Two of New Zealand’s principal economic issues are its low productivity and high effective corporate tax rates.
So will the Ardern government tackle these issues in Budget 2022?
Finance Minister Grant Robertson could write himself into NZ’s economic history if he did so.
Sadly, Point of Order suspects he might go for what are quick-fixes (if he does anything at all) that do little to raise investment levels and lift productivity to stop NZ falling further behind other advanced economies..
The OECD in its annual review of the NZ economy attributed the low productivity rate to muted product market competition, weak international linkages and innovation, and skills and qualifications mismatches.
Along with that, the OECD said:
“Effective corporate tax rates are high by international comparison, holding back capital investment and FDI”.
It went on:
“New Zealand has considerable scope to boost productivity by fostering growth of its digital sector and stimulating digital innovation. This requires strengthening the domestic pipeline of digital skills, making sure that regulations evolve with technological change and enhancing exports by firms exploiting digital technologies.
“New Zealand is relatively advanced in some aspects of digitalisation, such as the high share of small firms selling online or use of the Internet of Things. However, the digital sector is smaller than in other OECD countries and has relied heavily on skilled migrants to fill jobs requiring advanced digital skills.
“It is now facing a severe skills shortage caused by border restrictions in the short term and competition from other countries in the longer term. The domestic pipeline of graduates with advanced ICT skills is narrowing, as weak mathematics and science achievement by students in primary- and lower secondary schools closes the door to tertiary studies in ICT-relevant fields. The diffusion of digital technologies is also held back by a copyright regime that does not accommodate the use of some digital technologies, the cost of adopting digital tools for small businesses and the difficulty of reaping high returns on investment in digital technologies by exporting.
“ The government has been developing several policy initiatives on digitalisation, including the Industry Transformation Plans to foster the development of digital technology and agritech sectors. It recently embarked on the production of a national digitalisation strategy, which aims to promote trust, inclusiveness and growth in the digital economy and society. This strategy would help stakeholders in a wide range of policy areas to work together in a coherent way.”
The OECD also says the introduction of unemployment insurance would help to make the diffusion of digital technologies more equitable by reducing the burden on workers displaced by digitalisation – most displaced workers do not qualify for the means-tested unemployment benefit.
The OECD, noting that corporate income tax rates are higher in New Zealand than in most other member countries, said they are especially high compared with some small advanced economies.
“The high nominal rate encourages internationalised firms to shift profits abroad or locate their highly profitable activities outside New Zealand. The high marginal effective rate discourages firms, including multinationals, from investing more by increasing the user cost of capital, contributing to low rates of capital investment in New Zealand. The difference between nominal and effective tax rates is smaller in New Zealand than in most other OECD countries because the corporate income tax base is broader, despite the reinstatement of depreciation deductions on industrial and commercial buildings in 2020.
“Reducing the nominal corporate tax rate to align the effective rate with those in Australia and small advanced economies would encourage investment in tangible and intangible capital that contributes to productivity growth. It would also reduce incentives for internationalised firms to minimise the share of profits declared in New Zealand. However, these benefits need to be weighed against fiscal and other costs of reducing the corporate tax rate. For instance, lowering the corporate tax rate (28%) further below the top two marginal personal income tax rates (38% and 33%) could endanger tax integrity by encouraging wealthy individuals to shift income to corporate entities to reduce their tax liabilities. It would also reduce taxation of economic rents.’’
Like other sage advice from the OECD, Point of Order thinks it has fallen on deaf ears in the Beehive.
If it hasn’t and the Budget contains some actions at least to raise productivity, we will be pleasantly surprised and have one less issue to beef about when we are judging the Ardern government’s performance. At least for now…