EY's David Snell assesses Grant Robertson's first Budget and concludes there's much more to do to boost all-important productivity growth

EY's David Snell assesses Grant Robertson's first Budget and concludes there's much more to do to boost all-important productivity growth

By David Snell*

Budget 2018 – At a glance;

  • A plan for a plan about the future of work
  • $1 billion over four years on R&D tax incentives
  • The Green Investment Fund germinates

Productivity is at the heart of living standards.

In the long-run our living standards depend on productivity. New Zealand’s productivity growth has lagged behind our competitors for at least 60 years.

We can’t expect Finance Minister Grant Robertson to solve New Zealand’s productivity deficit in one bound.

In his own words from Thursday’s speech:

"To transform the economy we have to be more productive. We have to work smarter, build our skills and resilience, explore new innovations and adapt to change. We cannot continue to rely on merely increasing our population, exporting raw commodities and an overheated housing market to drive economic growth." 

In turn, New Zealand’s ability to improve our standard of living over time depends almost entirely on our ability to raise output per worker.

Budget 2018 starts to flesh out that plan:

  • $1 billion over four years for the R&D incentive
  • A tripartite “Future of Work Forum” between the Government, Business New Zealand and the Council of Trade Unions
  • A Productivity Commission inquiry into technological change, disruption and the future of work; and
  • $100 million into a Green Investment Fund.

That’s a start but there’s much more still to do. There could have been a stronger plan with a greater focus on skills and capital, with perhaps a lesser emphasis on fora and inquiries.

R&D incentive expected but broadly welcome

The R&D incentive has been previously announced, with details currently out for consultation. A well-designed incentive can lead to increased innovation activity and this commitment is a welcome one. The crucial test will be seeing whether the R&D incentive in action leads to a stronger innovation eco-system, with real success stories to its credit in years to come. 

What’s particularly interesting is that New Zealand is introducing our R&D incentive at a time when Australia has just announced a tighter set of rules. On balance, that makes New Zealand a more attractive place for productivity enhancing research for trans-Tasman business.

R&D is hard to precisely define. For the R&D incentive to enhance productivity, the bottom lines are:

  • It needs to be sustainable, with a long term commitment from Government to make the rules work.
  • For loss-making businesses, especially capital-constrained SMEs, the incentive needs to be refundable.
  • There should be a clear pathway for current Callaghan Growth Grant recipients to move to the new incentive, and
  • Inland Revenue must commit significant resources to making the claims process both easy and capable of being audited.

The Future of Work is still in the future

Robertson’s right to hone in on the future of work. More automation is on the horizon. That’s productivity enhancing, while simultaneously empowering and threatening for workers. The gig economy is leading to more short-term roles and rising numbers of contractors. A productive economy needs a skilled workforce.

On the other hand, is the tripartite government/labour/unions forum stepping “back to the future”? And how will this body sit alongside the Tax Working Group, which already has strong union and business representation and an overlapping remit?

Combined with the Productivity Commission inquiry, are we still at the stage of groping towards a plan for a plan?

A green light for the Green Investment Fund

Again signalled well in advance, the Government has committed to a Green Investment Fund. 

Green investment funds have had some successes in Australia, the UK and some US states but are still relatively novel. Speaking at the budget lock-up, Robertson stressed climate change as the greatest challenge of our time.  With global capital starting to shift into climate-aligned investments, could the Green Investment Fund bring private-sector investment in high-value, low-carbon industries, clean tech and new jobs?

Funding at this stage is limited and detail is scant, but this is an area we’ll be watching with interest.

Other than R&D, tax reform is missing in action

We’re waiting for recommendations from the Tax Working Group, so tax is understandably in a holding pattern. 

An efficient and equitable tax system is necessary for inclusive growth. That system could be achievable in the medium term. The Government will need to make a substantial commitment to tax reform if enduring productivity improvements are to be delivered. That’s probably an issue for 2019.

Funding for Inland Revenue investigations

In the year to 30 June 2017 Inland Revenue spent $174 million on investigations. As a result, it identified $1.3 billion where customers did not get things right.

Its overall return on investment for investigation activity was $8.31:$1 against (in my view, a soft) target of $7:$1.  Its most recently funded initiatives contributed $11.55 per dollar spent. 

