LD: That’s different to National’s Investment Boost.
BE: There, it’s a one-off 20% in the first year and it gradually depreciates over time.
LD: So this is more generous but at a lower threshold?
BE: At a lower threshold. For me, Investment Boost is a success if you can measure the additionality. How much extra are people spending, other than money they would have spent anyway? There’s a timing benefit for bringing forward your asset purchase, but does it mean you’ve spent more than you would have otherwise? In the recent IRD [Inland Revenue] survey, just over 50% said Investment Boost made no impact on their decision-making. Of the 24% who said it did, only 7% said it was significant. When I asked Treasury and IRD officials whether they’re measuring the additionality, they said no.
For our focus, particularly with small businesses, if you reduce compliance costs, they become more efficient. Not having to keep full asset schedules and do the depreciation calculations still costs time, even if you’re using a tax agent, or MYOB or Xero. And this wasn’t just made up by Labour. In MYOB’s annual business insights survey, raising the immediate write-off from a thousand dollars to 10 thousand dollars was in the top five things small businesses asked for in the last two surveys.
LD: How about the bigger picture? When you look at the economy right now, there are hints of recovery, but what do you see as the things stopping us from getting to some sort of stable recovery?
BE: If I go back to first principles of economics, there’s a downturn in the cycle, usually because the private sector is pulling investment from the economy due to uncertainty or some shock. That’s the time the Government should invest to smooth it out. What we’ve seen in the last few years, particularly in infrastructure, is that Civil Construction says the Government pulling back from projects has cost 11 billion dollars. That’s 11 billion sucked out of the economy, with wider ripple effects. You can understand the Government pulling back when the economy is running hot, but when it was running really low and obviously heading into a recession, that’s when the Government should invest.
LD: But the counter would be that the last Labour Government kept spending too much when the economy was running hot. So we’ve had both out of sync.
BE: And the Reserve Bank review picked that up as well.
LD: So you acknowledge that the pullback didn’t happen fast enough?
BE: I don’t apologise for the decisions we made at the time, because we were faced with huge uncertainty. There was no playbook. The advice we were receiving was that unemployment was going to be the size of Palmerston North and that we faced a huge amount of potential death. We were making decisions with the best advice we had. I think the Reserve Bank review made it clear that, as the Government was pushing investment, no one would have thought the private sector was going to invest the way it did, because we’d never been in a lockdown before and then the Reserve Bank dropped interest rates where it did. So I acknowledge there could have been better handling of pulling back the investment where we needed to. But at the time you had to make the best decisions with the information you had.
LD: In Auckland, we’re feeling the property downturn. What do you say to the criticism, a specific one, about [a] capital gains tax right now, that there might not be money there because there’s just no capital gain?
BE: Well, that’s how capital gains taxes work. You only get taxed on the gain.
LD: So you’re happy with that?
BE: I’m absolutely confident. We’ve used very conservative modelling of a 3% long-term average. In the pre-election fiscal update [Prefu], the figure is actually 3.1%, so we could possibly claim more, but we haven’t, because we’re thinking about it over the longer term.
People would obviously be concerned if they’d bought at the height of the Covid market and [had] seen their valuations drop, so there are rules around not taxing that paper gain from the previous period. A person has five years to give a valuation, either a market valuation or the rateable value, and if they don’t choose one, a standard default method applies. When they come to dispose of the property, only gains from July 1, 2027 are taxable. The opening book value is the higher of what you paid at the height of the market or the value at the valuation date. That way you’re only taxed on the actual gain.
LD: Would you like to see the property market get back into growth mode, with house prices rising again?
BE: What I really want is stability in the housing market. You don’t want the big peaks and you don’t want the big troughs. We had a big peak during Covid and we’re now in a trough. In some cases there will be growth, but it’s better to have incremental growth; in the same way it’s better not to have huge losses.
In an ideal world, you’d want house-price growth to almost match wage growth, but we know that’s not the case.
LD: You mentioned wage growth. How do we get it up? That’s where we go with productivity, isn’t it?
BE: That is the major issue in New Zealand. If there are no conflicts, no economic shocks, no Covid, our productivity is still lagging for some key reasons. Higher productivity equals higher wages equals higher living standards. One reason is access to capital for firms. Part of the point of our capital gains tax is better allocative efficiency, so an investor looking at where to put money has a more even playing field between housing and business.
The unfortunate thing in New Zealand is that unless you’ve got a house, you don’t have an easy way to access capital. Our Future Fund is about building something we can distribute towards key areas: enabling infrastructure, helping smaller firms access capital and lifting innovation and tech.
