If a business model if flawed (e.g. electronics retailers, supply lead business based on credit), why prop it up – eventually it will fail. Surely this is an opportunity to weed out the flawed business models which have been one of the engines of our so called growth and emerge leaner and fitter?
If you don’t let them go naturally, you are just delaying the inevitable and exacerbating the problem.

We have just posted the following comment on The Hive

We have been calling for leadership and good on Skilling and Weldon for rising to the challenge.

We don’t think that we will achieve a consensus on these ideas quickly but we share their desire to stimulate a debate.

The idea of a Temasek style vehicle to support our growth strategy interests us enormously. We have had similar ideas ourselves. We have also argued for some time that we should be integrating the strategies being pursued by the NZSF, EQC, ACC and our wider trade and investment strategy. We would support fully these ideas being picked up in a wider review of industry and export strategy which we see as urgent post election.

The one area of disagreement would be around the R&D tax credit. We don’t think that this was that well designed or effective. Our view is that lower tax across the board is much better for the economy than trying to support but a few companies. Feedback from those using this policy was mixed as there was a high compliance price.

We share the view that retirement savings should be compulsory, but would not want that rate to be any higher than 2% contribution by both employee and employer in the short term – we need to keep cash flowing through the economy.

At last some economic leadership shown in this country. Good on the NZ Institute and NZX. I don’t know about delaying paying the piper with the provisional tax suggestion, nor rewarding those kiwis that left the country for better times overseas whilst those that stayed to make the country better get nothing. But one thing is for sure, businesses need support now, not consumers with marginal tax cuts. Consumers are worried about losing their jobs not if they can afford another cup of coffee, or if they’re lucky, a block of cheese a week. So support business by whatever means to keep people employed! If people feel secure in their employment, the economic turn-around will happen sooner.

Congratulations on your blog. I have reviewed a few ideas myself over on my blog over at
( http://www.dialogcrm.com/blog/2008/10/10/new-business-paradigm-needed/)

I think there is a vacuum of leadership on this issue. Mr Key should be in his element – but he has no cut through on any of this. A big key to this (no pun intended) is changes to KiwiSaver. That Australia has had 20 years of build up to their Super funds has been a huge success.

Of course having those big holes in the ground in WA is also very lucky but over the longer term ANZ super funds – if they stay away from over financialization of the local markets will be a pillar for long term success.

Congratulations again to the team including David Skillings and others who have put out the draft doc.

Mark/David,

Congratulations on a great initiative.

I agree with the general objectives of the report and with many of the proposals.

I do have some concerns around the proposal for a tax rebate for returning Kiwis. Again, I agree with the objective, but think it suffers from two flaws:
1. There’s no lockin. I don’t think 2 years service is enough to justify a big tax cut. We want people to come back for longer. We know from the experience with student loans that bonding doesn’t work–it just means that people who leave never come back!
2. I’m not convinced that capital will follow people back into the country. Investment doesn’t necessarily follow residence and, with the drop in the exchange rate, I think many returning kiwis would leave their savings offshore in the hope of a recovery.

So, in the spirit of constructive debate, here’s a suggestion: instead of an income tax rebate, why not offer additional government matching of voluntary Kiwisaver contributions (up to some maximum)? This provides an incentive for people to return–and at least contemplate staying long term, encourages at least some of their savings to follow them, ensures those savings go into the productive sector (rather than propping up the property market), and could be structured to cost the same as a tax rebate.

I also recognise the equity issues. And as someone who had significantly greater economic opportunities overseas but chose to come home, I’m directly affected. However, I think we should all be putting those concerns behind us in the best interests of the country.

Great to see someone has some vision going forward, even if many don’t agree with the mechanics of it. Do the political parties have any risk management options to share with the rest of us? Globally, there are question marks over how to deal with the credit crunch. It is well past the time to open up debate here.

Regarding rewarding ex-pats, forget the “why didn’t I get something?” attitude. This is serious on a global basis, no time for whinging about what you may or may not have done, locally (very small minded).

Medium-term, NZ needs (the Govt) to reduce the incentive to invest so heavily in residential property, hasn’t leaky buildings and now the credit crunch brought this home? Releasing those funds for investment in business (and R&D) would be a great start but to date no political party has wanted to take that step. It would require a huge change in local attitudes and expectation. Banks in particular need to be regulated on lending. Do we really need to be paying offshore banks for the “luxury” of having high growth and pricing of our property sector?

Leadership and ideas by those not in charge is in all likelihood not going to achieve much. Good to see something different however.

@Juha

It’s called a revolution. The Eastern Europeans among us know about them. Only problem is there is no such thing as blood-less revolution

@Miki No… that’d be, err, anemic.

What Skilling and Weldon propose is drastic enough for them to stand for Parliament, instead of remaining on the outside and trying to affect change from there. Doesn’t that seem reasonable?

I’ll add to the congrats for putting out bold yet thoughtful policy. I’d say I agree with 80-ish% of it, but have particular interest in how you suggest dealing with these “issues”:
1. The 20% tax-rate for returning Kiwis would still likely see them paid less than they could receive in Aus/Singapore etc – as such we’d risk wearing the opportunity cost of those who’d have returned regardless, and provided no real incentive for those considering Aus instead. An analysis of the required increase to make the policy a net benefit would certainly be useful
2. How to deal with the “weening” of these measures in 24 months time – at the very least clear cut-off dates (with possible weening periods) with commitment to see them through are necessary. But given the uphill battle to see any change occur now, I’m not convinced that we could transition again in 2 years time.
3. There has already been comments made around the tendency of international firms to up and leave at the end of a reduced-tax period. Strategies to avoid race to the bottom outcomes would be useful.
4. Many of these have tax revenue impacts – a rough analysis of those impacts makes it more useful to decide if the cost to social programs is worth the benefit.

Well done though all involved, if only we could transition think-tank to action-tank!

In addition to the work undertaken, here are some additional incremental steps in relation to tax issues to assist the economy:
1 Relax use of money interest rates
2 Allow more taxpayer to use the cash basis of accounting for GST (i.e. allow them to defer GST until they have actually got the cash. This could be reasonably helpful as debtors become slow to pay suppliers etc!)
3 Allow deductions for provisions for bad debts. Deductions are only allowed when debts are written off as non recoverable by balance date. A middle of the road option would be to allow a deduction for bad debts if the debt become bad by the time the corporate is required to file its tax return (or perhaps within 6 months of balance date). This will obviously benefit the banks as all other taxpayers.
4 Allow deductions for accruals of holiday pay (deductions are only allowed if the accrued holiday pay is paid out with 63 days of balance date)
5 If full write of capital assets is too expensive, why not increase the depreciation deductions (i.e. double the depreciation etc)
6 Allow unincorporated businesses (like many farmers and small SMEs) to incorporate their business with No tax cost (i.e. don’t tax depreciation recoveries, gains on stock etc). This means that money reinvested in their business can be taxed at a maximum of 30% (currently such business face tax rates of 33% and 39%).

