B Policies to Improve the Domestic Business Environment

In addition to maintaining a stable macroeconomic environment and improving state sector performance, the five most pressing domestic policy areas (each with international dimensions) for reform are the tax system, the regulatory system, science and innovation policy, network infrastructure, and natural resource management.

i Further reform can make the tax system more efficient and competitive

New Zealand's tax system is generally regarded as well-run and efficient. The “tax switch” reforms introduced in 2010 helped to improve the efficiency of the tax system, and enhanced incentives to work, save and invest. However, there is potential for further reforms to enhance economic performance. In particular:

• The increasing mobility of global capital and workers (New Zealand workers appear to be especially mobile), together with the downward trend in international company tax rates, continues to apply pressure to the competitiveness of New Zealand’s personal and company tax rates (figure 23). This pressure adds to the rationale for further reductions in these tax rates to improve incentives to work, save and invest. Reductions in these rates could be funded by more base broadening or by additional cuts in low-value government expenditure without compromising fiscal targets.
• As noted, there is wide variation in the tax rates that apply to different types of capital, and potential for capital tax changes to encourage a more productive allocation of capital.
• With specific respect to Australia, we recommend continuing to push for mutual recognition of imputation and franking credits to promote the free flow of capital across the Tasman. This would expand trans-Tasman investment and assist in the movement towards a trans-Tasman single economic market.

Figure 23: International company tax rates: 1990-2011

Source: OECD

ii Regulatory improvements are needed at both the regime and system level

New Zealand has lost ground over the last decade compared with other countries in terms of the quality of the regulatory framework for business (figure 24). There are a number of specific regulatory areas, noted in other parts of this briefing, where reforms are likely to have material benefits for the business environment. These include regulatory regimes relating to chemicals and new organisms, investment screening, resource management, local government, housing supply and the minimum wage.

Figure 24: Product market regulation - selected countries; 1998 & 2008

Source: OECD

Improving regulatory quality also requires continuous improvement of the broader regulatory system. Regulatory impact analysis requirements introduced in 1998, and refreshed and extended in 2008, provide a solid foundation for improving the system, and have helped lead to an improvement in agency performance. The focus for future system-level changes should be:

• promoting principles of best practice regulation including minimising barriers to, and maximising benefits from, cross-border flows, backed up by regime assessments
• improving regulatory scanning and planning, and adding a medium-term perspective
• building regulatory goals into performance expectations of chief executives and agencies, and
• supporting cross-agency collaboration to develop and share best practice.

iii Science and innovation policy should focus more on firm-led R&D and commercialisation

Many aspects of New Zealand's research and science system, which is mostly government funded, appear sound but the level of business expenditure on research and development (R&D) is particularly low compared with other OECD countries (figure 25). This indicates there is scope to improve innovation performance with respect to business R&D and the commercialisation of government-funded R&D. There are three priorities for enhancing economically-beneficial innovation:

• increasing the proportion of government expenditure on R&D that is business-led
• improving incentives on research and tertiary education institutes to undertake more firm-relevant research and transfer knowledge to firms, and
• ensuring there is an appropriate balance between managing environmental and public health risks, and opportunities for economically beneficial innovation in relation to new organisms and chemicals.

Figure 25: Business expenditure on research and development - selected countries; 2008

Source: OECD

iv Better prioritisation of investment and management of existing assets is required to maximise the contribution of network infrastructure, especially roads

National spending on network infrastructure has increased rapidly over the last decade, with investment in electricity transmission, roading and telecommunications in particular helping to provide a stronger platform for future economic growth. Nevertheless, survey measures continue to suggest there is substantial room for improvement. The National Infrastructure Plan 2011 provides an overarching strategic direction for the planning, funding and building of infrastructure over the next 20 years. The key priorities for enhancing the contribution of infrastructure to economic growth are:

• ensuring that Auckland has a robust and realistic plan for transport, in which people and businesses have confidence, and which optimises the future network through new investment and measures to manage demand, including network pricing
• using rigorous, consistent and transparent benefit-cost analysis for developing Auckland’s transport plan and for other transport investment – unfunded projects with net economic benefits should be accelerated through a range of funding mechanisms including increases in fuel excise and road user charges, and
• ensuring that the Christchurch rebuild is focused on future needs and is prioritised to support infrastructure that is growth enhancing (box 6).

v More efficient management is required to increase the economic contribution of natural resources, while managing degradation and scarcity challenges

Primary production accounts for a large proportion of New Zealand's economy, partly because of our natural advantages in climate and geography. New Zealand is facing increasing challenges with respect to the degradation of natural resources, managing scarcity as sustainable limits are being reached (especially for water) and system efficiency. These problems necessitate changes in a number of areas, including:

• The Resource Management Act (RMA)

We recommend continuing to build on recent progress to improve speed and efficiency, and to articulate the national interest. Refining the principles of the Act to give greater explicit recognition to economic growth alongside ecological protection and other values is also important. Beyond this, further gains will come from focusing on better implementation of the system, including looking more deeply at the role, capability and incentives on local government to plan for and manage infrastructure, growth and environmental protection.

• Freshwater Management

Freshwater (volume, flow and quality) is an essential resource for our economy and society. The paramount challenge is to set up a system with the versatility to cope with growing demands. A shift is needed to create incentives in the administrative structures and the market that will communicate the true value of water and facilitate its highest valued use. The Land and Water Forum is spearheading development of options to progress towards such a system. The Government should be closely involved in this process. Clarification of Maori interests in water will also provide for greater certainty.

• Climate Change

New Zealand's climate change policy will continue to be informed by international developments, given the global nature of this challenge. A legally binding global agreement is unlikely to immediately follow the 2008-2012 Kyoto Protocol period, providing an opportunity to reconsider some key Emission Trading Scheme (ETS) design settings. The Government's response to the 2011 ETS Review will provide an opportunity to reduce short-term costs imposed by the ETS, while positioning the economy for the longer-term risks and potential opportunities associated with climate change.