Cunliffe David: Taxation (Consequential Rate Alignment and Remedial Matters) Bill — First Reading 
Text is incorporated into the Bound Volume 
Cunliffe David: Taxation (Consequential Rate Alignment and Remedial Matters) Bill — First Reading 
[Sitting date: 28 July 2009. Volume:656;Page:5161. Text is incorporated into the Bound Volume.] 
Hon DAVID CUNLIFFE (Labour—New Lynn) 
: 
 We thank the Minister who has just resumed his seat and wish the House to note that Labour will be supporting the Taxation (Consequential Rate Alignment and Remedial Matters) Bill. The bill contains consequential changes to tax rates in line with recent tax rate and threshold adjustments and it includes a number of other remedial and technical measures that are sensible and that in some part follow from work streams initiated by the previous Government. Indeed the previous Minister was much better than the current one which just shows that it is how one holds the pen that counts. 
Of course this is also an opportunity to reflect upon the context within which these changes are being made and the broad shape of the Government’s tax package introduced on 1 April this year. The context for that discussion is the deep recession that the country now finds itself in and the fact that we can expect between another 60000 and 79000 job losses and that 1300 New Zealanders are joining the dole queue every week—1300 every week. In other words the expected jobs created by the cycleway account for 1 day’s worth of new unemployment. I will say that again. The cycleway provides 1 day’s offset against the wave of unemployment we face. 
This is a serious situation and it causes us to reflect upon the changes to the tax system that saw incentives removed from KiwiSaver and from research and development tax credits in order to fund the lowering of the top personal income tax rate to 38c in the dollar and to reflect upon the threshold changes which overwhelmingly provided benefit to upper-income earners. 
It has been a matter of debate in this House that across the whole of the Government’s proposed tax reforms one-third of the tax cuts would go to only 3 percent of taxpayers. It is on record in this House that the Opposition has criticised that on two principal grounds. One ground is that at a time of recession and stress in the homes of ordinary hard-working New Zealanders making sure that 97 percent of the population does not benefit from a third of the tax remission is hardly appropriate on social equity grounds. 
But secondly at a time when every penny of fiscal stimulus counts and when we are getting lectures about how scarce the Government’s access to capital is it is essential that every cent is effective and well spent. Sadly the tax changes that require this consequential legislation are not effective. The truth is that National has delivered $120 a week to somebody on say the Prime Minister’s salary and nothing to someone with children who is on the median income. That can be neither fair nor good economics. You can bet your bottom dollar that people with kids who are on the median income will be spending every cent of tax remission they get and someone who is on the Prime Minister’s salary can probably afford to squirrel some of it away thus taking it out of circulation. 
Let us spend a minute talking about KiwiSaver in the context of the Prime Minister last Wednesday giving a major signature speech on economic policy to show us the plan and on Thursday Fitch Ratings putting us on negative watch. The timing was probably not accidental because Fitch Ratings like the rest of us had been waiting with bated breath to see what the plan actually was. It was like an old Holden that when we lifted the bonnet we found had no engine. There was no “There!” and that is why Fitch Ratings decided to place us on negative watch. Fitch Ratings like Moody’s and Standard and Poor’s the other two rating agencies drew particular attention to two deficits—the savings deficit and the external deficit. It was in order to cover the savings deficit that they have insisted that the Government either run surpluses or limited deficits on its books. But that is a patch not a resolution of the fundamental problem. 
In that context it really does beggar belief for all the reasons that we have discussed that the Government would withdraw half of the value of the incentives in the KiwSaver programme—the single most successful programme in our history for getting New Zealand’s savings rate up—and use those funds to give a tax break to upper income earners. It beggars belief and it will not have done anything to encourage Fitch Ratings Standard and Poor’s or Moody’s as they keep this economy under review. It is just simply not sensible economics and I think the Minister of Revenue knows that. 
If that was true of KiwiSaver is it not also perhaps even more true of the issue of innovation? We know that we are a primary-producing country with an external deficit. We are not paying our way in the world. It is really quite simple. What we make from our exports plus New Zealanders’ investments overseas is less than we pay for our imports and the returns we have to give to foreigners who have invested here. That is the current account deficit—both the trade balance and the financial balance. It is simple. Moody’s in particular stressed in their review of the New Zealand economy that New Zealand will never get out of the hole it is in unless it produces and exports more. There is an element of communality between the Government and the Opposition on that issue. We both think productivity matters and I think we both think the export balance matters. What we disagree on is that the Opposition believes that in order to improve those things we need to get innovation up and in order to get innovation up it has to pay for businesses to innovate. 
Businesses respond to incentives. I think even Roger Douglas would agree with that point. One of the strongest incentives is the tax system. There was almost universal support within the business community—the “Mood of the Boardroom” survey stated it was well above 80 percent if I recall correctly—for the research and development tax credits and it is a real shame that they were scrapped to fund these tax write-offs for upper income earners. We do not need to be cushioning upper income earners at a time of recessionary crisis. We need to be fuelling the engines of exporting and productivity and we do that by innovating by creating a competitive business environment and by the Government lending some sense of direction and strategy so that private investors can make their capital investment decisions their hiring decisions and their production decisions alongside those of the Government. It is therefore in that context that this bill is important. 
There are some supplementary measures in this bill—not only the tax rate changes but also the threshold changes and in particular the PIE or portfolio investment entity rates. No that is not a new Government initiative for healthy food in schools; far from it. We have had enough of that today. They are the rates that prevent New Zealand savers from being overtaxed. It is an initiative of the previous Government that has been I am pleased to say adopted by the new Government. It is designed to avoid the prior situation where people’s savings were taxed at the top marginal rate in the savings institution regardless of their own personal rate. We are pleased that the Government has adopted the far-sighted proposal to look through the savings rate of the institution to the tax rate of the beneficiary and adopt vehicles like portfolio investment entities that allow that to flow through. 
Having said that the devil is always in the detail. It is very important as the Finance and Expenditure Committee members know that the structure of the tax law surrounding portfolio investment entities is simple it is principled it is difficult to rort it is not too complex and it does not create undue compliance costs. We need to monitor the application of these rules to ensure that the original policy intent which is shared across the House is in fact borne out in its application to day-to-day policy. 
There are other changes in this bill. There is the correction of some errors and some remedial matters to do with the permanent forest sinks initiative the beneficiary income rules and so forth. But for the public listening to this debate today although it is true that the Opposition is supporting the bill and although it is true that it makes important and sensible consequential changes without which the tax system would be a mess it is also true that the context within which we are debating this is in our view an inappropriate one. The context is that two-thirds of the money goes to people in the 97 percent of the population who are in the middle and the lower income brackets and one-third of the money goes to the top 3 percent. That is not a good idea when capital is starved and it is especially a bad idea when we have to wind back KiwiSaver to do it.