Capital Markets: David Parker: Three I's key to Labour plan

David Parker is Labour's deputy leader and finance spokesperson. Photo / Sarah Ivey

Opinion

Labour's Economic Upgrade focuses on investment, innovation and industry, says David Parker.

New Zealand is a trading nation. We are a country of innovators, with good businesses and products. Our workforce is well-educated and hard-working. We have a wonderful resource base. Yet we have not posted an external surplus for 40 years, and have interest rates which are structurally higher than our competitors pay. Even this year, on the back of wonderful terms of trade, we do not export enough to pay for our imports and interest.

Despite low general inflation, Auckland house prices are up 40 per cent, while exports have narrowed towards over-reliance on dairy. Plainly current settings need to change.

Labour has a 98-year history of innovative, new ideas to drive growth to sustain improved standards of living and higher wages. Our policies link to reduce interest rates, and help remedy the overvaluation of our currency, which is related. This is fundamental for our exporters and their investment plans.

Our broadening of the objective of the Reserve Bank will align its efforts with our export sector, without the RB losing its independence or undermining its control of inflation.

It's part of the grand tradition of bold and original thinking where Labour often leads the world.

A part of Labour's plan which has captured the headlines is the variable savings rate mechanism "VSR". We want to give the Reserve Bank this new tool as a means of dampening down inflation.

A dollar less consumption via more savings is just as effective in controlling inflation as an extra dollar paid in interest. The Australians proved this as they transitioned into their scheme. While interest paid is lost to the payer forever, often to overseas, savings belong to the saver.

The VSR is innovative, albeit less important than the move to universal KiwiSaver.

In some ways the VSR has a more direct link to consumption than changes to interest rates via the Official Cash Rate (OCR). Fixed interest loans mute the effect of the OCR, as do changes to trading bank margins. The VSR puts money into savings, whereas some of the higher interest payments under the OCR mechanism are spent by those who receive the higher interest. There is no perfect mechanism.

Because total debt is higher than total earnings, it is unlikely the Reserve Bank will be able to rely upon the VSR alone, but every bit done by savings reduces the need to push up interest rates via the OCR. Other policies like a capital gains tax also help avoid inflationary pressures and help keep interest rates low.

This is just part of Labour's vision for the economy - what we call New Zealand's Economic Upgrade, which focuses on the three "I"s - Investment, Innovation and Industry.

The current system has led to high interest rates by international standards, higher mortgage payments, and an over-valued currency, which forces our exporters out of business and sees our firms undercut at home.

Labour's upgrade will address external deficit of over $10 billion by making sure we export more overseas to pay our way in the world.

The investment pillar of the upgrade requires support for capital markets.

Capital markets play a crucial role in growth and improvements in the New Zealand economy.

Since Norman Kirk's superannuation fund was thrown on the scrap heap by Robert Muldoon, New Zealand has struggled with domestic savings. In contrast Australia has $1.5 trillion in their universal workplace savings. We are 25 years behind and playing catch-up. The Australian scheme is why they own their own banks, plus most of ours, and so many of our other businesses.

That's why Labour will make KiwiSaver universal. It will significantly expand our domestic savings and create a large pool of local investment.

Universal KiwiSaver is not enough on its own. Additional steps are needed to ensure the increased investment goes where it's needed - into productive, innovative businesses. That's where our pro-growth tax reforms come in.

Labour will introduce a capital gains tax of 15 per cent, excluding the family home and long-term small businesses. That will encourage investment away from our overheated property market and into the productive sector. Building affordable houses under our Kiwibuild policy will also dampen house price and rent inflation.

Labour will use tax tools to encourage innovation. Labour has already committed to rolling out accelerated depreciation tax deferrals for the wood processing industry and advanced manufacturing to encourage more investment in new technology.

We plan to introduce accelerated depreciation across the economy in the long term, but can only do that over time as fiscal conditions allow. That's why we are starting with industries where we think it will bring the most benefits.

However our research and development tax credits will apply across the economy. That will encourage businesses to invest to develop new products and markets, crucial to an innovative and advanced economy.

Labour's economic plans have met with support across the spectrum.

The current settings are keeping investment and savings low, hurting our net international liabilities and reducing productivity. The economic upgrade is exactly what New Zealand needs to be a wealthier nation with better jobs that pay higher wages.

• David Parker is Labour's deputy leader and finance spokesperson