Labour to double depreciation rate in targeted industries
UPDATED: The major new element in the Labour Party's manufacturing policy, announced today, assumes depreciation rates for assets in each affected industry would double, a party spokesman says.
The additional details from this morning's manufacturing policy announcement by Labour leader David Cunliffe comes as predictable brickbats and bouquets arrived from across the political spectrum.
Economic Development Minister Steven Joyce called it "same old, same old", while the First Union headlined its press statement "at last: a manufacturing policy."
Peak lobby group Business New Zealand headlined its response "focus on manufacturing welcome" but went on to suggest "some of the policies need more work."
Instead of accelerated depreciation, BusinessNZ would prefer an across the board cut to the corporate tax rate.
The accelerated depreciation policy is assumed to cost $30 million in its first year, rising to $70 million, and Cunliffe it was "envisaged" that the policy would apply to all manufacturers when fiscal circumstances permitted.
In the meantime, "the policy has been costed on the assumption that the diminishing value (DV) rate of depreciation for each asset class within the affected industry would double," said a Labour spokesman in an email responding to questions from BusinessDesk.
"For example, the default class for the 'chemical plant and machinery' industry category currently has a DV rate of 13 percent per annum. This is based on an assumed useful life of 15.5 years. Our costing has assumed that this (DV) rate of depreciation increases to 26% per annum."
The policy had been costed, in part, from official statistics on gross fixed capital formation, broken down by industry grouping.
"We got some advice from external consultants, particularly on working out an appropriate average weighted (across asset classes) rate of depreciation for each industry grouping."
Assuming the policy contributed to higher economic growth rates, its net fiscal cost would be expected to be lower.
BusinessNZ said "allowing certain sectors accelerated depreciation on plant and equipment would provide assistance by reducing the tax burden in the early period following the equipment purchase."
"However, choosing which sectors or industries should get this tax assistance would be problematic. Any policy changes should assist all industries. More fundamentally, given that the depreciation proposal would essentially be a reduction in the tax burden on manufacturers, a better form of assistance would be a simple reduction in the corporate tax rate."
O'Reilly was more supportive of Labour's plan to increase government procurement from local firms by a target of $200 million a year.
"In many instances, government contracts have gone to overseas companies even when New Zealand-made options were available at better price and quality," he said. "New Zealand manufacturers would prefer government agency purchase decisions based on explicit, transparent criteria so local manufacturers have a fair chance when competing against overseas providers for New Zealand government business."
Accelerated depreciation, buy Kiwi-made core of Labour manufacturing policy
EARLIER: The Labour Party has unveiled its pitch to the manufacturing sector, adding accelerated depreciation for advanced manufacturing and promising to target more government procurement from local firms.
Labour leader David Cunliffe launched the policy to an Auckland business audience this morning, adding the depreciation and procurement policies to the known suite of Labour's approach for manufacturing, including research and development tax credits, lower power prices, a more active monetary policy to create "a more stable exchange rate" and a suite of sector-specific "Economic Upgrade" packages.
"Our aim is to influence investment policy overall," said Cunliffe. "To change the culture of investment in New Zealand so that firms, entrepreneurs, and investors feel confident in developing world-beating ideas here."
Cunliffe offered little detail on the accelerated depreciation policy beyond saying it would cost $30 million in its first year, rising to $70 million over time and would target "advanced manufacturing", defined by the Ministry of Business, Innovation and Employment as high and medium-high technology.
"We envisage extending it to all manufacturers over time," said Cunliffe.
Economic upgrade packages, such as the one already announced for the wood processing industry, would be rolled out for other sectors.
On government procurement policy, Cunliffe pledged a target to increase by $200 million the value of contracts let to New Zealand rather than foreign firms, while remaining compliant with World Trade Organisation rules. That would be worth around 2,000 jobs, he said, citing low quality rolling stock bought from China by KiwiRail and the impending billion dollar revamp of the Inland Revenue Department's computer system as examples where local industry should be able to participate.
Resumption of the Labour policy, dumped by National in 2009, of a 12.5 percent tax credit for research and development expenditure, was also reconfirmed.
Cunliffe rejected the mindset of "New Zealand as a tiny boat adrift in the turbulent seas" with "no alternative but to passively ride the cycle of global commodity prices", characterising this as a "Thor Heyerdahl approach to economic strategy."
"It creates a 'Kontiki' economy that drifts with the current, without a rudder or an engine," he said, referring to the 1947 trans-Pacific crossing by Heyerdahl, a Norwegian ethnographer, in a hand-built raft to demonstrate ancient peoples could make long sea journeys.