Good to see some bold thought coming through. I do have some concerns with some of the strategies:

1. I fear that deferring provisional tax will cause a major funding problem for firms when it comes to catch up time at the end of the deferral. Many find it easier to manage cash flow on a ‘pay as you go’ basis than having a big hump to deal with later.

2. The R & D tax credit has, between legislators & IRD, been screwed down so tightly that it will be more effective in generating fees for tax advisers than it will be in stimulating additional investment in R & D. If the ‘incentive’ is to be meaningful, the regime needs to be reworked.

3. As much as I agree with the view that we must change the culture of investment in real property, it’s incorrect to say there is a bias in favour of investment in housing. Arguably, the opposite is the case. There are situations under which investment in real property will give rise to taxable gains which is not the case for any other types of investments.

With a bit of luck the recession will burn off the obsession so many have had with investment in real estate. I might add that the probelm is not only limited to the housing sector. The prices paid for much rural land can not be justified on the basis of the return from farming it.

4. Firms that can move here easily to take a tax holiday can presumably just as easily move on when the holiday is over. Perhaps some thought needs to go into how we can encourage them to stay beyong the holiday period.

Why politicians never suggest these ideas I will never know – instead we get policies that seem to perpetuate the issues and the mediocrity that is fast becoming our trademark.

I see merit in all the recommendations of the report, but I completely and whole-heartedly support the sale of SOEs. We know that as things stand, these companies are not the most productive, and why would they be when there is no accountability to shareholders and therefore no focus on performance. Being more productive is something we need to get better at doing and this needs to happen fast.

Selling SOEs in a way that prevents or limits overseas ownership will allay the fears of the masses, while providing a much needed boost to our capital markets, giving New Zealanders the opportunity to share in the success and profit from assets other than property. Assets that are actually economically productive and would therefore provide a positive contribution to economic growth and our standard of living. Furthermore, this would put more focus on performance through more accountability to all stakeholders but especially shareholders.

The capital unlocked and raised from the listing of SOEs could then be used to invest in our infrastructure, ideally through PPPs.

The suggestion to bring Kiwis back home is not likely to work in my opinion. And if it does, it is likely to only be temporary. Listening to the reasons why so many of us leave NZ, you quickly realise that the issues are far more deeply rooted than we think. A tax break would be nothing more than a band-aid solution if we could not change our mindset and embrace success (i.e. drop the tall poppy syndrome) as well as technology as the means to get our productivity up to levels within the top of the OECD. This means businesses being more willing to spend money to make money, which of course is helped by healthy capital markets, and banks whose credit policies recognise the value in assets beyond property.

As part of changing our mindset, we need to reward those willing to take a risk and think outside the box, which is why i also agree with the suggestion around R&D. Saying that, the status quo has room for improvement.

By making ‘risk’ a dirty word, we end up too scared to try new things, instead taking existing ideas and repackaging them as something new, when the end result will be exactly the same. Clearly this is a memo aspiring Prime Ministers did not get.

Sam

Peggy Noonan, the best political writer in America, wrote today at the end of her column in the WSJ that:

“It is asking a lot to ask a political animal to be thoughtful, because they find meaning in action. They are propelled through life by the force of their hunger. But now and then you want to see them think. You want to see them speak the truth. This is one of those times.”

Well. We are not getting any of this from Helen Clark or John Key, nor Cullen or English, so great job by these guys to go outside the square and have a go at coming up with solutions.

It really is sad how small the square our political parties are dancing in really is. Be interesting to see if any of them are big enough to stop attacking each other over stuff we don’t care about, and admit they need some help to figure out what the solutions are (and neither meaningless tax cuts nor “trust me, I’ve been here for 9 years” ring any bells for me)

Great paper and agree with all prev responses that now is the time to hold our heads up and think through the problems and issues rather than bury them in the sand. The dependence on an open economy like NZ on overseas funding and capital means that we need to recognise the influences (positive and negative) this has on our economy. Funding for NZ enterprise and NZ govt will dramatically contract and we will no longer be able to sell plots of land in Queenstown or borrow cheaply to fund an expanded govt sector to make up for the lack of productive investment and achievement in our productive economies.

I am an Irish man resident in NZ and while Ireland has had its own issues over the past 18 months, due to an oversized fincl sector (who would ever have thought this would be an advantage for NZ), two tax based initiatives that have served the Irish economy well and should be considered in NZ are:
* in contrast to the two year honeymoon proposal, would pref to see permanently lower corporate tax rate for overseas businesses locating into NZ making a commitment for a defined number of years (could we get Aus businesses to locate into NZ and maybe list on our markets giving kiwis ownership over Aus assets). Proposing permanently lower rates as key is how you keep these companies once honeymoon ends – businesses need to have sustainable rationale for a base here. Sustained lower tax rates for bus that otherwise would not be here is the only way to go.
* lower corporate tax rate for exporters or entities in strategic sector that NZ needs or wants to be great at (agri, technology)

If people feel this is somehow unfair (as many initially did in Ireland), should these initiatives succeed and the spinoff benefits of an expanded economic pie, then they soon change their tune. While man could say, well look at where Ireland is now or where the Aussies might go, we in NZ should look at both economies and ask what positives can we pick up from them i.e. rather than pronouncing ‘We don’t know how luck we are”, we should be asking “how luck can we be?”.

One other tactical benefit, speaking of an over or under sized financial sector is that when the bank crisis does really hit home in Aus and their big banks are forced to look at their most strategic assets and offerings, what better oppty could there be for some clever Kiwis to take back banks or banking market share and bring back this most strategically vital of sectors. Isn’t this how we lost a couple of them in the first place? Would love to see (and hell yes, even own a few shares in) a bank which funded a rapidly expanding kiwi economy BECAUSE we answered in a proactive manner the tough questions posed in this paper.

@ Jerry Flay

An NZX Blog has been discussed internally for some time – but the decision to launch it was based around the release of “Swan Dive or Belly Flop” and the need to engage broadly around these ideas.

However, to your question, we do have a long term commitment to this blog. We hope you are right that it has great potential as a forum. As to where it goes, and how it evolves, the blog will be demand rather than supply driven – i.e we do not see it as a brochure to advertise the NZX market, but potentially as a place where debate such as is now occurring can be facilitated, and great ideas generated. But – as to the details of how it evolves, we would be keen to hear your ideas

@Jane – specialised business programmes like ASB Business have been covering the crisis quite comprehensively. As for the rest of media, its foreign owners subject editorial departments to a sinking-lid policy of cost-cutting that devalues debate an analysis, as institutional memory and expertise is forced out in favour of cheaper juniors producing salacious, gossipy churnalism. In face of that, why would any politician feel accountable?

