12 July, 2012
Address to NZ Credit & Finance Institute
Your conference programme looks to the future, looking at challenges and opportunities that lie ahead.
Looking at the economic environment around us, one could be forgiven for being pessimistic as we contemplate the deepening crisis in Europe, but I want to outline for you why I think we are now poised at a point in New Zealand’s history where our future looks promising.
Of course, there will be challenges along the way – and no doubt some significant ones – but compared to some countries, our challenges are perhaps not as great as those facing some, and I see a great many opportunities ahead for our economy which is built on a solid foundation.
At the outset, it is important to acknowledge that we are in all this together – government, business and the people – and that we each have our particular part to play.
An important contribution the Government can make to help the country weather the economic storm clouds gathering overseas is to get the Government’s finances in order and get debt under control.
Rising debt means greater debt servicing costs, which crowds out more positive expenditure.
It also leaves us vulnerable to moves by credit ratings agencies, which can impose higher economy-wide interest rates.
As Minister of Revenue, I am fundamentally aware of how important a part our tax system is playing in reinforcing our economy.
We accept taxation as the price we pay for the amenities and services of a modern and developed society.
Our system relies on voluntary compliance and in that, we have a good rate.
Because we essentially feel the tax system is fair and know that our taxes pay for the roads we drive on, the hospitals that care for our sick, the police, schools and so on.
We see a good return for our tax dollars and we essentially have a say in how the revenue is spent.
But an efficient and well-functioning tax system is not just the means for collecting revenue for state expenditure; it can also help provide the sort of environment that supports economic growth.
It has been suggested that Greece’s woes stem from an overly relaxed attitude to debt, imprudent spending and a misguidedly proud tradition of tax evasion.
I read recently that the efforts of a tax collector on the island of Naxos who went looking for tax evaders were thwarted when his car’s licence plate number was broadcast on a local radio station.
Another, on arriving to conduct an audit was confronted by a whip-wielding Athenian.
Clearly the role of a tax official is not regarded as a noble one in Greece.
However that aside, I think that clear and causal links can be drawn about a community’s attitude towards tax and the strength or otherwise of its economy.
In times of economic adversity, it is necessary to ensure that government revenue is protected because certain government services and functions must continue – preferably without having to borrow to fund them.
Indeed, Christine Lagarde, Managing Director of the IMF, has expressed the view that Greece can help lift itself out of its economic woes by simply paying its taxes.
Acknowledging the truth in this for his own country, the Italian Prime Minister Mario Monti has vowed to hunt down tax evaders.
So maintaining a stable revenue stream is absolutely critical in retaining international confidence.
Raising revenue fairly
But maintaining such a stream is not simply a matter of gathering as much tax as possible.
To ensure the stability of our revenue stream, rather than the panic-stricken imposition of new taxes or hikes in tax rates, the focus in New Zealand has been on making changes at the margin within our current framework to make it fairer and more efficient.
These themes have been an ongoing feature of our Budgets since the GFC began, if not before, and were well illustrated in this year’s Budget handed down in May.
That Budget included measures that through a combination of better enforcement and collection will collect over a billion dollars in additional revenue over the next five years, without one tax rate being raised.
And as I say, we have found that for the most part people pay their taxes if they think the system is fair.
Therefore, I believe that we can take some level of satisfaction with our broad based, low rate tax system with its general alignment of tax rates.
We are aiming for the best possible tax system supported by the best possible tax administration.
That is a goal that keeps us on track and constantly improving and fine-tuning.
There is more to be done and we will continue to root out inequities in the system as we become aware of them.
The role of taxation
Because relatively low tax rates and broad bases help minimise economic distortions, a good tax system has an important role in helping New Zealand build a stronger economy and increase productivity.
If we take account of taxes on both companies and shareholders, New Zealand tax settings are very favourable for retaining and attracting good entrepreneurs and businesses to our shores.
But let us be clear on the role of taxation.
It is what it is.
It cannot suddenly produce a high income economy.
Suggestions that growth will come from taxing more those who earn and produce most are simply nonsensical.
What a good tax system can and should do is minimise obstacles to growth.
I am not interested in calls for imposing taxes to influence behavior or provide incentives for business growth.
As Revenue Minister, I can tell you that there are numerous demands of this kind.
Therefore I say that a major challenge ahead is to resist the urge to tamper with the tax system in this way. Now is not the time to experiment with rates and new taxes and it is also not the time to be moving the line on tax avoidance.
