Saturday, May 27, 2023

Oliver Hartwich: No competition? Time to level up trans-tasman business relations

Let’s imagine a computer game, shall we? It is called ‘Master Lobbyist’, and your job is to play the governments of two countries off against each other.

You tell each of them that, unless they cut taxes for the industry you work for, your industry will move to the other country. Predictably, both governments fall into the trap and outbid each other in tax relief.

The result: your industry must now pay hardly any taxes at all, and you have truly earned your handsome consultancy fees.

Sounds like a stupid game, right? Well, it is exactly what has just played out between Australia and New Zealand. And the industry in question is the computer gaming sector.

In last week’s New Zealand budget, thanks to heavy lobbying, the Government announced a 20 percent tax rebate for New Zealand’s game developers. The subsidy is worth about NZ$160m. It is not quite the 45 percent rebate that the industry gets in Australia, but it might be just enough to prevent a threatened mass exodus of game developers from New Zealand to Australia.

The lobbyists obviously played their game well. Yet, the story highlights an issue larger than New Zealand’s gaming industry.

This year, Australia and New Zealand celebrate 40 years of their Closer Economic Relations agreement (CER).

CER was designed to foster a shared economic market. It was ahead of its time, and it still provides a good foundation for our two countries’ economic integration. New Zealand and Australia have since transformed CER into a process called the Single Economic Market (SEM). It is meant to create a seamless trans-Tasman business environment.

And yet, both CER and SEM are missing a crucial aspect: a mechanism to monitor and control subsidies, which would ensure a truly level playing field.

Should we need any inspiration for what such a mechanism might look like, we might take a page out of the European Union’s book.

Now, you might be thinking, why would we want to adopt something from the EU? They love their bureaucracy, while we down here revel in our pragmatism. But hear me out. Even the EU occasionally gets a few things right.

The EU faces the same problem Australia and New Zealand do when it comes to competition in a common market. There will always be a temptation for governments to lure away whole industries from neighbouring countries via subsidies and tax breaks. And politicians will always listen to lobbyists threatening the exodus of an entire industry.

The founders of the EU foresaw that and included Articles 107 and 108 to the Treaty on the Functioning of the European Union. These articles regulate state aid. In principle, they outlaw the organised bribery by which some industries pit governments against each other in the pursuit of tax breaks and other subsidies.

To be fair, like so many other EU policies, the practice of applying Articles 107 and 108 is a bit murkier and more complicated. But the principle is there, and that principle is a good one. It is about fairness. No industry should be allowed to escape taxation or live off taxpayers because they threaten to leave.

State aid control as part of CER would not be another bureaucracy. This is not about red tape. No, it is about ensuring a predictable, fair, and equitable business environment.

We want our companies to compete on merit, not on who has the more generous fiscal fairy godmother. We want our industries to innovate, to flourish, without being worried about a fiscal wand waved across the Tasman. And we do not want taxpayers to be vulnerable to extortion.

Let’s be clear: this is not about stifling competition. On the contrary, it is about ensuring competition is healthy, beneficial, and not tipped unfairly in one direction by virtue of another state’s largess.

When they signed CER in 1983, Australia and New Zealand showed leadership in economic cooperation. But now, to use a phrase from the world of gaming, it is time to level up CER.

A state aid control mechanism will not be a magical quick fix, but it will set the parameters for fair play. It would help protect the integrity of our single economic market, and ensure it continues to thrive, benefitting all Australians and New Zealanders.

The nature of economic sectors and competition has evolved since the inception of the CER agreement. In our digital age, industries like game development can shift base rapidly, propelled by the allure of more attractive tax environments. It is thus crucial that our economic frameworks adapt accordingly to prevent such distortions and to facilitate fair competition.

In crafting such a mechanism, it will be essential to balance regulatory autonomy and economic integration. Australia and New Zealand are sovereign nations with different economic strengths, challenges and strategic priorities.

Therefore, the proposed state aid control system should be designed in a way that respects those differences and allows for a degree of flexibility. But there need to be some clear red lines, especially when it comes to tax.

The spirit of the CER agreement is one of cooperation and mutual benefit. Therefore, while politicians might want to champion their domestic industries, they should never lose sight of the collective trans-Tasman interest in having an open and free market.

The 40th anniversary of CER is the perfect opportunity to consider ways in which our two countries can reaffirm this spirit. An upgraded CER agreement with a state subsidy control mechanism would be the next logical step. It would also make the Single Economic Market live up to its name – on both sides of the Tasman.

Such an upgrade could help ensure that, while each of our countries can develop its unique sectors, they do so in a way that fosters a sustainable and competitive trans-Tasman economy.

The way Australia and New Zealand currently play their CER game, the winners will sometimes be those industries with the best lobbyists. Oh, and the lobbyists themselves, of course.

The losers, meanwhile, will be governments, consumers and taxpayers.

But the Australian and New Zealand governments can change that. Ultimately, it is up to them to come up with a mechanism that will protect them from future industry blackmail.

It is in the two governments’ own interest to do so. Their taxpayers would thank them for it.

Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative think tank. This article was published HERE

1 comment:

Anonymous said...

A simply brilliant and essential extension to what was originally intended. Shame it's taken 40 years for someone like Dr Hartwich to suggest it but, I suppose, better late than never.

Now, as a taxpayer, here's hoping some politician grasps it and gets it over the line. Do keep us posted Oliver and, thank you.