australia has increasingly sought to
characterise and identify itself as part of Asia. Australian businesses are increasingly looking north, rather than due
east.
Even in world soccer, Australia has left the Oceania Confederation and talked its way in to the Asian Confederation.
Realists would say they have done this to give themselves a better chance of getting to the World Cup.
Let me also say that I think the aims of the Australia New Zealand Leadership Forum are primarily of a commercial
nature, and do not to the same extent revolve around foreign policy and defence. The lead Ministers, therefore, should
be the respective Ministers of Finance rather than the Ministers of Foreign Affairs. In addition, the forum would do
well to be smaller and focus on a tangible list of outcomes which need to be achieved and in a realistic time frame.
The second point I want to make is this: A strong New Zealand assists Australia, and vice versa. Open competition drives
productivity and in the long run will ensure both nations are well placed to compete on the world stage.
I mentioned a moment ago the asymmetric nature of our relationship. Some have argued that New Zealand, as the junior
partner in this relationship, needs to understand its relative lack of bargaining power - that in practice the concept
of integration is code for adoption of Australian rules and regulations, many of which we might not consider to be
world's best practice.
It's fair to ask, then, whether New Zealand should seek to harmonise with rules that are not best practice and which we
have a limited ability to alter.
These are decisions that I tend to think should be considered and evaluated on an industry-by-industry basis.
But, as a general rule, both countries need to ensure that their regulations are constantly refined to bring them
towards best practice. Inevitably, however, countries pass laws which are not. From New Zealand's perspective, adopting
Australian regulations which, for historical reasons are far from perfect, may at the margin improve our competitiveness
across the Tasman.
Every day, New Zealand firms are servicing an ever-growing Australian customer base in a range of fields as distinct as
financial services and architecture. Without common rules and standards such an expansion is hampered. It may,
therefore, be beneficial to adopt some Australian regulations even if these rules are more cumbersome. The cost of
second-best regulations may be more than offset by the benefit of common standards. They shouldn't be rejected out of
hand.
However, there is a risk that adopting these rules will make us less productive domestically, and may make us less
competitive in other parts of the world. After all, the fact that Australia takes 20 percent of our exports means that
the rest of the world takes 80 percent. If adopting particular Australian rules comes at the cost of weakening our
global competitiveness then it may not be worth doing this.
I should stress that at all times you can expect us to bat for what is in the best interests of New Zealand, just as I
would expect Australia to follow what is in Australia's best interest. That doesn't mean a compromise can't be reached
with a bit of give and take on both sides. That's what the art of negotiation is all about.
The third point I want to make is that moving towards a single economic market is not a magic bullet.
To illustrate this, I want you to think about what would happen if we went the full monty with Australia - further than
currency union or adopting the same tax structure - in fact, as far as political union that is, with New Zealand joining
the Federation of Australia.
Would that solve all our economic problems?
Well, joining the NRL hasn't made the Warriors a brilliant rugby league team. And last time I looked, simply being a
state of Australia hasn't been the economic salvation of Tasmania.
It wouldn't be for us, either. In particular, it certainly wouldn't end the competitive threat that Australia - or,
rather, the rest of Australia in this example - poses to our economy. Australian states are very competitive. Queensland
vies with Victoria and New South Wales all the time, for example, to grab new businesses. Being in the same country
didn't stop Melbourne nicking the Formula One Grand Prix off Adelaide.
We need to understand that our future economic success lies in being more productive, in having the right policy
settings, leveraging off our competitive advantages, and ensuring we are the preferred choice for business and people
because of what we can offer in the form of, amongst other things, infrastructure, skills and a competitive tax
environment.
The aim of getting closer to Australia is to expand our economic opportunities. But it's not a panacea for all that ails
us.
In the last part of this speech I want to turn away from trade and look in particular at the trans-Tasman capital
markets.
Australians have $59 billion invested in New Zealand at last count, which is over a quarter of total foreign investment
in this country. What is more, Australian investment in New Zealand has grown 84 percent over the last four years.
What has driven this increased investment?
For the most part it is driven by the Australian compulsory superannuation scheme which began in the early 1990s. This
scheme now has over $1 trillion under management and is set to reach $2.4 trillion by 2015. By contrast, New Zealand has
a much smaller level of funds under management - about six percent of the Australian total - and is growing only very
slowly each year.
The Australian superannuation funds, facing declining yields in Australia, have been increasingly turning their eyes to
New Zealand. >From venture capital and private equity to listed stocks and property, Australia has stormed into the
New Zealand capital markets. Australian private equity has acquired dozens of firms - so much so it would be quicker to
name what they haven't bought.
And you can't help feeling that we ain't seen nothing yet.
