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Pete Hodgson - Address to Rotary Club of Remuera

Monday, 19 June 2000, 6.30pm, Commerce Club of Auckland, 27-33 Ohinerau St, Remuera. Speech Notes Pete Hodgson

Address to Rotary Club of Remuera

Some of you may feel you've heard enough about the Budget, but I'm here to tell you a little more. It is, as Mr Speaker says when granting a snap debate, a particular case of recent occurrence that involves the administrative responsibility of the Government and deserves our immediate attention.

I don't want to go through the whole thing, however, because too many numbers spoil the digestion. Instead I want to make a few remarks about the bigger picture – about where this Government is heading – and then go into a few particulars about industry and regional development and science and innovation.

A note of caution first. Budgets need to be kept in perspective. They affect the business environment, but they don't shape it. I think that's a point that gets lost sometimes. There's a tendency in this country to focus obsessively on what the Government is doing.

I think in some of the recent criticism of the Budget there are also signs of a somewhat childish impatience. We've been accused of not delivering a "jump-start" or suchlike to the economy. Well there's no instant gratification or overnight success in economic policy. This is the beginning.

There has been a significant change in political direction in this country and the Budget was just one of the markers. The crucial difference is that this Government accepts that it has a role in supporting and stimulating business growth.

We don't pretend to have a hand on every contour of the economic landscape, because there are major factors like global demand, interest rates, and currency fluctuations that we must adapt to, just as business does. But we don't say, any more, that the Government has no business with business. We don't stand back from the economy and say we're sorry, there's nothing we can do to help it grow, that we don't believe in partnerships, brokering, facilitating.

As a Government we have set ourselves some pretty broad goals. One of them is to transform the New Zealand economy. That means moving on from our basic reliance on primary production, to more added-value and knowledge-based production. We're very good at primary production and we need to maintain our expertise there, but it's no longer enough. So we're embarking on a range of measured, carefully-designed policy initiatives to see if we can stimulate the higher-value, innovation-based end of the economy.

It's early days yet but we're moving as quickly as we can to build up some new resources for economic development. We've set up the Ministry of Economic Development to give us policy advice. We've applied CPR to the few remaining officials with expertise in that area and we've recruited an interim manager for our delivery agency, Industry New Zealand. That's Rik Hart, who's been running economic development in the state of Victoria. He's a Kiwi who wants to come home.

Although it became the conventional wisdom in this country that government basically couldn't do anything right, we believe it is possible for government to help businesses grow. Most other developed countries have governments that do it as a matter of routine and this country became something of a Western world freak when it abandoned all efforts.

That doesn't mean heavy, expensive intervention in the economy. If you read the National Business Review or listen to some of our more extreme critics, you'll pick up the assumption that there are only two mutually exclusive alternatives in macroeconomic policy. You've got doctrinaire market liberalism at one end and Muldoonist, nanny-state, Polish shipyard interventionism at the other, and any deviation from the doctrine of Roger and Ruth takes you straight to Gdansk.

It's rubbish, of course. There are many shades of grey, blue and pink between those extremes. And this is not a Government of extravagant, Quixotic or heroic aspirations. We're not going to spend huge amounts of money like Ireland to lure high-tech multi-nationals here. We're not going to put up a billion dollars in venture capital as Singapore has done. We're definitely not going back to the lunacy of Think Big, or having something like the DFC speculating with public money on the property market.

Discipline and restraint has been required because we have set ourselves a spending cap for our first term in office and we're sticking to it. The limit is an extra $5.9 billion over the three years, with two constraints. One is that we won't build into basic programmes any allocations that depend on sustaining current rates of economic growth. The other is that we don't compromise the ability of the Government to make allocations for predictable increases in spending occurring in ten, twenty or thirty years time.

With those constraints we've got expenditure growth is tracking below nominal GDP growth, so we have falling operating expenses as a percent of GDP. We are looking at a substantial surplus in each of the three years.

You'll be aware there is a broad mix of social and economic development spending in the Budget. Four of the biggest items were on the commitment card Helen Clark signed before the election:
 reversing the 1999 cuts to New Zealand Superannuation rates,
 introducing a fairer student loan scheme,
 restoring income related rents for low income tenants of state houses,
 reducing waiting times for surgery.

Closing the gaps between Maori and other New Zealanders is another major area of investment. And I do mean investment – in social security and stability and most importantly in developing the full potential of this country. Don't be tempted to think, in Remuera, that it has nothing to do with you.

Two more of the pledges on Helen's card – cracking down on burglary and youth crime, and promoting employment through better support for exporters and small business – require both increased spending and improvements to Government processes. I'm going to go into a bit of detail now on that business and economic development stuff.

First, an issue that has generated more heat than light in recent days. We've set our to promote research and development in the private sector through a grants scheme. New Zealand's private sector investment in R&D is undeniably low by international standards, about a quarter or, on a good day with a tail wind, one third of the OECD average.

