Cullen: Opening Address to NZ Fixed Income Forum
Michael Cullen: Opening Address to NZ Fixed Income Forum
Hilton Hotel, Princes Wharf, Auckland
It is now almost a week since the budget. The bouquets have faded and the brickbats, such as they were, have been lobbed back where they came from.
One of the unfortunate realities of budgets is that they tend to disappoint expectations in the short term even if their long term impact is positive and undeniable. Especially now that fiscal policy is driven by long term objectives, such as maintaining prudent levels of debt, it is easy to see the more immediate fiscal settings as a zero-sum game.
From this short term view, to be adjudged pro-business, a budget needs to be anti something else. The usual candidate for that something else is social spending in the form of health, housing and welfare. However, the practical and political reality, recognised by governments of both the left and the right, is that social spending is difficult to rein in.
The easy option is for a so-called pro-business budget to be anti future fiscal stability and anti investment in public infrastructures and services. It is a kind of inter-temporal theft from a future Peter to pay a present Paul.
Despite that I would argue that Budget 2005 is very much pro-business. Its strongest contribution will be realised in the years and decades to come, although it nevertheless contains a modest but not inconsiderable package of tax cuts which will start to impact positively on many New Zealand businesses from this year.
With respect to financial services, the budget contributes to a larger set of policies whose effect will be to support growth and diversity in that industry. Many of these are familiar to you, but it is worth seeing the whole picture in context. It includes:
A stable long-term fiscal environment characterised by low public debt;
A larger domestic savings market aided by increased rates of participation in workplace savings schemes;
A fair and transparent tax regime for investment and savings;
Harmonisation with Australia; and
I think I can take it for granted that you are supportive of running fiscal policy aimed at reducing public debt and maintaining it at prudent levels.
The cash deficits forecast in the budget flow through into a flattening of the debt track just above 20 per cent of GDP. The net debt track is likewise somewhat flat around 7 per cent of GDP, while the Crown is forecast to move into a net positive financial asset position for the first time ever in 2006-07.
This is a satisfying goal to achieve and reflects the government’s focus on building up assets now to ensure the fiscal position remains sustainable in the future.
The centrepiece of Budget 2005 was the savings package aimed at achieving over time a significant increase in the level of domestic savings.
This is not a compulsory scheme like Australia’s, but it is a definite tilting of the playing field towards participation. New employees will automatically be enrolled in the KiwiSaver scheme and will have to opt out if they do not wish to participate.
The emphasis from the contributor’s point of view is on choice, with competing providers and a capacity for contributors to specify their preference for risk. Nevertheless, there are clear expectations that savings will be locked in for retirement or, under certain circumstances, for the purchase of a first home.
Our working assumption is that 25 per cent of the eligible workforce will have enrolled in KiwiSaver by 2012. All things being equal, the scheme should lead to a general increase in the liquidity of New Zealand’s capital markets. It represents a significant opportunity for financial intermediaries at both the retail and the wholesale level.
If over time KiwiSaver has the effect of shifting the balance of New Zealanders’ net wealth so that it is not so concentrated in residential property there will not be many who will regret that.
What the savings package does is bring into sharper focus the need to ensure that our financial services industry functions efficiently. That means a fair and transparent taxation regime and a robust regulatory environment.
Budget 2005 made important moves towards this goal through addressing the issues raised last year by Craig Stobo in his report on the taxation of investment.
As you are aware, direct investments in New Zealand companies are presently taxed at the company level, with imputation to alleviate double taxation. For most direct investors, these investments will be on capital account, with the result that capital gains on sale are not taxable income.
Investments through a financial intermediary, such as a unit trust or superannuation fund, are typically taxed according to the nature of the intermediary as a business and are on revenue account as a result. This means any resulting capital gains are considered taxable income. As a result, direct investments are generally in a superior tax position relative to indirect investments.
The 2005 Budget included announcements to solve the distortion against using financial intermediaries. In particular, investments by intermediaries that qualify as Collective Investment Vehicles, because they take portfolio investors and facilitate access to portfolio investments, will generally be on capital account so that investments through such vehicles are not disadvantaged relative to direct investments.
This treatment will apply to equity investments, and is not designed to change the treatment of debt, where similar distortions do not exist. Equity investments designed to exploit the boundary between debt and equity, will remain on revenue account. This is important to prevent the reform adding new distortions, and to maintain the relative desirability of interest bearing investments.
While domestic equity investments will have an impediment removed, these investments will still face tax at the New Zealand company level, as is appropriate.
Overall, the demand for interest bearing assets should remain strong, especially from the potential increase in the use of collective investment vehicles for portfolio investments. As a result, I do not see interest bearing investments going off the radar screen of New Zealand investors any time soon.