I hasten to add that Australian investment in New Zealand is a good thing. New Zealand needs capital if it is to develop
and grow. If we are to continue to be one of the poorest savers in the world then we don't have a whole lot of options.
But this investment does have some consequences.
In the past few years a host of companies, amongst them Fernz, Lion Nathan and Baycorp, have relocated to Australia, and
others have been taken over by Australians, including Waste Management, Wilson and Horton, Tranzrail and Gullivers.
So many companies have moved across the Tasman that soon it might not just be half a million Kiwis that call Australia
home but also an overwhelming proportion of our business community, leaving us to one day ask "where the bloody hell are
ya?".
I, for one, think economic sovereignty matters. New Zealand pays a price when head offices leave town. It also pays a
price when potentially mid-sized firms never make it to the stock market but end up being amalgamated with a
similar-sized Australian business and directed toward the Australian Stock Exchange.
Once the power base shifts to Australia, or anywhere else for that matter, so do the ancillary businesses that support
these companies. The Irish model of business development that brought my old firm, Merrill Lynch, amongst many other
companies, to Ireland created huge downstream economic activity. Head offices create the demand for accounting, legal
and hospitality services amongst many, many others.
If we in New Zealand want to stop the exodus of people to Australia, we have to provide a genuine future. David Cunliffe
might think a snazzy $400,000 billboard campaign aimed at luring Kiwis home will work, but personally I think it will be
about as effective as trying to run the 100 metres in flippers - unless it is backed up with the prospect of credible,
well-paid jobs.
Why companies' leave, and what can be done to halt the flow, is an extremely complex issue and I am reluctant to select
isolated parts of this conundrum.
But it has to be said that New Zealand's higher company tax rate, and our inability so far to negotiate the streaming of
imputation credits with Australia, are issues of genuine concern.
Without streaming of imputation credits, and with an ever-increasing Australian-based shareholder register of New
Zealand companies, it almost goes without saying that these companies will look to book a growing amount of their
company profits in Australia. In this way, the benefit of the company tax that is paid can be passed on to domestic
shareholders.
Such pressure inevitably adds to the rationale for relocating existing head offices across the Tasman.
What can be done?
One move would be to push harder for the streaming of imputation credits.
Would Australia contemplate this? My guess is that they might well do so, although I estimate that the cost of this move
in terms of lost revenue would be about five times greater for the Australian Government than the New Zealand
Government.
I am not, therefore, arguing that this would be an easy sell to the Australians, but New Zealand represents a
significant investment market and it is something worthy of deep consideration. We should get around the table and see
once and for all if this issue can be resolved to the mutual benefit of the savers and investors in both countries.
Following a similar theme, it's clear from New Zealand's perspective that maintaining a corporate tax rate above that of
Australia cannot be in our long-term best interest. This is an issue which simply must be addressed as a matter of
urgency. Reducing the company tax rate to 30 percent, as it is currently in Australia, was one of National's tax
policies at the last election.
Then there is the issue of savings. New Zealand households are not good savers, and New Zealand has long required the
use of foreign savings to invest in the economy. Currently, foreign investments in New Zealand, including those of
Australians, outweigh New Zealand investments overseas by $136 billion, or around 88 percent of GDP. This is the highest
net liability position of any country in the OECD. I intend to look further at the issue of savings in a subsequent
speech.
In the end we can't and wouldn't want to advocate anything less than the free flow of capital in and out of our country.
Given this, and noting the sheer size of the financial assets now controlled by Australians, our ultimate aim should be
to make New Zealand the destination of choice.
In other words, we need to drive a policy programme that sees New Zealand - including our infrastructure, tax system and
overall regulatory environment - as the best dog in show rather than the runt of the litter. This won't be easy and we
can be sure that Queensland, Victoria and New South Wales will fiercely compete every step of the way. New Zealand
already has some advantages, not the least of which is our unicameral system of representation.
Let me summarise then as follows:
· National is committed to fostering a strong economic relationship with Australia. CER has proven what a positive
impact that can have for both countries.
· We need to show real commitment and urgency to this process, something a reformatted and more defined Australia New
Zealand Leadership Forum could help to enable.
· New Zealand should assess possible regulatory changes on the basis of what is in our national interest and not get too
precious about the origin of them, but always with an eye on driving international competitiveness for our long-term
prosperity.
· Being some late entrant to the federation of Australian states never would have been, and never will be, the panacea
to the many and varied challenges our country faces in travelling the long pathway to a borderless global economy.
· There are real gains to be made in the capital markets area and in recognising the benefits and risks that a rapidly
emerging Australian savings industry presents.
· Though riding in the slipstream of Australia does have some real benefits, the future of our country will only ever be
maximised through being more productive, by having the right policy settings, and by being competitive - not just in
Australasia but across the globe.
ENDS