With recent research by Inland Revenue and Victoria University estimating the average underreporting of self-employed and contractual workers at 20% on average[1] - a finding which has been surprisingly little noted - the time is right to step up that spend. A productive economy requires us all to pay our fair share.

In that respect it’s interesting to see additional funding of $31.3 million over four years to raise $180 million targeted at company tax returns. At a little under $6 per $1 spent, that’s less efficient as a revenue raiser that most Inland Revenue activity. Potentially more could have been done here.

Towards Wellbeing

Robertson confirmed 2018 will be the last traditional budget. Next year will be a “Wellbeing Budget” based on broader measures of living standards. Perhaps a move towards a more just economy rather than just the economy?


*David Snell is EY New Zealand Tax Policy Leader. The views expressed in this article are the views of the author, not necessarily those of Ernst & Young. 


[1] Victoria University (2018), Estimating self-employment income-gaps from register and survey data: Evidence for New Zealand, Victoria University Press.

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21 Comments

14
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The OECD says NZ does have a skilled workforce; the trouble is many of our best leave and are replaced by an excess of low wage immigrants. No trouble with immigrant experienced engineers, academics, doctors but our dept of Immigration has low wage bakers and chefs as 'skilled' immigrants. But only 28% of immigrants are 'skilled' even by INZ standards; the rest are family, refugees, etc. Because of our lack of infrastructure these cheap immigrants are displacing Kiwis with skills the rest of the world values by putting up house prices and damaging quality of life (congestion, over-crowded schools, etc).
So ensure immigrants earn well above average wage - it is the simplest long term solution to productivity.

Agreed. The last thing we need is to spend billions towards higher productivity domestically but end up importing low productivity from overseas.
I know we aren't the US or UK to demand the best talent from around the world but high skilled migrants looking to escape social and economic stresses from around the world may see us as a suitable host; provided we improve our infra quality and tweak our migration policy to attract them over.

Why stay when you can be paid more and taxes less overseas? Or at least why engage in economic activity here even if you plan to live here (have a proxy / trust do it overseas instead)?

High productivity (high achievers) want to be able to see that their hard work pays off and are unlikely to be fans of equality of outcome despite disparity of input

Well, it doesn't help that we push all the money out of business and into property by levying taxes so heavily on corporate and personal incomes, and not at all on property where free unearned income can be gained. Meanwhile, business owners lobby government to import cheaper workers. Of course high-achieving young NZers will be better off heading overseas in such circumstances.

Sure, you could blame it all on a small portion of the social welfare budget, when in actuality 60% of which is given out to old people regardless of their need, but perhaps we need to take a good look at what incentivises productive business investment and high wages.

What's most likely to drive young Kiwis overseas? High house prices and low wages, or a small minority of a welfare budget going to people in cyclical poverty, a sub-segment of whom could be abusing the system?

The best way to improve productivity up is to force wage rises. This will
A) Retain skilled staff in the country
B) Force companies to increase productivity to be able to pay for the higher wage costs and produce more per unit of labour cost
C) Close down those enterprises that cannot meet the productivity challenge, thereby release labour and resource for those that are productive. (Obviously this will happen in a self balancing way and if enterprises are overly effected then more labour will be released to the work market and counteract the upward wage pressures)

The best way to do this quickly is to severely constrain immigration to the few work categories that can truely afford to pay high wages as opposed to a source of cheap compliant labour that just perpetuates our low wage low productivity economy.

I think you are correct, but do you think the electorate would be able to stand the pain during the transition?

Yep: I like the high price my house is now worth and enjoy the cheap fast food and coffees made by friendly international students and eventually my family may want cheap carers to look after me. NZ high immigration has been good for me (and our low productivity NZ businesses that have an ever growing customer base). It would be a shock if low wage immigration stopped but honestly that would be the best for NZ and in the long term for my 4 young adult kids.

What pain?
Every body would be moving to the highest paying jobs and the only people to really suffer would be a few business owners who cannot cut the mustard. The owners of businesses who are forced to innovate and put effort into achieving higher productivity might grumble about it initially, but long term I would be pretty sure that they would be far better off.
Very reminiscent of the removal of subsidies from farmers on the 80's. Would any of them really want to go back to that situation now?

