Finance Minister (an newly minted Minister of Economic Growth) Nicola Willis has promised bold changes in her upcoming Budget to stoke growth. Photo / Mark Mitchell
Finance Minister (an newly minted Minister of Economic Growth) Nicola Willis has promised bold changes in her upcoming Budget to stoke growth. Photo / Mark Mitchell
Analysis by Kate MacNamara
Kate MacNamara is a South Island-based journalist with a focus on policy, public spending and investigations. She spent a decade at the Canadian Broadcasting Corporation before moving to NZ. She joined the Herald in 2020.
The Government aims to deliver economic growth, focusing on productivity and investment reforms.
Nicola Willis promises bold steps in the May Budget to address productivity challenges.
New Zealand’s GDP per capita has been declining, with a 5% drop since late 2022.
The Government has announced that its focus this year will be delivering economic growth. It’s one thing to tell a growth story, but it’s quite another to be one – where high per capita economic performance really lifts living standards.
New Zealand doesn’t need arolling maul of growth announcements, as newly minted Minister of Economic Growth (and Finance Minister) Nicola Willis has promised.
That includes the “digital nomad” announcement of last month; the only change is that travellers to New Zealand arriving on visitor’s visas, the duration of which is unchanged, are now allowed to work remotely for an employer abroad. As though they weren’t already doing so.
Andrew Craig, acting general manager employment, skills and immigration policy at the Ministry of Business, Innovation and Employment intimated as much.
The department holds no data on the number of visitor visa holders already coming and working remotely without disclosing this to officials, and Craig declined to provide any estimates for how many additional visitors the change might bring in. He told the Herald: “It would be difficult to predict…”
Furthermore, the old rule was unenforceable. Neither Immigration nor the Inland Revenue Department had any mechanism for ferreting out visitors who perpetrated conference calls with their home offices or emailed their clients.
To be clear, there’s nothing wrong with the visa change, it brings the rules up to date. But it’s not meaningful for growth.
The announcement of a new agency, Invest NZ, is in a similar vein. It is essentially a plan to carve a welcome wagon-type entity out of New Zealand Trade and Enterprise.
It will act as a shop front for foreigners interested in investing in New Zealand, but, as yet, it has no new inducements to offer those investors.
Perhaps anticipating this line of criticism – that her announcements to date will do nothing meaningful for growth, and less still for growth per capita – Willis has promised that her upcoming May Budget will “contain bold steps” and “address New Zealand’s long-standing productivity challenges”. Moreover, in recent interviews she has said she’s considering changes to corporate taxation.
Minister of Agriculture and Trade, Todd McClay, will also head Invest NZ, a new agency aimed at attracting capital investment to New Zealand.
The scale of the problem
New Zealand’s growth problem is currently contraction. GDP per capita – a measure of the size of the economy relative to the population – is going backwards.
Since late 2022 our per capita wealth has fallen by roughly 5%. Prior to that, the country suffered decades of slow per capita growth that lagged the OECD average. This is, as economists put it, a productivity problem, and it means that output per hour worked (labour productivity) is poor, and moreover, it is not keeping up with the rest of the world, though the problem is certainly not unique to New Zealand.
To make matters worse, New Zealand is currently running a budget deficit, whereby the government’s income is chronically outstripped by spending. The latest Treasury projections anticipate that this difficult predicament will continue for at least the next four fiscal years (including the current one).
What bold steps could the Government take?
Willis has pointed to a handful of other small advanced economies (and one medium-sized one) that New Zealand hopes to emulate in growth: Ireland, Singapore, Estonia, and South Korea.
And she told the Manawatū Chamber of Commerce in a speech last month that all: “made determined decisions to reform their economies in favour of investment, trade, development, innovation and growth… All have undergone a step-change in their GDP growth rates, and all have delivered dividends to their people and as a result have: higher incomes, more opportunities, and more investment in public services. New Zealand needs to be as bold”.
Willis listed various steps the Government is already taking, in education, deregulation, freer trade, changing the Government science institutes and more. All of which may be needed, but none of which appears to be sufficient to reverse the country’s lagging, long-run, productivity. Then she came to a little-used term (at least by politicians): “capital intensity”, which is essentially capital investment per person, in an economy.”
