Editorial: Economy depends on enterprise

Long ago, when New Zealand was in the early phase of its economic reform, Treasury officials discovered there was just one indicator that international credit agencies noted above all - debt. And governments have concentrated ever since on reducing the public sector's contribution to the national debt, by balancing budgets and putting surplus revenue towards retiring debt.

In an open market economy there is little governments can directly do to balance trade and payments in the private sector and the country has continued to run current account deficits, sometimes among the highest in the developed world. Previously the credit agencies have been mollified by the healthy public accounts but late last week a warning came from Standard & Poors that it is now worried about the Government's fiscal intentions too.

Finance Minister Michael Cullen has long set his face against tax cuts, despite constant claims by the National Party and others that surplus revenue means the country could well afford them. After the election a year ago, which National nearly won, Dr Cullen has relented somewhat. Labour's post-election deal with United Future committed it to a review of business taxation. When the options under consideration were announced in July a cut in the corporate rate from 33c to 30c was on the list.

The prospect strengthened last week when Dr Cullen told an audience in Singapore the business tax review was "likely to produce an attractive mix of a lower corporate rate and tax credits, particularly helping those businesses focused on tackling overseas markets". If business hearts soared on those words, they produced a different response on at least one country rating desk in New York. A week later S&P announced they would be "concerned" if the Government's fiscal balance deteriorated and would look closely at New Zealand's AA+ rating.

This is a long way short of a credit warning. The analysts are worried, as always, about the current account deficit, now 9.7 per cent of annual gross domestic product. As one said, "It is high, it's chronic and it is not sustainable but there are mitigating factors ... in particular the strong fiscal position that the Government maintains." They are waiting to see whether that position can be maintained if corporate tax cuts eventuate.

It is a timely reminder that this country's economic health is still riding too much on sound public policy and not enough on private enterprise. Apart from fiscal policy, the country analyst at S&P praised monetary management, banking supervision and the orderliness and transparency of Government decision-making generally.

These are qualities that go too little appreciated in this country, where it remains fashionable to blame governments for every problem. The fact is, public policy has been the main pillar of our economic stability for a good 20 years now and it has had to offset a poor trading and investment performance by business generally.

Advocates of a corporate tax cut argue that the revenue left in business pockets will be invested well, or at least better than if it continued to be channelled into the so-called Cullen fund. But the experience of 20 years suggests that is a heroic argument. By all means, the corporate rate should be cut to a more competitive 30c, but the country cannot bank on a compensating revenue boost from the cut.

To keep the credit rating agencies comfortable Dr Cullen will have to build incentives to save and invest the profits left with corporate taxpayers. Otherwise a credit downgrade could add to business borrowing costs and leave nobody better off. We have been warned.