Wednesday, December 6, 2023

Regs without rhyme or reason

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Fast-moving regulations are strangling agribusiness and the economy, says Findex Waikato’s managing partner.
Findex Waikato’s managing partner, Hayden Dillon, says some of New Zealand’s rules and regulations are ill-conceived.
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By Hayden Dillon

This article first appeared in our sister publication, Dairy Farmer.

It’s not regulation that’s the major issue for New Zealand’s farmers – it’s the hasty implementation of ill-conceived rules that are strangling the industry, as burdensome red tape intertwines with unforeseen repercussions, a perilous convergence akin to being stuck between a rock and a hard place.

Uncertainty stalks the agricultural sector and that slows investment decisions, particularly in an election year. You see things like the proposal for the trust tax rate shooting up to 39% coming out of the blue, with no discussion, no preamble. Smart money won’t touch that until after the election as it is probably not a well-thought-out policy but something on the spur of the moment.

Then there’s the carbon price, which didn’t clear the recent auction, leaving the government short of half a billion dollars. This signifies a lack of confidence, and investors are apprehensive that the government might abandon its ambitious environmental objectives as it crashes headlong into economic realities. 

The Primary Sector Climate Action Partnership, known as He Waka Eke Noa, is in a precarious state due to ongoing political indecision, with the plan’s future ranging from being on life support to completely abandoned, leaving it – and affected agribusinesses – in limbo.

If that wasn’t enough, there’s increased regulation on banks, and of course while easily promulgated in Parliament, regulations don’t come cheap for those who must comply. 

And if those regulations are on the cards but not yet in law, they create yet more uncertainty – uncertainty that holds everything up and hangs on how the election falls.

As for unexpected consequences, take a close look at the Reserve Bank. It’s been heavy-handed with regulations ostensibly designed to make our 15-some banks fairer and more accountable while protecting their balance sheets. In comes Dr Unforeseen Consequences with a perverse, opposite effect. You don’t get more competition (as if 15 banks didn’t signify just that); it becomes harder for agribusiness to get finance as it is more complex to give it to farmers. 

The banks focus on home loans as they are easier and more profitable. Extra regulations also increase the barrier to entry, protecting existing operators and delivering a poorer outcome for consumers and the economy.

The Reserve Bank has done one thing right, and that is its emergence as a good example of over-regulation. 

Some regulation is also, arguably, redundant. The dairy industry, for example, must comply with the demands of their big buyers, which have carbon emission plans that must be met by Fonterra when negotiating commercial terms, and those requirements are passed on to the farmer. That’s the way it should work, through the force of the market with willing participants – rather than someone from Wellington imposing a regulation on the farmer at the stroke of a pen, without ever having muddied their boots on a South Canterbury dairy farm.

Of course, uncertainty isn’t the same thing as calamity – bankruptcy is not stalking the land just yet – but there is a capital and confidence shortage leaving the sector gun-shy and weary. 

While domestic issues are prevalent, there are international concerns, too. China pays all our bills, and it is our biggest customer, but that market is unpredictable coming out of covid. Consumer demand hasn’t bounced back, and the Chinese government manages inventories, so we see big jumps up and down. 

We must manage that; will the government put in money and kick stimulation? We can try understanding their inventories; are they short or long? But ultimately, we don’t know.

Finally, a last word on regulatory impact and how it can limit national prosperity. Regulations on the economy have a profound impact and influence on a nation’s prosperity. If we look at Australia, it becomes apparent why they can offer higher salaries to their teachers and nurses compared to NZ – they simply have the means to do so. 

Australia’s ability to generate $140 billion in revenue from coal exports to India plays a significant role in its financial capacity. On the other hand, NZ imposes bans on coal, oil, and gas exports, and apparently any random thing these days, resulting in lower earnings and subsequently limiting our budget for public services. 

Remember, there are no free lunches in economics (or anywhere else). The notion of increasing taxes is convoluted, as it involves taxing a diminishing capital base and, as Winston Churchill once noted, “for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”. 

We must acknowledge the existence of economic trade-offs and understand that choices always come with consequences.

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