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Cullen Speech To Ourtown Rangiora Breakfast

Hon Dr Michael Cullen, Minister of Finance


Thursday 11 April 2002

Thank you for the welcome. It is a pleasure to be in Rangiora and to be discussing with you the prospects for the local economy.

I am very used to engaging in debates about trends in the national economy, but it is good to be reminded that, at the end of the day, what we think of as the national economy is simply the aggregation of local economies. And in turn local economies are an expression of the skills, hard work and ambition of local communities.

The real economy happens on the streets of towns like Rangiora and in farming communities like those which look to Rangiora for their services. It has been the ambition of the Labour-Alliance government to take actions that have practical benefits for real businesses and communities throughout the country.

In Rangiora you are well positioned to observe the way the economy is changing. You have a strong connection to the rural heartland, focusing on traditional primary produce and processing, but increasingly looking to niche products and new technologies to provide additional value and secure ongoing success in world markets. And just down the road in the city of Christchurch you have one of our major centres of manufacturing, electronics, telecommunications, software and tourism.

As a whole, the Canterbury regional economy is in very good shape, despite the uncertainty that has dogged world markets following the September 11 attacks of last year. Economic activity in the region rose by 4.2 percent in the year to December. This result was spread across a broad base, including of course the primary sector, benefiting from good growing weather and a low New Zealand dollar, but also a booming tourist industry, despite the temporary drop in international visitors immediately after September 11.

As a result, unemployment in the region is below the national average at 4.9 percent in December last year, and business confidence has bounced back strongly after a difficult final quarter of 2001, with businesses expressing positive expectations in terms of staffing, investment and anticipated sales and profits.

I will not try to claim that all is rosy, however. There are challenges ahead, in the shape of a potential rise in the value of the dollar and the forecast for an emerging El Nino weather pattern later this year. But things could be a lot worse; and most importantly the New Zealand economy – and the Canterbury economy – is showing that it is increasingly better positioned to weather economic storms as we become more diverse, more entrepreneurial and more innovative.

It is fair to ask: what role does government have to play in the Rangiora economy, and in securing its future? In the past ten to fifteen years, governments have found this kind of question something of an embarrassment. This is because they have adopted a passive, standing-on-the-sidelines, approach to economic growth, and have tended to deny any constructive role for government in the economy.

However, this government recognises that government is a legitimate part of the equation for local economies, and that the smaller, smarter government we now have should be tightly focused on activities that protect and promote the kind of economic and social conditions we want for ourselves. Things like bio-security, environmental protection, law and order, education, workplace safety and health care contribute to strong communities and a health economy.

These are not luxuries; they are necessary for our continued growth and well-being. But at the same time the government is committed to ensuring that they impose the minimum cost, both in terms of fiscal expenditure and in terms of compliance costs.

Over 95 percent of New Zealand employers have fewer than 20 employees, 84 percent have fewer than five. I imagine – although I have no figures to prove it – that most of the businesses represented here this morning fall into these categories. The government recognises that compliance costs can be a major irritant and impediment to small and medium enterprises who generally do not have access to the economies of scale larger companies have in dealing with regulatory and taxation issues. Hence reducing compliance costs for small businesses is good for economic growth because it releases money and time for growing New Zealand’s companies.

Last May we released a discussion document entitled “More Time for Business” aimed at reducing the stress, uncertainty and risks small businesses face in meeting their tax obligations. The discussion document contained a number of proposals relating to small businesses, including provisional tax, employers and PAYE end-of-year tax adjustments and ways to benefit from information technology.

The tangible outcome of that discussion document is a set of new provisions in a taxation bill introduced into Parliament in December for passage this year. These include:

- Removing the need for companies to file multiple imputation returns in order to receive refunds of income tax;

- Reducing the number of provisional taxpayers who are exposed to use of money interest by increasing the threshold under which a provisional taxpayer is not subject to the use of money interest rules from $30,000 to $35,000 of residual income tax;

- Making it easier for banks and other interest payers to communicate resident withholding tax information to their customers; and

- Not requiring small businesses to value and make adjustments for small amounts of trading stock ($5,000) at the end of the year.

In addition there are a number of other measures that are still under consideration for inclusion in future legislation. These include:

- Allowing employers to transfer PAYE obligations to intermediaries such as payroll firms;

- Pooling of tax payments with a view to reducing the risk of use-of-money interest charges; and

- Allowing small businesses to align their provisional tax payments to their GST payments, which will help relieve cash-flow problems and remove risk of exposure to use-of-money interest.

Even so, there will always be a limit to how simple we can make the tax system. However, the government is committed to an ongoing and open process of reviewing tax issues from the perspective of the small and medium sized businesses that make up such a large portion of our economy.

Looking more broadly than taxation, in July 2001 the government received the report of the Ministerial Panel on Business Compliance Costs. This report contained 162 recommendations aimed at reducing compliance costs incurred by New Zealand businesses. Our response has been to focus on a number of key themes from the Panel’s report:

- Improving the use of information and communications technology to reduce compliance costs for business. Our goal is that by 2004 the Internet will be the dominant means of enabling ready access to government information, services and processes. Already many key business dealings with government can be carried out electronically, including customs processes, tax returns, personal property security registrations and company registrations.