Having taking a NZ service business (people + broadband connection) overseas it is laughable to see the obsession with either attracting overseas businesses to NZ or getting expat kiwis back – while ignoring existing NZ businesses (who should pack up and join us overseas!).
At best there are suggestions for tax incentives for particular (e.g. export) businesses, while other businesses pay full tax rates (30% at the corporate level, but 39% when distributed).
Temporary tax holidays won’t get back skilled people who can move offshore and incorporate their businesses in low tax or no tax countries. (So a “tax holiday” returning to NZ would be an increase.)
Businesses, wealthy and talented people will continue to leave NZ’s high tax, welfare state where “tall poppies” are not welcome.

Yes – the standard of journalism leaves a lot to be desired in this country. 100% agree. Don’t forget, most journalists have strengths in english literature, not business or science.
But we digress people! It is time for focus…on an economic plan to get us out of this mess. So, good ideas for economic policy spring forth please…how about a tax incentive for businesses that maintain current headcount (to stem the sure-tide of redundancies on the horizon) and an even bigger incentive for those businesses that increase headcount in the upcoming tough economic times?

OK – here’s what I would do.
First, I do not think you can treat the economy in isolation. That will only exacerbate the problem.

Any strategy for NZ should also take into account other key sectors – Law and Order, Health, Infrastructure, Education etc.

So I would set up a forum with separate sections for each of these. Then, through online debate, agree on the main issues, problems and goals. This will lead to an identification of the key areas requiring solutions and strategies.

Again, through online debate, achieve concensus for which solutions and strategies should form policy. This will lead to the effective creation of a draft manifesto, which once again can be debated and revised accordingly.
What then happens to this manifesto is a moot point – presenting it to any political party will mean that at best it gets cherrypicked and integrated into that party’s own agenda.

The only logical progression would be for the architects of the document to form their own party, use the internet as a means of campaigning and see what happens. If the policies within are genuinely arrived at by intelligent debate and citizen concensus, then why not take the plunge?

But….. ongoing debate amongst people who have no intention of doing anything other than debating is fairly pointless and will dry up very quickly

I support the suggestions made. As a small business owner who has spent 6 years abroad my priorities are about survival first most, and second using the opportunity to improve productivity, attract talented staff (if I could find some money to pay them) and to position for the future. I think the ideas – especially the focus on easing business cashflow in the short-term, attracting people to NZ and increasing NZ’s capital pool are great. Our banks are relatively sound so we have quite different problems to the rest of the world. My concern is how can this be made real? We NZers are very passive. Do you intend to lobby the incumbent government in a meaningful and co-ordinated way. How can we all help?

After the weekend, with Nats saying nothing (so weak – they are losing a real leadership opportunity that should play to their strengths) and Labour getting better headlines but doing nothing either – we need to pressure them somehow to adopt some of these, or other ideas

Good call for action and a timely reminder how apathetic & complacent our two main political parties have become. I find myself agreeing to these suggestions with the exception that returning NZ’ers & new immigrants should be given favourable tax treatment – that would be an insult to all other taxpayers. Instead, the entire definition of “taxable income” in NZ needs to be redefined for ALL NZ tax residents regardless how long one has lived here. “Taxable income” should follow the Singapore model where only locally sourced income is taxed (company profits, wages/salaries), anything else is tax-exempt, period. Why on earth would somebody want to return to NZ and become subject to tax on all investment income no matter where in the world it’s held, after already having paid tax at source once? It’s an insult to tax interest earned on a savings account, again after the fact that the funds going into the accounts are NET of tax in the first place. Eliminate all the double whammy taxes and encourage tax free savings/investments, get rid of taxes on foreign exchange gains so that NZ savers are incentivised to have a diverse portfolio of currencies & asset classes.

Ideas to stimulate the NZ Economy

1) conduct a survey into the economic dead weight loss of NZ monopolies and consider adjusting competition policy to facilitate more competition in capital intensive business in NZ

2) review section 36 of the commerce act -

3) force all returning Kiwi expats who want tax breaks on thier capital to break up monopolies rather than reinforce them on their return to NZ

4) drive a domestic asset allocation culture amoungst the NZ investing public , so a 401k culture develops rather than a real estate obsession

cheers

Tex

I applaud Weldon & Skilling’s initiative and I trust that our political leaders will finally rise to the challenge. The world financial crisis may prove to be a ‘wake up call’ for the consumer-driven west. In a very short space of time, it will motivate more people to review their values and change their lifestyle. While this may not be good for some businesses, New Zealand has a fabulous opportunity to attract thinking, educated migrants from the developed world who would like to make a fresh start in a country with a reputation for being clean and green. Why not target the US for more migrants? Unlike the Brits, Americans do not traditionally immigrate in large numbers but recent events may change this behaviour. As an immigrant myself, I know how attractive New Zealand looks to someone living and working in a heavily populated city on the other side of the world. The suggested two year waiver of tax for new companies is a good idea but I don’t think individuals should be given special tax treatment. Delaying provisional tax would be helpful, however. I also applaud the suggestion to review the allocation of taxpayer funded savings institutions (NZ Super, ACC etc) and increase the proportion invested in New Zealand to benefit the national interest. A review of ‘orthodox investment and portfolio allocation criteria’ is well overdue.

Already many suggestions, critiques and refinements that will improve the set of recommendations. Really good. Some examples include:

Raid on global talent (Miki’s phrase, which we like) – seen as clearly being good for the country. But, concerns in some quarters around equity with people who have stayed here, and a need to ensure that those who do come back, come back for a longer term than any incentives apply for. One idea that has come through is to give returning Kiwi’s a tax break for two years, but to have that extra income put into a Kiwisaver scheme that is locked up, and which they lose if they leave within five years of returning. This could be one of two options available to returners, the other being to write off student loan debt to the same amount, for those that return in the next 12 months, but only after they have stayed here for 5 years.

Same issues around tax breaks for corporate tax for firms that relocate here. Reality is that the easiest targets for New Zealand to pick off will be Australian, and therefore quite easy for them to leave again (not costless, but not a killer). Just need to lock-in a contractual obligation for them to repay the unpaid tax (plus interest) if they leave, or reduce staff to skeleton levels, within a 5 year period.

R&D. Strong views that the anti-avoidance and other compliance requirements put in by IRD have mostly managed to create a new industry for tax professionals…but, some firms have relied on this, borne the cost, and will be really hurt, at exactly the wrong time, by pulling the credit now. At a time we are going into global recession, with most of these firms export focused (i.e selling into softening markets), to yank this without phasing it out is seen as potentially fatal to some firms. One idea, is that, for firms that take advantage of it in 2009, to allow phasing out over 3 years, with no new firms, or projects within firms, able to be phased in. Broad preference though for government to rethink the focus on anti-avoidance, make it cleaner, and have it do what it is meant to do – it is not the idea of an R&D credit that is the issue, it is the effectiveness of it.