“We know that faster-growing countries tend to have more capital intensity in their businesses, which helps drive productivity. I’m keen to unlock more of that in NZ and am considering the best ways to support it,” Willis said.
Overseas investment
Willis pointed out in her speech that, despite seriously needing more investment, New Zealand makes it very hard, through the rules of the Overseas Investment Act, for foreigners to invest their money here.
The Government is taking steps to reform the act, but the pace has been slow. The Cabinet agreed on the principles of that reform in October, central to which is the presumption that outside investment should be allowed in, unless there is an identified risk to New Zealand interests. The plan is to pass the necessary legislation by the end of this year.
However, as yet, the Government has said nothing substantive about the remaining problem: foreigners have a lot of choice in where to invest their money. Why would they choose our small and distant economy?
New Zealand’s corporate tax drag
A variety of tax policies affect foreign investment, but the headline corporate tax rate is often the most important, and New Zealand’s, at 28%, compares unfavourably with much of the world.
Headline rates in 2024 in the comparator countries Willis favours were 12.5% (Ireland), 17% (Singapore), and 20% (Estonia), where all undistributed profits were tax-exempt, giving a hefty boost to reinvestment.
South Korea had several lower rates for small and medium-sized businesses, and a top corporate rate of 24%. In addition, local corporate tax applied to profits at gradual rates of 0.9% to 2.4%. The combined top marginal rate was 26.4%.
Economist and blogger Michael Reddell said the Government could plot a path to lower corporate taxes in the upcoming Budget if it has the resolve.
It’s worth noting that New Zealand domestic investors are afforded relief from the country’s high corporate tax rate in the form of “imputation credits” – a mechanism that allows tax already paid on company profits to reduce the tax owed by shareholders on company dividends.
Foreign investors, however, have no final New Zealand tax liability, and consequently they have no means by which to offset New Zealand’s high corporate tax rate.
To improve matters, Willis could drop the headline corporate rate. Economist and blogger Michael Reddell told the Herald that lowering the corporate tax rate is one of “the big levers” for boosting growth per capita; other important levers he cited were deregulation, including loosening the Overseas Investment Act, and keeping much tighter control of immigration than is New Zealand’s current policy.
”The big deficit is a fiscal constraint, but the Budget could plot a path to reform, with, say a 1% a year reduction in the corporate tax rate for the next four years,” Reddell said.
Given the government’s straitened books, more limited changes to reduce investors’ effective corporate tax appear more likely (effective tax reflects offsets to the headline rate, such as deductions and credits). These relatively cheaper options range from expanding research and development tax credits for companies to providing accelerated depreciation or total or partial expensing for capital assets, such as machinery.
Boosting domestic investment?
University of Auckland economist and professor Robert MacCulloch said New Zealand lacks capital investment, both foreign and domestic. And he too cited New Zealand’s corporate tax rate as an impediment to foreign investment in particular.
In addition, MacCulloch emphasised that another piece of the puzzle of New Zealand’s shabby per capita growth is the low domestic savings rate.
He contrasted New Zealand with Singapore, where compulsory save-as-you-earn schemes (for retirement and healthcare, for example) are funded by workers, employers, and, to a lesser extent, the government.
The savings flow to the country’s “Central Provident Fund”, the largest pool of investable funds in the country, which for decades has been used to drive a huge volume of internal investment.
University of Auckland economist and professor Robert MacCulloch favours compulsory domestic savings, something he said the National Party has no stomach for. Photo / Supplied
MacCulloch and former finance minister Roger Douglas, who drove economic reform in the 1980s, have, for years, promoted the potential benefits of a similar system in New Zealand – in the Sir John Key years they even provided the National Party with a costed plan.
Deeper domestic savings would drive growth, MacCulloch said. But on that count he’s all but given up.
“The Nats love to talk about Singapore, they’ve been at it for a long time, but what do they do? Status quo stuff...they prefer to manage than to make big change... from what we’ve seen so far from Luxon and Willis they’re not genuine reformers.”
