Good ideas, but Govt unmoved
Lukewarm reception for latest report on how to boost productivity — and living standards
The OECD has some helpful suggestions for how New Zealand might lift its lousy productivity performance — and with it, living standards. The Government’s response? On the whole, “yeah, nah,” especially to those ideas requiring changes to the tax system.
The analysis in the OECD’s latest country report is drearily familiar.
New Zealanders’ output per hour worked is only 63 per cent of the average for countries in the top half of the OECD. Remember when the aspiration was to join their ranks?
It has languished around there since the mid-2000s. Australia’s labour productivity is nearly half as high again, despite being not all that much more populous and just about as remote from major centres of global economic activity.
What the OECD sees is a lot of firms which don’t face as much competition as their counterparts in other advanced economies, which don’t invest anything like as much per worker and which spend way too little on research and development.
The concern about weak competitive pressures echoes work by the Productivity Commission which points to comparatively wide margins between costs and selling prices, and the survival of zombie firms with poor productivity.
More competition would also lessen inequality, the OECD argues, by putting downward pressure on prices, which benefits consumers over (generally richer) shareholders.
It endorses giving the Commerce Commission the power and resources to undertake proactive market studies, rather than being confined to merger and acquisition applications and violations of competition law.
This is under consideration as part of a review of the Commerce Act, Finance Minister Steven Joyce said.
But he gave short shrift to the OECD’s suggestion to cut the company tax rate in order to lower the cost of capital and boost capital investment per worker.
The capital-to-labour ratio is low and is thought to explain much (though by no means all) of our unimpressive labour productivity. Excluding investment related to the Canterbury rebuild, capex per worker has been around 75 per cent of the OECD average since the mid-2000s.
That is partly because of a higher cost of capital than in most other advanced economies. “As national saving has persistently fallen short of investment, New Zealand has accumulated substantial foreign liabilities and international investors may require a premium to invest here,” it says.
Australia’s labour productivity is nearly half as high again[as in NZ]
At 28 per cent, the corporate tax rate is higher than the OECD median of 25 per cent. New Zealand is even less competitive in terms of the effective marginal tax rate corporates face. It adjusts for provisions which reduce the tax base. At around 21 per cent, it is about half as high again as the OECD median and the fifth highest among its 34 members.
Joyce’s response was to point to the imputation system under which dividends come with a tax credit for a shareholder’s share of the company tax paid, to avoid double taxation of those earnings.
“The Government is not currently reviewing corporate taxes and notes that New Zealand’s company tax is structured to effectively be a withholding tax for individual taxpayers and is therefore not directly comparable with most other international company tax rates,” he said.
That hardly addresses the OECD’s point about relative attractiveness to international investors.
“It is difficult to see how [New Zealand] can resist the global trend to lower corporate tax rates without losing out on foreign investment,” it says.
“Any cut in the corporate tax rate would need to be assessed in the context of a holistic review of the tax system, including personal taxes and the option of expanding the number of tax bases to includes land (which is immobile and t here for non-distortionary), capital gains and negative environmental externalities [like carbon emissions].” And if one downside of a corporate tax cut is that some of the benefits accrue to foreign investors, well, such benefits are the price to be paid for attracting foreign capital.
Essentially, the OECD is telling us we are falling between two stools.
On the one hand, we have a tax system that encourages us to invest in housing, especially owner-occupied housing, rather than business enterprises, while on the other hand a relatively high effective corporate tax rate is liable to deter inward foreign investment.
The result is a low capital-to-labour ratio, low labour productivity and consequently low incomes.
The OECD is also struck by the fact that Auckland does not seem to be delivering the agglomeration efficiencies that big cities are supposed to provide.
Infrastructure investment is lagging behind the requirements of the city’s rapidly growing population.
A major problem, it says, is that the Auckland Council, like others in New Zealand, has weak incentives to invest in amenities to facilitate growth, as local ratepayers bear much of the cost while the fiscal benefits flow mainly to central government.
Echoing the New Zealand Initiative, it says one way of increasing the council’s debt- servicing capacity would be giving it a share of a revenue base linked to local economic activity like GST. Another, echoing the Productivity Commission, would be using targeted rates to tax the windfall gains to landowners from the provision of new amenities.
On the latter recommendation, Joyce said “policies in this area are currently under development.” On the former he was silent.
The OECD also recommends increased fiscal support for business R&D. This is another of the measures in which we languish in the lowest third of the OECD league tables.
As well as spending more on grants and scrapping the current cap ($25 million a year), it recommends a tax incentive, allowing firms to claim a deduction for more than 100 per cent of their R&D spending, to reflect the spillover benefits to the wider economy.
Joyce’s response was defensive. He cited a survey last year which found a 29 per cent increase in business R&D spending between 2014 and 2016, and pointed to increased Budget support for innovation.
It is the old “never mind the level, look at the growth” defence. But it is the former that matters.