As stated in the budget, the taxation of offshore investment is a much more difficult matter, but it is one that is critical to get right if we are to avoid New Zealand's scarce domestic capital being encouraged to chase offshore tax advantages. The government will shortly be releasing a discussion document with proposals to address this issue.
In addition to making progress on the tax regime, we are continuing to work on effective regulation. As often happens, the regulation of the finance industry in New Zealand is a large tapestry, woven by many hands over many years, with parts that are very tidy and others that are threadbare and moth-eaten.
It is important, given that we want to entice more New Zealanders to build up financial assets, that we remedy that.
The government has recently announced a review of financial products and providers. The Ministry of Economic Development is leading the review.
The key objective for the review is to develop an effective and consistent framework for the regulation of non-bank financial institutions, financial intermediaries and financial products, including unit trusts and collective investment vehicles. The aim of the framework is to promote confidence and participation in financial markets by investors and institutions, and which results in a sound and efficient non-bank financial sector.
An open and consultative approach will be taken to the review to encourage the participation of and contributions from the financial sector.
The review will take the same approach as the MOU on Business Law: co-ordination with Australia will be considered but any regime must be appropriate for New Zealand conditions.
Policy decisions are expected to be taken by late 2006, with legislation planned to be passed in 2008.
The other current initiative is the Task Force on the Regulation of Financial Intermediaries. The Task Force was appointed to review the regulation of financial intermediaries to ensure financial intermediaries provide quality financial information and advice to the public, and assist New Zealanders make the most of their savings.
The Task Force has been asked to take into account the regulatory regimes in other countries, including Australia. However, it must consider the costs and benefits on industry participants, consumers and the economy generally of any changes it proposes to ensure that any proposed solution provides the best outcome for New Zealand.
Responses to the initial questionnaire indicated people had different perceptions, some positive others negative, of their experiences in dealing with financial intermediaries. Some common themes were about possible conflicts of interest, bias towards high risk products, incompetent advisers and issues with fees.
Feedback to the Task Force’s issues document identified that there are issues with at least some aspects of current practice, such as information asymmetries and ineffective enforcement and dispute resolution mechanisms, as well as a perception of a lack of consumer confidence in the industry.
The recommendations of the Taskforce will inform and will be considered within the MED Review of Financial Products and Providers. The Task Force is due to reports back to the Government mid year.
With respect to closer ties with Australia on Financial Supervision and Regulation, the agenda Peter Costello and I have been pursuing over the last few years has focussed on reducing barriers to trans-Tasman investment flows. Changes to taxation, business law and work underway establishing a mutual recognition regime for cross-border securities offerings will ultimately create a single Australasian investment market.
We have also focussed on bringing our regulatory regimes closer together, including in the financial sector, to improve the quality and reduce the cost of regulation in both countries. We have established a Joint Trans-Tasman Council on Banking Supervision to help inform our thinking in this regard. Similarly, the Memorandum of Understanding (MOU) on Business Law identifies insurance as a possible area for further co-ordination. However, we have no pre-defined end points. We will consider both the costs and benefits of further co-ordination and any regime must be appropriate for New Zealand conditions.
Both governments recognise that one single approach would not be suitable for every area and that coordination does not necessarily mean the adoption of identical laws.
With respect to securities offerings the current proposals would allow issuers to offer securities in both Australia and New Zealand using the same offer documents and offer structure. A mutual recognition regime would reduce the costs of raising capital in both countries, while maintaining investor protection through appropriate disclosure. It will also promote investment between Australia and New Zealand, enhance competition in capital markets, and increase the choice for investors.
The treaty establishing the regime is likely to be finalised within the next two to three months.
The 2005 Review of the MOU on Business Law is a further opportunity to review the work programme and to identify areas where the MOU might be strengthened in order to more comprehensively meet its objectives of increased co-ordination in the Trans-Tasman markets.
Industry groups will be consulted as part of the review of the MOU.
Standing back from these specific initiatives, I think it ought to be clear that there is a large degree of consensus about where we are heading, and a significant optimism.
We have an economy that is growing, that has strong underlying fundamentals, and that is hungry for investment in new capacity and in infrastructure. We have strong public finances which allow us to make provision against future shocks that would be felt first of all as unwelcome shocks to the finance sector.
With last week’s budget we have a new emphasis on getting New Zealanders more focused on asset accumulation and therefore more engaged with sectors of the economy outside of the labour market and the residential housing market.
All of these augur well for the development of our financial markets and for increasing sophistication in financial services in the years ahead.