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JUL 13

Questions on Policy

Our most recent CEO Forum featured Dr Girol Karacaoglu, Deputy Secretary, Macroeconomics, International and Economic Research/ Chief Economist at The Treasury. Weather delayed his trip down to Christchurch, meaning the planned presentation was missed but time remained for a question and answer session.

Girol posed a question to the audience: What would manufacturers and exporters want to see the Government actually do (apart from the obvious, exchange rate controls, etc) that would help them grow and succeed?

Firstly, for manufacturing and exporting, in particular elaborate and high value manufacturing to survive in New Zealand we need a cultural change. We need to recognise as a country that manufacturing is not an optional extra, that if we wish to have better jobs, higher living standards and improved performance in the future manufacturing in New Zealand must grow. If this change occurred the choice to implement policy changes required to support manufacturing in New Zealand would not be quite so difficult.

There are a raft of changes that government could introduce if they wished, although some have already been labelled as impossible or politically undesirable by the current Government:

•Correct the existing biases in the tax system. We have multiple distortions in our tax system,   including the absence of a capital gains tax.
•Exchange rate management, via Central Bank policy reform, although there is ongoing        denial that this is possible.
• Accelerated depreciation on productive plant and equipment.
• Support in developing export markets.
• Tax deductibility of depreciation on buildings.
• Incentives to be delivered by the tax system, not grants.
• Research and Development incentives.

Tax structures have a huge impact of investment incentives in New Zealand. Currently land and property carry tax advantages, by there being no capital gains tax. This skews investment away from our added value productive sectors, where it would help create jobs, pay better wages and build real growth.

The next part of the discussion centred on inward and outward foreign investment, and what part this has to play in improving the manufacturing sector. The Treasury has previously completed research around this. Probably the only reason for inwards investment is to control resources here in New Zealand, the other three reasons: market, intellectual property and cost don’t have great attraction for investors. On the other hand manufacturers face significant inducement and some cost saving to invest offshore.

Many of these policy changes have been outlined in the recent Manufacturing Inquiry Report, which was built off the submissions of manufacturers and exporters.

Encouraging inward foreign investment into areas such as high value manufacturing brings many benefits to New Zealand. This means jobs can stay in New Zealand, helping to build future capability. There are also advantages in terms of intellectual property (IP), as keeping this on our shores serves to protect IP, allowing it to bring future development benefits. If New Zealand manufacturers don’t invest here, why should others? That is the key question.

A question was asked in regard to Government helping make Christchurch a business and exporting “hub”, taking the pressure off some of the bottlenecks appearing in Auckland. That said, when looking at the value of exports that leave from each of these cities, the difference is not as large as you might expect. Including both air and sea, in 2012 the value of exports which left via Auckland was $11,034,360 (NZ$000), where Christchurch was $9,531,969 (NZ$000). This suggests the disparity between the two cities is more in the non-tradable sector and underlines the fact that Christchurch actually has a higher proportion of exporters. We believe corrections to our general policy settings would have more effect in improving the sector than simply targeting one region, like Christchurch.

It is especially important that those who advise Government speak directly those who operate every day in the world of our real economy; they are after all the people who have to make a living in the environment created by current policy settings. We cannot live off the domestic sector alone, even though that thought has some political attractions.

We appreciate Dr Girol Karacaoglu’s interest in learning directly from those who operate in the real economy.

tags: dr girol karacaoglu, manufacturing, exporting, exchange rate, policy, capital gains tax, reform
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