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EMA Strategic Remuneration Conference- Speech

30 May 2000 Speech Notes

Hon Dr Michael Cullen - Finance Minister
EMA Strategic Remuneration Conference

Thank you for inviting me to speak to you this morning. Over the past few weeks I have spent a lot of time listening and talking with the business community. I have heard a range of opinions about the government's policies and where we are heading.

The Employment Relations Bill is undeniably a hot topic at the moment and today I would like to speak to some of the issues surrounding the Bill and to put the ERB into an economic context before discussing some of the tax issues pertinent to employers.

The Employment Relations Bill, while not an economic policy tool itself, fits into our overall economic policy objectives. I believe it will help establish a ‘social contract’ between employers and employees.

But there would be little point in introducing legislation that restored confidence to employees at the expense of good employers.

Employers have highlighted a number of problems concerning various clauses within the Bill. We concede that in the drafting of the Bill some consequential repercussions were missed. I am quite confident these will be picked up by the select committee. After all, that is the role of the committee; to consider draft legislation and refine and tune it into workable law.

The issue of contractors will be clarified so that the Bill will accurately reflect the status of contractors and employees. It will provide protection for those workers whose employers exploited the latitude of the ECA by arbitrarily calling employees contractors to avoid their legal obligations like holiday pay and sick pay. But it will uphold the freedom of those bona fide contractors who have no wish to change their employment status.

The directors' liability clause has caused deep rumblings throughout the business world. Again, the Select Committee will need to make sure the wording of the clause reflects exactly what it was designed to do. That is to target unscrupulous employers and directors who knowingly breach the Minimum Wage Act, ignore statutory holidays and deliberately put their businesses into liquidation as a way of avoiding these obligations.

I am sure the Select Committee will treat other issues like union access, communication with employees and the requirement to open the books during collective contract negotiations with the same principled pragmatism.

The government is determined to build a modern and dynamic economy and the Employment Relations Bill is part of a package aimed at greater fairness and opportunity.

The ERB hamonises with other initiatives in the overall economic policy mix - promoting economic development – especially building the knowledge economy, investment in skills and training and a more active role for the State.

Our primary reason for repealing the Employment Contracts Act is not economic. We are repealing the ECA first and foremost because it simply fails to reflect the instrinsic imbalance in the worker-employer relationship. The Employment Relations Bill is designed to bring New Zealand into line with basic ILO conventions and to restore fairness to the workplace by promoting collective bargaining and requiring that both parties bargain in good faith.

The economic effects of the ERB are almost impossible to predict and will not be easy to measure. Unemployment is trending down at the moment and forecasts are for it to continue to fall until 2002. There are skill shortages that also could affect wages. Outcomes for workers could depend as much on a greater investment in training, apprenticeships and reduced education costs, as on the ERB.

Late last year the Labour Department briefed the incoming government. The Department made some interesting observations about the relationship between the labour market and economic policy objectives.

They maintain that the two major concerns facing any government are achieving sustainable economic growth and improving the position of people within the community who experience persistant disadvantage.

To do that we have to focus on a broader range of areas than just the labour market perspective.

We need to:

 Close the economic and social gap between Maori and Pacific Islanders and the rest of New Zealand

 Reduce persistent levels of unemployment

 Improve and increase our education and skill levels

 Retain and attract back New Zealanders with valuable knowledge and experience

 Attract quality migrants with entrepreneurial skills, innovative ideas and investment capital

 Reduce the loss of human capacity through illness, accidental injury and death in the workplace

 Increase the growth of sustainable jobs through a strong, innovative business sector

The Government has made a commitment to address these issues. Closing the gaps and economic development - with a kick-start to the knowledge economy, are two parallel themes running strongly through next month's Budget.

New Zealand has lagged behind in terms of the gains from the hi- tech boom that is adding a high-octane mix to growth in other economies.
Trade NZ has highlighted several areas where we are failing to latch on to the knowledge economy boom – our small capital base, a poor understanding of technology by financiers, a brain drain to offshore markets and a lack of critical mass.

We will attack these problems with a series of initiatives to promote research and development and to encourage inwards direct investment. We need to give the kiss of life to research and development. It is a fundamental step in transforming the economy beyond its traditional dependence on primary industries.

We will inject more funds into Technology NZ and restore the target of raising of raising public funding of R&D to 0.8%of GDP by 2010. The Government is leading by example because we need the private sector to come to the party also as its investment in R&D is low by international standards.

Labour's pre-election policy was to use tax deductions to stimulate R&D in the private sector. But when we talked to innovators in the business community they suggested that a grants scheme may well be a simpler and more effective means of supporting R&D investment.

