Russel outlines why it is crucial to keep manufacturing in New Zealand, and how the tax law being debated in the house encourages off-shoring. When you're borrowing money to pay the interest on the money that you've already borrowed, you know that something needs to change!
(Speech on the Second Reading of the "Taxation (International Taxation, Life Insurance and Remedial Matters) Bill", House of Representatives, Tuesday 4 August, 2009)
TRANSCRIPT - Russel Norman: Taxation (International Taxation, Life Insurance and Remedial Matters) Bill — Second Reading
Dr RUSSEL NORMAN (Co-Leader—Green) : I stand to speak on the second reading of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill. It was introduced by the previous Government and followed through on by the current one.
There are some good things in this bill. Payroll giving, tax exemption for honoraria, some of the changes being proposed in the associated persons test in order to try to catch more tax avoidance, and some of the changes to life insurance are not bad ideas at all—in fact, they are good ideas. Some of the good things that are found in this bill are undermined by the changes to the taxes for controlled foreign companies—that is, companies owned by New Zealanders that are operating overseas. I will focus on this issue in my speech tonight.
These changes mean that New Zealand companies that manufacture goods overseas will not pay New Zealand tax on the income derived from these activities, while New Zealand companies that manufacture goods in New Zealand will pay New Zealand tax on that income. Go figure. It means that New Zealand companies that create jobs in New Zealand will pay tax on their income, while New Zealand companies that create low-paying jobs in China will not pay tax on those overseas operations. Go figure. It means that New Zealand companies that create demand for goods and services from New Zealand suppliers will pay tax on their income, while New Zealand companies operating overseas that create demand for goods and services from overseas suppliers in the countries where those companies are operating will not pay tax on their income derived from the overseas operations. Go figure. It means that New Zealand companies that meet basic human rights and environmental standards in New Zealand will pay tax, while New Zealand companies that meet lower human rights and environmental standards—if any at all—while producing goods and services in other countries, such as China, will not pay New Zealand tax. In fact, they will be exempt from New Zealand tax. Go figure.
This bill creates a tax disadvantage for New Zealand companies that remain in New Zealand. Conversely, it creates a tax advantage for New Zealand companies that relocate overseas—that is, it encourages New Zealand companies to relocate overseas. So New Zealand firms that manufacture in New Zealand will find themselves competing with foreign-based manufacturers that have a significant tax advantage over them. Surprise, surprise. As has been said in the Independent and in many other places, this bill will drive production overseas, and will help to drive New Zealand - based producers of goods and services out of business.
Why would any New Zealand Government make it harder to manufacture in New Zealand? It is already hard enough. We probably need to reflect on some of the ideology that has been embraced by the mainstream Labour and National parties since the 1980s and 1990s. Part of it relates to the comparative advantage ideology, which they have embraced for quite some time. It is part of a broader, neo-liberal globalisation ideology that was trendy for a while, but is not so trendy since the global financial collapse. This ideology says that it does not matter whether we manufacture in New Zealand. It just does not matter. Manufacturing is so last century. We do not need to manufacture; we will simply import all of our manufactures, everything we need, and we will export goods and services to pay for them. The basic idea behind the comparative advantage ideology, taken to its illogical extreme—something David Ricardo would never have imagined any one would do with his theory—is that it does not matter whether we manufacture in New Zealand. This was also very fashionable for a while because manufacturing was seen as kind of dirty. It was the kind of dirty thing that people who get their hands dirty do. It was not very trendy. We have had a systematic policy from Labour and National over 25 years now to try to get rid of manufacturing—that rather dirty, old-fashioned industry. Systematically throughout the 1980s and 1990s and into this century we have seen policies designed to grind the manufacturing sector into the ground. This current bill contributes to that even further.
The small glitch in the comparative advantage theory taken to an illogical extreme is that if domestic manufacturing stops, then it needs to be replaced with the export of a huge array of goods and services, because manufactured goods are a very large part of consumption. A lot of other stuff is needed to pay for all the manufactures we now import. As we change the tax incentives with this bill, and drive more of our manufacturing overseas, we will have to export more and more. Of course, in spite of the theory the outlook has not been quite so rosy in terms of our trade deficit and our current account deficits. We have replaced the manufacturing base that we have systematically destroyed with three other sources of income: dairy, tourism, and debt. Instead of making things through manufacturing, we now make milk and export milk solids—lots of it. It is not necessarily a bad thing, except that there are ecological limits to how much dairy can be exported. It might be great that we have a comparative advantage in making milk and milk products, but there are real ecological limits to replacing the entire manufacturing sector with the export of milk products so that we can buy all the manufactures we no longer make. One of the downsides is that most of our lowland rivers are now so polluted that our children cannot swim in them.
Instead of making things and manufacturing things, we now invite tourists to come and look at so-called "100% Pure New Zealand". Unfortunately, although the tourism sector is a significant contributor, it is a low-wage sector compared with manufacturing. This bill adds more incentives to undermine our manufacturing sector and to replace it with tourism. Tourism is a very important part of our export sector, but it is a low-wage sector.
The third and perhaps most important thing that we have done to replace the manufacturing sector is to borrow. We have the second-highest net debt after Iceland as a proportion of GDP. We are now approaching about 100 percent net debt as a proportion of GDP. Manufacturing produces jobs, yet we have destroyed manufacturing and have low unemployment. Why is that? Because we have borrowed and consumed our way to employment. There is, and was, a debt-fuelled, consumption-led boom in the non-tradable sector. Bill English is absolutely right on that point. We borrowed money to buy goods and services from other countries—goods and services that we had systematically stopped making in New Zealand because of a bizarre neo-liberal ideology that said manufacturing is bad and we do not want it here. These days we borrow money in order to pay the interest on the money we have already borrowed. But I will get on to that.
As a result of this long-term position of destroying the productive sector, to which this bill contributes by making it harder for manufacturers based in New Zealand, our net international investment position has rapidly deteriorated. Our overseas assets minus our liabilities currently stand at about $176 billion or $177 billion, or about 98 percent of GDP. Just 12 months ago—that is, as of 31 March 2008—we owed only about $154 billion, or about 86.4 percent of GDP. So it is rapidly escalating. This is, in part, the result of 5 years of deficits in goods and services. We are looking at returning to a balance in goods and services, but after 5 years of deficits in goods and services, we are adding to our overseas debt, repeatedly.
The interest paid on our overseas debt in the year ended March 2009 was about $5 billion. We needed to come up with about $5 billion just to pay the interest on the debt, excluding the return that overseas investors get on their equity. We needed to come up with $5 billion just to pay the interest on the debt. Of course, on top of that, we needed more. So we borrowed to pay for all the goods and services we imported, and we also borrowed to pay the interest on the debt we already owe. Of course, because of our destruction of the productive sector—something this bill further contributes to—we are borrowing in order to pay the interest on previous borrowing. This is not a sustainable economic strategy. The world will not continue to fund our lifestyle with borrowings forever. The sooner we realise that we cannot destroy the manufacturing sector and the productive sector, and that the country needs to produce things, not to just borrow money to pay the interest on the money we have already borrowed, the sooner we will deal with this reality.
When this bill comes before us, yet another bill that will make things harder for New Zealand manufacturers, I say that it is not a very clever strategy. It will make our trade deficit worse. It will exacerbate the trade problems we already have. We have had 25 years of the New Zealand experiment—this crazy new-right experiment—but it has not worked. Why would we add another nail in the coffin of New Zealand manufacturing? It is not clever, it is ideological, and the Green Party will not vote for it.
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