Hodgson Pete: Taxation (Urgent Measures and Annual Rates) Bill — In Committee 
Hodgson Pete: Taxation (Urgent Measures and Annual Rates) Bill — In Committee 
[Volume:651;Page:173] 
Hon PETE HODGSON (Labour—Dunedin North) 
: 
 I did hear the Minister of Finance say that we have to make choices about priorities. I did hear him say that. In fact that is what Governments do all the time; they do it all the time. I would like to suggest that the choice that the Government has made to eliminate the tax credit for research and development is simply the wrong choice. I want to adduce a little bit of evidence to that effect. 
Members will be aware that New Zealand is a poor performer in the research and development stakes. The normal way of measuring research and development effort is to measure research and development expenditure as a percentage of GDP and to look at it in the public sector and in the private sector. Compared with countries around the world in the public sector New Zealand underperforms a little. We are around about three-quarters of the Western World average. It would be good if we could get ourselves up to 100 percent or indeed 120 percent of the Western World average but we are below the Western World average in the public sector. However in the private sector we are not at 75 percent of the Western World average; we are at 33 percent of the Western World average. New Zealand private sector investment in research and development is amongst the lowest in the world. The good news is that it used to be even lower. In 1999 it was not 33 percent of the Western World average; it was 25 percent of the Western World average. A number of things have contributed to that increase such as the Venture Investment Fund Technology for Business Growth the Pre-seed Accelerator Fund the law around venture capital and the establishment of the Incubator system and on and on it goes. Throughout the past 9 years a lot of private sector effort and a lot of Government effort have gone into improving private sector investment in research and development. It has gone from 25 percent of the Western World average to 33 percent. That is progress but it ain’t much progress. 
When the Labour Government decided to introduce the tax credit at 15 percent—and it came in on 1 April 2008—the Inland Revenue Department had to determine how much money it would forgo. It had to do the modelling. It knew that it would take a while for private sector entities to get used to the new system. It knew that it would take a while for companies to gear up their research and development. It knew that it would take a while for companies to stop oozing offshore and to start coming onshore with their research and development. It knew that it would take a little while so it did a 4-year projection and at the end of 4 years the amount of money forgone—the amount of money going to businesses for innovation—would have been $332 million a year. 
The point is that if we do our sums and work out how much research and development would have to come to book in order for $332 million to be forgone we see that New Zealand’s private sector research and development would rise from 33 percent of the Western World average to almost exactly twice that—to almost exactly 66 percent of the Western World average. That is still below 100 percent of the Western World average but way better than 33 percent. Of course we know that it would include some research and development that was under-reported. That is known that is taken into account and that is modelled. It is also known to give the case cited by the Minister of Finance that the banks might call themselves information technology companies and claim that their software development was somehow eligible for a research and development tax credit. So we put a cap on that. We said that a company could not claim more than $2 million per year for software. That was a black hole that we would not let the Inland Revenue Department fall into. So the tax credit was designed to be both generous in terms of rate and limiting in terms of rorts. It was designed that way. 
We had long enough to design it. As the previous Minister of Finance the Hon Michael Cullen said he wished he had done it earlier. But you see if the Inland Revenue Department predicts that New Zealand’s reported private sector research and development expenditure will go from one-third of the Western World average to two-thirds of the Western World average over the next 3½ years then I suggest that if we are to pass this legislation we have to be prepared to acknowledge the fact that that expenditure will stay at 33 percent over the next 3½ years that therefore the economic base of New Zealand will stay at a lesser amount than it would otherwise have been and that therefore the taxable base will be a lesser amount than it would otherwise have been. 
This is fiscal nonsense. This is as Dr Cullen said the stupid part of the legislation. To have the good Dr Paul Hutchison get up and try to defend it—well all I can say is that I saw him wringing his hands and he wrung his hands for the whole 5 minutes that he spoke. I heard Mr Bennett the member of Parliament from the Waikato—I am sorry; I have forgotten his first name—get up and tell Labour members to put our money where our mouth is when it comes to primary production research and development. My retort rather obviously is that we did—$0.7 billion. It was called New Zealand Fast Forward and this Minister of Finance swiped it. He swiped it. He got rid of private sector involvement got rid of the fact that there would be a legacy fund got rid of the fact that there would be certainty about the money and replaced it with nothing. Labour members think that that will be very very bad for New Zealand’s economic development future. 
The tragedy is that 3½ years from now this $330 million if it is divided amongst 4.1 million New Zealanders will put about $1.60 in the pocket of every man woman and child per week—$1.60 a week. That is the price we pay for a dumb economy. Every person in New Zealand will get it except of course the poor people—they will get nothing. The rich people will get let us say $3.20 a week in their pockets and we will have a dumb economy a slower-growing economy a less export-oriented economy and a less innovative economy and we will have a bunch of firms that will not be able to grow faster because they do not have a tax credit and therefore cannot fund their own growth as quickly as they otherwise could have done. It is a really dumb policy. It is one that I am really sad about. And when I am not sad about it I am angry about it. I think New Zealand will be a worse place as a result of this decision I think $1.60 per person per week is a very very low amount of money and I do not think the decision that this Government has taken—it says that it has to make choices about priorities—is the right one. I think that if it is going to prioritise an extra $1.60 per person per week for consumption over an innovative future if that is its priority choice then clearly it has taken the wrong choice.