There are real legs in the scale ideas of a Tamasek-like vehicle, and in bringing our various government funds vehicles (including VIF, GIF, etc) under one roof, to allow more scale, greater local focus on lumpy local bets, and as a long-term cornerstone shareholder. Real recognition that something needs to be done like this, and soon. Growing sense that we can do something meaningful and productive with SOEs and keep them New Zealand owned. One interesting e-mail suggested that the only reason Labour do not change the legislative framework around SOEs is because, as they are, they are “saleable” and thus they can go into that tired old box of fishing tackle every three years and use the “threat” of sale in the political arena at election time. Well, if Labour really care about outcomes, lets be really bipartisan on this one, and get all parties to agree to amend legislation around a Tamasek type vehicle, with strict limits on the ability to change it in the future. We need to keep thinking and get more ideas on this.

Provisional tax. Effective, sensible use of government balance sheet to smooth and de-risk but not subsidise. Some concerns that firms with no internal disciplines may be hurt by one large sum at the end of the year. In this case we should allow firms to choose to pay provisional tax, but, as many have pointed out, get rid of use of money interest penalties and the uplift provisions. As Tony says, with probable falling profits it is penal to expect businesses to have to pay tax on last year’s income plus a percentage uplift. Until we are back in a growth cycle, this needs to be shelved. Also a need to increase the threshold at which provisional tax is paid – seen as way too low at this point. Finally, a question as to whether this should be limited to New Zealand domiciled companies – interested in thoughts on this. In the seasons that are coming, cash flow is king.

Some have pointed out that 100% depreciation was used in UK a few years ago and worked then, provided assets are identified and there is a tax claw-back on sales of those assets which have been given the 100% allowance.

Keep the ideas and critiques coming.

Mark

With David Skilling, I believe the future of Western Civilisation is with the Ownership Society, defined through at least a minimally meaningful level of personal wealth ownership by all citizens eventually (About $300 000 now).
Please comment on the following policies & sums, whether this could turn our expected years of recession & budget deficits into accelerated development at reduced Forex deficits:
1. Amend the NZSF into a permanent institution, and allocate it to PAs (Personal Accounts) – a relatively simple task, with the oldest age group (60 – 64), as the longest time contributors, credited with the highest accounts, say, $9000.- each. (After the initial allocation, a PA would grow as a proportion of taxes paid, by a token sum even for those without taxable income, based on an average GST value for low level consumers).
2. From the 65th birthday during the 1st year of NZSF PA introduction, this $9000.- would finance its owners NZ super until consumed, at which point our hand-to-mouth PAYGO system would take over automatically, with no means testing or other complications involved – releasing this amount of taxation revenue for spending (or whatever) in other areas.
3. Over a certain number of years, the PAs of higher and middle income earners would finance all or most of their NZSuper, totally eliminating the case for means testing or surcharging, and visibly contributing to solving the demographic retirement cost problem of NZ Super entitlement at age 65 – and if the current accumulation rate of approximately 2% of GDPper annum proves not to be enough for that, political approval to raise the accumulation rate should not be impossible after the benefits of a higher savings culture have been experienced.(In the case of death before a PA has been consumed, it would be part of its owner’s estate. Together with KiwiSavings, a PA would also be available towards 1st home mortgage reapyment.
4. Since this would be a very slow initiation towards meaningful ownership by lower income earners, Dr. Skillings proposal of a $1000.- super account for all newborn babies could be introduced as a $1000.- KiwiSaver incentive to all qualifying citizens with say, at least 10 years residence in NZ – AS AN INITIALLY PASSIVE KS Account within the NZSF, separate from the normal PA, but returning the same profit or loss – until activated by its owner either within or without the NZSF.
5. If done simultaneously with the NZSF PA allocation, it would not cost the taxpayer a cent extra, but even reduce some outlay, because – if there were 4 million people qualifying for this initial incentive – there are not, and several 100 000 are enrolled already – 4 million $1000.- KS accounts would require $4 billion of the $14billion NZSF being reserved for KS accounts, leaving still $10billion for PA allocation.
So, in subsequent years, the perhaps 30 000 per annum newly KSaver Account qualifying citizens would be “peanuts” compared to the # of KS accounts opened in 2007/08.
6. When NZSF Guardians are mandated to invest a substantial proportion of the NZSF in NZ – incuding LOW INTEREST INFRASTRUCTURE FINANCE – and possibly converting as much foreign debt as prudent and possible into domestic debt, thereby reducing the Forex deficit & keeping the interest at home – wouldn’t that all turn the expected recession into a constructive, wealth and taxable income creative period of growth and full employment?
7. Would it not be substantial relief to repay the infrastructure debt to our own NZ Super cash flow in 1 transaction, instead of paying the same sum twice, when the infrastructure loan has to be repaid (possibly at a higher interest rate) to private and possibly foreign investors ?

Boot – while I agree that small savings accounts (perhaps for children & youths up to a certain age and value) should not be taxed, I am not certain at all about exempting all overseas income – because shouldn’t all NZ residents contribute towards the costs of running the country, if they want to live here?
You are right in NO PLANET – NO ECONOMY, and I hope our Business Roundtable and economists have learned the lesson, that what might look like economic growth through (excessive speculation) investment on credit, is undesirable and ultimately punished by “the hidden hand” anyhow.
But do you realise, that with the world population as large as it is, the only way towards a greener and cleaner world with hopes for acceptable living standards for most (or all?) eventually, is through a higher and widening rate of possibly lower profitability investment, especially in distant and small NewZealand? (And population stability.)
So, our most basic priority is a widening and higher savings (for investment in sustainability) culture, to enable priority choices among all the mostly only marginally influental proposals in this forum so far.
(Example: Freely consumable tax reductions are a less effective way towards an increasing and widening savings culture, than a direct tax rebate converted directly into investment wealth ownership, when the NZSF is allocated to Personal Accounts – debate welcome.)
Do you see allocation of theNZSF to PAs as helpful towards what you see as needed, and why or why not?

KR – how does all this relate to our prospect of many years of deficit budgets ahead?
As a small businessman before retirement 17 years ago I no doubt would have appreciated lower taxation, but it would only have boosted my consumption and debt repayment, not new, direct employment by me. The point is , there would be more capital for investment created through taxes converted into investment directly as through KiwSavers & the NZ Super Fund, than through freely consumable tax reductions. True and relevant, or not?

Congratulations Mark/David. Good to have a great forum.

1. I agree with Alex Fala (above) on tax breaks for returning kiwis. It in itself will not bring NZers back. Kiwis returning is usually of circumstances that are beyond income or tax (e.g. family, working visas etc). However giving a tax break to a returning kiwi will only incentivise the person to a. return to NZ for 2 years or b. just a tax break for the sake of a tax break (therefore they were going to return anyway). Therefore an additional contribution to kiwisaver by gov to a maximum would be more appropiate and keep funds in NZ. More needs to be address to tax brakets to stop this flow out of NZ in the first place.

2. I don’t think NZers are ready for compulsory savings, however kiwisaver is definitely a great vehicle. However is there legislation that the monies into managed funds are kept or invested (porportionately) in NZ? This may be the vehicle in which to return capital to NZ.

