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Wake Up New Zealand - Three Strategies For Success

Richard Worth OBE
NZ National Party Candidate for Epsom
Speech to Institute of Directors
20 July 1999

This is not a political speech but the November elections may well be a watershed for New Zealanders.

 What if we face tax increases. Six weeks ago the Labour Prime Minister of Britain and Chancellor Gerhard Schröder of Germany issued a new charter calling for lower taxes to stimulate growth and jobs.

 What if the Employment Contracts Act is overturned?

 What if the current education strategies both in capital and operational funding are reversed?

 What if the worker’s compensation insurance industry is brought to an end without compensation for the participating underwriters?

These four issues are the pledges of one of the major parties.

So there are issues of consequence for the election.

Here are some propositions which are a background for what I seek to say. The first is the most important:

 We need to search for niches in the global market and exploit them. Head to head confrontation where we have no competitive advantage is pointless.

 Opportunity and better incomes will lie in better ideas and smarter people. Intangible assets will increasingly replace physical assets as our stock of wealth.

 We have to remain competitive with Australia. Our 3.8 million people; their 17 million represent a strategic possibility second to none.

 The media in New Zealand are generally negative, cynical and damaging to the national interest. Not so in Australia where the call of “lucky Australia” is commonplace.

Some years ago I was a keen young sub-lieutenant in the Navy and we would stand watches by day and by night on frigates in the course of ocean passages in the South Pacific. They were long hours at sea. Our seniors had drummed into us what are now called “the Collision Regulations” and what used to be called “the Rules of the Road at Sea”. To remember those rules there were memory aids.

One such aid which related to ships crossing at night as to which ship should give way was:

“If to your starboard red appear
It is your duty to keep clear
To act as judgment says is proper
To port – or starboard – back or stop her.”

In the context of what I seek to say today that memory aid identifies an aspect of the New Zealand ship of state. That is our ability to change course when conditions of adversity arise. We can be nimble and fleet-footed if we choose to be. We are the brilliant backyarders.

Much has been written; much has been said about the urgent need to greatly increase business opportunities, economic activity and company profitability in New Zealand if the serious relative decline of the New Zealand economy is to be reversed.

Ireland, which also has an agricultural based economy, has achieved spectacular economic growth because of the strong performance of its export sector. Its GDP has grown at an average annual rate of 8.9% from 1994. The 1999 forecast is 8%.

As in New Zealand, the government decided to dismantle protective barriers and expose Irish industry to world markets. However, unlike this country, the Irish Government takes a proactive role in establishing new industries. The government offers two types of incentive to industry:

 A corporation tax rate of 10% for all manufacturing companies, financial services in the Dublin International Financial Services Centre, trading activities in the Shannon Free Zone; and

 Capital grants towards the cost of fixed assets, employment grants with agreed amounts for each job created and training grants towards the cost of training workers.

Ten new companies in Ireland generate $5 billion more export sales than the entire New Zealand economy. The populations of the two countries are comparable in size.

To bring some balance to the Irish success however one should not overlook the substantial EU subsidy flows. The corporate tax rate is 32%. The maximum personal tax rate is 46% and there is a capital gains tax of 20%.

So what should New Zealand do? I would like to talk about a concept called “Recreation New Zealand”. But first here are some numbers:

 In the year to June 1998 we earned $3.7 billion in the dairy industry in foreign exchange.

 In the same year, our meat industry earned $2.9 billion.

 Manufacturers earned $2.3 billion.

 In forestry, we earned $2.2 billion.

 Last year tourism earned $4.4 billion.

In terms of earning foreign exchange, tourism is more important than any of them.

Imagine if we could double our tourism earnings, we would earn $9 billion a year in foreign exchange. It would mean a total of approximately 150,000 tourism related jobs. Our total tax take from tourism would go up to $1.6 billion. Tourism would then be contributing an additional $4.6 billion to our total GDP.

Howard Scott is the creator of this concept called “Recreation New Zealand” and that is the first of the three strategies.

The concept of “Recreation New Zealand” is premised on fast tracking new industry creation through “seed money” from central government. It is a quick start plan which could start tomorrow.

Perhaps 150 activities such as the New Zealand world series in horse racing, the New Zealand world series in golf or the New Zealand world series in tennis would be run each year with a minimum $1m first prize.

These international competitions would be run by the private sector after an open and competitive auction to bid for the right to the first prize of $1m which would be provided by central government.

The government would effectively be guaranteeing the $1m first prize and subsidising the difference between the auction bid price and the $1m guarantee. In early years the bid price at auction would most likely be less than the $1m first prize guaranteed by the government. In later years the bid price may well exceed the government guarantee.

The winning bidder would deposit with the government the cash value of its bid offer in order to be eligible to host and run the global competition. That money would be held by the government in trust on interest-bearing deposit. The competition would be run as a profit venture by the winning bidder selling global media rights and so on. Any loss would be carried by the bid winner.

The competition would not only encourage inward visitor traffic to participate in the competition itself but would also attract visitors to watch the world class competition take place. And the competition would also be a focus for wider economic activity such as hotel occupancy, taxis, restaurants and other services. Further, the greater critical mass of activity would become the seed and focus of new industry activity just as yachting race wins have advanced the New Zealand boat building industry.

