Finance Minister Bill English’s keynote address to Centre for Accounting, Governance and Taxation Research Forum, Wellington, February 12 2009

Thank you very much for the welcome. I do credit a significant part of my tertiary education to Otago University, but then I spent three years at Victoria and then worked for a while.

I joined Treasury at the end of that year and within 18 months or so I was working on Roger Douglas’s flat tax package and had the unique opportunity at an early age to see radical ideas on tax debated, policies put together and then watch it all unravel.

The one thing I learned from the flat tax package is that it doesn’t work. And that’s really the main reason why it hasn’t been tried since. So I’ve had the good fortune now to have been exposed for a period now over 20 years to the tax debate, although I don’t claim to be an expert. The audience are the real experts on issues like this.

Can I acknowledge the Centre and the Institute for putting this conference together. I have only given a couple of speeches since I have been the Minister of Finance and I think they have both been at the Centre, so I hope they will continue to contribute in such a constructive and useful way.

The organisers of this conference would not have recognised when they started organising this event a few months ago how much it would matter. Because tax is often seen as an instrument capable of achieving almost everything short of general human welfare.

I suspect the more important challenge is going to be over the next 20 years governments paying a great deal of attention to tax policy, because as we speak governments around the developed world are piling up vast amounts of debt – and every dollar of that debt has to be repaid with interest.

Far too few politicians are paying attention to the burden that is being laid down for the next generation of workers.

In New Zealand, of course, we have a fabulous set of circumstances where events have unfolded a bit differently than they have in other countries. I will just take you through that briefly, because it does shape the way we see the tax debate from the Government’s point of view.

New Zealand managed to go into recession before anyone else. We started in the beginning of 2008 with a recession that was largely the product of too much debt, limited capacity in the economy, high inflation and a necessary adjustment in the economy because it simply couldn’t be balanced.

Within that environment of a growing economy and large deficits, that much needed tax debate has taken place. And that was a debate about what concessions could be usefully made to researchers, companies putting R and D credits and a pretty lengthy debate about cutting taxes, whether the surpluses were so large and whether tax cuts could be afforded.

We find ourselves now in a position that wasn’t expected, where significant income tax cuts were made around the time that the world financial crisis got underway. In fact I recall during the election campaign National announced a $15 billion tax cut package, which included quite significant changes to our savings concessions and abolishing the R&D tax credits, on Thursday. That weekend Lehman’s went under and by Sunday we were being asked questions by journalists – what are you going to do about it? – even though we were in opposition.

The fact is that New Zealand has fired its big shots when it comes to tax cuts and support in coming through recession. We started firing those shots in the 2008 Budget which had a big uplift in spending and a significant tax package from the previous government, which was at the outer limited of the fiscal situation we wanted to be.

We started borrowing in the 2008 Budget. Then we have another tranch of tax cuts coming in through the current Government’s tax package.

The stimulus which results from those series of events, unplanned and unlinked as they were, amounts to about 4 to 4.5 per cent of GDP. The stimulus to the economy is at least as large as Australia, not as large as the US.

As I explained to a journalist this morning, it might not have been one big announcement, but it is real money. The media have trouble distinguishing between announcements and money.

So New Zealand has got to a very similar position to Australia, where it has very substantial fiscal stimulus, its debt is going to rack up quite quickly over the next few years and we will face the same challenges as everyone else: how to pay that debt having spent a lot of it supporting the economy through the recession.

Just to give you an indication of that: Gross sovereign debt is currently about 17.5 per cent of GDP, so by international standards quite low. That’s a good place to start. By 2011, it will be over 30 per cent of GDP, and forecasts outlined in our Budget Policy Statement before Christmas show debt never slowing down. It shows ever rising debt, which in the Treasury’s long-term forecast horizon going to 50 – 60 per cent of GDP and continuing to rise.

So that is the context in which we are going to develop a tax policy over the next two or three years. That it is the challenge of getting on top of what now look like operating deficits of around 4 per cent of GDP on current forecasts. Permanent operating deficits of around 4 per cent of GDP.

I think what that means is that every tool will need to be on the table. That is why this kind of conference is relevant because it’s about an objective view of what can and should be done with the tax system.

I know you will be discussing a range of issues to do with mobile capital, mobile labour forces – those aren’t hard in the general environment, but from our point of view dealing with the fiscal results of this once in a lifetime recession is going to be the overwhelming challenge.

