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Guy Trafford says unless the Government intends all of us to become beneficiaries its needs to do more than pay scant lip service to New Zealand’s future and focus on improving productivity

Guy Trafford says unless the Government intends all of us to become beneficiaries its needs to do more than pay scant lip service to New Zealand’s future and focus on improving productivity

One area that I found frustrating in the recent Budget was the lack of anything meaningful that could be seen to be contributing to lifting overall New Zealand productivity.

The National Party established the Productivity Commission in 2010 and recently quite a bit of coverage was gained with the appointment of well known media commentator on economic matters, Ghanesh Nana, who headed up the Berl consultancy used by the Labour Party for its economic advice.

In the last public report provided to the responsible Minister (who ironically also happens to be the Minister of Finance) it contained the following sentence;

Whatever priorities different governments may have for the wellbeing of New Zealanders, the nation’s productivity performance is at the heart of achieving sustained higher living standards and greater wellbeing.

Looking at the numbers, New Zealand is about 30% per capita of GDP below the top half of OECD countries (those we like to compare ourselves against) and have been at that level since about 1996.

When looking at labour productivity the story get worse with New Zealand operating at about 40% below the top half of the OECD and this gap has widened since 1996 when it was around 34%. This makes us comparable to countries like Estonia, Portugal and Czech Republic.

Some lesser developed countries can improve their performance by lowering the unemployment rate. However, one measure that New Zealand does do well with is keeping our unemployment rate relatively low. This just leaves lifting productivity as the only long term permanent means to improve living standards.

In the meantime, lifting social welfare benefits, while welcomed by those receiving them and probably overdue, are really ambulances at the cliff bottom - something New Zealand seems to do more readily on multiple fronts rather than taking proactive and preventative action.

Looking at the graph above two countries standout for being at the wrong end of where they might have been expected, they are Japan and South Korea.

Generally, it is accepted that manufacturing economies do better than non-manufacturing and both Japan and South Korea have a history of innovative and successful manufacturing sectors. However, defining why countries fall is complex but in this case it appears both countries now have ageing and falling populations, little immigration leading to a lack of innovation and entrepreneurial drivers.

This leads to why New Zealand is also lagging behind, especially given when the country was bursting at the seams from previous governments immigration policies. We do have a lack of manufacturing in the country, and the ‘tyranny of distance’ from major populations contribute to reducing any competitive advantage here.

However, one area where New Zealand has been successful is in IT ‘manufacturing’. Unfortunately, too many just as they become successful, they get swallowed up by bigger international companies. So far this year the fourth has been sold this year, and in total going for billions. This testifies to the success of this sector and fortunately there are still some operating successfully within New Zealand. Whether New Zealand has had a competitive advantage in this area is perhaps questionable but there appears to be something in the DNA that fosters their development.

One thing that has made further development problematic has been the lack of skilled people to grow this sector. At the moment on the back of how the government has ‘allowed’ different sectors access to MIQ there appears to be no appreciation in their decision making on the benefits of who is allowed in. The classic example has been the favouring of Russian fishermen who incidentally could have triggered another lock-down versus skilled IT workers.

To provide some context in 2011 Peter Gluckman is quoted as saying that an employee in the tourism sector produces around $82,800 versus a technology worker who produces $1.7 million.

With New Zealand’s attractiveness as a place to reside in on an all time high (on the back of the government’s handling of the Covid-19 response) we should be cashing in on this by filtering in attractive applicants to fill the roles vacant. This doesn’t have to be mutually exclusive of other sectors and doesn’t even require the shelling out of more funds.

It is also likely if we had a healthy technology development sector it couldn’t help but spill over into our more traditional primary sectors and help to lift their productivity.

Another example of where the country should have a competitive advantage is in forestry processing. Currently it is our third largest exporter and yet the vast bulk are is exported as raw logs. In the meantime, local processors are closing and at the same time there is a shortage of timber for milling. One of the issues that is distorting the market are the state subsidies China provides to its onshore industry to allow them to compete for our logs. It has been said that China, who takes up to 80% of our logs, operates strategically whereas New Zealand operates very transactionally, and ‘we’ are one of the few countries that allows unfettered access to our timber resources. This has resulted in overseas companies buying up our timber resources and sending the logs offshore to China and strangling the local mills.

Given that we are trying to also balance our carbon emissions this does seem to be a clumsy oversight.

