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JUN 10

Materiality, Fiscal and Monetary Policy




We have just experienced another budget that fails to demonstrate any understanding of the productive, trade exposed sector. What follows is the content of a slide I developed a while ago that tries to compare the impact of fiscal and monetary policy options on a typical firm operating in the real economy and exporting half of its annual sales.

Taking some nominal number of sales at NZ$10m, fixed assets of NZ$3m with an annual reinvestment of NZ$300k, a high 7% of sales on R&D and a pre-tax profit of 9% sales:


• 1% change in corporate tax is 1% x 9% x revenue = $9000
• 1% change in depreciation 1% of NZ$3m = $30,000
• 15% R&D tax credit = .15 x .07 x 10m = $105,000
• 1% change in exchange rate = 1% x 5m = $50,000
 

Now consider what the ranges might exist on each of these variables:


• A huge corporate tax a big change might be 5% = $45,000
• A big depreciation change to total first year write off at 28% of 300k = $84,000
• Maintain the R$D tax credit at 15% = $105,000
• A “normal” exchange rate fluctuation of 40% = $2,000,000
• Or an adverse exchange rate change of 18% can wipe out any profit.
 

On this basis is it any surprise that the real economy sees little from current policy. Equally is it any surprise that those who serve the domestic economy that are not trade exposed, don’t do R&D and have no need to invest in plant and equipment are happy with existing settings. Further is it any surprise which segment of the economy gets the investment and which does not?

Budget 2010 has further entrenched the favourable treatment of the non-trade exposed elements of our economy. As a result the trade exposed sector will continue to struggle through a long battle of attrition; the outcome will be to the detriment of everyone
 


tags: fiscal policy, monetary policy, trade exposed
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