3. The KiwiCo has merit to a point and should be carefully considered. The main issue in NZ (unlike Temasek or Khazanah) is that long term infrastructure investment in not intrinsic to NZers. What I’m afraid is that every 3 years with elections is that a government may sell or change the legistlature nature of the % of offshore investment. It could all end up overseas. Therefore SOE’s individually should be sold to a single entity list on NZSX (at market value) or purchase on individual merit. Might as well call a dead duck a dead duck. Ownership should be by way of Gov approx 25 – 49% (no more), 25% max overseas and the rest from individual tax payers (mum and dad kiwis). Majority voting should not be held by Gov to stop once change in the % of shares sold overseas. Easy to get 2/3rds approval with gov and overseas shareholders. Although I may have summarised it too simply, the one big factor is that KiwiCo do not just become a larger beaucratic SOE but rather an international equity investment company with Kiwi companies as part of its portfolio.

Michele – It looks like you have not experienced really dictatorial govt. yet, to appreciate the liberal “nanny state” law & order we have the fortune to experience, choose, and canvass for or against, here.
Civilised living requires legally enforceable rules, like traffic regulations, or compulsory education, etc, etc. – & expect some more rules on investment on credit.
Compulsory NZSF savings – (Ricky, through the NZSF we have compulsory savings already, and even those without taxable income are participating through GST) – are just like say, practically compulsory life insurance when taking up a huge home mortgage.
You would prefer the NZSF money to be spent on growth projects, including infrastructure. Both, Cullen & Key talk of considering infrastructure finance from the NZSF to boost our economy and development, if unemployment becomes a problem.
Consider this: A million of the NZSF invested in infrastructure construction at say 5% (CHeaper than our people are prepared to save for voluntarily), with a labour cost component of say $0.5 million, generates more than twice the taxable income for New Zealand, than a (risky) 20% return of the same $1 million from abroad.
Also consider – without the efficient collection through taxation and bulk investment through the NZSF, (profitable from day 1 for all the parties concerned), saving for superannuation would just not be worthwhile for low income earners, as the administration of small accounts up to a certain value on their own, costs more than what they earn.
Michele, Ricky and all others economically enlightened – unless you explicitly prefer unegalitarian plutocracy (which is the natural outcome of unregulated libertarian laissez-faire), the sort of compulsory saving leading to Ownership Democracy is in your own interests to enjoy your eventual prosperity in tranquillity and peace POSSIBLY AT A LOWER RATE OF REDISTRIBUTIVE TAXATION – than what would be possible in our society (and the world!) with still a substantial proportin of hand-to-mouth living have-nots.

I’m very pleased to see this initiative – well done Mark and David.

Commenting on the detail of these matters is above my pay grade. However, I would like to see stronger evidence based decision making in all policy decisions. There are too many important decisions made with only anecdotal evidence. Partisanship in this country is used as a substitute for thinking.

Since stepping back from a full-time role at Trade Me, I have been exposed to a lot of businesses. A couple of observations to fuel the debate:

* The existing grants system (NZTE/ FRST) are very poorly allocated and ineffective. Ditto for the co-investment schemes.

* Management quality in New Zealand for entrepreneurial enterprises is generally poor and our ambition limited once basic needs (BMW and Bach) are met.

The suggestions on provisional tax, for example, are good – but need deep analysis. There are already schemes in place to service bridging (pioneered in the rural sector where revenues lag costs by a long way), there would be an increase in unpaid taxes (because cashflow management is poorly done, on average) and the majority of benefits obviously only accrue to the companies making larger profits – most NZ companies don’t.

As a start, I would just like to see more smart people – with business experience – working on the solutions. The government’s latest go at the guarantee scheme for finance companies is just another example of how valuable an internship at a real company and some economics training would be for our politicians.

Like National’s fund policy. Sensible. We are so dependent on overseas capital, and we ship all our away, creating national risk, and starving NZ companies on a key part of their diet.

Blair said…
Privatise and fully fund (via an endowment) one small university with a view to creating at least one local elite institution with a focus on postgrad science and technology.

That’s an interesting idea. Perhaps such a small private university can be established here (with ~ 2000 students) to specialize in natural science & engineering R&Ds, similar to the prestigious CalTech (California Institute of Technology), in the US. Such an elite private institution with focus on natural science and technology might attract NASA into considering to shift some divisions of JPL (Jet Propulsion Laboratory) from CalTech to New Zealand. The academic skills is already here in NZ, it just needs an impetus from someone or organization to start it.

One elite group that has been already established here locally (2006) is the Dodd/Walls Photonics Centre, which is a joined effort of Auckland/Otago/Canterbury Physics Departments. The work of researchers at Dodd/Walls is world-class. They target to develop world-class technology which will be central to the success of New Zealand’s future economy. Perhaps the Dodd/Walls can pealed off from those Universities to establish a small private elite University named HillTech (Hillary Technical Institute) to concentrate on science & technology. Over time, other disciplines of science/engineering must also be established at HillTech so that it widens its focus to other emerging areas of technology.

I was surprised that I didn’t see any government ministers or officials from the Ministry of Research, Science & Technology (MORST) at the opening of the Dodd/Walls Centre at Auckland University in early December, 2006. I asked the organizers if they invited any government officials to the opening ceremony and they said yes. Invitation letters were sent to the MORST minister and his officials, but no one bothered to turn up. I told one organizer that it was odd/bizzare that in 2 weeks prior to the opening of the Dodd/Walls Centre, the messiah Al Gore’s lecture at the University of Auckland’s School of Engineering was packed with government ministers, even John Key was there too, to listen to messiah Gore’s gospels. This sort of attitude, shows that our politicians are more interested in questionable science (man made global warming) rather than real science which has huge potential for commercial applications & producing other economic benefits.

We must not allow our economically inept politicians alone to manage the New Zealand economy through what could be the world’s worst ever recession!

In the 25 years to 1984, New Zealand’s GDP per capita dropped from 4th highest in the OECD countries to 18th. Thank goodness for the economic reforms introduced by Rodger Douglas in 1984 and continued by Ruth Richardson, because in the last 24 years we have lost only another 4 places to 22nd. During the same period other smaller economies made great economic progress, and raised the quality of life of their peoples – because their Governments worked with leaders from the internationally competitive sectors to maximize their growth.

To date neither Helen Clark nor John Key have given any indication they understand the effect the world’s imminent recession will have on our vulnerable economy, which is so dependant on the economic health of our major trading partners.  We must therefore, with great urgency, implement a process which forces the new Government to implement a policy which ensures New Zealand’s most successful business leaders play a key role in planning the future direction of our economy.
 