We are, however looking at other ways to help business through the tax system.

You can expect to see major emphasis on tax simplification in one form or another in our policy work programme -- since a good tax system is one that is easy to understand, to comply with and to administer.

The massive job of rewriting the much-used Income Tax Act into a plain language style of drafting will continue. Its purpose is to clarify the law and make the act easier to understand, in order to minimise the various costs of those who use it.

We will press on with measures to simplify the tax system for businesses, especially small businesses. For example, we are looking at ways of streamlining the information and payment requirements that the tax system places on businesses, and simplifying taxpayer interaction with Inland Revenue.

We will continue to find ways to make it easier for people to comply with the law, since voluntary compliance is essential to the success of the tax system.
We have already introduced legislation to provide some relief to what are essentially compliant taxpayers who find themselves in difficulty with paying their taxes.

You can expect more such measures to be implemented as we review other policy recommendations arising out of last year's inquiry by Parliament's Finance and Expenditure Committee into the powers and operations of Inland Revenue. Many worthwhile recommendations also emerged from the 1998 report of the Committee of Experts on Tax Compliance.

Some of these recommendations are being picked up in the work of the Government review of the compliance and penalties legislation in the Tax Administration Act. This legislation, which came into effect in 1997, is undergoing a post-implementation review, as provided for under the Generic Tax Policy Process.

It is timely to review the legislation, since it has had three years to bed in and for people to become familiar with it.
The review will look at how well the legislation is meeting its objectives. They are to deter non-compliance, be understandable and fair, be flexible yet consistent, and be consistently administered.

In a similar vein, the continuing review of GST is looking at where improvements can be made and where the law needs updating as a result of changes that have occurred in the 14 years since the tax was introduced. The review has already resulted in proposed legislation, now before Parliament, that improves the workability and effectiveness of the tax. It also lowers compliance costs and removes opportunities for avoidance of GST.

The next stage of the GST review will look at the tax treatment of imported and financial services, a key part of updating the tax system to cope with developments in electronic commerce.

Over the next year or two you will see a number of discussion documents setting out policy proposals in a wide variety of areas: the taxation of Maori Authorities, small business tax simplification, compliance and penalties legislation, and electronic commerce, to name a few.

This Government is committed to the Generic Tax Policy Process, which builds in opportunities for consultation -- through discussion documents and the like -- at key points in major tax policy reform.

Reforms such as the GST review and the compliance and penalty review will be fully subjected to the formal consultation process. Obviously, however, any government is unlikely to consult widely on every issue, and there will be times when it may not consult at all -- for example, in relation to base maintenance issues and tax rate changes.

The Government is also looking at ways the tax system could be used to improve New Zealander's savings habits.

When I entered the workforce, many years ago, superannuation schemes were part and parcel of many remuneration packages and they added substantially to the overall income of individual New Zealanders and the economy as a whole by reducing our reliance on foreign saving.

Over the past decade we have seen more streamlined remuneration packages introduced, especially for lower and middle income workers - with allowances, over time and superannuation policies rolled into or replaced by a single weekly wage or salary.

We have a tranche of measures planned to make it more attractive for people to save for their retirement. We want to encourage savings through more company superannuation schemes and private schemes. We have used the new 39-cent tax rate to create an incentive for high wage and salary earners to save. Employer contributions to company superannuation schemes will be taxed at the old 33-cent rate provided the savings are locked in.

Another way the tax system could be used to improve savings habits is to change the way we tax retirement savings. Since 1987 we have taxed superannuation fund savings on a taxed – taxed – exempt basis. This means the contributions to a fund are made from tax-paid income, and the earning of the fund are taxed but the withdrawals are exempt from taxes.

Under this system, income is taxed at the same rate it accrues, which aligns the taxation of superannuation savings with that of other types of savings. It also removes any tax advantage that could arise from different types of saving being given unequal tax treatments.

The philosophy behind the existing system is that retirement savings are just the same as a bank account. I am not convinced, however, that this is the right approach.

I am interested in exploring the possibility of adopting another approach – whereby contribution are made from tax paid income but earning are exempt from tax. So the taxation is deferred and saving are taxed when they are withdrawn.

This system recognises that there is a difference between money in a cheque account and retirement savings. It would be interesting to know if changing the system of taxing retirement savings would serve as an incentive for people to save more.

Looking through the programme over the next two days I was interested to see the variety of incentives and strategies to address the dual challenge of attracting and keeping employees. This conference is timely as employment relationships are on the move with both new industrial legislation and through innovations in e-commerce and the knowledge economy. Yesterday's rules will not necessarily suit tomorrow's employers and employees.

I wish you all well for your conference.


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