Cunliffe David: Taxation (Urgent Measures and Annual Rates) Bill — In Committee 
Cunliffe David: Taxation (Urgent Measures and Annual Rates) Bill — In Committee 
[Volume:651;Page:162] 
Hon DAVID CUNLIFFE (Labour—New Lynn) 
: 
 Now we come to the heart of this bill. How is it funded? The goodies that are being handed out apparently willy-nilly have got to come from somewhere. They come from two substantial sources. The first is $3.5 billion from KiwiSaver which we will be talking about in the debate on a subsequent part. The second is the cancellation of the 115 percent research and development tax credit. Through that measure $1.5 billion will be saved. We believe that the Government will come to regret the day that it moved this part. 
It is very interesting to begin with the analysis set out in the explanatory note of the bill. It recognises that there are significant externalities associated with research and development. The company undertaking the research and development can never capture all of the benefits. Innovation benefits the whole of society the whole of our economy. It lifts the game it improves productivity and it drives us all forward. The data we have shows that companies that invest intensively in research and development tend on average to employ more people to grow more quickly to register more patents to have higher productivity and to export more products and services. Why would the Government not want to encourage such companies? Moreover how could it begin its year with the commitment that it will do everything it can to focus on productivity and growth then cancel one of the better growth tools in the innovation tool box—the research and development tax credit? 
The second issue we have is one of trans-Tasman equivalence or business diversion. It is accepted that our colleagues in Australia give their Government a much more proactive role in boosting research and development both directly—historically—through the magnitude of its subsidies to the Commonwealth Scientific and Industrial Research Organisation and many other organisations and indirectly through significant subsidies and tax concessions for innovative firms. One of the principal reasons why New Zealand’s research and development tax credit was brought in in the first place was to ensure equivalence between New Zealand’s innovative firms and those of their colleagues across the Tasman—to make sure that the Government’s footprint was not accentuating any trend towards trans-Tasman business migration. That theme was picked up by the current Government—then Opposition—during the election campaign. The bogey of New Zealanders moving across the Tasman was repeated at every opportunity like a mantra. So what has happened? On the first business day of the House the National Government attempts to repeal the research and development tax credit which has been one of the sources of guaranteed trans-Tasman equivalence. 
The reaction has been completely predictable. Selwyn Pellet the chief executive of one of the Deloitte/Unlimited Fast50 fastest-growing companies—Imarda—said: “We are right this minute deciding where we do R&D whether it’s New Zealand or Australia and the removal of the tax credit here negatively incentivises the decision to bring it back to New Zealand.” The Manufacturers and Exporters Association has been highly critical of this bill. It has been highly critical of the removal of the research and development tax credit—which was to be fair signalled before the election. It has been highly critical of the environment that New Zealand manufacturers exporters and innovators have to cope with. This move makes it worse. 
When we look at the ledger of what is being done and what is being undone we have to ask why. On the one hand we have the removal of something we know is generating sound returns; on the other hand it is going in order to fund a consumption tax cut that is both highly inequitable and badly designed. It is so badly designed that the explanatory note of the bill states that neither the proper consultation nor the regulatory impact assessment has been completed and the impacts have not been quantified. 
Some of the key issues as we debated in the debate on Part 1—[ 
Interruption 
]—9 years to do it—are first that this is a long-term fix for a short-term problem. It is a structural tax change to address a recession trend. Second we are putting in place a consumption tax cut—funded largely by borrowing and these productivity tools—whereas what we need is something that will lift productivity itself. In that respect this cut is in extremely stark relief. 
I think the reaction of general commentators is instructive at this point. John Armstrong from the  
New Zealand Herald  
said the winners from this package taken on balance are easy to identify: working singles and couples without children. The comparative losers are families or those on below the average wage. Jenny McManus from the  
Independent 
 said: “Voters awaiting National’s grand plan for managing the effects of the global financial crisis will be disappointed at the tax and economic package …”. Jo Doolan from Ernst and Young said that she is “gutted” at the package: “The whole thing is hurried and ill-conceived. … We need to develop a savings culture and this sort of thing doesn’t help.” Gordon Campbell said: “Putting tax cuts ahead of science and research neatly underlines the lack of vision or sensible strategy for growth in the National package—”. 
I know from walking around the press gallery that journalists—and no doubt soon the public—know what is going on. They know that despite the rhetoric of the election campaign on this first business week of the House certain things are being done that deliver certain benefits to constituencies that have it “owing to them”. Surprisingly enough it is not our innovative exporting businesses that are getting the nod here; it is the financial sector and top-income earners who will be the general beneficiaries of the package. It is our poorest Kiwis our struggling families and oddly our innovative businesses that will pay for it. 
Leaving aside the equity arguments that we discussed in the debate on Part 1 the lack of logic between the negative productivity impacts of this move and Government members’ stated aim—even if we take them at their word—is extraordinary and compelling. Mr English in speaking to Part 1 said: “Well we poked and prodded at your plan. We campaigned on ours. Our having been elected there is no need for our plan to be scrutinised.” So there is no need for it to be scrutinised no need for the select committee process and no need for bills to be tabled? The bills to be debated in the rest of the week are still not on the Table. That one has gone through an election campaign is justification apparently for setting aside the normal process of Parliament. Of course we have seen the lie to the proposition that “No one is worse off because certain changes have not happened yet.” This bill undermines measures that have already been passed into law and therefore the Opposition is fully justified in showing that people are worse off. 
In summing up taken as a whole the retrenchment of this research and development tax credit will be bad for our best businesses and bad for New Zealand. It will be bad because it is a poor source of funding for a misguided bill. But even if one takes the Government at its word and swore for a moment that these tax changes are necessary funding them by removing the research and development tax incentive does not serve even this Government’s stated ambition of lifting productivity and growth.