I am more focused on making sure we collect the revenue currently due to us through our broad-based, low rate system, before embarking on new taxes, which almost inevitably would fall more harshly on some than others.
Therefore in Budgets 2010 and 2012 the Government committed extra funding to Inland Revenue to bolster its successful tax compliance activities in dealing with the hidden economy, debt collection, and following up on unfiled returns.
The tax system is performing its role well, I believe, in minimising distortion, serving the Government’s revenue requirements and supporting the Government’s objectives.
The priority for the Government is moving back into surplus. This will position our economy well to ride out any future economic shocks.
As Minister of Revenue, I also have a particular interest in the role of the tax system in promoting the Government's priorities.
I believe the tax system can, and is, already doing a great deal to support the Government’s overarching objectives.
One of the key paths forward for an economy righting itself after a period of recession is to reduce the distortionary effects of taxation.
Tax advantages should not influence investment decisions, thereby skewing investment away from the productive sector.
Another important point is that where national indebtedness is of concern to the economy, then government savings are crucial and of course, this is achieved by the Government earning more than it spends – a fiscal surplus.
Efficient tax collection – within the constraints of fairness – becomes more important.
The tax system therefore is the vehicle for achieving government savings.
Which brings me to a significant challenge that we as a nation face.
As taxes are the lifeblood of government, so savings represent growth and stability for our economy and for individuals.
We need savings to ensure that we all are secure financially in the event of another financial crisis.
We also need savings so that businesses in New Zealand have adequate supplies of capital to draw on for business development and expansion in order to get to the point where we are exporting more than we import.
It is this expansion which will help us put the recession behind us.
At a policy level, the Government is focused on lifting New Zealand's long-run growth rate and reducing the economy’s vulnerability to external shocks.
It will do this by focusing its attention on providing stimulus for better economic outcomes:
• responsibly managing the Government's finances
• building a more competitive and productive economy
• delivering better public services, and
• rebuilding Christchurch
There is a strong focus here on investment for the future.
While increasing levels of investment should in general lift our long-run growth rate, it is the quality of investment that matters most.
New Zealanders’ record around investment is not a happy one.
We have invested heavily but poorly, principally in property.
The tax system has supported this and distortion has resulted.
Over the longer term, part of the Government's economic strategy is to move away from unsustainable reliance on credit.
Until we address that, our economy will continue to be vulnerable.
The Government is concerned that New Zealand places too high a reliance on foreign capital to fund investment and consumption – a reliance that makes New Zealand more vulnerable to foreign shocks. For example:
New Zealand has run a current account deficit every year since 1973.
National investment has continuously exceeded savings, with the difference funded by offshore borrowing.
There is an increasing net debt to the world.
One only needs to look at the problems in Europe today to see the risks that can arise from imbalances of this sort.
It is important however to keep things in perspective.
We start out with an internationally low ratio of government debt, meaning that there is no concern about our ability to fund our obligations.
And borrowing from abroad is a good thing if it funds investments that earn more than the cost of that borrowing.
Investment is a positive thing, but where New Zealanders are making investments, we want investment decisions to be driven by the inherent quality of that investment, and not just the manufactured tax advantages that may derive from them.
A fair and efficient tax system creates the right incentives for quality private sector investment.
We have resisted the temptation to reintroduce tax incentives – a path that has proven inefficient and ineffective in the past.
Rather we sought to remove distortion caused by investment in property in Budget 2010.
The concern was that the tax rules might have been encouraging excessive investment in property.
Lowering income tax rates and removing depreciation deductions were aimed at reducing these biases.
Reduced income tax rates – balanced by an increase in GST – also addressed a key goal of the Budget 2010 – to reduce biases discouraging saving and investment.
These measures are helping New Zealand to be a great place for people to set up businesses and produce the jobs which make New Zealand an attractive place to live, work, raise a family and have the means to enjoy a comfortable retirement.
On the latter count, a big challenge ahead is superannuation and saving for retirement.
Firstly, and I am speaking here in my other capacity as Associate Minister of Health, I would like to make the point that having an ageing population is by no means a bad thing as various commentators seem to suggest.
On the contrary.
One could argue that an ageing population is an indication of the effectiveness of our health system – people are staying well enough to live longer.
From the revenue perspective, as our population ages, we face a future where there are likely to be fewer taxpayers bearing the tax burden of what is being called a silver tsunami.
That tax burden includes the cost of New Zealand Super itself as well as the rising healthcare costs for an older population.