The other key reason for me is competition law. We’ve got the supermarkets dominating everything at the moment, and electricity and energy are a massive concern for businesses, particularly in manufacturing.
If you can’t get a big third competitor into supermarkets, then support the smaller competitors, which is why we have a proposal on the wholesale-retail split.
LD: Is it possible to drive productivity by tweaking a lot of those things, or does it need some bigger structural change?
BE: There’s no silver bullet. On the employee side, Labour has particular views. People want to go to Australia because of the higher wages, and there are higher wages there because there’s a reward system. That’s where fair pay agreements came in. They set the bottom lines, so if you’re a cleaner, you can expect this, and that takes away the edge larger firms have over smaller ones in competing for cleaning contracts because they can pay their people less. That’s not productive and it doesn’t help wages.
LD: You guys have been attacked on debt and fiscal policy. I get lost on it. What’s the 18 billion dollar hole [claimed by Nicola Willis]?
BE: I don’t even know. But that’s just it. We have a fiscal plan, so you can compare our numbers to the pre-election fiscal update. On core Crown net debt, expenditure and so on, we’re pretty much on the same track to meeting surplus. The numbers are similar, but the economic choices are very different.
LD: How concerned are you about debt? Do you have a target, like 40% of GDP [gross domestic product]?
BE: Roughly, it’s to bring it down to 20% over time. And again, our fiscal plan compared to the Prefu is very similar.
LD: That’s the same historic goal [Sir] Michael Cullen achieved.
BE: And Grant Robertson for the first two years, prior to Covid.
LD: You might get criticised from the left [for that debt track].
BE: I’m getting criticised from the left, and from the right that I’m not cutting enough. Ultimately, I’m trying to make the economic choices that help government invest back into the economy to get it moving again.
LD: When you get the criticism from the left around debt, the idea is that governments aren’t households; we could afford to run more debt, as long as we invest the money wisely.
BE: We’re totally not a household. The element I’m always thinking about is bond vigilantes. If the government is issuing debt to the external market, the market can respond if too much is issued and the cost of borrowing goes up.
But you also have to provide a cushion for the future, because that’s responsible, and it’s about economic choices. My view is: do as much as you can within the current window, make sure you have enough for the rainy days that happen to governments and countries, and as the fiscal and economic environment allows, you can spend a bit more.
LD: One of the things I’ve felt is that it’s not necessarily the amount of debt for many people; it’s …
BE: Bad debt versus good debt.
LD: Yeah. When I hear [left-wing commentators] talk about being able to borrow more, I think that works if there’s trust in governments to spend the money on things that drive growth. But I think that trust has been lost.
BE: Part of that trust is lost because of the flip-flopping around infrastructure. That’s a big chunk of government spending, and that is good debt. We should be borrowing for infrastructure and the good stuff. What you shouldn’t be borrowing for is tax cuts, the operating side. Our fiscal plan has a 12 billion dollar capital allowance and we’ve only spent four billion of it. We’ve got eight billion to deal with the things we need to once you get into government and see behind the hood. We’ve got the fiscal headroom, we just need the information about where the best place to spend it is. Stop the flip-flopping, because that’s what makes people lose trust in government, and stick with the plan the Infrastructure Commission has issued. Every party in Parliament supported it.
LD: Businesses really want some consensus around a long-term infrastructure plan.
BE: They do, absolutely. In the last two years we’ve lost 20,000 construction sector roles and 1500 engineers. That’s highly skilled people leaving our country or losing their jobs. When the infrastructure pipeline does start to wind up, there’s going to be huge demand. Underneath that, procurement is really important. We’ve got the 15% small business target, but are we really getting value for money? I want a line-by-line understanding, particularly from [NZ Transport Agency] Waka Kotahi, of who these contractors are, what projects they have, how much they’re getting and whether that’s competitive or whether we’re just going with the bigger firms because that’s the easiest way for government agencies to handle it. There needs to be a much better competitive process and much better oversight.
LD: Can you get the bureaucracy to do what you want? The centre-right parties speak a lot about imposing these ideas, but New Zealand’s bureaucracy is a whole bunch of individuals and it seems hard to get policy ideas all the way through. Can you impose the discipline?