New Zealand should have an advantage (in this case) over China with energy and capital whereas China’s advantages lie with cheap labour (for now). However, with the current policies around energy, New Zealand has some of the highest power changes in the world and little incentives currently exist to invest in timber processing while the distortions exist. Whether the government is able in the current political climate to extract change out of China in the way the timber trade is conducted is a moot point, but they could provide more onshore support to even out the field. However, at the moment they still need our timber (while their plantations are establishing) and our processors need help to survive otherwise we will end up in a situation where our raw timber is unwanted and we don’t have any domestic capacity to utilise the timber.

A frustration at the moment is the lack of what seems to be any Government appreciation for the wider picture beyond the welfare state.

Welfare is important but unless the Government intends all of us to become beneficiaries its needs to do more than pay scant lip service to New Zealand’s future.

P2 Steer

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29 Comments

Why is the government so opposed to lowering taxes to make us more competitive? At the very least corporate taxes.

Because lowering income/company taxes would mean they have to lower their level of services which they provide. Or alternatively fund these services with the creation of a new tax i.e capital gains/land tax. So it won't happen as the property ponzi is sacrosanct in this country.

Robbo and JA (and Orry) have gone full 'print, borrow, and spend', words like 'taxes' and 'productivity' have no meaning anymore as we have ascended to cloud cuckoo land.

Company tax has already become such a small proportion of the overall tax take - see here;

https://www.interest.co.nz/news/110450/budget-2021-summary-all-tax-colle...

I don't think the issue of low productivity has anything to do with the rate of company tax here.

Bingo. Most company tax goes through havens offshore or into asset purchases to hide net profits.

Thanks. I was startled to see this breakdown - I used to follow the pie charts when (I think it was NZ Herald put out an infographic each year) and I recall company tax being roughly proportional to PAYE. The 'mix' shown in that pie chart suggests we really need to broaden our tax base. We are presently relying on income and consumption (as tax on profit diminishes) - begs the need for a capital/wealth or land tax as a means to take some of the burden off wages earners and consumers.

A different interpretation is possible. Since the 1970s and 1980s, NZ has adopted a tax system that is very different from those used in most OECD countries, one that taxes capital income at relatively high rates and labour income at relatively low rates. For nearly two decades New Zealand has one of the highest fractions of tax collected from capital income (including business profits) in the OECD - typically in the top 3 or 4 countries. (Correspondingly, we have one of the lowest fractions of tax collected from wages and salaries, often in the bottom 2 - 3 countries) This is without a capital gains tax! Most countries including the highest income and most progressive countries in the world (eg Norway, Denmark, Ireland) deliberately try to tax labour incomes, particularly high labour incomes, at higher rates than capital incomes to ensure businesses invest a lot (enabling a high productivity, high wage economy) and to ensure their most productive businesses do not depart for other countries. NZ has adopted a unique approach, one that attempts to tax labour and capital incomes at similar rates. Whether or not this is a major cause of the low capital/income ratio NZ "enjoys" is difficult to determine empirically, but most tax economists argue that high taxes on capital income reduce investment and for this reason reduce the capital stock. There is also fairly good evidence that high taxes on capital incomes lead to lower wages, and many studies suggest they lower economic growth rates. So overseas evidence suggests it is at least plausible that relatively high taxes on capital incomes are responsive for part of New Zealand's continued low productivity growth.

It is a pity that there was very little discussion of the major differences between the tax systems of rich and progressive countries and NZ in the recent Tax Working Group. They missed an opportunity to discuss whether the unique path NZ chose more than 30 years ago is working in the intended fashion.

Appreciate the points made, Andrew but just not sure what forms of capital income you are saying we tax higher than our OECD counterparts?

https://www.smartcapitalmind.com/what-is-capital-income.htm#:~:text=Capi....

Using the above definition for capital income - where are we out-of-whack?

The basic form of capital income is business profits, which then can be distributed as dividends, interest payments, or rents; and property rents (which are in many ways a subset of business profits, but which are often treated as a separate class); and capital gains. Property rents include in principle the value of rent that people who own their own homes implicitly earn from their homes, although these are not taxed in most countries. Capital gains are a type of capital income, although they are appropriately treated as "special" in most countries and taxed at a lower rate.

