Tax reform and cut in tariffs, but no ‘quick fix’ for farmers

Press, 13 December 1985, Page 1

Tax reform and cut in tariffs, but no ‘quick fix’ for farmers

By

MARTIN FREETH

in Wellington

Farmers have been given new Government policies with which either to confront the big economic changes in their industry or sell up and leave.

The economic package delivered yesterday spells out Government determination for agriculture to become more efficient and market-led.

The package rules out any “quick-fix” approach to farmers’ financial problems through subsidy. Instead, tax reforms and import tariff reductions will be made to promote farming as a business, answerable to market imperatives and managed within commercial restraints.

The package has received a hostile reception from

farmer spokesmen and the Parliamentary Opposition.

Announcing the package in Parliament, the Minister of Finance, Mr Douglas, said the policies would reduce cost pressures on farmers and other producers, and help the adjustment in agriculture by making it easier to buy and sell farm properties. Mr Douglas blamed previous Government policies for undermining the long-term viability of farming. Income support and tax concessions had combined with inflation to encourage

farmers to farm for capital gains, rather than income, and promote production unmatched by market demand.

Between 1976 and 1984, real returns to pastoral farmers fell nearly 50 per cent but the real price of the land they farmed rose 26 per cent, he said. Past policies had also led to inefficiencies in the processing and marketing of farm produce, Mr Douglas said.

“We have explicitly rejected a return to the hand-

out policies of the past which have been directly responsible for the position we are in today.” The Government will leave the financial difficulties of individual farmers to be dealt with through greater attention to debt arrangements by private sector financial institutions encouraged by the practices of State-owned lending agencies. The main elements in the package are:

® Repeal of tax laws Cassed in 1982 which “claw ack” deductions for in-

terest if agricultural land is sold within 10 years of its purchase, and which also put a 510,000 limit on the amount of farm development expenditure that can be written off against income.

• The phased removal of provisions for the immediate write-off of development expenditure and its replacement with a scheme allowing depreciation of capital aspects to be written off against income.

• Introduction of a new scheme requiring farmers to write-up the value of their livestock, in line with market values, for tax purposes.

• Removal of restrictions on the aggregation of farm properties and the purchase of land by foreigners. • The removal of maintenance provisions on concessional loans to farmers under the land development encouragement scheme and the livestock incentive scheme. • Removal or reduction of tariffs on a wide range of imported goods, most of which are not otherwise produced in New Zealand. • A new import protection regime for the products of New Zealand Steel. ® A set of principles aimed at making Government agencies more efficient and managed commercially as a thrust towards reductions in the Government deficit.

In addition, the package notes a present Government review of the industrial relations system and gives notice of likely deregulation in other parts of the economy.

Mr Douglas said the tax changes were aimed at ensuring farmers carefully related capital expenditure to expected market returns, and removed financial penalities on farmers who wanted to leave the industry.

Expenditure decisions had been distorted by the ability to defer taxation, Mr Douglas said. Provisions of the 1982 tax law had penalised farmers selling up.

Repeal of parts of the Land Settlement Promotion and Land Acquisition Act would help the restructuring of farms into more economic units.

Mr Douglas said the proposed tariff reductions, from January 1, would reduce costs directly and indirectly for farmers and help boost export returns by influencing the exchange rate.

The package would encourage commercial lenders to work with their farmer clients on ways of restructuring debt or easing the process of exit where it was necessary, Mr Douglas said. Although the package contains little in the way of financial relief, it indicates that existing Rural Bank practices of extending loan repayments and the putting of loans on an interest-only basis for individual farmers will continue.

It also indicates that the Government will examine new approaches to restructuring farm debt “on a fully commercial basis.”

Mr Douglas said the Bank of New Zealand and the Rural Bank had been “invited” by the Government to co-operate with private sector lenders in handling debt management “so as to minimise any adverse consequences for the financial sector or farm land prices generally.” The package’s references to the labour market and the running of the public sector are acknowledge-

ment of recent pleas from farmers for the Government to.move more quickly in this area or an even-handed

application of its economc strategy. Mr Douglas dismissed privatisation as a key to greater public sector efficiency. He said the essence was, instead, to make the public sector adapt to meet the management needs of a modern economy. The package spells out principles requiring the Government to separate the non-commercial functions in departments from their trading activities. Mr Douglas said this would provide a rational basis for pursuing the Government’s social aims previously “tangled up” with trading activities. The managers of Stateowned enterprises will be given the main aim of running them as successful businesses and the responsibility for decisions on inputs, pricing and marketing within performance targets set by the Government.

The trading activities will be exposed to the same environment faced by other businesses, and individual enterprises will be reorganised in ways appropri- • ate to' their commercia 1 purposes. This will be done j under the guidance of nev / boards comprising director s mainly appointed from th e private sector. Mr Douglas said the Goi remment would also in con iing months review the i ndustrial relations systei n, the first step of whi ch would be the publicati on next week of the lor igawaited Green Paper. A systematic appraisal of other areas of econor hie regulation would contii aue with the aim of bringing in reform where necessary, . he said.