28 July 2006 Speech Notes

Embargoed until: 1pm, Friday 28 July 2006

The trans-Tasman economic relationship

Speech to Trans-Tasman Business Circle luncheon, Minter Ellison Rudd Watts Boardroom, Level 20, Lumley Centre, 88 Shortland St, Auckland

This afternoon I would like to talk about the development of the trans-Tasman relationship, and in particular the progress in the Single Economic Market agenda of reforms. I would also like to talk about the review of business tax, and the discussion document that was released earlier this week. That document has important implications for trans-Tasman business.

The economic relationship between New Zealand and Australia remains remarkably strong, and is growing in both breadth and depth. We now have a combined Australasian market of 24 million people, with deep and strong links between the two economies. For Australian businesses, it has meant access to another domestic market about the size of Queensland, and for New Zealand businesses the domestic market has effectively increased six-fold.

In 2004-2005, New Zealand exported close to $6 billion worth of goods to Australia, while Australia exported around $10 billion worth of goods to New Zealand. In that year, trans-Tasman merchandise trade increased 3.2 percent over the previous year.

New Zealand has consolidated its position as a major trading partner of Australia, being the fifth largest export market for Australian goods and services and eighth largest source of imports. New Zealand is Australia’s number one market for elaborately transformed manufactures, an important sector of the Australian economy. Likewise, New Zealand’s exports to Australia have increased so that Australia is New Zealand’s largest export and import market.

Bilateral investment ties continue to deepen. New Zealand is Australia’s third most important destination for outward investment, and the sixth largest source of foreign investment in Australia. Australia is the second largest destination for New Zealand investment abroad after the United States. Australia is also the largest foreign investor in New Zealand.

New Zealand is Australia’s number one source of short-term visitors, with approximately 1 million visits by New Zealanders each year, the large majority being tourists. Coming the other way, some 875, 000 Australians visited New Zealand in 2005, again, mostly for leisure activities.

CER has also been highly successful as a spur to the internationalisation of both economies. It has encouraged business people and the general public to understand the vital importance of international linkages and led to a more competitive, dynamic business environment in both countries.

Australia is the first offshore market for many New Zealand businesses, and likewise, New Zealand provides a straightforward first market for many Australian companies.

For these reasons, advancing the Single Economic Market agenda is an important element of our strategy to increase our international connections. This is not a matter for bureaucrats and academics. Whether New Zealand businesses grow depends upon the quality of these connections. Deeper linkages provide bigger markets in which to buy and sell goods and services, allow access to a larger and more varied pool of capital and labour (as well as providing greater opportunities for New Zealand capital and labour), and open our economy to new ideas and technology.

So, for the government, Australia remains a strong focus, as a major market for goods and services in close proximity, as a source of capital and technology, and as one of our sources of high-skilled labour. As the statistics indicate, we are at the moment net importers of highly skilled workers from Australia and elsewhere, and net exporters of low to mid-level skills. The much vaunted ‘brain drain’ is in fact a ‘brawn drain’, while we enjoy a ‘brain gain’ coming the other way. Of course, this simply reflects an integrated labour market where skills go wherever they are most highly valued.

A great deal of progress has been made in recent years in the Single Economic Market work programme. What we want to create is an environment in which businesses need not face any additional regulatory hurdles from expanding their business across borders than they would if expanding domestically. A properly registered business in Auckland should face no more regulatory requirements in expanding into New South Wales than into the South Island.

However, there is more to be done:

- Firstly, we need to reduce the impact of our border, focusing on reducing formal barriers (such as rules of origin and investment screening) and streamlining border clearance processes;

- Secondly, we need to improve the business environment through regulatory coordination, reducing behind the border barriers to trade by streamlining trans-Tasman regulatory frameworks;

- Thirdly, we need to improve regulatory effectiveness, focusing on finding ways for regulators on both sides of the Tasman to operate more efficiently and effectively; and

- Fourthly, we need to support business opportunities through industry and innovation policy cooperation, focusing on facilitating connections between businesses to take advantage of increasing openness in trans-Tasman markets.

The last year has seen some important steps forward. To cite just a few examples:

- A Trans-Tasman Council for banking supervision was established in February 2005;

- A revised Memorandum of Understanding on Coordination of Business Law was signed in February this year, aimed at reducing unnecessary compliance and transaction costs arising out of trans-Tasman differences in business laws;

- New CER rules of origin have been agreed between the two govern-ments, allowing manufacturers to take advantage of competitive global inputs and still benefit from the market access conditions CER allows;

- A joint customs working party has led to changes at major Australian airports to allow New Zealand passport holders to queue in the same lanes as Australians when passing through customs and immigration checks, mirroring the arrangement that has been in place for Australian passport holders arriving in New Zealand; and

- The Trans-Tasman Accounting Standards Advisory Group has made progress towards harmonising accounting practices in both countries.

There is a full work programme for the year ahead, including important work on the CER Investment Protocol, information sharing between the Commerce Commission and the ACCC, various taxation issues, court proceedings and regulatory enforcement, intellectual property and cross-border insolvency.

