Finance Minister upfront, speaks openly on the economy and other issues
On Monday evening Finance Minister Hon Mark Brown fronted up to listeners of Matariki Radio for a 2 hour discussion on the economy. Brown faced a series of questions on the state of the economy from William Framhein and to his credit responded with clear, direct answers and a general willingness to provide answers.
In this writer’s view, the main points to emerge from the radio session was Brown’s acknowledgement that the economy was “flat,” that businesses were struggling and that government needed to provide some stimulus as it was not possible for the private sector to do this. The Minister was clearly up front with his comments and is to be congratulated for his frankness.
The topics Brown dealt with were wide ranging including tax rates, departure tax, tax revenue, tax on airlines and other foreign companies, prosecutions over unpaid taxes, State Owned Enterprise dividends, the budget deficit, import substitution, the Air NZ subsidy, the Withholding Tax and the Toa Petroleum subsidy, the review of the Banking system, savings government could make, the flat economy, plans to revitalize the construction industry, depopulation, telecommunications, Social Welfare review, possible mergers of government Ministries and the review of the public service functions.
Space does not permit a full, in-depth report on the two hour session however, here is a brief overview of the Minister’s comments on some of the topics raised. The Herald acknowledges the assistance of Matariki Radio and William Framhein.
Tax rates
The Minister said no increase is planned to the tax rates in the three main categories of tax revenue-PAYE, Company and VAT taxes. He said the current rates were well set and government recognized companies were struggling.
Departure tax
The Minister said he expects departure tax to be included in the Airline tickets about December. As to an increase in the departure tax, he said it was up to Cabinet to confirm the level but a decision will be made soon. He said Fiji had recently doubled their departure tax to F$100. The UK had also increased its departure tax significantly.
Tax on airlines and other foreign companies
Brown said government decided not to pursue the matter of Air NZ paying tax locally after a meeting with the airline. He said Air NZ does pay tax to the NZ government on income earned in the Cook Islands. However, other foreign companies do pay local tax including the foreign owned banks.
Prosecutions over unpaid taxes
Brown said the recent actions by Revenue Management to take court action to claim unpaid taxes had come as a surprise to him. However, under the legislation, a Minister had no jurisdiction over the actions taken. He said over $20 million in unpaid taxes was owed by companies and individuals. After government Ministries reconciled their accounts the amount outstanding came to $13 million. Brown said he had a lot of sympathy for the companies involved at a time when people are struggling. The high cost of oil had pushed up the cost of interest on borrowing. The first bill people tended to pay was the mortgage and the last bill the yearly tax bill. In a recent court case the Justice had asked why Revenue Management had let the matter go for 8-10 years. The problem was a lack of staff to cover more than 300 companies. Brown said he has had discussions with Cabinet members on some options. For instance, should there be a moratorium? Could government afford it? Can companies trade back into business? Brown said the law imposes an automatic penalty which in some cases exceeds the tax owed. He said it is not the business of government to make money out of people’s misery. Brown said government needed to find a way to ensure the tax bill did not put people out of business.
State Owned Enterprise (SOE) dividends
Explaining the role of SOEs, Brown said government expected them to pay a dividend. He said the bulk of the returns to government came from Telecom, Te Aponga and the BCI. The SOEs must operate as independent businesses and maximize profit to the shareholder-the government. However, in a fundamental shift in focus, Brown said he has told the SOE Boards to change focus to maximize what is in the public interest.
The budget deficit
Brown said government was on course to get a $2 million surplus then the airline underwrite threw the budget into deficit. Brown said government was looking at making savings by culling out duplication and non-priority items. He said the majority of the funds needed to overcome the deficit would come from an increase in the tax take. He said despite tough times, the economy was ticking over but it was not doing as well as it can.
Import substitution
Brown said ours was an “import” economy. Initiatives being considered were to stop relying on imported foods and grow more food locally for local consumption and also export. Incentives being applied included working in with local and outer island growers. Outer island growers still faced constraints especially in transport. Brown said at present two and a half tones of food (vegetables) were being air freighted in each week. These were produce that could be grown locally. He said imports of lettuce and tomatoes could be reduced through new growing techniques and new varieties and strains to ensure growth all year round.
