I retired from personal blogging in July 2008 but you can find me over at blog.xero.com
Follow @roddrury
I’m normally more blue leaning these days but happy to take a chocolate out of every box and be socialist when it suits - especially a digital one.
I have to admit that my first reaction to Cullen’s Budget is positive.
- R&D tax credits are good. (This will need policing). I would have liked an export component in here as well so that we are not just focussed to playing with things, but actually generating export revenue. Still, this is a good step.
- Company Tax Rate drop to 30%. Good, though tightly related to the next point.
- Compulsory Super Scheme. Very good. Even though the net effect of the tax cut is largely negated by employee savings contributions I think this is very good for business as savings lead to investment. Businesses shouldn’t thrive or die on a tax rate change. But creating a culture of savings is something we just need as a country. Some will say that it is an additional cost on business but I think that salary levels will come to take into account these contributions and they will net out.
It really irks me when they say that Tax cuts cost money. If you decrease tax rates that may lead to more investment and potentially the net tax take may actually increase. It does not make sense that changing Tax policy has single direct effect on the total tax take.
In Export Year I would have liked to have seen more focus on exporting. We are too inwardly focussed as a country.
The new blue team under John Key has had good running for the last few months, but there is a lot for business to like under this so it will be interesting to see how they respond.
In summary, a positive step forward, but I’d like to see more focus on growing the size of the pie, rather than how it is sliced up.
What do you think?
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Forgive me for saying this, and please anyone hound me if its not true but I know that the public reaction to this budget will err slightly on the negative. I agree with you that cutting taxes is not necessarily going to cut the tax take, and that I see is what most of NZ will see.
However, Cullen is between tax and a hard place. The Reserve Bank has said, and rightly so, any tax cut will be inflationary. Running a cash surplus by the government does indicate money that is out of the economy. Even after all its spending commitments it has $2bn, if that were in criculation we would be paying more for our mortgages.
Sadly this is likely to be a budget that will be maligned today and celebrated a generation from now. Savings is the biggest macro economic problem we face as a country. If we want to invest in our future, and grow future start ups into much bigger firms then local businesses must have access to local capital. Australia is a great example of this. Dr. Cullen broke a bottle over the bow of a ship that will one day cut a path through the choppy path of global finance.
This could be the straw that brakes the back of this current government. It will go its full term but faces an uphill struggle to get elected, still Howard and his conservatives managed that. And it is likely that next will see a lolly scramble similar to what we have seen from Costello in election year. If National wins the treasury benches next year it will have to offer more than tax cuts. Labour won’t let them use that advantage; a third term election should be one for the opposition to lose that is already clearly the case.
Helen Clark is still the smartest operartor in the house, be prepared to see her send her cabinet into early retirement in order to present a fresh face to the country in 2008. A fourth term government with a bold first term agenda is what is needed. She has the nous to make it happen, to do so she must deal to the issue of tax cuts and really steal the global stage on climate change. Actions speak louder than words, for a third term goverment that couldn’t be more true. But anymore action on the way society behaves may draw more than a smack on the hand from the media; it will be a smack in the face from the electorate.
It’s a budget to help grow the capital base of NZ, which is what we desperately need, but agree there should be a clear focus on exports here in order to maximise the economic gains.
The debate on whether tax cuts are good or bad and to what extent are completely dependent on how the money is able to be leveraged and whether as you say its used to grow the pie, which in a country short of equity and loaded with debt should be priority number 1 after encouraging savings.
I just posted my response here (also below): http://www.siliconwelly.com/exports-and-growing-the-pie/
New Money and the Growing the pie equation:
If I pay less tax on profits made in my export business, then I reinvest this money into building my business, which will lead to more export sales. More export sales means more money coming into the country - aka a bigger pie. Conversely, if I sell only domestically, then I’m just redirecting money from somewhere else already in the economy - I get the money, someone else doesn’t.
The Real Role of Exporters in the economy
The job of export businesses in the economy is not to create profits so that the government can tax it, the job is to increase the money supply for the country. Once there is more money in the supply the government has more money to tax as it moves around domestically, this is where government should focus on making its tax revenue.
