The value of export incentives in doubt

Press, 12 November 1981, Page 18

The value of export incentives in doubt

By

RICHARD MANNING,

Professor of Economics at the University of Canterbury

Fletcher-Challenge paid SI.BM net taxes on a profit of S94M for the year. The company got over S3OM in export incentives. In “The Press” on November 5, the Corporate Relations Director of FletcherChallenge, Mr E. L. Stoddart, defended export incentives as a policy, and the money paid to his own company in particular. Some arguments he put forward are not supported by facts; others ignore the cost of export incentives; others rely on the selective application of a general principle. Mr Stoddart advances these general claims in favour of export incentives. I paraphrase him, and group his points in a logical sequence. First, export incentives encourage exports, and so help correct our bal-ance-of-payments position. Second, the New Zealand dollar is over-valued, so exports are expanded by incentives without the rise in import prices that a devaluation would bring. Third, export incentives have maintained employment levels. Fourth, since other industries and firms are subsidised, so should exporters be subsidised. Each of these claims should be regarded with suspicion by the taxpayers of New Zealand. They are now examined in turn. Manufactured exports have gone up a lot in recent years. Most of this is due to the fall in the value of the New Zealand dollar, which makes local producers more willing to sell abroad than they were before. After allowing for this, what remains is the increase in exports due to export incentives. Using figures made available by Mr lan Douglas of the New Zealand Manufacturers’ Federation, I have calculated in this way that for every $2 worth of export incentives granted by the Government our exports go up by $l. Independent, industry by industry calculations by some economists at the University of Otago obtained the same result. Now it may be thought that taxpayers are getting a bargain with $1 of overseas funds for $2 worth of tax avoidance by manufacturers. But the real issue is the effect on our balance-of-payments, and I

know of no study which shows that export incentives have improved that. One important form of export incentive is the issue of licences to import. In addition, imported components are needed to produce extra exports; resources are also diverted out of import-compet-ing industries, and other export industries, by the demands created by the incentives. On taking these effects into account, it is clear that the $2 worth of tax avoidance by exporters gives us much less than a $1 improvement in our balance-of-payments deficit. It might actually make the deficit bigger. The implication that Mr Stoddart would have us make is that export incentives help to “. . . cure our economic problems and the resultant social problems. . .” by allowing us to “. . . earn enough overseas funds to pay for the changes we want.” Yet he presents no facts on the net effect of export incentives on our balance-of-payments in order to justify this. Lack of evidence on the effects on the balance-of-pay-ments of export incentives invalidates the second of Mr Stoddart’s claims listed above. There is no doubt that the New Zealand dollar is over-valued (given our comprehensive system of controls). The dollar, ought to be substantially devalued. This will put up prices here, but it will also get rid oi the balance-of-payments deficit if not accompanied by monetary expansion. There is no doubt that this will hurt. However, export incentives also hurt. The over-valued dollar may make imports cheap. But everyone, except those able to avoid taxes, has to pay higher taxes to finance the export incentives. In contrast, after a devaluation, New. Zealanders would have the choice of paying the high prices of imported goods, or not doing so. With export incentives, and an overvalued dollar, high prices must still be paid for imports, taking all costs into account. The difference is whether individuals are able to shift the burden onto someone else. Since New Zealand manufacturers buy huge amounts of inputs overseas, it is clear that

many of them will be hurt by devaluation. The maintenance of an over-valued exchange rate, for which manufacturers are compensated by export incentives, shifts costs onto the general public. The distribution of income after tax is also the issue in the claim that export incentives maintain employment. If my income taxes are cut to 2 per cent of my income, I will expand employment. That I pay 40 to 45 per cent of my salary in income tax (not to mention sales taxes and tariffs) is a severe limitation on my ability to employ domestic servants, carpenters, electricians, motor mechanics ... A reduction in the tax imposed on anyone will allow them to expand or maintain employment. Fletcher-Challenge can claims no special credit for doing what everyone would do. The real issue is, why should exporters be given concessions rather than other taxpayers (whose tax bills are higher because of export incentiyes)? As already noted, export incentives are of dubious merit for the purpose for which they were intended; their employment consequences could be generated in other ways. The last claim is that export incentives are acceptable because other industries are subsidised. These other subsidies are the result of pressure from special interest groups, in par 7 ticular the Manufacturers’ Federation. It is surprising that manufacturers should publicly suggest that the distortions for which they are responsible are a reason for adding a further distortion to the economy. The simpler solution would be to remove the subsidies and “protection” that others enjoy. With access to cheaper goods, New Zealand consumers will be better off. In summary, export incentives have done little for our balance-of-payments, and have "shifted the costs of the deficit onto the general taxpayer. Whatever they have done for employment could have been achieved by alternative tax reductions. The best solution is to remove them, and the other subsidies for which they are supposed to compensate.