Prof Paul Callaghan and I believe the most effective way in which to achieve this goal, would be for respected New Zealand business leaders to actively use the media to support, particularly in the period to the election (when key politicians are forced to listen and react), urgent implementation of the following initiative:    

Identification of New Zealand’s internationally competitive sectors. (Perhaps 8 or so, plus an “Other sectors” category.)
Identification of the most respected leaders in each of the above sectors. (Perhaps 5 or so from each sector.)
Formation of Sector Growth Committees comprising the above leaders and appropriate Government Ministers and Ministry representatives, and have them prepare agreed Sector Growth Strategy Plans, which would maximise the sustainable growth of each sector. Ensuring the Sector Growth Committees have access to the resources to implement these plans.
Wide publication of these plans – both within New Zealand, and to New Zealanders living overseas

Ensuring the Sector Growth Committees meet, review and update their Sector Growth Plans at least three times each year. 
 
These Sector Growth Plans would maximise the sustainable growth of the sectors – and would thereby maximize the taxation receipts received by Government during the forthcoming recession. They would also encourage expats involved in these sectors to return to New Zealand, and with their experience and overseas contacts, play a key role in growing our internationally competitive sectors.
 
To battle through the imminent recession, our most experienced people, must work with Ministers and the relevant Ministries to prepare, publicize and constantly update Sector Growth Plans – plans which must be based on maximizing the sustainable growth of sectors which have already proven their international competitiveness by their success in export.

1) Provisional tax deferment: No; Effectively this would only be a temporary loan that would be disruptive to long term investment planning and would create significant default risk.
2) 100% depreciation: YES A great incentive to invest productively, and would avoid some of the bureaucratic nightmare that surrounds tax accounting for fixed assets. This should be made permanent for assets costing less than $10,000, no perhaps $100,000.
3) Bring Kiwis home: No, they will be coming anyway. If they aren’t already planning to come back then this incentive wouldn’t significantly incentivise them, and it would create a lot of resentment from those of us who have stayed here to try and develop NZ.
4) Attract new firms to NZ: No, as this is unlikely to be successful in the current climate. There are huge re-location incentives available in many jurisdictions which are very difficult to match, much less beat. Ireland was successful but that was in an entirely different economic period. It also took quite a few years to get rolling.
5) Retain the R&D tax credit: Yes, but with refinements to reduce the gaming that is underway to reallocate ordinary expenditure as R&D. The R&D credit is bureaucratically neutral and piggy backs private investment decisions. This is much better than the ‘expert’ based granting decisions of government agencies which are supporting many projects that completely lack merit.
6) Government borrowing for productive investment: yes, but hopefully not for another Motonui.
7) KiwiCo to own SOEs: Not sure. In my experience businesses thrive because of great management and with good competition, seldom because of a great board. SOEs mostly lack competitive markets and I don’t think a holding company board will help them. Even partial privatisation has many politcal problems, unless the stake is given to every NZer who has paid taxes over the last 3 years.
Redirecting taxpayer funded investment funds. Lots of room for management improvement here and good opportunities for better strategy.
9) Compulsory savings: Yes, but the problem is that poor people can’t afford to put money in Kiwisaver.
10) Eliminate housing speculation bias: Yes, even though it has been a tax beneficial bias for my own retirement planning.
11) Deposit insurance: Yes, I hope RBNZ is on top of the crisis in confidence which could even bring down Local Authorities if they can’t refinance existing debt.
12) Interest rates: Yes

Congrats to Mark and David for raising this issue. It is crucial to NZ’s economic health and well-being over the next decade. Your call for input has been exercising my brain, so before it becomes too late, here is my twopennorth:

1) Brain Drain: The suggested tax reduction for returning prodigal sons is politically poisonous and will not be adopted by the major political parties for fear of voter backlash. I also agree with others that a 20% tax reduction will probably still not be enough for employees in UK, Europe or Asia to benefit financially by returning home. Besides which, why should we distinguish between returning kiwis and other skilled immigrants? New Zealand needs more infrastructure (see below) and to achieve that it needs more taxpayers/customers to pay for it. Doubling New Zealand’s population (e.g. 8 million) seems to be an appropriate target that will go some way to fixing that. Targeted immmigration advertising camapigns (c.f. ’50’s/60’s one way free ticket programme) would be my preferred approach to this. Debate will undoubtedly rage about “where” are appropriate regions to attract migrants from, I don’t care – I just want enough people to be paying taxes that we can build a proper motorway between Wellington and Auckland. There are going to be quite a lot of people globally looking to make a fresh start of it when the dust settles in the northern hemisphere. A welcome, a job and an opportunity to start again will go a long way – just like it has done throughout history in the wake of major economic upheavals. A likely source of jobs will be in building 4 or 5 new towns that will be required to house these new immigrants. A national debate is required to re-educate new zealanders that (a) we are a nation of migrants, and (b) that immigration is great for the economy and great for the country.

2) Tax benefits for immigrating businesses: This has worked well in otehr countries (e.g. Ireland, Singapore). I disagree with the draft doument in as much as the real trick is to attract immobile businesses with ’sticky assets’ – not the mobile ones who will disappear to the next tax haven once their welcome wears out. A lot of NZ firms are also going to cry foul at this unless they get the same benefits up front; ie. 2 years tax-free starting from April 9th 2009. This is just too expensive to be seriously entertained (as is an alternative strategy of 4 years taxed at 15%). There is room for tinkering with business tax around the edges, but a better approach to attracting new businesses to the NZ economy is to simply make it the best and easiest place to do business from. Which leads me to my main point:

3) Infrastructure in all its forms is a fundamental ENABLING attribute of an economy. The cost-effective and timely movement of things, people, data and energy around the entire nation is eesential to enable the available resources to be used in the most efficient manner. Infrastructure that works is of far more value to an economy than the profits made by infrastructure owner-operators. The current SOE system has led to chronic underinvestment in broadband and electricity generation & transmission. Transport infrastructure in NZ is woeful in a global context. Taking the energy sector as an example; short-term profit considerations drive a “maximum price for minimum service” mantra that yields high dividends to the shareholders (government) whilst maintaining a price point too high to permit the growth of energy intensive businesses. One of NZ’s key global points of competitive advantage is its low population density leading to a high ratio of natural resources per capita; this includes energy. There is a strong positive correlation between energy use and GDP. Energy intensive industries such as Aluminium-smelting and NZSteel have been key economic success stories for NZ. Despite under-investment, NZ still has the 3rd cheapest electricity in the OECD. But Tiwai Pnt and NZSteel would never have been built in today’s political climate. If NZ can double its energy generation capacity in the next 5 years, and maintain close to current prices, there will be plenty of manufacturing industries flocking to our shores. How to enable investment in energy generation? We need a step change – infrastructure investment must be driven by an entity who’s performance measures include the economic benefit to the nation – and if that sounds dangerously like Think Big and nationalisation thats because it is. The Great Depression saw the nationalisation of a number of indutries throughout the world, and this one will too. When it all goes horribly wrong governments are the only ones capable of picking up the pieces. Getting systems in place before it becomes an emergency is a very good idea. The trick is to learn from the failures of the past and set in place management systems and accountability that encourage efficiency AND ambition. I don’t think the current SOE system matches up on the ambition front (or has enough money) to install ~10GW of generating capacity in the next 5 years. A new investment vehicle is needed – lets call it NewInfraCo; NewInfraCo needs to be able to take more into consideration than just shareholder profits and hence it must be a separate entity to any NZ soverign-wealth fund type entity (see below). NewInfraCo would sell government-guaranteed infrastructure bonds to fund its investments in new generation and once the plants were operational and delivering power to the grid it would seek to sell them onto operating SOE’s. It should only be able to hold a small number of plants at any one time thus requiring it to divest of a previous investment before it can begin a new project and thus maintaining focus on adding new capacity. A similar model with concomitantly ambitious targets would also be suitable for the proposed broadband roll-out and urgently neccessary Transpower upgrades.

