BusinessNZ welcomes the focus on manufacturing in policy directions released by the Labour Party today, but says some of the proposals need more work.

BusinessNZ Chief Executive Phil O’Reilly says NZ’s prosperity increasingly depends on innovative high value manufacturing and services and on a policy focus on the right conditions for the sector to thrive.

“From our close involvement with the manufacturing sector and frequent surveys of manufacturers we have a clear picture of what manufacturing requires.

“Manufacturers’ top need is for relevant skills. They need a better supply of skilled, educated people to achieve innovation and productivity in manufacturing firms. What manufacturers want to see from political parties are policies to address current skill mismatches and get more well-trained graduates with in-demand applied skills.

“Manufacturers need good infrastructure that supports business and trade – good transport, electricity and broadband infrastructure.

“They need good access to capital to be able to develop and grow businesses. Realistically, that means being able to attract overseas investment on good terms, so it requires a business environment that is welcoming to overseas investment.

“Manufacturers need good access to overseas markets for their products and services, without costly tariffs or other barriers, so they are supportive of ongoing work to achieve free trade agreements in many markets. They appreciate a business environment in NZ that facilitates their contributing to the global supply chains that are now a dominant force in the world economy.

“Manufacturers will appreciate the particular emphasis on their sector in policy directions released by Labour today, and will appreciate the opportunity for a national conversation on manufacturing’s needs during the upcoming election period. We would welcome other political parties releasing policies for the manufacturing sector.”

Mr O’Reilly said BusinessNZ would be pleased to engage further on Labour’s proposals following initial responses to some of the proposals:

Government procurement

New Zealand manufacturing companies would be delighted if NZ government agencies purchased more NZ-made products. In many instances government contracts have gone to overseas companies even when NZ-made options were available at better price and quality. This occurs despite ongoing initiatives to encourage government agencies to buy NZ-made. NZ manufacturers are not seeking any form of compulsion to buy NZ-made, nor any other form of special protection. This is because compulsion and special protections end up distorting investment decisions, making the NZ business environment less competitive overall. NZ manufacturers would prefer government agency purchase decisions based on explicit, transparent criteria so local manufacturers have a fair chance when competing against overseas providers for NZ government business.

Accelerated depreciation for high-tech manufacturers and wood processing businesses

Allowing certain sectors accelerated depreciation on plant and equipment would provide assistance by reducing the tax burden in the early period following the equipment purchase. However, choosing which sectors or industries should get this tax assistance would be problematic. Global markets change rapidly according to changes in consumer needs and ongoing innovation in product offerings by competitors. Choices about which NZ industries should get favoured tax treatment would be hard to justify, given this constant change in markets. Any policy changes should assist all industries rather than e.g. only those with high expenditure in capital plant and equipment or those in specific sectors. More fundamentally, given that the depreciation proposal would essentially be a reduction in the tax burden on manufacturers, a better form of assistance would be a simple reduction in the corporate tax rate to assist all businesses in all sectors, not just a few.

R&D tax credits

NZ businesses invest significantly less in research and development than firms in other developed countries. There are a number of reasons for this, including the dominance of agricultural-based industries which, although innovative, have historically invested less in formal research and development than other industries, while industries with a history of high formal investment in R&D, e.g. pharmaceuticals, aviation, military technology, have not been dominant in NZ. More formal investment in R&D is desirable, and current policies have been introduced to encourage this, including R&D grants based on company performance and co-investment criteria, and the development of an innovation ecosystem including Callaghan Innovation which is supporting many firms in developing more advanced products and services. R&D tax credits are not a feature of current policies because of distortions arising from their past use: they introduce an incentive to claim credits for expenditure unrelated to research and development, distorting investment decisions and diminishing the amounts actually spent on R&D. Clearly targeted R&D grants based on company performance and co-investment criteria are a more transparent form of R&D assistance than R&D tax credits.

Monetary policy and exchange rates

Labour is proposing to give the Reserve Bank more tools, as yet unspecified, to bring down the high dollar. This would be a significant change in direction from the current policy of the Reserve Bank having a single focus on keeping inflation under control. Keeping inflation in check is the most valuable function of the Reserve Bank because inflationary pressures are the key reason for an appreciating exchange rate. Widening the Reserve Bank’s responsibilities would dilute its effectiveness in fighting inflation and high exchange rates. Depending on the extra powers that Labour may plan to give to the Reserve Bank, these may have the effect of distorting and reducing the efficiency of free markets, to the detriment of the NZ economy and NZ manufacturers. The proposal could also create constitutional uncertainty by assigning powers to the Reserve Bank that may more properly belong to Executive Government.

Capital gains tax

Labour is proposing a capital gains tax on all investments except the family home, to encourage investment in productive business rather than over-investment in property. A capital gains tax would not address the cause of the problem of over-investment in property. Over-investment in property results from overvalued housing in urban centres, which is a consequence primarily of local government restrictions on land supply. Loosening land supply restrictions would address the problem; imposing a capital gains tax would not. Manufacturers would not be supportive of a capital gains tax.

Increase national savings through compulsory KiwiSaver

Labour’s proposal for universal (compulsory) KiwiSaver would not necessarily increase NZ’s pool of savings. The already high uptake of KiwiSaver means that compulsion to achieve more uptake would not achieve a significant additional increase in saving overall. Treasury research indicates that the KiwiSaver policy in itself has not significantly increased overall savings levels in any case, but has instead prompted the reassignment of savings from other savings vehicles to KiwiSaver. Compulsory KiwiSaver could be a hard policy for those on lower incomes who may be simply unable to afford to contribute. Business would like to see national savings increase through higher prosperity resulting from a well-functioning business environment, rather than through compulsory savings policies.

Price controls to reduce electricity costs

Manufacturing would not be supportive of proposals to artificially control prices in the electricity industry. The danger of a centrally-controlled electricity generation market is that it would deter private sector investment in the sector. Imposing price controls would send a signal to overseas investors that investment in New Zealand is risky, as investments could be devalued at will by government pricing decisions. Rather than artificial price controls, manufacturers would prefer a more competitive sector where prices are kept in check by electricity companies competing hard on price.

Industry-specific assistance

Labour proposes industry-specific assistance packages for selected industries. Manufacturers would welcome policy changes to help all businesses to grow – e.g. reductions in tax and compliance costs and improved skills policies – but would not favour special assistance for some industries at the expense of others. Industry-specific assistance has been provided by successive governments over many decades, and continues in a number of forms, for example specific investment in border security, Crown Research Institutes and other areas. But industry-specific assistance should be only undertaken in instances of market failure, where government intervention is the only option, where there is strong justification for the intervention, the justification is open to debate, and where the costs of intervention are met by the industry concerned over time.

Compliance costs

Compliance costs are still a significant burden on business and fall disproportionately on smaller firms that make up most of the business sector. Business would be highly supportive of a reduction in unnecessary compliance costs and will look forward to the release of Labour’s planned policy details for this.

Thriving manufacturing

BusinessNZ agrees that a strong manufacturing sector is vital for NZ’s future prosperity, and like Labour disagrees that “manufacturing’s decline is inevitable”. Industry statistics including the PMI show the manufacturing industry growing strongly and developing towards production of higher value goods and services. A continued strong focus on manufacturing and policies to uphold and support manufacturing in NZ will be welcomed by the business community.

Contact Phil O’Reilly 04 4966552 or Kathryn Asare 021 555 744

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