7.4  The role of business in the national saving debate

As previously discussed, the role of the SWG is to assess how New Zealand might increase its national saving rate. National saving is made up of three components: household, government and business. Much of the attention in this report is focussed on household and government sector issues, but it would be remiss to overlook the role of business in the savings process.

It is true that the business sector is owned by either households or government so in many ways a significant number of the issues to do with saving have been addressed elsewhere. However, it is equally important to recognise that, in the simplest sense, business saving is based on business profits. Therefore the more that can be done to enable businesses to work efficiently, the greater will be the funds available for distribution to the owners and, hence, the higher might be national saving. As businesses losses directly reduce business saving, anything that reduces that size of losses will improve saving.

Moreover, in assessing the role of business in the savings debate one must also remember that the saving issue can be summarised in the national accounts identity. That is, saving minus investment (the saving balance) equals exports minus imports less net international payments (the current account balance). The primary focus of this exercise has been the saving part of the equation but equally it is important to assess:

• The quantity and quality of investment in the economy.
• The extent by which we might be able to encourage exports.
• The policy mix that might discourage imports.

These are all business sector issues that are critical to the debate.

There have already been numerous papers written over the years about what can be done to enhance business profitability largely concentrating on measures that impact productivity. We do not wish to revisit these in depth, but rather list the more obvious things that need to be done in this space. We suggest that Government should:

• Take a strategic approach to improving competitiveness, in terms of the impact of the design and management of its policies.
• Ensure that labour markets are as flexible as possible.
• Reduce barriers to entry to the labour market such as high marginal tax rates and relatively high welfare payments.
• Put significant focus on ensuring that the education system is well-designed to create work-ready high school leavers and university graduates.
• Ensure that the nation has the necessary infrastructure in place.
• Reduce business compliance costs.
• Ensure that the Resource Management Act is working efficiently.
• Streamline and clarify the consenting process.
• Ensure competition regulation is appropriate.
• Develop a population policy.
• Make sure that the government does not crowd out the private sector.
• Ensure that state-owned businesses are operating as efficiently as possible and, if necessary, look to heightened levels of private provision of services.
• Remove barriers to trade and sustain open capital markets.

There is one other significant issue to consider: the structure of the New Zealand business sector. We have no firm conclusion on this matter but wonder whether the dominance of small to medium-size enterprises (SMEs) in New Zealand means that investment (and saving) activity is less efficient than it could be. Does this also mean that New Zealand's business structure is less able to create the growth in exports that the economy desires, as small businesses clearly have greater difficulty in penetrating global markets? To put this issue in context, as at February 2009 there were only 2,143 enterprises in New Zealand employing over 100 people. We believe structural issues warrant further investigation.

The quantity vs. quality of investment

There is little evidence that the quantity of investment in New Zealand is out of line with international norms. This begs the question as to the efficiency of that investment. Many of the factors above will help raise the returns on investment. However, in addition, one has to question whether the New Zealand tax system has created an environment where people have been enticed into over-investing in property assets – both residential and rural – that ultimately have a low return. A reassessment of this would be highly desirable.

Another question is whether the ability of businesses to borrow using housing as collateral has meant that a lot of investment decisions have been made based on insufficiently high hurdle rates, meaning that projects have been embarked upon that should not have. This may in part explain the proliferation of small businesses in New Zealand, the high failure rate and, as a corollary, a general unwillingness (or inability) to pool investment funds to create businesses of scale.

Furthermore, more work needs to be done to assess why New Zealand businesses pay out high levels of dividends rather than using these funds for expansion purposes.

Export policy

Again, the adoption of profit-enhancing policy will, by definition, help exporters. Anything that can lower the cost structure of an exporting business enhances its position of global competitiveness.

We recognise that in the export space the government will have a significant role to play, now, and in the future, not only with market entry, trade barriers and the like, but also in regard to its management of climate change, emissions trading and general environmental concerns and the impact of these on competitiveness. In addition, there is an urgent need to clarify the likely future national position on water rights and potentially the trading thereof, to the extent that this will be of great significance for a country whose export earnings are dominated by water-affected production. Electricity is another area of concern, given its importance in primary resource processing.

Import policy

On the import front, the “attack” on imports must come by way of raising the competitiveness of domestic producers and encouraging New Zealanders to reduce consumption in order to take pressure off interest rates and the exchange rate and release resources for import substitution as well as exports.

In summary, the SWG emphasises that the role, both direct and indirect, of the business sector should not be underestimated.