Air NZ subsidy
Brown said the level of the subsidy payment was getting close to that point (the trigger or tipping point) where government may have to consider the future of the scheme. He said if the cost of jet fuel continues to increase government may need to reconsider the subsidy. He said the cost of jet fuel was “cyclical” it went up and down depending on traveler ability to afford fares. He indicated a $10 million tipping point on one route but said there was some dispute over the figure. Brown said the LA route was 80 percent of capacity on average.
The Withholding Tax and the Toa Petroleum subsidy
Brown said he stood by his commitment to review the Withholding tax within two years or when the payments to Toa ceased.
Review of the Banking system
Brown said the review by former Kiwi Bank CEO Sam Knowles would take 6-8 weeks. He would look at what can be done and how to reduce the cost of banking to the consumer. Kiwi Bank had been set up in NZ to counter the Australian banks by offering rates lower than commercial banks. He said the banks were struggling for business due to the downturn. There were no new businesses setting up. Our own bank, the BCI was constrained by law as to how much money it could source.
Savings government could make
Framhein suggested government vehicles as an area government could make savings. Brown said the PSC made a submission on Monday on a new vehicle policy to be tabled before Cabinet. The policy would tighten up vehicle use, ensure more efficient vehicle use and ensure vehicle suitability. At present HOMs controlled the use of vehicles. An issue has been the lack of information on Ministry expenditure on a range of items such as vehicles and telecommunications. Since the appointment of Richard Neves as Financial Secretary, MFEM has been trying to centralize information on Ministry expenditure. Brown said Cabinet had issued a Minute compelling Ministries to provide information. Brown said this information will be available to the public.
The flat economy
When asked by Framhein why the economy was “flat” Brown said it was a tough question. He said the overseas economic experience is mirrored in the Cook Islands. He said it was critical to small businesses that cruise ship passengers visit and come ashore.
Re-vitalization of the construction industry
Brown said at present there was no construction activity. He said government must step in and stimulate activity when the private sector is unable to generate business. He said there were some projects government can initiate that construction companies can take up. He said work on the water and roads were about to start. He said a government building to house all agencies was being considered. A new parliament house was also being considered with the 50th year of self government approaching. He said these initiatives would allow the construction sector to get back on its feet. Government was looking at how to finance these activities and in doing so it must engage with the private sector. The work to be contracted out to locals.
Depopulation
Framhein proposed to brown that government should look at increasing the population so the country would have more consumers. Framhein suggested adopting an open border policy-attracting people with money and skills. Brown agreed more people would result in more spending and more tax revenue. Brown said BTIB was preparing an information paper on short term stayers and was planning to market our country to retirees.
Telecommunications
Brown said he wanted cheaper, faster and more reliable services especially I broadband telecommunications. He wanted to see a service more in line with best practice. He said a draft bill had been prepared which removed government from decision making on regulating and placed all authority with a Commissioner outside of government. He was not happy with the draft bill. Brown said the Cook Islands was not like other countries and overseas business models did not fit our situation. He said we needed to develop our own business model. He was looking to set up a consultative group to advise him. Brown said government needed to consider what was in the best interests of the people and the country. He said a private company should not dictate what a government or country should do.
Social Welfare review
Brown said the review of our social welfare by the Asia Development Bank (ADB) was commenced by the previous Demo government. He was surprised because the review seemed at odds with the policy of the current CIP government. Brown said the review was a condition of the ADB grants funding of $900,000 to support the vulnerable in our society but also to seek comment on the review. Brown said the Ministry of Internal Affairs had been told to point out at the public meetings that the recommendations were those of the ADB and not the government. Some recommendations government did not support at all like raising the age limit. He said government will be increasing the payment for those 70 years and over. The payment will not be back dated and he hopes it will begin in the new financial year. He said there were over 100 people in the over 70 years age group. As to means testing, he said this would cost more to administer so it was not being considered.
Mergers of Ministries and review of the public service functions
Brown said there have been two mergers so far. Education and National Human Resources (NHRD) had merged and so had the Financial Intelligence Unit (FIU) and Financial Services Commission (FSC). He said government’s main focus will be on implementing the outer islands governance regime in the new financial year. He said other recommendations in the PSC functions review report will be considered over the next year. -Charles Pitt

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