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EMABusiness How irrational exuberance harms markets By Paul Winter, Chief Executive, EMA Central The contribution to economic growth from well functioning markets are often not well understood even though they multiply the rewards from innovation, and add comparative value and improvements in productivity. Hence, it seems, governments feel the need to continually alter the ‘rules of the economic game,’ often with unforeseen consequences. The functioning of markets is not always predictable and we need to remind ourselves people participating in them can be driven as much by emotion as by logic and information. The recent financial, liquidity and economic crises have well illustrated this. A result is that many people want Government to protect people from themselves. The impact on markets of decisions driven by emotion through excessive exuberance, or worry, is the harder challenge as it leads to the creation, and then the bursting of market bubbles, often with quite devastating effects. Irrational exuberance or worry tends to be contagious. At its worst it creates challenges via such things as huge government borrowings and deficits. Whether societies can stop these long cycle mood swings, or even dampen them, is currently the subject of a lot of debate. Like many things in life you often have to experience the loss from a bursting bubble to achieve a more balanced perspective on a personal level, and become less easily caught in future euphoria. I was living in Hong Kong when I experienced a period of irrational stock market exuberance. Wiser investors at the time understood what was happening. They described it as a “bell-hop market.” Normal assessments of risk and reward were cast aside, so even a bell-hop - the most junior worker in a hotel - came to believe investing in the stock market produced easy wealth. In principle this is similar to our irrational exuberance for investing in real estate. Education, and access to good and timely information can clearly make an important contribution to "A result is that many people want Government to protect people from themselves. " the quality of decisions. However, its impacts are usually not as immediate as the introduction of new laws and regulations can be. So it is not surprising the latter is the most typical response. History demonstrates that increasing the interventions of the state in the operation of markets can result in solutions worse than the problems they were trying to avoid. While the abject failure of communist states illustrates the point well, examples in New Zealand’s own history show we too have paid a high price because of poor solutions. More devastating long term is that government interventions don’t encourage the right cultural attitudes vital to achieving optimal behaviour. For example, its cultural attitudes that determine the strength of four of the five drivers of productivity that Treasury says is vital to accelerating our wealth creation – Innovation, Enterprise, Investment and Skills. (The fifth is natural resources, and our access, use and stewardship of them.) Every strength is a potential weakness and I would argue this is evident in our over dependence on the State to solve problems, on incentives that favour security of employment, or dependence on our welfare system including universal superannuation, or placing too high a value on owning our own homes. The challenge and rewards of investing in our own development and in entrepreneurial activity need far greater encouragement through better incentives and policy settings. Getting the balance right is the challenge. Peter Drucker, an original and influential thinker, argued in ‘The New Realities’ that we are in a new period when we avoid looking for panaceas to solve society’s problems. Instead he advocated for an enlightenment brought about by applying good information to each new challenge. He encouraged careful analysis and diagnosis of issues through sound information and transparent processes, and a search for the most effective remedies for each specific ill. Good information and transparent processes are also what we need implanted to gain the greatest benefits from well functioning markets. AGM 2009 & Issues Briefing All members are warmly invited to attend our last Issues Briefing for the year, commencing with the Annual General Meeting of the Employers and Manufacturers Association (Central) Inc. at 3.00 pm on Wednesday 25 November 2009. Refreshments will be provided at the conclusion. Venue: Duxton Hotel, 170 Wakefield St, Wellington PAGE 2 EMA Business Plus Magazine - Exclusive EMA news, advice, learning and networking
By Alasdair Thompson, Chief Executive, EMA Northern EMABusiness Tax review presents great chance The tax review underway offers a great chance to align New Zealand’s tax system with the imperative for New Zealand which is to rapidly improve the nation’s productivity. EMA has strong views on all matters related to tax. We say anything that discourages investment or harms our ability to earn higher incomes will ultimately hurt employment and wealth creation. And we certainly need more investment to increase productivity. We need 1.8% GDP growth each year in New Zealand over and above Australia to catch up with them by 2025 and our company tax rate will need to be better than Australia’s. As well we need to be competitive with them in tax costs as headline tax rates are not everything- exemptions are important in the measuring of the effective tax rate. In addition, we need to address the Working for Families scheme which has perverse effects at present as earners move from welfare to higher incomes. It should only target the lowest income earners. The tax principles we are drafting for the tax review will include recommendations that the company tax rate be dropped to 18% or lower and for imputation credits to be removed. We will note, as we have done many times that companies are only a conduit for providing income for their employees and shareholders, and they should be where the tax is applied. In the past Treasury has used a static economic model to assess and rebut reductions to the company tax rate – it needs to apply a dynamic one. Alternatively, we support investigating different approaches for business tax such as ACE – ACE is Accreditation for Capital Equity – and means that tax should not be paid on normal rates of return or on equity invested. If Australia goes down this path it will be important to match or better the provisions they introduce. We will recommend negative tax gearing systems should only be aimed at the bottom strata of the tax base. While income tax rates in New Zealand are not too high, we do need for tax thresholds to return to indexed levels of the past 10 years to eliminate fiscal drag. We do not support a capital gains tax but other options targeted at rental property investment should discourage over-gearing and the ability to deduct depreciation. We would go along with an increase in GST to cover any revenue shortfall to retain a fiscally neutral tax system. SME’s should have the option of paying provisional tax aligned with their GST and paid bi-monthly with a wrap up annually, and with minimal or no penalties for shortfalls in that wrap up. We need to change the capture of Fringe Benefit Tax too, so it becomes part of the PAYE system. Fringe benefits should be treated as part personal income and taxed accordingly. Tax at the top level should apply equally to personal tax and trusts but not to companies due to the withholding nature of the income for companies. The overriding principle we promote is that the tax system should encourage investment and not overly penalise the earning of income, because we urgently need to raise productivity and to achieve this we need far greater investment and to reward higher labour productivity. Passage of super city law historic The passage of the super city bill into law made history for Auckland and New Zealand. EMA campaigned hard for this very outcome. Under the new law’s provisions the Auckland region is to become one city with one council with local boards to respond to, and manage local issues. We are confident the new governance structure will help expedite a rapid lift in productivity and for Auckland to move decisively to compete with other Pacific rim cities. We look forward to scrutinising the third Auckland bill for more detail. EMA NORTHERN AGM & COCKTAILS Members are invited to the Annual General Meeting of the EMPLOYERS & MANUFACTURERS ASSOCIATION (NORTHERN) INC to be held at: CT Club - NZ Institute of Chartered Accountants 27-33 Ohinerau Street, Greenlane, Auckland Thursday, 5 November 2009, at 4.30 pm Members are reminded they are entitled to nominate a person(s) to stand for the Board of the Association. To do this you will need to complete the form (available by emailing to: raewyn.mckenzie@ema.co.nz) and returning it by 5.00 pm, 21 October 2009. Nominations should be accompanied by a brief biography including the nominee’s employment history and outside interests. All members are entitled to attend the AGM, and vote or appoint a proxy. A proxy form for the purpose will be forwarded with the list of candidates for office seven days prior to the Annual General Meeting. Those wishing to attend should email to raewyn.mckenzie@ ema.co.nz Our Vision. Your Success PAGE 3
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