New Government – what could – and what will - they do to improve conditions for manufacturers?

16 November 2017

The Labour-led Government’s plan for its first 100 days covers a range of areas, a number of which have the potential to impact manufacturers – some directly, many indirectly. Among the latter, the first one to come to mind is housing – anyone trying to find and retain quality staff, especially in Auckland, knows the extra pressure the recent years house price appreciation has put on people and wages.

The banning of foreign ownership, alongside extra effort on the supply side through Housing New Zealand, may contribute to easing housing cost pressure.  There has already been some softening of the market, but time will tell if the Government’s new response can tackle the long term problems, both on the supply and demand side of the coin. Questions remain as to how realistic big plans to increase the housing stock are in the face of a crippling skills shortage in the building and construction industry. Further restrictions on migration may put pressure on new builds, unless new migration policies really manage to have a highly targeted impact.

In terms of the tax working group, any tax changes aiming at tackling our poor productivity, one of the root causes of our lack of real economic growth in terms of GDP per capita, and per hour worked, need to make it easier for businesses in the productive economy to access capital.  Funding the investment in people, machinery and equipment required to maintain an internationally competitive manufacturing position won’t happen out of operating cash flows alone. 

We need a tax system that effectively incentivises and pushes investment into the productive areas of our economy, rather than the current system which tilts the playing field towards investment in speculative activities by not (adequately) taxing profits. A combination of a general R&D tax credits, accelerated depreciation for certain machinery and equipment, and a tax on gains from speculative investment would go a long way. Beyond that we also need to design processes by which manufacturing SMEs, for example, have alternative sources of capital to turn to if they want to modernise machines on their factory floor – aside from the banks.

Over the past 15 years or so successive governments have been quite comfortable intervening in capital markets by providing targeted funding stimuli for high-tech start-ups. Why wouldn’t government do the same for established manufacturing SMEs willing to modernise their operations?

Another big area is the review of monetary policy and the eventual appointment of a new Governor. We have experienced years of an overvalued exchange rate that has hit margins and made it harder for import competing manufacturers. Despite expressions of unhappiness with the way the exchange rate has held back growth of the tradable sector, we never saw any real action by the last Governor. The current acting Governor has expressed a sentiment that he is comfortable with the current exchange rate level, given the recent 5% fall – we hope the new Government will appoint someone who takes the issue more seriously and is willing to act. 

Labour has also set out to implement their policy of providing one free year of tertiary education at the start of next year, later expanding this to three years free. For this policy to really be effective, it needs to have a wide focus on other education and training options other than simply reinforcing the bias towards universities that we already have. Current policy proposals show no sign of being part of a bigger plan to address the growing, and already crippling, skills shortages across the productive sector. They forego the opportunity to provide financial incentives only to those students willing to engage in education and training that benefits the productive sectors of our economy, for example.

On the downside, moves to rapidly increase minimum wages and a general sentiment of “now it’s wage earners turn to improve their lot” hold significant risks to the competitive positioning of New Zealand’s manufacturing exports. Many peoples’ wages have failed to grow significantly for far too long – that’s agreed.  That’s not only ‘unfair’, it also means that the only stimulus for domestic demand – apart from immigration - comes from people who feel wealthier because of the nominal increase in property values. But higher wages need to be funded ‘from somewhere’ – and that ‘somewhere’ has to be a significant increase in (labour) productivity, not by eating into manufacturers’ margins that are constantly already under threat from global competition.