Surely IRD should be compelled to pursue any tax collection that can be done so economically? If they can spend less than a dollar to collect a dollar they should do so.

The remaining tax liabilities they should attempt to sell on to private collectors.

10
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As long as New Zealand's dominant business sectors chase low production costs rather than high customer value, our productivity per capita will be stuck in the mud. As they pursue this low-cost strategy (in effect attempting to compete with the third or developing world), New Zealand businesses have ever-increasing demand for minimum- or low-waged labour and limited or reducing need for highly educated, highly skilled people.

One result is that New Zealand doesn't get the benefit of its investment in education. This is an enormous structural problem. The well-educated leave - I have heard a previous education minister say that 80% of New Zealanders living overseas are degree holders. By comparison, many new immigrants (in my personal experience) barely have secondary education. I'm aware of the stated ambition of someone - a person with almost no English language ability - to work in a nail bar.

The outcomes?.New Zealand exports high productivity capability to the rest of the world. And overloads its infrastructure importing a low productivity economy.

To improve productivity, the first and foremost thing need to be done is to have a sizable and highly productive industry -- be it aircraft manufacturing, high speed rail manufacturing, weapon manufacturing etc.

If you do not have such a industry or industries, you only talk about improving productivity at margin at the best.

No, xingmowang, your examples are irrelevant. In New Zealand it's not about large-scale heavy industry. It's about added value production and manufacture in dispersed communities up and down the country.

What this means is using the advantages of our education, training, etc, to produce or manufacture a range of items to a higher standard of design, integrity, authenticity and value than the ordinary. That is the nature of enhanced productivity, of added value.

Instead of China, think Denmark: brands such as Bang & Olufsen, Scanpan, Bodum, Ecco shoes, Carlsberg, Georg Jensen, even Lego. And Denmark still has high value agricultural production in Danish butter, Danish bacon, etc. These brands and companies are the direct result of a focused national strategy to build national productivity based in added value goods

By comparison, the loudest voices at New Zealand's policy table are debt-laden agriculture and low-skilled employers wanting more and more minimum- or low-waged workers.

I don't think the government really understands its own productivity commitments.
One recent example, the government puts a ban on oil exploration killing off an industry that hires high skilled workers (engineers, geologists, complex machine technicians etc.).
To make up for these lost jobs, the government commits more than $18m towards new tracks and a cathedral but less than half a million towards science and innovation.
Unless the government assumes these high skilled workers will work in the tourism sector, the government is replacing a high productive industry with a lower one. As a result, we will have a hundreds of high skilled workers on a flight out of NZ and a few thousand low skilled workers coming in to work in the Taranaki tourism industry.

I love being in NZ but you guys work really inefficiently. So much hand holding!!! In our shared office we get considerably more work done (all our clients are over seas) than our office colleagues who all also work in digital media and IT. We maybe a max of 1-2 hours per month on the phone to clients (and we have a much bigger client list than any of the NZ companies we work alongside), they on the other hand spend huge amounts of time in meetings and on the phone. Mostly addressing unproductive issues. They don't get paid any more for all these meetings and phone calls, it's not time spent on building anything.

And I have experienced this in so many fields. We have a NZ accountant... we spent several hours on the phone and he wanted to meet in person too. All things that we could easily have done via email in much less time. It was perfectly pleasant but utterly unproductive. Our UK accountant is brilliant but we've never met him. We don't need to. We know he's a great accountant, he gets the job done, he doesn't need to hold our hands and we don't need to hold his.

I am used to buying everything online. But sometimes that just isn't possible in NZ. So I have to go into an actual physical shop, waste a bunch of time parking and queuing. This week, what I needed wasn't in stock, so I had to order it in store. When it arrived in the shop, there wasn't an automated system to ping me an email to say it was ready for collection, they actually called me and wanted to arrange the collection time... this shop just has 3 people standing about every day!!! So then, I had to spend several minutes on the phone, which interrupted the work i was doing. It doesn't sound like much, but it all adds up, to a lot of wasted time.