NZ has very high effective rates of tax on capital income for three reasons.
First, most countries levy special social security taxes on labour income but not on capital income. These pay for retirement income and unemployment benefits . In addition there are income taxes that are paid on both capital and labour income. This means two taxes are paid on labour income but only one on capital income - and so capital income taxes are lower than labour income taxes. The social security taxes are high - about 9 - 10% of GDP in most countries, versus 1-2% in NZ (the ACC levy). This means NZ has a higher effective income tax than most countries, although the top marginal tax rates are low. This is the main reason why tax on capital income is high. At the same time, the combined income tax plus social security tax charged on labour income is one of the lowest in the world. NZ is more or less the only country to fund most retirement earnings out of general taxes rather than social security taxes or compulsory saving schemes, a decision going back to Muldoon's 1975 government.

The second reason is that NZ has high effective taxes on capital incomes is that they are paid in the year they are earned. In most countries, earnings from assets held in retirement income accounts are only taxed when the assets are withdrawn in retirement, so the earnings and assets accumulate much faster and are taxed at a lower effective rate. New Zealand is one of the few countries to do this, a decision that goes back to Lange's 1987-1990 government.

The third reason is that young businesses can claim fewer deductions in their first few years, which brings the timing of their tax payments forward relative to firms in other countries. The World Bank routinely places NZ as having a top four place in the amount of tax paid by a young medium sized business.

So, even though there is no capital gains tax (except for the Byzantine regulations increasingly applied to rental property), NZ ends up having some of the highest taxes on various forms of business income in the world.

The most important tax theory of the last 50 years argues that there are good reasons to tax capital and labour income at different rates, and most countries do this, choosing to tax capital income at lower rates than labour incomes as a way of generating a more productive and higher wage economy. NZ has largely chosen to ignore this advice, largely for ideological and political reasons. The real question is how much this decision costs the country in terms of productivity: no one has really tried to estimate this. Consequently, no one really knows if adopting a unique approach to tax has impeded economic growth and contributed to relatively low wages in the manner that economic theory suggests.

AC

Very interesting - thanks for that, Andrew. I was once asked to provide my 'ideal' split in terms of tax source on a percentage basis of the overall tax take. Here's what I came up with - I'd be really interested to get your view on what you see as that ideal (I've put our current split in brackets - current percentages taken from here https://www.interest.co.nz/news/110450/budget-2021-summary-all-tax-colle...);

Consumption tax = 25% (23% - note: my target figure includes resource consumption taxes)
Income tax = 10% (37%)
Company tax = 10% (13%)
Inheritance tax = 20% (0%)
Land tax = 20% (0%)
Excise and other tax = 15% (27%)

I'm not an expert by any means - hence the reason it would be so interesting to get your ideal split!

great post - thanks

I' don't see a good reason why our starting point shouldn't be near the OECD average - what the rest of the world does. New Zealand normally isn't that special, except when we make choices that make us underperform . The OECD average is

Personal income tax 25%
Corporate and capital income taxes 8-9%
consumption taxes 30%
social security taxes 25%
Other taxes (including taxes on land and environmental taxes) 11-12%
I would probably aim for higher taxes on urban land over time: these tend to be inefficient, and in the NZ context would help balance the large tax incentives to overspend on housing that help to artificially raise land prices

Tax involves a tradeoff between efficiency and equity considerations, but NZ seems to have chosen a combination that is neither particularly efficient nor particularly redistributive. It is particularly unusual, so moving towards what other countries make work seems like a good idea.

Thanks again Andrew. Yes, I agree, our tax/welfare system is certainly not efficient. I guess in order to move us toward that rebalancing we'd have to make super non-universal and convert all kiwisaver accounts to a new method of social security/retirement; much like the US (and Australia).

And the other side of the coin to that is the Government dipping into those social security funds - as they have done in the US.

All good points. The mention of the surprisingly low placing of South Korea and Japan got me thinking - and then I looked at the way-out-there, top two performers: Ireland and Luxembourg - and that raises questions about the validity of the measure. What makes these two so outstanding? Any guesses?

Indeed. One suspects that the equation might be a bit too simple, using a simple 'volume of money' factor like GDP that doesn't measure productivity in a meaningful way. It looks like tax accountants are very 'productive'. Norway and Australia's numbers are probably jacked up by extractive industries, where the digger driver is removing thousands of dollars worth of ore each hour; it doesn't really mean they're doing anything 'right'.