This is the start of the long slow process. It will take some time to turn around the fiscal outlook and we want to make short-term decisions that are consistent with our long-term views.

I will just take the tax decisions we’ve made, for instance. We generally believe in a broad-base, low-rate system. We generally believe that the manipulation of the tax system isn’t the best way to ensure that an economy grows. It’s one tool that can be used sometime, but we think the best use of the tax system is to collect revenue, not to achieve a whole lot of other objectives in fact. That can make the tax system very difficult to run.

So we are at the purist end of the spectrum. That’s reflected in the decisions that we’ve made. We’ve abolished R&D tax incentives, the tax package that’s rolling out over the next few years lowers rates across the board because we believe that provides better incentives for people to get ahead.

We want to maintain GST as it is – probably one of the best examples of indirect tax in the world. We want to keep that rate and no doubt there will be continuing debate about where the corporate tax level should go and the need for a capital gains tax.

But the decisions that underline the fiscal outlook are consistent with our long-term objectives for the tax system. We haven’t gone for short-term compromises on our fiscal approach.

That of course won’t be enough. We have set out to deal with the spending side of the Budget as well because the two can’t be disentangled. We only have to raise as much tax as we have to spend.

We’ve taken some early steps, such as establishing the true nature of the fiscal risks that the Government faces. The Government had developed a culture lacking in transparency, shall we say. And there have been any number of examples of fiscal risks that have been unexpected.

We are dropping all unfunded commitments of the previous Government. The need to let the media cycles determine announcements pushed the Government in the direction of promising things when they didn’t have the money for them.

So we found a large number of those. And we have set out to signal to the public service that we are looking at a period of at least three to five years of significant restraint and that their priorities are the incoming Government’s priorities.

I have to say that this has had a remarkable effect on the number of Budget bids which have traditionally been 700 or 800 a year, and it’s down to around 200 now.

So we will be working pretty hard on the expenditure side because it’s the only way we can maintain a principled approach to a tax system where we are trying to lower rates and to keep it as efficient as possible.

When it comes to our longer-term objectives, the current environment means that they are more aspirational than real. The opportunities to actually reduce further tax rates are go to be very minimal if occurring at all.

We are very keen to see though a move to the 30/30/30 alignment of the top rate – to achieve that on the one hand. We would have to keep a fairly close eye on the competitive pressures of Australia, and where their income tax regime is headed – and in particular where their company tax rate is headed.

I did prick my ears up last night when we were talking to Dr Heady of the OECD, who I think told us that in the EU company tax rates had been dropping by 1 per cent per year. I hope that stops, because we won’t be able to keep up with them.
I expect that it would stop.

But certainly the Australian regime is going to be a big focus for us. Because whatever they do has a very direct impact here.

It’s a salutary experience for politicians like myself meeting and greeting the public in their electorates. Quite a few low paid New Zealanders have quite a sophisticated understanding of the relativities between pre tax and post tax incomes in Australia and New Zealand.

Because everyone has a sister who’s a nurse and went on a plane to move to Brisbane, and rang them up and toll them just how much they’re getting paid.

One of my neighbours down in the country area where I live who drives trucks… over Christmas his wife gave me a detailed breakdown of the pre and post tax incomes in Perth. And that is why they are leaving – they can’t afford to stay here.

That’s an opportunity, but I’m just a bit a bit worried about people coming back pretty shortly.

On that, can I say that the Government welcomes open debate about tax issues and including the contributions from public agencies. I think it’s important for New Zealand in these times that we don’t persist with the kind of political control of debate that has reigned for the last 10 years.

We are quite happy to see any issue around tax discussed and discussed on its merits openly. I actually think that’s going to become a necessity. You just get this feeling that all policy is on fast forward.

Every unthinkable event that could occur has occurred in the last six months. Who know how many more unthinkable events might occur.

The Government has to equip itself with every possible tool and engage in every possible debate that it can. So we can see that as an opportunity. And certainly as an incoming Government we see that as an opportunity. The opportunity to have much more to have much more in depth and thorough policy debates and moving quickly to decisions.

Because we are in a world where if decisions are good decisions, they should be made now. We don’t have the time to muck around with endless consultation and hand wringing over things that are going to need to be done.

That of course means there is the opportunity to do things that should be done because it represents good policy.

If I could make some comments on the medium term – I think that’s quite important. There is so much focus in political debate on the short term, but we need to look past to look past the short term to what we need to achieve over the next three to five years.

I welcome very much the contributions this conference is making. I promise that I will read any very good papers.