Labour's pre-election policy was to use tax deductions to stimulate R&D in
the private sector. We proposed to allow full deductibility of R&D in the year of expenditure.

But with the advice available to us in Government, and some feedback from innovators in the business community, we've decided a grants scheme is likely to be a somewhat more effective policy. And I'm going to explain that, because there's been some criticism of that decision that I think shows a poor level of understanding of the tax situation for R&D, both here and overseas.

It has been pointed out by some of the critics that Australia allows a 125 percent deduction of R&D spending and Britain 150 percent. We've been asked, rhetorically, why New Zealand can't offer just 100 percent.

Well, we do. R&D costs on a company's revenue account are immediately 100 percent deductible. Scientific research costs on capital account are also immediately 100 percent deductible. The difference comes with some other capital expenditure on D, which is currently depreciated over the life of the asset rather than decuctible immediately. It is still, ultimately, 100 percent deductible, so the difference is one of timing.

A quick example. In most countries a building used for development is not 100 percent deductible. Nor is any plant in that building. But a production prototype is deductible in, say, Australia or Britain. In New Zealand the difference is that the prototype is depreciated.

Now we were thinking of allowing immediate deductibility of those R&D investments that are depreciated. But it became clear that a grants scheme has some significant advantages over that.

For a start, it allows us to help innovation-based businesses at the stage they most need help – at start-up. Tax breaks won't necessarily allow that. They're no good to you if you're still in a loss-making investment phase and you're not yet paying tax. Start-ups need cash now, not cash later.

Another plus is that the Government knows, with grants, that it's actually getting some new R&D for the taxpayers' money it's investing. With tax breaks, the overseas experience is that while you might well get some new R&D happening, you also get a lot of reclassification of existing business activity in pursuit of tax relief rather than innovation.

There has been some righteous indignation in some quarters of the business community when this has been pointed out. Sorry, but that's just precious. It's happened elsewhere. It would happen here. New Zealand companies are no more or less virtuous than any others when it comes to minimising their taxes.

Related to that issue is the question of compliance costs. To combat creative reclassification of activities as R&D, tax regimes that allow more than 100 percent deductibility typically grow complex layers of tests and qualifications. To protect the integrity of the tax base, the hurdles on the path to a deduction can't be too easy to leap. So you end up with evidence – mostly anecdotal, inevitably – of companies failing to pursue the higher deduction, even if they might be eligible, because of the compliance costs involved in securing it.

I should also note that the Australian and British schemes are not without strings attached. The UK does not offer 150% deductibility of R&D across the board, as commentators have tended to suggest. In fact only a segment of companies are eligible, and then only for new and additional R&D.

One last point. This is new-ish territory, this grants programme. It resembles the Technology for Business Growth scheme, but it breaks new ground. We think it will work well. But we will keep it under constant review. We have some R&D of our own to do. We will learn by doing, like the rest of society. And we will make changes as the need arises.

Now to some other moves on industry and regional development, because there are a number of them you should know about. Spending in this area will increase by $34 million in the coming year, then it goes up by $73 million next year, and $112 million for each of the two years after that. By then we've roughly doubled present spending.

The funding is being ramped up gradually because we are starting almost from scratch in building our capacity to deliver regional and industry assistance. The first new programmes will be rolled out by Industry New Zealand between July and September, with three opening on July 3:

 A regional development programme, which will provide funding of up to $100,000 for any single regional strategic planning or audit initiative and, later, up to $2 million for major regional or community initiatives. Funding starts at $6 million this year and increases from there.

 A $2 million financing scheme, which will provide grants to help the development of innovative business projects.

 The $2.5 million Incubator Development Programme, which aims to help individuals and small businesses develop their ideas to the point where others can invest in them. They'll get help through a national programme of workshops and seminars and from ideas brokers and deal making services. There is also money to support for new and existing incubators – such as Unitec's Centre for Innovation and Entrepreneurship, here in Auckland.

There will be more Industry New Zealand programmes, including specialist support for firms with high growth possibilities, a programme to identify major domestic investment opportunities and support for an Angel Network linking investors and investment opportunities in the $50,000 to $500,000 range. We might have to talk about them another time, when you have more time and I have more detail.

I haven't got on to the Budget increases for Trade New Zealand's foreign direct investment initiatives, or to the work that agency is doing on export credit guarantees and other export finance issues. Maybe you can fire some questions at me on those.

But let me wrap up now with a simple message about our approach to economic development. There are no gifts or handouts in any of this. There are just partnerships.

That might be with an enterprise applying for start up capital, a local body wishing to progress regional development, an employer wishing to take advantage of the modern apprenticeship scheme, a researcher seeking funding or a company wishing to make a technological shift.

Partnerships are not corporate welfare. We expect our partners to pull their weight. We'll be monitoring and evaluating the value we get for taxpayers' money very carefully. We're focused on results. I think we'll get them.

Thank you.


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