ConnectMe - June 2017

12 July 2017

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The Budget 2017: Another Missed Opportunity to Support New Zealand’s Productive Economy 

Budget 2017 was released on the 25th of May, and while it has received a lot of attention, there has not been a lot of talk around what it contained in terms of support for manufacturers and the other productive industries in our economy.  We saw some catching-up on core service and infrastructure spending, improvements for families, but little focus directly on our manufacturing and productive sectors.

Firstly, the main area connected to manufacturing that saw any increase directly, was funding towards R&D support by Callaghan Innovation, which received an increase of $74.6m over four years.  That increase was only given, however, to Growth Grants, which are only accessible to larger companies. The stated reason for the increase was to keep up with demand. Project Grants, which are aimed towards smaller and medium sized businesses, including most manufacturers, did not see any additional funding in this Budget.

In contrast, support towards the film industry saw significantly higher increases: international screen production grants saw an additional $222m over four years, and domestic screen production grants increased $63.9m over the same period. 

Clearly, the Government sees the value of supporting this high-value industry - why else would they inject so much extra funding through these grants.  They say this direct support is indispensable to ensure New Zealand’s film industry keeps growing and quote a number of flow-on benefits to other sectors, like tourism. We’ll review the more tangible side of these benefits here at a later stage.

However, we don’t see the same level of additional commitment to our high-value manufacturing sector, which faces intense global pressure and has high flow-on effects to the rest of our economy, creating demand for other sectors, employment and innovation that helps to create ever more complex and high-value goods and services. 

Keeping up with technology and investing in R&D is a vital component in staying competitive and growing into the future.  We need to see more from Government and all political parties in terms of how they can create settings and policies that will help our productive industries grow and become more profitable through investment in process and product innovation.

There continues to be a missed opportunity to review and improve our R&D support system. Within the current Grants system, many small and medium sized manufacturers who undertake R&D find it next to impossible, or simply not worth their time and hassle, to apply for Callaghan Innovation Project Grants – or sometimes even to claim under grants already approved.  In addition, R&D into process innovation and productivity improvement still does not appear to be recognised in the same way as product innovation.

R&D grants are great for those companies who meet the Governments definitions and able to go through the process to receive them – but if we really want to increase R&D spending across the board to a wider group of companies, moving to a R&D tax credit system would be simpler and open support up to more companies, especially those small and medium sized manufacturers. 

The Budget did see some additional finding towards the Trade Agenda.  Much of this appears to be focused on outcomes for the primary sector, however, which matches our experience of trade agreements.  For better outcomes for manufacturers, the hard work tends to start after FTA’s have been signed and the task of getting into the details of removing non-tariff barriers starts.

Aside from these measures directed at the business sector, there were a number of significant changes, including adjusting income tax thresholds and boosting Working for Families, as well the Accommodation Supplement.  However, according to an analysis from NZIER and Victoria University, at least in some areas, such as Education and Health, spending is still failing to keep up with our strong population growth, or maintain the status quo at best.

For those effected, these changes could be helpful in the short term, particularly with the Accommodation Supplement. Many families are seeing housing costs rise much faster than wages - or productivity, for that matter. This appears to be a growing problem, especially for companies operating in high-cost areas like Auckland, and could aggravate existing skill shortages. The core issues in housing, both on the demand and supply side of the equation, still need to be addressed to ensure the affordability problem and its associated stability risks are sorted out. 

By Dr Dieter Adam, CE of the NZMEA