The Recreation New Zealand concept would become the seed activity for continuing “fast track” economic development.

With, say, three events every week of the year the general economic activity in New Zealand in associated industries would be greatly enhanced and employment opportunities and career development would likewise be strengthened throughout the economy. The government guarantee of “prize money” would be recovered through a combination of increased GST, increased company and personal taxation and decreased costs in social welfare support services.

The second issue I would like to talk about is CER and our relationship with Australia. CER came into force on 1 January 1983. It is now a wholly unsatisfactory relationship. Australia sells more to New Zealand than we sell there – the reverse of the mid 1990s as New Zealand manufacturers move to Australia and New Zealand retailing shifts from local to Australian produced processed food, clothing and other products.

In the 12 months to 31 December 1998 New Zealand exported $4.7 million of product to Australia and imported $5.1 million from Australia.

At the Australian Government level there are massive subsidies of exports and the offering of tax breaks and other incentives for New Zealand based companies to move to Australia. Australian manufacturers get A$1.4 billion annually in tax breaks and direct government subsidies. Under CER these incentives are illegal.

There are other barriers to trans-Tasman investment. The classic illustration (which has now been resolved) touches Ponsonby Pies. It is a long story but put simply:

 New Zealand pies must contain 70% meat

 Australian pies must contain 25% meat.

The Department of Primary Industries and Energy in Australia granted Ponsonby Pies Limited on 5 January 1999 a permit to import pies into Australia provided they contained less than 5% meat. If the company wanted to put more than 5% meat in the pie (some Ponsonby Pies contain up to 95% meat) they needed a MAF certificate stating what farm the meat came from, a veterinary certificate stating the meat was disease free and a MAF inspector at their factory at $100 an hour to watch the workers making pies.

Meanwhile of course there is a free flow of meat pies from Australia into New Zealand.

What is the New Zealand Government doing about these practices? It is a very good question. My answer is not enough. Not nearly enough. When Prime Minister Howard came to New Zealand in February this year an inter-government taskforce was set up. My understanding is that it comprises a representative from the Prime Minister’s Office and an Australian counterpart. More recently I understand that the Asean New Zealand Business Council tasked Sir Ron Carter on 25 May to head a group to enquire into CER and report its findings to the New Zealand Government in August.

That is critical and important work for the country.

The answers are surely not difficult.

The Australian Government must honour the CER agreement at the state and federal level. We need a disputes mechanism and in a case of proven breach an outcome where exemplary damages can be imposed for breaches of the agreement.

Next we must remain tax competitive with Australia and by competitive I mean with a clear edge over Australia. The Howard Government was proposing to cut company tax rates from 36% to 30% as part of the GST tax reform package. That plan may have changed with the failure to secure the originally intended breadth of GST.

We need to continue the work which is being done on reduction of compliance costs.

We need research and development funding to be made available to the manufacturing sector. Existing funding could possibly be diverted from other sectors for that purpose.

A clear regime for tax deductibility of R&D needs to be developed. A write-off of R&D expenditure in year 1 of 150% would be appropriate.

The third issue I would like to talk about touches aspects of sustainable prosperity. At the heart of this issue is a restatement of our national identity.

Most of us have never thought that the natural environment and our culture are the keys to our economic success.

The opportunity for New Zealand exists at the premium end to foreground our products and services against a remarkable background of the environment, our culture and unique way of life.

There is a dislocation, which prevents this happening. A fundamental gap in wealth creation between business and our designers, writers and film makers, even our conservationists, historians and most tragically Maori. The very groups of people capable of romancing the product and regions are not seen as central to the development of our economy.

Global customers are happy to pay a psychic premium for a nationality component of specialness from many countries. Swiss watches, French cheeses, Italian clothing. There is a seamlessness between business and the creative world in these countries which makes these premiums possible. We must cure this dislocation between business, culture and the environment in New Zealand.

The government must refocus at the highest strategic level on protection of our national heritage and identity. It is the third leg to responsible government alongside economic and social responsibilities.

Building a bold ethos of what New Zealand stands for is critical to our global success.

Although most New Zealanders cannot identify it, all of us want this in their hearts. Tourists want to discover it when they get here.

Here is a specific and provocative example. It is the so-called greening of the tax base. All taxes distort incentives and thereby alter patterns of production and consumption. In New Zealand, the bulk of taxes are levied on income and consumption. Income tax, at the margin, makes work less worthwhile. GST makes consumption more costly. It is a fair question to ask whether the current mix of taxes on income and consumption generates the best possible incentives. The case for greening the tax base rests in the proposition that if we have to raise taxes, we should do so in a way that minimises harmful side effects of economic activity (bads) rather than positive attitudes to work and productivity (goods).

So we could green the tax base by shifting the emphasis of tax progressively on consumption that has environmentally harmful side effects commencing with a fiscally neutral, low level carbon charge.

I have spoken about three strategies.

 Recreation New Zealand

 the disbenefits of CER

 sustainable prosperity.

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