The election policy options for 2005

Colin James on the legislative agenda for the Business Herald for 31 December 2004 Second of two

Workplace productivity is the key phrase on one side, tax cuts and deregulation on the other. The 2005 election battle lines on policy for business are drawn.

They represent different beliefs about the path to prosperity. They promise different operating environments for business.

For all that, much is now agreed between the National and Labour: free trade, Budget surpluses, an independent monetary policy to contain inflation, a relatively clean tax system, pre-funding national superannuation, four weeks holiday.

There is also agreement that the government has some role assisting business, though there is still wide disagreement what and how much. National’s Max Bradford was already getting into business assistance in 1999 — Jim Anderton, however, has taken it far further (and with less rigorous oversight) than Bradford would have done.

Bradford also in 1999 initiated a programme to boost and refocus research and development, a theme which Labour has developed into a strategy (though underfunded). So there is a base agreement there — though, again, also variations on how and what. National’s policy is due for release in February-March and will, for example, argue that in biotechnology Labour has taken far too regulatory an approach and that is driving researchers offshore.

Largely uncontentious also is Labour’s recognition of the need for a programme to build or rebuild the infrastructure, particularly in energy and transport, though again National has different perspectives.

Then there is an issue that was not on any party’s horizon (except perhaps the Greens’) in 1999 — the need to develop new ways of allocating and managing water rights. That, like infrastructure, is under Deputy Prime Minister Michael Cullen’s oversight: some papers have been developed and there is work behind the scenes but no policy is expected before the election. The issue is to find the right mix of administrative allocation and tradeable rights. A National-led government would likely be bolder than a Labour-led one on tradeable rights.

Overall, the differences are narrowing, election by election. Labour accepted the great bulk of the 1980s and 1990s reforms, despite its rhetoric about “failed policies”. National has accepted some of Labour’s post-1999 “corrections”, notably the Cullen super fund, four weeks holiday and the 2000 labour legislation. And new issues are emerging.

Labour-led governments since 1999 have made their biggest breaks with pre-2000 policy in four areas:

* Tax: they lifted the top personal tax rate, allowed fiscal drag upwards through the $38,000 and $60,000 thresholds and imposed a range of higher excise taxes and government charges.

* The environment: they signed up to the Kyoto protocol, banned logging, expanded marine reserves and held fast to the Resource Management Act which National was on the verge of reforming in 1999.

* Local body law: they have given more scope for action to councils.

* Re-regulation: this has been principally in the workplace (labour law, occupational safety and health, holidays and parental leave), telecommunications and energy (with dedicated United States-style commissioners) and intellectual property.

On all of those a National-led government post-2005 would revert at least partway towards the pre-2000 position.

National has yet to issue details of its tax policy — as with almost all of its policy, it is “work in progress”. But in essence the policy is geared to slowly reducing personal and company income tax while maintaining budget surpluses net of funding the Cullen fund at the present 2%-of-GDP rate.

One unknown is what it would do with the tangle of tax credits and rebates in the government’s “working for families” package, which it has heavily criticised but not yet committed itself to junk. If it keeps that package or much of it, its room for manoeuvre would be limited because the Treasury’s projections show the fiscal cash position going into deficit in 2005-06 and staying there.

One option, which Brash has floated, is to fund more of the infrastructure spending by way of loans and private sector investment than Labour is prepared to do, thereby leaving some room for cuts.

Cullen has not absolutely ruled out company and personal tax cuts, though he has vigorously presented the case against and worries that cuts become irreversible and, when the economy turns down, drive spending cuts. So rate cuts are unlikely.

His tax programme is built around simplification and “things that affect the cost of money” (capital) to companies, such as depreciation rates.

Generally, Labour feels it needs higher taxes to fund what it thinks people want from the government. National thinks Labour has been wasteful, has bloated the government and does not have rigorous enough accountability for money spent. Expect state services staff cuts with a change of government.

On the second item, the environment, National would see through the country’s commitment to the first phase of the Kyoto protocol, to 2012, but not the second phase and without the carbon tax Labour plans for 2007 (the level of which it will announce around Budget time this year).

Generally, National says it would tilt the balance in environment policy more towards development: that would be the driver in its Resource Management Act rewrite. It would keep that act, despite some of Brash’s stronger statements, but would make more use of national standards, would deal more harshly with vexatious appeals, would replace specific references to Maori cultural and spiritual values with general references to all cultural and spiritual values, stop councils delaying proceedings and introduce tradable resource rights.