(N.B. To put this much extra generation in is going to require relaxing the thermal generation rules and recognising Kyoto as just too expensive. Don’t worry everybody else will do too – Canada did so a while ago)

4) A Sovereign-Wealth Fund (e.g. Temasek NZ): I don’t think this is a good idea for NZ SOE’s that are infrastructure-owner-operators (see above). But this is a great idea if, like Temasek, it seeks to launch corporate raids on foreign businesses, thus allowing NZinc. to build up an asset base and income denominated in non-NZ$ currencies. Over time this will enable us to offset the current account deficit and it will also provide vital ballast for an economy and currency that has a tendency to bounce around like a ping-pong ball. “Temasek NZ” should be a purely profit-driven enterprise with top quality managers who are rewarded appropriately. Invested in large multinational corporates at levels which enable shareholder activism, this is the correct place for NZSF and maybe some of the government contribution to kiwisaver. Further funds would be available through share offering (restricted to 25% of the company and mandated to be listed on NZX in perpetuity) and/or bond issuance (lets try and avoid guaranteeing this one too!). Temasek NZ would obviously be free to invest in any NZ business that was not infrastructure-based.

The next decade is going to see economies that produce ‘things’ flourish. Consumption without production is not going to be a successful strategy. NZ needs to start working towards a successful strategy urgently.

Let us recognize that the exposure this country now faces has one cause and that is 20+ years of policy which punishes domestic savers. Every year savings are depreciated by inflation, yet income tax is levied on the interest which barely (if at all) makes up for the depreciated investment and is not income at all. So it simply doesn’t make sense to save money. We know that the official inflation rate is understated by intent (Pollyanna policy) by including things like satnavs which artificially drag it down and wages which make a circular reference. Printing money, giving it away, and lowering the interest rates again won’t help. It has to make sense for people to save.

This is definitely a great paper and greater still is the initiative to involve other stake holders into this discussion.

Our position in the world has slipped because we have failed to emerge from the mind set of an agricultural economy. As economies develop the share of agriculture in overall GDP reduces. We largely missed the industrial age because we did not have economy scale in our favor due to the small population base. But there is simply no excuse to miss out on the opportunity that information age provides us.

Wealth is always created through exchange of ideas. Advent of the print media was the first major break through which ushered science and the industrial age. This was followed by radio, telephony, television and now we have the internet which leading the new charge. In NZ we have perhaps the costliest communication set up in the world. We remain insulated not only geographically but also mentally. The economic revolution in India took place when the costs of telephone calls and internet came down dramatically. India today has much faster broadband, optic cables connecting the country and communication costs that are at least 50 times cheaper than NZ. If we have to move ahead in the information age then this is the first bottle neck that has to be removed. Wealth in today’s world is created through ideas……this is the greatest untapped strength of NZ. If we have to take a leap ahead then we have to remodel our economy to take advantage of the information age. Our geographical isolation from problems of terrorism are a huge advantage in the information age. We can be isolated and yet be global in our approach. Our small population base has no disadvantage in the information age. To remodel ourselves we have to create the right infrastructure and education.

Secondly we have to market NZ as the most politically stable, corruption free, secure country with excellent infrastructure. Money today is electronic and flows in a direction that has environment for growth and stability. Fortunately we have both these in abundance and yet we have been able to secure so little of it.

Lastly, NZ is a retires haven with it beauty & climate…………..we have to promote this………….we should make NZ the retirement village for the rich.

David, a pity you do not mention what Phil Verry’s ILSS proposal is all about.
Praveen, NZ as a retirement haven is a good idea, and ideas are needed for innovations – but you must be awarethat say, that the investment in India’s communication’s progess did require savings to finance it…..

And A May – yes , inflation punishes cash savers, so our latest policy efforts to keep inflation below 3% is a sound move.
Unfortunately, the effort to do it via relatively high interest rate did not increase our local savings rates as much as attracting foreign savings, which in turn, made it more difficult to keep inflation low.
So, for the future, better inflation control could perhaps be achieved through a combination of RB interest rates control, marginal compulsory (super) savings rates adjustments, + higher or lower domestic NZSF investment rates?

David R – I was surprised – and haven’t you noticed – that the ILSS (Interest Linked Savings Scheme) in 11 (a – k) lengthy points – agrees with, and proposes almost exactly what is contained in my last sentence, Nov. 29th?
My only criticism is in that there are no explanations as to what the “new & more effective instruments of the ILSS solution” are, “to replace the failed OCR(?) surcharge (high RB interest) with the collected new free savings fund”?
Where are the “new free savings” supposed to come from? In my view, they could come from a proportion of the NZSF, and those KiwiSavings, where their owners prefer them invested with the NZSF?
Can you please draw my attention to anything I might have missed or misunderstood in the ILSS proposal?

Jens,
I accept your comments in full.
I personally have not involved myself in in-depth analysis of the ILSS presentation.
My sole response (almost with incredulity) is that our illustrious parliamentary representation on the select committee chose not to (possibly could not understand) the content of the submission.
Then to accept without question the RB experts(?) that they know best shows our government is deficient if not defective.
I am sure we all would value some comment from our authors.

Vaguely related to the above, today I see Kiwibank is being very successful in mopping up cash from within NZ and lending it out on mortgages at very competitive rates.

Bonds held when you rent a property don’t earn interest. This should be changed. Bond money should earn at least OCR over the period it is held for.

To accelerate NZ out of recession when the break-point does emerge I suggest the following:

Number 1 – A different method to control inflation, and I suggest the use of a complementary tool to the OCR called the Reserve Capital Rate (RCR). This rate would also be set by RBNZ and it’s purpose would be to direct money to a ‘reserve capital account’ associated with any loan, even credit cards. The RCR would apply to both domestic and commercial borrowers. Funds in these accounts (or one aggregate account per person or business) would be owned by the borrower and be held in reserve until released at some future point on the inflation curve.

This kind of thing is easy to implement and seems more palatable than say ring-fencing investment property losses, a capital gains tax, stamp duty/mortgage tax or a compulsory ’interest linked compulsory savings scheme’ as the terms tax, compulsory or remove are nowhere to be seen. (These are not great motivational terms!) At worst, it’s the less nasty ‘delay’ word. It need not restrain choice any more than choice is restrained now and it’s no more compulsory than having to pay all the interest component to a bank/lender, all of which is never seen again with just an OCR based mechanism. At least with this mechanism you’d get some of it back, that is, the RCR component. It’s you money why lose it to overseas lenders, off-shore bank shareholders – keep it here in New Zealand.

