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Labour to double depreciation rate in targeted industries

Labour to double depreciation rate in targeted industries

By Pattrick Smellie

April 17 (BusinessDesk) – The major new element in the Labour Party’s manufacturing policy, announced today, assumes depreciation rates for assets in each affected industry would double, a party spokesman says.

The additional details from this morning’s manufacturing policy announcement by Labour leader David Cunliffe comes as predictable brickbats and bouquets arrived from across the political spectrum.

Economic Development Minister Steven Joyce called it “same old, same old”, while the First Union headlined its press statement “at last: a manufacturing policy.”

Peak lobby group Business New Zealand headlined its response “focus on manufacturing welcome” but went on to suggest “some of the policies need more work.”

Instead of accelerated depreciation, BusinessNZ would prefer an across the board cut to the corporate tax rate.

The accelerated depreciation policy is assumed to cost $30 million in its first year, rising to $70 million, and Cunliffe it was “envisaged” that the policy would apply to all manufacturers when fiscal circumstances permitted.

In the meantime, “the policy has been costed on the assumption that the diminishing value (DV) rate of depreciation for each asset class within the affected industry would double,” said a Labour spokesman in an email responding to questions from BusinessDesk.

“For example, the default class for the ‘chemical plant and machinery’ industry category currently has a DV rate of 13 percent per annum. This is based on an assumed useful life of 15.5 years. Our costing has assumed that this (DV) rate of depreciation increases to 26% per annum.”

The policy had been costed, in part, from official statistics on gross fixed capital formation, broken down by industry grouping.

“We got some advice from external consultants, particularly on working out an appropriate average weighted (across asset classes) rate of depreciation for each industry grouping.”

Assuming the policy contributed to higher economic growth rates, its net fiscal cost would be expected to be lower.

BusinessNZ said “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. Any policy changes should assist all industries. 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.”

O’Reilly was more supportive of Labour’s plan to increase government procurement from local firms by a target of $200 million a year.

“In many instances, government contracts have gone to overseas companies even when New Zealand-made options were available at better price and quality,” he said. “New Zealand 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 New Zealand government business.”


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