Don’t tax it at the door in
It’s a short-term outlook to see exporters just like any another business and should be taxed the same as any other business, if the government is willing to take a short term reduction in tax revenue from exporters it will get medium and long term gains in tax revenue from the money moving around the economy that far surpass any initial taxing of the profits as the money comes into the country from export sales.
The concept here is multiplier effect - 10 bucks that the government doesn’t take from a business is 10 bucks that can be invested in the business. This leads (hopefully) to a downstream profit and a whole host of benefits like employment, downstream tax revenue, high export earnings better BOP etc etc (assuming here that the business is one which we are trying to grow - ie exporting and preferably exporting ETM’s (elaborately transformed manufactures). It is a budget with a long term macroeconomic view and to that end may be a different sell. As mentioned previously, down the line in a decade from now the rewards may be reaped. I think John Key is being a little harsh when he comments that Cullen has merely created a money-go-round, it’s better than that.
I agree with Ben, It is the multiplier effect. In business it is all about retained earnings that are re-invested in R & D and spent growing sales.
This tax cut is offset against the compulsory kiwisaver contributions will result in payroll costs increasing, We also have the extra weeks holiday to account for in this financial year.
I believe that there should have been more incentives for companies to manufacturer here and sell their products internationally. New Zealand is becoming a more expensive country to manufacturer in hence most of our manufacturing is done offshore. We need more initiatives to bring money into the country not make the money flow around inside the country!
On a different note, big plus for the electrification of the Auckland rail system - I wait with baited breath to see if it happens.
Kiwisaver scheme is a compulsory state-theft from business owners.
Falafulul Fis - only in as much as taxation is compulsory state-theft from us all. We live in a society that determines that all should contribute to services and that these should be provided by the state. We also live in a society that is (albeit slowly) realising that state funded retirements are a thing of the past and that some degree of compulsion is required in order to bridge the savings gap. For all these reasons - a compulsory savings scheme is a good concept - one can argue the delivery but it’s hard to argue the concept
Will it be possible to sue Kiwisaver savings to fund business startups? I suspect not as it would be so open to abuse, but it would be nice.
NZ taxes are already amongst the lowest in the OECD. Really, to go any lower would involve becoming a semi-tax haven like Ireland or Luxembourg. This might be a good idea - all those financial services companies would generate lots of jobs in IT and other areas - and it could almost be fiscally neutral (as large numbers of businesses would nominally locate here).
However I doubt it would be a goer even for John Key as the NZ populace are vary strong on perceived fairness…
TYPO! I meant “use Kiwisaver savings to fund business startups”.
“Kiwisaver scheme is a compulsory state-theft from business owners.”
Empty rhetoric, Falafulul. Business owners, including myself, don’t take such a short term view. My take is very similar to Rod’s that this is generally a positive budget given the current climate. By doing what he does today he makes the economy much more robust and able to cope with the sort of tax cuts that seem inevitable further down the track. This guarantees more balance to the economy in the future. In fact, any blue leaning finance spokesperson be very pleased at the hard yards that Cullen is putting right now on their behalf as some of the economic arguments used against tax cuts will, over time, disappear.
“In Export Year I would have liked to have seen more focus on exporting. We are too inwardly focussed as a country.”
Has it started? Who noticed?
I agree Don, we must take a long term view about Kiwisaver. I should be pointed out as well, that companies are not obliged to do anything with their tax cut, they could simply return it to shareholders. The argument that it will lead to business investment and higher salaries assumes that companies behave in the interest of the whole economy, rather than that of their shareholders. Given that NZ has one of the highest dividend rates in the OECD we know that more often than not a business tax cut is not used to grow the business. We can’t really target this effectively, hence the government scrapping export tax credits.
Why don’t we simply say that all income generated overseas and brought into NZ is tax free?
On Kiwisaver - ultimately it should create a pool of local equity available to local businesses. Some of the other changes on R&D also sound useful.
Heard Rod Oram today - note that Limited partnerships are now back for use. This also sounds like a plus for investment minded companies and individuals.
I’ve had a look over at http://www.beehive.govt.nz/ViewDocument.aspx?DocumentID=29338 but only this from Dr Cullen.
“Later this year a Limited Partnerships Bill will be introduced which the Government hopes the House will be able to deal with expeditiously as it will assist significantly new technology and venture capital companies.”
Anyone know more about this as it also sounds like a significant change?