Consequently, there is currently much debate about the affordability of NZ Superannuation and the age of entitlement.
The Government remains committed to New Zealand Superannuation, and it will remain a crucial safety net for older New Zealanders.
We fare well against other OECD nations on measures of old age poverty.
New Zealand super is a solid foundation on which further supplements such as KiwiSaver can be added to enhance financial security.
The universal aspect of New Zealand Superannuation means that it does not provide the disincentives for retirees to work and save that are associated with means- and income-tested overseas schemes.
With our ageing population this becomes increasingly important.
An advantage of New Zealand Superannuation is that it enables people to maintain participation in the workforce in their own way and on their own terms, often in a reduced hours or part-time capacity.
Such ongoing workforce participation is often what people want and has benefits other than financial.
It keeps people socially engaged and active.
I look forward to the debate when a discussion document on my party, UnitedFuture’s Flexi-Super policy proposal is released for public consultation probably next year.
This was a key component of our confidence and supply agreement with National, and I have to say it has received a very good reception from both the public and other parties in the political spectrum.
The important point about it is that moves us away from the sterile debate about age limits by passing the choice to the individual to make, based on their savings and their assessments of their circumstances at the time.
You may well also have noticed that KiwiSaver has just turned five years old at the beginning of this month, and what a precocious five year old it is!
More than 1,950,000 people have joined it since KiwiSaver was launched on 1 July 2007 and the first 17,500 members – those who joined in their 60s and have now been in KiwiSaver for the full five years – will be eligible to withdraw their funds this month.
New Zealanders have embraced KiwiSaver in numbers and with an enthusiasm far beyond all initial expectations.
In the past five years, $11.8 billion dollars in individual and employer contributions have gone into the funds run by over 30 providers – and that is not counting voluntary contributions members may have also made which have taken the total up to around $12 billion.
The number of members continues to rise, which shows that New Zealanders really see KiwiSaver’s value and how it can play a key part in their future financial security.
However we cannot let this go to our heads.
Yes, KiwiSaver has been very effective in attracting new members, but previously it has done so at a high cost to taxpayers, with the scheme costing the Government over $1 billion a year in subsidies and tax breaks.
To put it plainly, it is not really saving if the Government is borrowing from overseas with one hand to put into an individual’s account with the other.
Doing it that way simply amounts to all taxpayers bearing a greater tax burden to cover the cost of the borrowing.
Budget 2011 put the brakes on this somewhat because reducing Government contributions and increasing private contributions to KiwiSaver will also lift national savings.
It is calculated that these changes to KiwiSaver will save taxpayers $2.6 billion over four years and help lift national savings.
KiwiSaver is good, but to be truly valuable, its future lies in a larger share of contributions coming from members and employers, and Government providing a lower share, but better targeted incentives.
And looking ahead, the inevitable question is, should KiwiSaver be compulsory?
It is a question worth asking with arguments for and against.
Personally, I have always favoured the idea, and I believe New Zealanders are coming around to it.
Kiwis have an increasingly mature and real view of the big world out there, and how they need to prepare for their future. In 1997 New Zealand categorically rejected a referendum on the issue.
The rejection was huge – in the vicinity of 93 percent.
Times have changed and I believe the views of New Zealanders have shifted quite substantially in this area.
So the very fact that New Zealand is asking these questions now is a good sign for the future.
I must acknowledge that compulsory KiwiSaver is not, however, Government policy.
But what the wider debate indicates an understanding of the importance of national savings and a willingness to engage in debate on the issue.
So, the question, it seems to me is no longer about whether we save, but how.
Perhaps social historians will record that KiwiSaver’s biggest contribution was to instil a change in thinking about savings among New Zealanders.
On that score it has been phenomenal and that along with New Zealanders’ new-found fiscal prudence are engineering the biggest change in thinking about saving.
For the first time in a generation, New Zealanders are putting money aside and taking steps to live within their means.
This is what gives me great hope for our future.
In closing, let me say that these are the things which give me heart.
Every economy needs a solid foundation.
If it is a fair and equitable system, the tax system can contribute to that.
I believe ours is fair and is contributing to our economy’s solid foundation.
And my officials continue to work to find ways to improve the system.
It will continue to be a focus for the Government.
On the crucial question of savings and investment, while New Zealand’s previous track record has not been stellar, we are making great strides.
We are getting better.
We are improving.
There is no room for complacency — a lot of work remains to be done, but I am confident we are on the right track. Thank you