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Labour’s notes on manufacturing need discussion

BusinessNZ welcomes the focus on manufacturing in policy directions released by the Labour Party on April 17, 2014, but some of the proposals need more work.

New Zealand’s prosperity increasingly depends on innovative high value manufacturing and services and on a policy focus on the right conditions for the sector to thrive.

From our close involvement with the manufacturing sector and frequent surveys of manufacturers we have a clear picture of the needs of the manufacturing sector.

Manufacturers’ top need is for relevant skills. They need a better supply of skilled, educated people to achieve innovation and productivity in manufacturing firms.

What manufacturers want to see from political parties are policies to address current skill mismatches and get more well-trained graduates with in-demand applied skills.

Better infrastructure

Manufacturers need good infrastructure that supports business and trade; good transport, electricity and broadband infrastructure.

They need good access to capital to be able to develop and grow businesses. Realistically, that means being able to attract overseas investment on good terms. Therefore it requires a business environment that is welcoming to overseas investment.

Manufacturers need good access to overseas markets for their products and services, without costly tariffs or other barriers, and hence are supportive of ongoing work to achieve free trade agreements in many markets. They appreciate a business environment in New Zealand that facilitates their contribution to the global supply chains that are now a dominant force in the world economy.

Manufacturers will appreciate the particular emphasis on their sector in policy directions released by Labour, and will appreciate the opportunity for a national conversation on manufacturing’s needs during the upcoming election period. We would welcome other political parties releasing policies for the manufacturing sector.

BusinessNZ would be pleased to engage further on Labour’s proposals following initial responses to some of the proposals:

Procurement process

Our manufacturing companies would be delighted if government agencies purchased more New Zealand-made products. In many instances, government contracts have gone to overseas companies even when local products offered better price and quality.

This occurs despite ongoing initiatives to encourage government agencies to buy locally made products. New Zealand manufacturers are not seeking either any form of compulsion to buy goods made here, or any other form of special protection.

This is because compulsion and special protections end up distorting investment decisions, making the business environment less competitive overall. New Zealand manufacturers would prefer government agency purchase decisions to be based on explicit, transparent criteria so that local manufacturers have a fair chance when competing against overseas providers for NZ government business.

Speedy depreciation

Allowing certain sectors accelerated depreciation on plant and equipment would provide assistance by reducing the tax burden in the early period following the equipment purchase. However, choosing which sectors or industries should get this tax assistance would be problematic.

Global markets change rapidly according to changes in consumer needs and ongoing innovation in product offerings by competitors.

Choices about which New Zealand industries should get favoured tax treatment would be hard to justify, given the constant change in markets.

Any policy changes should assist all industries rather than only those with high expenditure in capital plant and equipment or those in specific sectors.

More fundamentally, given that the depreciation proposal would be a reduction in the tax burden on manufacturers, a better form of assistance would be a simple reduction in the corporate tax rate to assist all businesses in all sectors, not just a few.

R&D tax credits

New Zealand businesses invest significantly less in research and development compared to firms in other developed countries. There are a number of reasons for this, including the dominance of agricultural-based industries which, although innovative, have historically invested less in formal research and development than other industries.

Industries with a history of high formal investment in R&D such as pharmaceuticals, aviation, military technology, have not been dominant in New Zealand.

More formal investment in R&D is desirable, and current policies have been introduced to encourage this, including R&D grants based on company performance and co-investment criteria, and the development of an innovation ecosystem including Callaghan Innovation which is supporting many firms in developing more advanced products and services.

R&D tax credits are not a feature of current policies because of distortions arising from their past use: they introduce an incentive to claim credits for expenditure unrelated to research and development, distorting investment decisions and diminishing the amounts spent on R&D. Clearly targeted R&D grants based on company performance and co-investment criteria are a more transparent form of R&D assistance than R&D tax credits.

Monetary policy

Labour is proposing to give the Reserve Bank of New Zealand more tools, as yet unspecified, to bring down the high dollar. This would be a significant change in direction from the current policy of the Bank having a single focus on keeping inflation under control. This is its most valuable function because inflationary pressures are the key reason for an appreciating exchange rate. Widening the Reserve Bank’s responsibilities would dilute its effectiveness in fighting inflation and high exchange rates. Depending on the extra powers that Labour may plan to give to the Reserve Bank, these may have the effect of distorting and reducing the efficiency of free markets, to the detriment of the economy and manufacturers. The proposal could also create constitutional uncertainty by assigning powers that may more properly belong to the Government.

Capital Gains Tax

Labour is proposing a Capital Gains Tax on all investments except the family home, to encourage investment in productive business rather than over-investment in property. A capital gains tax would not address the cause of the problem of over-investment in property. Over-investment in property results from overvalued housing in urban centres, which is a consequence primarily of local government restrictions on land supply. Loosening land supply restrictions would address the problem; imposing a capital gains tax would not. Manufacturers would not be supportive of a capital gains tax.

KiwiSaver

Labour’s proposal for universal (compulsory) KiwiSaver would not necessarily increase our pool of savings. The already high uptake of KiwiSaver means that compulsion to achieve more uptakes would not result in a significant additional increase in saving.

Treasury research indicates that the KiwiSaver policy has not significantly increased overall savings levels in any case, but has instead prompted the reassignment of savings from other savings vehicles to KiwiSaver.

Compulsory KiwiSaver could be a hard policy for those on lower incomes who may not be able to afford. Business would like to see national savings increase through higher prosperity resulting from a well-functioning business environment, rather than through compulsory savings policies.

Price controls

Manufacturing would not be supportive of proposals to artificially control prices in the electricity industry. The danger of a centrally-controlled electricity generation market is that it would deter private sector investment in the sector. Imposing price controls would send a signal to overseas investors that investment in New Zealand is risky, as investments could be devalued at will by government pricing decisions.

Rather than artificial price controls, manufacturers would prefer a more competitive sector where prices are kept in check by electricity companies competing hard on price.

Specific assistance

Labour proposes industry-specific assistance packages for selected industries.

Manufacturers would welcome policy changes to help all businesses to grow (reductions in tax and compliance costs and improved skills policies) but would not favour special assistance for some industries at the expense of others.

Industry-specific assistance has been provided by successive governments over many decades, and continues in a number of forms such as specific investment in border security and Crown Research Institutes. But industry-specific assistance should be only undertaken in instances of market failure, where government intervention is the only option, where there is strong justification for the intervention, the justification is open to debate, and where the costs of intervention are met by the industry concerned over time.

Compliance costs

Compliance costs are still a significant burden on business and fall disproportionately on smaller firms that make up most of the business sector.

Businesses would be highly supportive of a reduction in unnecessary compliance costs and will look forward to the release of Labour’s planned policy details for this.

BusinessNZ agrees that a strong manufacturing sector is vital for future prosperity, and like Labour disagrees that decline in is manufacturing inevitable.

Industry statistics including the PMI show that the manufacturing industry growing strongly and developing towards production of higher value goods and services.

A continued strong focus on manufacturing and policies to uphold and support manufacturing in New Zealand will be welcomed by the business community.

Phil O’Reilly is the Chief Executive of Wellington based BusinessNZ.

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