My experience is that NZ working culture is very relaxed, personal and informal compared to others. There are upsides to that, but productivity isn't one of them.

Do I detect a nasty business bashing edge in the rhetoric? One of the main problems is not knowing what the IRD will think, so businesses employ an army of accountants to tell them. The accountants then guess for them. Simplifying the rules is much better than ad hoc deductions. The IRD has enormous power to rule a specific expense as a capital cost and thus not deductible.

Bill English did enormous harm by abolishing depreciation allowance for buildings. It was a horrid fudge for vote buying purposes and effectively a tax increase for all businesses. It laid waste to the avowed concept of developing principles and sticking to them.

When will people get it into their heads that businesses are our customers? As individuals we tend to see businesses as arrogant quasi monopoly suppliers, but as citizens they are the country's customers. Without them we have no jobs and no tax income.

My experience with these sort of schemes is they are very time consuming for your best people, and any concession is largely wasted because of this.

Low productivity is a result of low interest rates and low wages. High productivity arises when capital equipment is worth installing in order to reduce the wages bill. So reduce immigration to manageable levels and stop incentivising low productivity occupations like making beds, serving coffee and selling houses to new people at inflated prices. Introduce debt to income controls so the Aussie bankers can't drain us dry of capital. Help business make profits so they can afford to expand. In short, get real New Zealand, stop deluding yourselves.

I fear so, Roger. Business is viewed as a target for taxation, as constantly requiring yet more Gubmint red tape, and as an impediment to schemes dreamt up by The Elites Wot Know Best Always.

As Steven Pinker, (Enlightenment Now) quoting economist Peter Bauer, notes,

Poverty has no causes. Wealth has causes.

But, as is usual in all attempted Revolutions, the NewSpeak must be forced to supplant everything before. Hence 'Nine years of neglect', carefully omitting little things like the GFC, the Christchurch Earthquake, and the Kaikoura Earthquake., parroted by all the usual suspects including an unconscionable number of common taters on this 'ere blawg......

But, somehow, crying down the wealth creators of our fair land does not seem like a great way to get us all to the Sunlit Uplands of Productivity....because poverty, ignorance, tribalism and magical thinking are where we all started from and hope to never see again.

But Revolutions of all stripes have Unintended Consequences. And Producers always have the option of Going Galt.

I have experienced a significant culture shock with the tax situation in NZ. IMO the tax legislation is not clear. In other countries, the nitty gritty of tax legislation is thrashed out in the courts and with test cases. However, this simply does not happen in NZ. IRD set the agenda, not always clearly or fairly, and we are all just supposed to accept it on faith? No one is taking IRD to court and challenging them. In the UK, all new legislation is tested rigorously in the courts so there is more of a basis to understand the boundaries of the legislation.
Then there are issues like interest charged on estimated income tax. IRD charge over 8% interest if you underestimate your income, but if you overestimate and pay too much tax, they give you less than 2% on your money??? How on earth did that ever get agreed? How is that ethical or fair? Surely IRD should pay you the same interest on the overpayment as they charge on the underpayment?

Now i'm not suggesting that IRD can't be trusted or aren't doing a good job. But if they aren't, what on earth can NZ-ers do about it? Where is the path to recourse?

The unwritten rule applies to most things here. It's ok to bend the rules a little as long as you don't get caught. If you do get caught expect no mercy as you have ruined it for everyone else. It is a sort of club rules. If you overstep the line then everyone turns on you.

People follow incentives. Productive people tend to follow the carrots. As someone else here pointed out, if you want more houses built, then find ways to make it more profitable, not less so.

The interest rates make sense when you think like a tax payer. You don’t want people using the IRD instead of a bank to borrow or invest e.g. if you get 8% for overpaying it’s worthwhile doing that compared to 3.5% on Term Deposit.

Rexpat? eh? IRD take the 8%, you didn't receive anything. You only get something like 1.5% for overpaying. So IRD give you much less for your money than they charge you for what they consider theirs.

There are 2 systemic issues:
1) The high immigration rate means there is ever increasing consumer demand for company products. At the aggregate level there is no need to be efficient, i.e. more productive.
2) World wide interest rates have trended down since the 1980s lowering the rate of return required. This means more lower productivity companies exist