On local body policy, Brash has said National would: redefine councils’ role to focus on infrastructure and efficient services (so no more �social welfare� such as subsidised housing); reduce planning law compliance costs; remove Treaty of Waitangi requirements (notably the special consultation provisions and requirement to observe the principles of the Treaty); improve financial reporting (relaxed somewhat in the 2002 act); �require rates to be determined on the basis of who gets the benefit of the services�; and rewrite the Local Electoral Act to bring local body elections under a consistent voting system and consider giving the Electoral Commission the job of managing the poll.

Workplace law is the sharpest regulatory point of difference. Essentially, National sees the central issue as efficiency based on holding costs while Labour increasingly sees it as lifting real wages and salaries in pursuit of a high-income economy.

National has said it would broadly keep the 2000 Employment Relations Act, the 2002 workplace safety law and four weeks holiday (with an opt out) but amend unfair dismissal laws and suspend them for a probationary period for new hires, junk most of the 2004 amendments to the 2000 act, make the Occupational Safety and Health Service be more employer-friendly (Labour Secretary James Buwalda is in fact trying to do that) and soften the restrictive public holiday and overtime penal pay provisions.

Labour Minister Paul Swain has stated that the 2004 bout of legislation was the last in the post-1999 workplace re-regulation programme. Buwalda is trying to get his staff to interpret “reform” not as regulation, deregulation or re-regulation but as enhancing productivity in the workplace.

It is hard to see workplace productivity enhancement as controversial, though National has said little about it. Former Business New Zealand chief executive Simon Carlaw was the prime mover in getting his organisation, the Council of Trade Unions and the government together to work on it and his successor, Phil O’Reilly has enthusiastically endorsed the emerging programme. In office, National would be bound to back it, whatever changes it made to workplace regulation.

Where National would baulk, at least initially, is at Labour’s linking of the workplace productivity drive with “work-life balance”. This can be seen as a women’s rights initiative, especially since Women’s Affairs Minister Ruth Dyson, on the left of the cabinet, is in charge of it. Labour will try to present it as serving a productivity drive by drawing in and retaining more women in the workforce.

This raises a bigger question both main parties have so far approached only piecemeal: growing the workforce. Labour is still focusing principally on skilling and immigration. Australia is debating a population policy and the government has begun paying a cash bonus for every newborn Australian. New Zealand First has talked about population policy but only in the context of limiting immigration.

Energy will be a point of contention in the election and beyond. There are two main dimensions: security of supply and efficiency and conservation.

The government, despite its green credentials and Green supporters, has not pushed efficiency and conservation hard. Outgoing Energy Minister Pete Hodgson was planning to up the pace this year. Incoming minister Trevor Mallard hadn’t got his head around it at the time of writing and wouldn’t comment.

Security of supply is part of a more general concern with infrastructure. National’s policy approach in mid-2004 was to change the law to give electricity lines companies the ability to generate more power than regulations now allow and that way encourage more investment in energy infrastructure. It would adjust the Resource Management Act to ensure new generation capacity isn’t held up by frivolous objectors. There would be transparency in billing for electricity consumers.

Long-term saving is likely to emerge during the year as a major issue as the balance of payments deficit heads into the stratosphere and highlights how much this country depends on other countries’ savings for its investment and consumption. Negative household saving rates and low holdings of financial assets are not a recipe for strong sustainable growth, still less for personal security in old age. They also work against Cullen’s attempts to lower the cost of capital.

Till now the Treasury has been lukewarm on the need or value of government intervention to boost savings and Cullen has been similarly dubious.

Nevertheless, he is likely to implement Peter Harris’s suggested tax-based long-term savings plan this year in some form, though he has yet to resolve some major details, including whether there should be a sweetener and/or whether there should be an option to withdraw. He mused on other initiatives boost savings to a press conference in December, but refuses to indicate what they might be or even whether he would actually follow through.

Hodgson, as Commerce Minister till the election, has been left a considerable programme of work by predecessor Margaret Wilson.

Her Securities Legislation Bill is now working its way through Parliament. An Insolvency Bill is due in March — probably initially without provisions on who can be a liquidator, to be finalised by way of a government amendment at the committee stage.