BE: It comes down to leadership and to the way you implement it. If you’ve got a minister who’s very clear in their direction, who says “I want a monthly report on this; I want to see this particular information”, public servants respond to what their ministers ask for. If you don’t ask for it, they won’t provide it. The second element is that we’ve got very capable public servants, but in some agencies there isn’t a strong relationship with the private sector or the social sector. I worked in tax, in the policy unit for five years. We had a generic tax policy process that required IRD to work with the private sector in developing tax policy, so there was a very trusted, open relationship. IRD effectively got free commercial advice: “this won’t work because you haven’t thought about this” or ”this is good but could be better if you did that”. That process has been developed since 1994 and it works effectively.
LD: You mentioned your background in tax. Are you ideologically opposed to the idea that lower taxes help people be more efficient actors and boost the economy, or do you have a more pragmatic approach? People would think traditionally the left is higher taxes.
BE: Yes. It comes down to the evidence. When the last corporate tax rate cut was done, we didn’t see a big boost in productivity, and as many people know, we’ve had lagging productivity and growth. But that’s the main argument used by the right: you drop taxes, you get a boost in growth and higher wages. That hasn’t necessarily panned out. I seriously considered dropping the company tax rate very early on when I took on the finance role. But we didn’t have the resources to research what the productivity gains were in other countries when they’d taken a big drop, or the difference between countries with a two-tier tax rate system for smaller and larger firms. I did have the New Zealand evidence, and I didn’t feel comfortable enough to defend it, because that’s a revenue loss, so the question is where you find revenue elsewhere. New Zealand has been fortunate to have a firm basis around a broad base, low rate, because you’re taxing a broader base of assets, goods and services. There’s efficiency in that, and administrative ease, with fewer grey areas and less ability to avoid or evade tax.
LD: How much is the capital gains tax a game-changer? It’s quite a narrow one.
BE: But it’s still a new tax. We’re campaigning on a new tax. People on the left might say we’re not bold enough, it’s too narrow. People on the right say they just don’t want a capital gains tax. When Deborah Russell and I sat down and worked through the asset base, with the OECD working paper comparing countries, we said, we don’t have one, we’ve got all these land rules, let’s clean that up and put in a capital gains tax. New Zealand is familiar with land being profitable, so we recommended a much more narrow, targeted tax. We believed we could implement it practically, and quickly, because the bright-line test was brought in in 2015 and I was part of the team that did the commissioner’s interpretation statements on how to use it.
LD: Everyone can see the demographic challenges coming with an ageing population. If you rely on income tax and workers, you’ve got a smaller proportion of workers funding the retirees. Labour’s still committed to not means testing, and …
BE: … keeping it at 65.
LD: How do we do that?
BE: It’s a choice and this is where the politics comes in. Any party that wants to increase the age of superannuation needs a strong mandate from the people, because ultimately that’s who you’re accountable to. I looked through the old Cabinet papers and policy papers from when Sir Michael Cullen set up the Super Fund, as I was designing our KiwiSaver policy and our new Future fund. He knew you needed both private savings through KiwiSaver and the Super Fund. Changing superannuation settings was never in isolation. It was always within the bigger view of the full retirement system. If you want to change the age without dealing with everything else that’s coming, including aged care, which will be a big part of the health budget, I think you’ll fail at the first hurdle.
LD: Could it happen over time, if the trend is that we just get healthier and healthier?
BE: I think the discussion needs to build, and it needs to be a proper, formal one. I’ve talked about it as a political accord, because I was asked that question. There was a political accord around retirement back in 1994. I’m happy to work with any party across the aisle who wants to talk about the whole system, not just universal superannuation, because if you change one area, it affects others, and you’ve got to make sure there are safety nets.
LD: It seems a positive that whoever wins this election, there’s going to be some turbocharging of KiwiSaver. On the right, they have six and six, and Act has an issue with compulsion generally. On the left, one reason not to go further might be a concern that as the pool of private savings gets bigger, it creates an excuse to undermine public Super.
BE: There’s an element of that, but the bigger consideration for me was equity. If an employee has to meet six and six with no option to opt out, 6% from your pay each week is a big cut if you’re a low-income earner. I was a late adopter of KiwiSaver, because at that time in my life, with children and buying a new house, all the income was going towards that. Now I’m in a position to save for retirement through KiwiSaver, but having flexibility as life happens was a very big consideration. That’s why we have the default four, with flexibility once a year to opt for a different rate. Some people already save well over 4%. Giving more independence means they can save based on their life events. They shouldn’t be penalised by the fact that their employer’s not putting in anything, because the status quo at the moment is that if you can’t afford KiwiSaver, you have nothing.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
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