David PARKER
Economic Development
Associate Finance Spokesperson

Thursday 14 July, 2011 SPEECH

David Cunliffe has explained what a fair tax system looks like, and within that the main features of a capital gains tax. He has also shown we are in good company.

The world’s financial authorities say we need to do this.

I want to focus on the structural improvements a balanced tax system brings. The fairness arguments in favour of a CGT are indisputable:
• Is it fair that currently New Zealanders don’t pay tax on income from speculation, while those who earn wages, interest or dividends, all pay tax? No it’s not.
• Is it fair that younger generations can’t afford to buy a home, while their taxes crosssubsidise the people they rent off? No it’s not.

Equally important is the structural effect on our economy.

We have heard a great deal about how New Zealand’s poor economic performance has been made more difficult by the global financial crisis and the Canterbury earthquakes.

But what really requires attention is the fact that our underlying economic problems are structural and long-term. For decades we have spent more than we have earned as a country.

Two points stand out:
• Firstly, the trend is long-term.
• Secondly, yes, the government deficit is a problem. It must be reversed, but close to 90% of the debt is private. We need to address this. A structural fix is required if we want to develop a robust economy and own our own country.

The current system cannot deliver this change. If we look at the projections in the present government’s budget, they show that what is already bad will get worse.

The current account deficit is projected to increase to 6.9% of GDP. This flows through to even more debt. These projections have us getting poorer every year.

The budget documents make for sober reading. This net investment position measure shows what we own of the rest of the world less what they own of us. It is not good news. Authorised by Rick Barker, Parliament Buildings, Wellington www.ownourfuture.co.nz The latest budget shows this totals negative 78% of GDP by the end of this financial year (after receiving the reinsurance proceeds from Christchurch).

This gets worse every year hereafter, rising to minus 85% by 2015.

Under current settings, using the government’s own predictions, after 6 years of their management New Zealand gets poorer, then poorer, then poorer still.

What this analysis tells us is that substantial structural change is needed to improve our fortunes. We cannot simply borrow and hope, nor can we just cash up assets. Long term, there is only one way out - the export of more goods and services to generate more income for NZ.

Our tax system currently favours the speculative sector and penalises the productive export sector.

The OECD and the Treasury both say it is wrong for our tax system to have advantageous tax rules for property investment. This graph looks even worse for the many cases where there is no taxable profit and all gains are capital.

This bias diverts precious investment capital into the speculative sector at the expense of the export sector.

We need to fix this. And a CGT will.

Restructuring the tax system as we propose: • Allows us to fund other tax cuts and reduce debt without resorting to the sale of our assets. • It allows us to grow equity over time. This builds resilience in our economy. • It drives crucial investment capital into the productive export sector. This opens opportunities for the development of the export sector which we so greatly need to improve our economic well-being.

The tax changes fund a big tax switch. They pay for the $5000 tax-free zone for all New Zealanders, and GST off fresh fruit and vegetables.

These changes also allow New Zealand to keep our electricity assets and Air New Zealand, and to pay down debt – all while increasing our exports. The BERL projections are robust. It is not tax and spend, but is pro-growth.

There are other important benefits. The Reserve Bank supports a CGT because it helps keep interest rates down and the dollar lower for the benefit of all borrowers and exporters. Our country needs to save more, invest in the export sector and export more.

Growth in the breadth of our exports is pivotal for New Zealand. While our traditional export industries remain important, New Zealand desperately needs more exports from new and emerging sectors.

We are not alone in this view.

Authorised by Rick Barker, Parliament Buildings, Wellington www.ownourfuture.co.nz In one of Sir Paul Callaghan’s presentations he gives the revenues from new export sectors, which shows the potential.

But as he says, we have too few of these and have to change our economic settings to spawn more.

Equally, a presentation from the New Zealand Institute shows exports from Denmark and New Zealand, both small countries, on a per capita basis.

The wedge in the graph from agriculture is similar. The difference is other exports.

No-one says this will be simple. Nation building never is. Other countries are competing to increase their exports too. But what can make the difference is the way in which governments back their exporters, large and small.

We need policies designed to drive increases in our exports and jobs, and improve our productivity. Labour has the policy mix to make this happen. A capital gains tax is one of the most vital ingredients.

With the right supports in place, New Zealand will become wealthier.

Today is an important step in the progressive release of our plan to develop the economy.

As today’s tax outline shows, and our previously announced Research & Development tax credit also illustrates, our plan is designed to address all three of the stages we need to succeed – repaying debt, building equity and stimulating growth.

ENDS

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