Other projects are: insurance markets regulation (the Law Commission reported in November); a wider review of the Securities Act to be started this year, focused on initial public offerings, supervision and regulation of fund managers and responses to the recently established financial intermediaries taskforce; and reviews of credit unions and special partnerships, now under way.

This programme is technical and thus uncontroversial by comparison with the changes in the first five years. More controversial is the ongoing intellectual property law reform, in Judith Tizard’s hands: National opposes special deference to Maori.

Tizard’s focus is on digital IP (particularly downloading music off CDs on to computers and iPods), a narrower definition of patents to stop catchall patents (she is consulting on the first draft of a bill now) and protection of “traditional knowledge”, meaning Maori knowledge, including of native plant uses, which is the subject of the long running WAI262 claim before the Waitangi Tribunal.

Wilson also injected more urgency into trans-Tasman regulatory alignment. This includes mutual recognition of securities offerings and company registration and regulation of financial services. She was clear: New Zealand does not want Australia’s prescriptive approach.

Elsewhere, as far as the present government is concerned, regulatory initiatives are limited: energy and telecommunications are now settled for now, with special commissioners — new Communications Minister David Cunliffe is focusing on getting broadband use widened so that it is “mainstream” and implementing the digital strategy. One regulatory shift he is flagging is in allocating radio frequencies. The secondary market has been thin and national channels operate on multiple frequencies, which annoys listeners.

As associate SOE minister, Cunliffe is working on a revised governance protocol and continuing his review of SOEs’ capital strategies and scope. He has done “six or eight” so far.

Aside from Wilson’s two bills noted above, there is not a lot of business legislation on the parliamentary order paper. Bills modernising the oversight of lawyers and conveyancers and architects are in the final stages.

In transport there is the Railways Bill, which introduces a tough safety regime, and the Land Transport Amendment Bill dealing with commercial operators’ licensing and driver standards and oversight.

Cullen introduced his Overseas Investment Bill tightening the regulatory arrangements but loosening some of the criteria in December.

There are only five other bills of substance on the order paper or before committees, the lightest offering has been in five years.

This portends a potentially important shift in focus if Labour leads the government after the election.

While it would still likely overreact to “crises”, as it did to the leaky homes saga (by way of a sledgehammer Building Bill and a new department) and to the electricity shortages (by way of an interventionist regulatory regime), regulation would not be central to its programme.

That is inherent in the central position workplace productivity occupies in its thinking. Recognition that lifting productivity growth requires more investment has led Cullen to accelerate depreciation rates for short-lived assets (notably, computers). At his press conference on fiscal policy in December, he highlighted research and development and assistance for “enterprising businesses” as priorities for additional spending.

But what of the smaller parties, some of which will have an influence post-election.

The Greens will work only with Labour and, if crucial to Labour’s majority, would likely give a Labour-led government a more environmentalist cast and would push for more social spending.

Their four priorities for post-election negotiation are: genetic modification (in effect to perpetuate the moratorium since there will have been no approved releases come election time); safe food (a local regime or at least the capacity for New Zealand to make exceptions to the joint trans-Tasman food safety and therapeutics regimes); energy (with an accent on conservation and efficiency and rejection of coal-fired electricity); and transport (accent on alternatives to roads).

United Future favours tax cuts — with the emphasis on company tax, income-splitting for couples and/or a lift in the threshold — which it will use as a bargaining chip if it is crucial to Labour’s majority post-election. United Future’s general economic stance is relatively close to National’s.

United Future is also the driver in the select committee review of the constitution and will wave the interim pre-election report at voters as evidence it can play a nation-building role. Business might want to take an interest if constitutional change (improbably) gets legs in the next term.

For example, so far National has shown no interest in a constitutional innovation suggested by the Business Roundtable which could be of value to business: entrenched and/or referendum-based limits on taxing and spending.

ACT will work only with National and would push for lower taxes, extensive deregulation and privatisation of most remaining state-owned businesses.

New Zealand First’s role after the election is likely to be as a free agent, which could be important if neither major party can form a committed majority. Generally, it favours lower taxes and a less regulated workplace than Labour but otherwise is probably closer to Labour’s position than National’s.

The big exception to both is its suspicion of free trade, foreign ownership and immigration. At the party’s conference in November Peters telegraphed an intention to make New Zealand-isation of the economy his central campaigning plank.

The Maori party’s influence, like its likely number of seats, can only be guessed at — except that on most issues it will line up on Labour’s side.