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Insights 18: 25 May 2018
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To the Government's credit
Dr Oliver Hartwich | Executive Director |
If politicians could make companies more productive and innovative by decree, they would have done so a long time ago.

That did not stop the previous government from actively trying to steer companies’ research and development activities. In 2008, it abolished R&D tax credits and introduced innovation growth grants administered by Callaghan Innovation in their place.

As widely expected, the new Government axed these grants in last week’s Budget and wants to revert to a tax credit system. In the future, companies should be able to claim a 12.5 percent tax credit on “eligible expenditure”.

If you feel unsure what to make of this decision, so do I.

On the one hand, it is a courageous decision by Minister Megan Woods to end the Callaghan grants. They had always been problematic because they required picking winners and smacked of corporate welfare.

So congratulations to Minister Woods for ending this flawed policy.

On the other hand, R&D tax credits are not without their own problems. The first among them is the practical implementation of the scheme.

To administer tax credits, the government first needs to define what qualifies as R&D. It is unlikely that everything that companies regard as R&D will count. We can expect the Government to prescribe activities that are specifically excluded, just think of anything relating to oil and gas exploration. So the government will no longer pick winners but losers.

Once that question is solved, it will need to be decided which parts of R&D expenditure get a tax credit.

The scheme is then likely to be capped at a certain amount per company, with the Minister able to permit tax credits beyond that limit for specific companies.

You get an idea of the potential complexities of R&D tax credits by looking through the Government’s consultation documents on the Ministry of Business, Innovation and Employment’s website.

As much as I would like to applaud the Government for abolishing the grants scheme that was wrong on more than one level, I feel nervous about replacing it with tax credits. Though well intentioned, these credits could easily become a battlefield for bureaucrats, lawyers and accountants.

R&D tax credits sound like a simple idea to promote innovation. Let us hope they do not primarily drive innovative behaviour within the tax profession.

The extraordinary MBIE-Treasury spat over KiwiBuild
Dr Bryce Wilkinson | Senior Fellow |
The government plans to build 100,000 ‘affordable’ houses in the next 10 years.

How much greater is the housing stock likely to be in 10, 15 or 20 years as a result?

That is an analytical question. At its heart is the question of how many dwellings would be built anyway. The future housing stock is only larger to the extent of any difference.

Macroeconomic forecasters, including the Treasury, the Reserve Bank and the New Zealand Institute of Economic Research, are having to address this issue when they update their forecasts for residential construction.

The Treasury’s current verdict can be seen by comparing its pre-election projections for residential construction with those in its May 2018 economic and fiscal update. Both show strong growth. The May 2018 one is a little stronger, but the difference is not major.

It will be interesting to see how the other forecasters compare.

There are two major reasons for thinking a modest effect is sensible.

The first is short-term – capacity constraints. Newspaper headlines already scream of a shortage of construction capacity. A builder working for KiwiBuild is a builder not constructing someone else’s home. The short-term ‘crowding out’ of KiwiBuild could be close to one for one.

The second is long-term – demand. In the long-term the limiting factor is not industry capacity, it is price. Ridiculously high prices limit demand. The industry will not knowingly build houses for which no buyers can be found.

Get prices down and there will be more buyers. The industry will build more to satisfy the increased demand, even if government builds nothing.

Government could reduce prices by increasing land supply. This is politically difficult, but vital for overall community wellbeing.

So what was the spat with MBIE this week? Well, MBIE’s publicly-released document dated 15 May essentially assumed away either the capacity or price constraint issues.

The Minister of Housing seemed to interpret MBIE’s assumptions as plausible conclusions, lambasting Treasury for its analysis in comparison.

But who knows what MBIE really thinks about the issue - assuming it allows itself to think? 

And does this government not want the public service to do its best to provide it and the public with impartial professional assessments of policy proposals?

Ideally the government would have asked Officials for a competent cost-benefit assessment before setting out to spend $2 billion building 100,000 new homes. So where is it?

Outsourcing to the kids
Dr Eric Crampton | Chief Economist |
I know that people who aren’t economists manage to raise kids and that it all seems to work out in the end, but I’m not entirely sure how.

I have learned that standard practice in the Crampton household diverges a bit from practice elsewhere. So gaze in awe, or horror, at our system for managing the more irksome household chores.

Some chores, the kids are happy to do just as part of being happy members of the family – and to get their dollar-a-day allowance instead of an amount discounted by the cost they imposed on their parents that day.

Other chores are less fun. Those go up for competitive sealed-bid tendering.

At the start of every quarter, we list the jobs that need to get done around the house.

We make a point of listing those chores that are more efficiently done by the source of the chore in the first place, and ones that we parents find particularly unappealing. So the kids can bid to do their joint laundry, fold it, and deliver it to their respective rooms. Vacuuming and washing the floors is another outsourced chore. And so is keeping the cat boxes in order.

The children submit sealed bids tendering for each of the chores – the weekly price they would charge for undertaking the chore satisfactorily. It is very important to define the tasks precisely, like the areas covered by a mop-and-vacuum requirement, or the frequency of cat box cleaning.

We tell the children that we need not necessarily accept the lowest or any bid. I look over the bids and award the chores for the quarter.

It has been transformational. Before we adopted the system, the kids would whine about doing chores. Now, we can threaten to shift to the other supplier. They each want to win as many chores as possible.

Aligning incentives can work wonders: instead of throwing mostly clean clothes in the laundry so that he doesn’t have to deal with re-folding them for another wearing, our ten-year-old makes sensible decisions and polices his sister as well.

And they haven’t yet started colluding against us, so that’s great too.

When I told folks around the office about our contracting arrangement, Oliver thought it was funny and told me to write it up for Insights. But I think it far more best-practice exemplar than satire.  

Consider it for your upcoming third-quarter household planning.

On The Record
All Things Considered
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  • What have the Swiss ever done for us?
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