Experts see need for clarity on tax reform and spending

Tax experts and business lobbyists are no slouches when it comes to charting out just where New Zealand needs to move to ensure it stays internationally competitive.

Many applauded Finance Minister Bill English for presenting a Budget plan that won approval from credit rating agencies. But they would rather English had also used his first Budget to inject some clarity on areas vital to the country's growth such as:

Where the cash will come from to fund major developments in the infrastructure space.

The future direction of tax reform.

In the May 28 Budget, English confirmed the Government's intentions to increase its capital spending allowance from $900 million to $1.45 billion to fund activities such as new capex for health ($245m), new schools ($523m), the first tranche of the Government's broadband plan ($290m), state houses ($124.5m) and an extra $1 billion over three years for the state highway network.

Wellington Chamber of Commerce CEO Charles Finny reckons the proposed new infrastructure investment - particularly in transport and broadband - is vital to New Zealand business. "Increasing New Zealand's productivity growth depends on such investment," Finny said.

The projects will also provide a valuable fiscal stimulus as the recession bites, but there is a clear desire from the business sector for more clarity - particularly over the use of public-private partnerships (PPPs).

Deloittes corporate finance partner Paul Callow notes PPPs have been experiencing some difficulties in development markets where financing has dried up. Some substantive steps towards establishing the "bond bank" - which has so far only been talked about - or direction as to how the NZ Super Fund could participate in infrastructure, would be useful.

"There is no time to reform like the middle of a crisis," Callow said.

He points out the Government has enormous amounts of capital tied up in assets - many of which he considers to be under-performing in commercial terms - which could be freed up to invest in new infrastructure.

"Partial sell-downs of state-owned enterprises would invigorate our capital markets as well as provide ordinary New Zealanders with investment options other than domestic property."

This could be achieved without necessarily losing public control of the business and would result in greater accountability to shareholders for company performance.

"The SOE model was only ever really intended as a halfway house, rather than an end in itself, and we have spent over a decade stuck halfway. It is about time we moved things along."

Partially privatising SOEs is one of the measures Rob Cameron - who chairs the Capital Markets taskforce - believes will increase business efficiency. But National pledged it would not head-down the privatisation path without first putting its intentions in front of New Zealanders at the election.

Ernst & Young tax partner Joanna Doolan says the infrastructure spend-up will provide a foundation on which businesses can build innovation and productivity. She points out that directed measures like research and development tax credits and tax incentives for capital investments (similar to those in Australia) all sound "uplifting and fantastic, yet the question is do they really achieve the right outcomes?

"Australia has had tax incentives for research and development for nearly a decade and yet there is no evidence that their R&D is any higher than other countries that do not have incentives," Doolan said. "There will be those who strongly consider the Government is not doing enough, but there is a fine balance between governments providing a platform on which businesses can build growth, and tax measures that distort commercial decisions.

"Overall, I favour lower tax rates that enable businesses to keep enough of their profits to make commercial decisions. Tax biases can distort decisions or reallocate expenditure that would have been incurred regardless."

The Government's intention to defer the next two rounds of personal income taxes had been well-leaked ahead of the Budget. Finny said though some businesses would be disappointed, they would understand the fiscal imperatives. "Lower income taxes are the best way to improve our international competitiveness and we hope the cuts can be reinstated sooner than is foreshadowed," Finny said.

But, Doolan notes, "don't forget the good news". Unlike the UK, the NZ Government has not increased the top personal tax rate, nor has it removed the first rounds that were introduced on October 1 and April 1.

"This means that we are not out of winning range when it comes to comparing our personal tax burdens with Australia," Doolan said.

Ignoring exchange rate differences, someone on $20,000 will pay just over $900 a year more tax in NZ. Those on $40,000 a year pay just over $1300 a year more in NZ and those on $60,000 a year pay around $1000 a year more in New Zealand. Even for those on $100,000 a year, the increased tax payable in New Zealand is just over $2000 a year.

Doolan points out that high-earning individuals - those on $300,000 a year - will pay less tax here than in Australia.

"Given our need to attract high net worth individuals this is clearly an ideal opportunity to attract some of this talent to our shores."