Consider the following, From early 2004 RBNZ started to ramp up the OCR in particular due to the effect of house price inflation. Let’s suppose RBNZ had access to the RCR as they started their tightening. Let’s pick an arbitrary point to tighten with the RCR, rather than just the OCR, say April 2004, when RBNZ increased the OCR to 5.50% with a 0.25% increase. Say that 0.25% of interest load was directed to any loan’s associated ‘reserve capital account’. By October of that year RBNZ had increased the OCR to 6.50%, but had they used only the RCR for these increases that 1% of interest load would be in ‘reserve capital accounts’ – not heading offshore to foreign lenders and their shareholders, never to be seen again.

The aggregate effect of OCR and RCR would have meant inflation was controlled as intended with the OCR, but better than it was. This is because the OCR would have remained lower thereby not allowing the banks to so easily attract foreign loan capital, in excess of our real needs, which was actually drawn to us like bees to honey as off-shore money could see the OCR going ever higher as our banks insulated borrowers from it’s effects with ever increasing use of fixed rate mortgages. (Nearly 80% of mortgages are fixed rate.)This became a self-exacerbating loop as said off-shore money was easier to access because of our relatively higher and increasing OCR, loan capital was ever easier for borrowers, meaning RBNZ had to keep increasing the OCR. And so it went on. The off-shore loan capital wasn’t anymore expensive, if anything it was becoming relatively cheaper as we were sourcing it from countries with much lower cash rates – that’s why we were awash with it here. The irony in this situation is that it actually served to increase inflation, not reduce it. With the RCR this loop is effectively broken and the negative effects on inflation control moderated with the use of the RCR, not just because of the throttling of money supply, but because of the immediacy associated with the RCR’s application. Indeed even just knowing it’s there as ‘the stick on the mantle piece’ is useful, more so than Alan Bollard’s jawbone that everyone, especially the banks, ignored. No one would be able to ignore the RCR. I believe the net effect would have meant lower and less rapidly rising inflation, with all that entails, eg. better priced housing and lower currency – not having to get as high as 8.25% on just an OCR based system, with all that entails, in particular paying more in interest load – which you’d never see again don’t forget.

Now let’s think about what is happening now. Essentially we are experiencing an external economic shock not of our own making. (Notwithstanding the fact that we were well into a recession of our own making because the application of monetary policy was less and less effective.) Anyway, as the OCR is reducing the banks are struggling to pass the benefit on in retail rates, because they are filling holes, building risk-reserves and money is harder to come by out there for them now. However, if RBNZ had an RCR to play with too, most of the loosening we need could come in the main from a reduction in the RCR. Again it’s the benefit of immediacy with this tool. Plus we have funds in the associated ‘reserve capital accounts’ that could be released as appropriate.

Conditions for release in more benign times would need to be looked at in detail. However, in a free market economy you should be able to spend your money as you like, but the release point would be controlled by RBNZ according to the existing ‘Policy Targets Agreement’. Perhaps you might give a degree of tax credit for transfer into a retirement savings account/plan/Kiwisaver to encourage longer term saving for individuals – if that is their choice. Or, they might put it in something like a range of ‘New Zealand Investment Trusts’ which aim to invest in good Kiwi businesses – simple as that, it don’t matter what they are focused on in terms of type of business but they’d be Kiwi businesses. Government could help set these trusts up and maybe retain a stake, BUT, they’d be run by non-Government managers.

Legislation would be required making it illegal to lend for profit without arranging facility for deposits to be directed to a borrower’s ‘reserve capital account’. The location of ‘reserve capital accounts’ could be regulated by RBNZ and I’d suggest held only with institutions of highest repute and credit rating, or maybe RBNZ. This would stop profligate issue of funds against the intention of the RCR mechanism.

For savers disappointed with perceived lower interest rates, it should be noted that after the actuation point of the RCR in a tightening cycle, inflation would be under better control meaning purchasing power is retained – the point of inflation control. In the long run other avenues of sustainable investment would emerge, like prospering firms/exporters in the productive sector and more diverse base finance companies not prone to going bust because we get a wobble in the property market, because there would be less wobbles and more sustainable diverse investment opportunities in the productive sector. In addition savers deposits should increase as general wealth increases with what that implies for those living on savings.

As for importers who might complain about a lower exchange rate, we’d actually get wealthier based on our productive sector being more competitive and so we’d still be able to pay for our LCD TV’s and flashier cars, but in the main with a lower net debt component. The macro net effect would be a reducing current account deficit, which would lower the risk premium off-shore lenders seek from us as a deficit nation, which is of no small proportion as you well know, thereby delivering lower cost loan capital in the long run. Hence a virtuous cycle for increasing national wealth, and all that implies.

Domestic inflation could be more precisely targeted by RBNZ while leaving the OCR relatively lower therefore not leading to an over-valued exchange rate reflecting speculative money flows rather than real trade flows, thereby weakening our export sectors with all that entails.

The aggregate payment load of the two rates would be less than with just the OCR, as inflation would be more effectively controlled.

It’d be useful in that it more directly opposes our innate inability to delay gratification, and with it in application at any time, people might be more inclined to think if they actually do need that great looking LCD TV or flashier car. However, if you can’t wait you’ll get the RCR component back eventually – use of your money is simply delayed, not lost down the gurgler forever. It’s your money, so why should you give it away unnecessarily to bankers, credit card companies and their shareholders?

While we are at it, isn’t it about time we had a committee like BOJ, BOE and FOMC, setting rates, not just one individual?

Number 2 – Reintroduce the R&D tax credit. Government should do what they have tried to do with the RMA – de-bureaucratise the system. Other countries can get this to work, why can’t we? Not long after it was introduced I started to develop concerns on this aspect and I believe it comes down to the seemingly higher ‘bureaucracy factor’ in New Zealand. It was always going to risk prone with the restrictive Frascatti definition of research probably being pumped down the throat of IRD by FRST. New Zealand companies need this as little r, bigger D, and the system should reflect this and the culture of small medium enterprise firms in New Zealand – not Northern Hemisphere sme cultures.

Number 3 – Tax credit 3rd party investment in private sector R&D. You might have different rates for start-ups. Don’t forget oaks come from accorns and we are going to need em’.

Number 4 – First year full rate depreciation on plant and patent expenditure.

Number 5 – Tax credit firm sponsored training and education focused on management, leadership development and new product development.

Number 6 – Don’t shrink from debate and sweep politically awkward issues under the carpet. Positively critique and build on each others ideas so we can build a better New Zealand, so please do critique these suggestions rather than ignore them. You may be able to completely over turn them so we waste no more time on them, or you may make them better and that might benefit us all.