Government held hostage to deficit thinking

By Fran O'Sullivan

Rogering the Aussies is fine sport, but come on, Bill - it just didn't wash up as an excuse for your failure to slash the corporate tax rate.

Those of you out in business world who missed the Treasurer's minor gloat at Friday's Budget Breakfast - will quickly catch on to the piping litany.

New Zealand has posted Budget surpluses for the sixth year in a row - whereas Australia is only now posting its first recent surplus. There were similar takes on our relative standings in the world competitiveness index, the relative corruption ratings - it's a good tune.

But again, this Treasurer has missed the point.

We're not content with a mere win over Australia. We want Roger Twose and the boys to win the World Cup.

It's no different in business.

Sure the Goldilocks economy is on the way back. Economic growth is coming back - but not over-heating; unemployment is down and inflation whipped. The right measure of hot and cold. But it's still porridge.

Like our cricketers, those of us in business should not be content with a mere win over Australia.

If we can tip the scales our way and attract investment and spark new employment by reducing our corporate tax rates - then let's get on with it, instead of hiding behind the headline du jour: "Little room to move on tax cuts".

Let's freeze that frame.

Both Birch and the Treasurer-designate, Bill English, are currently fixated with "fiscal prudence" - the argument which says you can't introduce tax-cuts until you've effectively paid for them.

But a year ago, when the economy was in a tail-spin and our dollar was falling out of bed - these same politicians entertained the notion of a Budget deficit. They had little choice. Five years of Budget surpluses to Australia's nil record has still left the New Zealand economy far more exposed to the effects of the Asian Crisis. The Reserve Bank's monetary policy settings were partly to blame - but the fact is, we sunk into recession for two quarters. Australia didn't.

Against that background, plenty of sane and rational business economists argued that running a fiscal deficit did not matter under the circumstances. Better to do that than crunch the life out of the economy by trying to stave off the inevitable.

In the land of the setting sun, a different approach is now being taken.

Japan - with its strong dose of deflation, finance system tottering on bankruptcy - is going for an across-the-board marginal tax rate reduction.

Okay, the pedants will point out that New Zealand already enjoys lower tax rates than Japan. But the point is that the best-performing large country stock market index this year has been Japan's - up more than 18 per cent.

The effective corporate tax-rate in Japan will drop from 50 per cent to around 41 per cent. Depreciation on business equipment purchases will be cash expensed and the top personal income-tax rate is scheduled to drop to 37 per cent from 50 per cent.

Naturally - all this will provide a huge incentive to do business.

It's the old adage: if you tax something, you get less of it; if you tax something less, you get more of it.

That's why I don't hold much truck with Birch and English when they say we can't afford tax cuts until it's fiscally prudent to make them.

The prudent measure is to change the incentives now and attract some of the international investment which is currently flowing back into Asia - problems with transparency notwithstanding.

In New Zealand, revenue from corporate taxes is just under half that brought in from the consumption tax (GST). If the Government was serious about dealing to the imbalance on consumption and the lingering balance of payments deficit, it would change the tax levers.

Drop the corporate tax rate to 25 cents and, if it must, keep the move revenue neutral by raising GST. By lowering the tax burden on production and capital formation, jobs and income would be created.

By being somewhat "fiscally imprudent" - an even bigger incentive to do business here could be achieved by offering preferential tax rates for greenfields investments over a certain size. Other nations such as Ireland and Chile have done just that.

This is not the same as a tax subsidy. It assumes that the businesses are making a profit in the first place. But it's time to get rid of the white-noise obstacles and make a pitch for top-placing on the world competitive indices. Not a position just one step ahead of Australia.