Yes, that's all I could put it down to. Which is a real disappointment given the data is put together by the OECD. I lose faith in orthodox economics with each passing day.

WHY OH WHY CAN'T THESE PEOPLE BE THE WORLD'S 'POWERS THAT BE'?
https://vimeo.com/514851915?fbclid=IwAR0G4K2uXvt1k1aiWpBhrTiycqrYr6K4tUC...

I have a different view of why we lack productivity. Much of NZs remaining business relies largely on manual labour, that is very, very difficult to apply technology to automate, or otherwise improve workers productivity. The manufacturing industries where this could comparatively easily be achieved has largely been sold off overseas. The sooner we prevent this happening the better. Another reason we lack is pay and conditions. Successful business lobbying of Governments has enabled pay and conditions legislation to be eroded in the last 40 - 50 years, allowing employers to make false gains in productivity, and avoid making big investments in technology to make real gains. The first, cutting labour costs has an immediate result, but is shallow and limited in what can be achieved. The second costs more upfront, sometimes a lot more, but the potential gains are significantly higher, although further down the track. Both our Governments and our business's have been very short sighted in this area.

Ireland's position is due to foreign multinationals 'headquartering' there as a tax dodge. Ireland doesn't receive the benefit of that GDP being earned and generated in Ireland - just their scanty business tax from multinationals declaring their income to be made in Ireland.

For Korea, having lived there, I'd guess it's due to LG, Samsung etc as well as the Hyundai shipbuilding in Busan. Plus they get access to cheap Russian labour. Their tax rates could have something to do with it. When I was there 16 years ago I paid 7% personal income tax and my internet was fibre and ultra fast. Goodness knows how fast it is now

Yes, as in my response to brisket above on Ireland and Luxembourg - those were my thoughts as well - FIRE sector productivity (to my mind those "industries" shouldn't even be measured). Korea was noted for its lower position than expected - given the manufacturing powerhouse that it is.

Makes a mockery of the concept of productivity given the ptb (power that be) feed up such rubbish measurements. Or perhaps the problem is orthodox economics.

The question of importing skilled workers is an interesting one. How skilled does someone have to be, such that you can be sure there's more overall value in hiring them from overseas vs. training a local? I still think the *training* part of the equation is sadly lacking across all industries. I suspect it's a victim of the general breakdown of trust and expectations between workers and employers. Since the 90s no one (hmmm, maybe public servants) really feels secure in their job, so they don't emotionally commit to their employer; and employers don't want to commit to even a few months training a new person because they might leave for greener pastures before the cost of that training is recouped. HR consultants, who often know nothing about the industry they are hiring for, have filled the space where there used to be a genuine relationship between the two parties.

Training a local is way way harder and much more expensive, specially if the employer is to pay for the education. If NZ education system was capable of producing skilled graduates, that would have been different. But expecting businesses to compensate the inadequate education at Education NZ is an impossible ask.

Have a think about the Labour Hire companies influence things too.

This is separate to the IT & executive hrly contracting.

Too many talented people are being very well paid to do bullshit jobs within Private sector functional monopolies and Public sector. Plenty of Oxygen Thieves in both as well. But the available talent is locked up. Can't hate the players. But can hate the game.

Just yesterday heard of a local authority spending $300K on consultancy regarding a coastal adaptation report. And I had read the Terms of Reference for the consultancy work earlier. The job is basically synthesizing the mountains of other costly reports they've had done over the past 20 years! Sheeesh - do these bureaucrats not see the irony/wastefulness of that?

Ironic indeed when they pay other people to do the job they are paid to do.

Arse-covering is chronic. You need a dozen reports to justify your decision in case something goes wrong.
Because if something goes wrong, accountability is demanded. Nothing can ever be just a mistake, or a decision made with inadequate knowledge -- there must always be an inquiry, recommendations around improving processes, a slap on the wrist for someone... So making sure that you have plausible cover for any decision becomes *the* key skill in the public sector.

the irony being that accountability stops with the minions and doesn't work up the chain - the minions who do all the work, provide all the knowledge and protect all the managers are the first to get shafted - no wonder our productivity is crap - too many chiefs and not enough indians (figure of speech arse covering addendum goes here)

(and here)

(in triplicate)

(lets have a meeting and discuss it)

Funny how two tax havens are the most “productive”.

My first thought too.