- Making compliance easier by, for example, integrating the billing for ACC levies into one invoice from one source from 1 April 2002, and improving the ACC 45 form – the form filled out at the doctor’s when an ACC claim is made. This can now be lodged electronically, reducing the kind of errors that adversely affect employers.

- Working with local government to help improve the quality and implementation of regulations. An accredited council scheme is being progressed, and I trust that your local authority is working towards accreditation.

- Involving business earlier in the policy development process, in the overseeing of the implementation phase of legislation and the review of the policy outcomes. This will help to produce better quality regulation.

-Introducing a new requirement for a business compliance cost statement to be published as part of all new legislation that has compliance cost consequences. This will counteract the creeping build-up of compliance costs by ensuring that Parliament is alerted to the compliance costs that legislation would impose on businesses. It will also give businesses the opportunity to have a say on those costs as part of the select committee process.

In the context of the government’s commitment to low compliance, I would like to speak briefly about our commitment to ratify the Kyoto Protocol on Climate Change. Some of our political opponents are portraying this commitment as foolhardy and ideologically driven, and likely to impose significant additional costs on New Zealand businesses. None of these claims is true.

First, we must remember that there are compelling reasons for New Zealand to support international action on climate change. This country owes its prosperity to a stable, equable climate. Primary production will remain a basic driver of our economic welfare and the New Zealand knowledge economy will reflect that – so climate change is an issue of economic security for this country.

If global warming is allowed to continue unchecked, the long-term impacts on this country are likely to be severe, including:

- More frequent and extreme floods and droughts;

- Biosecurity threats from subtropical pests and diseases;

- Saltwater intrusion and infrastructure damage from sea level rises; and

- Water supply and infrastructure damage from higher rainfall in the west of the country and drier conditions in the east.

The costs of inaction on climate change are essentially inestimable, but likely to be huge and to magnify with time. Doing nothing is not the low-cost option.

It is true that the Kyoto Protocol, as the only concerted international action on offer, has its limitations. However, it establishes a functional international mechanism for reducing greenhouse gas emissions. New Zealand, for its part, is committed to showing leadership, but is acting in step with — not ahead of — a broad consensus of western countries on the Kyoto Protocol. It is important to bear in mind that, by the time New Zealand ratifies, some two dozen western nations are expected to have done so, including major trading partners like Britain and the EU.

The Protocol does not come into force until enough developed nations have ratified. In practice that means both Russia and Japan must join the European Union, Canada, Britain, Scandinavia and others in ratifying. It is likely, but not yet certain, that both Russia and Japan will ratify and the Protocol will come into force this year or early next.

In the first Kyoto commitment period of 2008-2012, when emission reduction targets apply, New Zealand will be a net seller of carbon credits into the international market. This means the overall economic effect of ratification will be positive.

The government is committed developing greenhouse policies consistent with economic growth and with out policy of minimising compliance costs on business. It has absolutely no interest in adopting crude or extreme climate change policies that would run counter to that goal.

Late in 2001 the government began a consultation process on climate change policy. The results are informing the development of a preferred policy outline, which we expect to release soon. That will be open to further public comment and the final cabinet decision on ratification will be made in late July or early August.

If the Protocol does not come into force for any reason, many of the policies required to implement New Zealand’s obligations will not take effect. Some policies – such as strategies for energy efficiency, transport and waste management – will proceed because they have a wide range of benefits. But there is no sense in which New Zealand will be “going it alone” with policies specifically relating to the Protocol.

If the Protocol does come into force, it comes into full effect on the first of January 2008. That is when our greenhouse gas emissions begin to count against our target. The more lead time we have, the easier it will be to implement a careful and progressive approach to reducing emissions, rather than a last-minute rush.

An important aspect of this careful and progressive approach is a policy of working closely with those industries that are vulnerable – including some major primary industries, such as agriculture and timber processing – and agreeing on sheltering processes to ensure that there is a sensible transition period which does not expose those industries to unfair competition from countries who have yet to ratify.

On the more positive side, we should bear in mind that, even prior to its adoption, the Protocol will create business opportunities by raising international demand for new technologies, and improvements to existing ones, that reduce greenhouse gas emissions and make more efficient use of energy. New Zealand should aim to be a country that originates and profits from such technological advances.

I cannot deny that ratifying the Protocol will require a mind-shift in many sectors of the New Zealand economy, just as it will require a mind-shift in many other economies. It will be a shift towards business practices that stabilise, and preferably reduce, the level of greenhouse gas emissions. The government’s approach is both principled and pragmatic. It is principled because we believe strongly in the need for leadership in the area of climate change, and in the very real threat that climate change poses to New Zealand. And it is pragmatic because it is consistent with a growing and sustainable economy, one which we know is heavily dependent upon the health and confidence of small businesses.

Thank you.

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