In this context it is rather irritating to see the National party putting the programme in jeopardy by their grandstanding over the introduction of legislation to give effect to an international treaty that will establish a joint scheme for the regulation of therapeutic products and a joint authority to administer the scheme.

This is an important industry, and the agreement is an important part of the Single Economic Market. The issues for New Zealand consumers have been worked through thoroughly, and the scheme has obvious benefits in terms of streamlining what can be costly processes, and hence giving New Zealanders better access to approved and quality therapeutic products.

Neither New Zealand nor Australia alone has the capacity to operate a world class regulatory scheme for therapeutic products on an ongoing basis. Together, however, the two nations can pool resources and ensure consumers gain maximum protection from an effective and sustainable regulatory capacity.

It is very sad, and something of an embarrassment for New Zealand, to see National queering the pitch, not only for this particular aspect of the SEM, but for the whole enterprise.

National needs to come clean on whether it is in fact committed to lowering barriers to trans-Tasman business, or whether it is driven by some form of antiquated economic nationalism or is merely pandering to a xenophobic element within the New Zealand electorate.

I want to turn now to business tax, and the discussion document that was released earlier this week. The aim of the review is to ask whether our current business tax regime, including the tax rates and the rules that establish the tax base, provide the best incentives for productivity gains and maintain our competitiveness, particularly with Australia.

This is the biggest review of business tax rules in nearly twenty years. All up, the options total nearly two billion dollars a year. Now, we may not be able to afford all of that, particularly when any implications for personal tax are taken into account.

What we are focused on is getting the best bang for our buck in terms of encouraging investment where it is needed most, namely research and development, workplace skills and export market development.

One of the key options is dropping the company rate to 30 per cent. This would align our company tax rate with Australia’s current rate of 30 percent. Proponents, and I can say there are a few out there despite criticisms you may have seen in the media, argue that the move would increase the competitiveness of New Zealand-based companies. It would encourage inbound investment by firms that have decided to locate in New Zealand, and hence would boost our productivity by increasing the stock of plant, equipment and buildings within the economy.

Reducing our company tax rate would also reduce incentives for firms to stream profits away from New Zealand, by way of artificially low sales prices or excessive interest deductions.

I note some commentators say this is still not good enough in terms of helping us foot it with Australia. A little reality check is important in that regard. We are proposing to match Australia's corporate rate without burdening business with all the other onerous taxes Australians suffer – namely, a capital gains tax, stamp duties, payroll taxes, and compulsory superannuation. So, if adopted, that move alone must make us more competitive with Australia.

What we are trying to do is grow the cake. Now, the National Party would rather cut it up and distribute it through multi-billion dollar personal tax cuts. I have never thought consuming your way to prosperity was a sensible economic plan. We do want a bigger cake and the business tax review is but one part of our strategy to transform this economy.

National's priority at the election was personal income tax cuts, not company tax cuts. It wasn't even talking about the other options we have outlined to assist business.

So I find it a bit rich for John Key to say we are not going far enough. Obviously deeper company tax cuts are possible. The trouble is there is no free lunch when you are cutting taxes and this government is not prepared to sacrifice current spending to justify deeper company rate cuts.

Offsetting a deep rate cut with a payroll tax was one option we considered and rejected. It clearly made little sense as it would harm labour intensive businesses and young companies that have yet to make a profit – the very companies we should be helping to grow.

It has to be remembered that this is a discussion document and not an exhaustive list of possible options.

But among the options we are asking business to prioritise to assist our final decisions are:

- Targeted tax credits for R&D, export market development, and skills improvement;

- Deductions for “blackhole” expenditure;

- Increasing depreciation loading on new assets; and

- Increasing the low value asset write-off threshold.

On the question of tax credits, the rationale is that there is under-investment by businesses in activities that deliver significant broader benefits to the economy. In economic terms it is a question of positive externalities.

A tax credit might, for example, be used to encourage businesses to invest in R&D, or to develop new export markets, or to enhance the skills of their workforce, all of which can have positive spin-offs for the economy at large.

Using a tax credit approach requires some careful policing of what counts as eligible expenditure, to ensure that the credit in fact prompts new investment, rather than simply a re-labelling of existing expenditure. However, it has the advantage of leaving the decisions about what and where to invest up to the company concerned.

Australia currently has a tax credit for R&D, and has grants for market development similar to those administered by our Ministry for Economic Development.

I am looking forward to some robust discussion on these issues over the next few months, and I particularly welcome input from those involved in trans-Tasman business. We in New Zealand have to accept a basic asymmetry on questions of trans-Tasman tax issues. As with many issues in CER, we are a kiwi sharing a nest with an emu.

The fact is we need to respond to changes in the Australian tax system more assiduously than they need to respond to changes in ours. That does not mean, however, that we should adopt a ‘me too’ attitude to changes in the Australian system.

There are, as you will understand, many factors that influence trans-Tasman trade and investment. Keeping these in balance has involved a good dose of pragmatism alongside a commitment to ideals.

That combination has served us well so far, and I believe it will continue to do so in future.

ENDS

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