The Problem With National's Small Business Stimulus
Yesterday National released its Small Business COVID recovery package. The two main planks of this were GST cash refunds and accelerated depreciation. It was certainly attention grabbing, but doesn't stand up to closer scrutiny. While the offer of tax relief will no doubt appeal to some small business owners, there are many problems with this package. Let's start with the GST refunds.
How this refund will work is pretty complex - I suggest you have a look at National's release. The point here is that GST refunds favour some businesses over others, for no good reason.
TOP Tax & UBI spokesperson (and Nelson candidate) Mathew Pottinger runs a small business in Nelson. The GST refund proposal by National wouldn't help his business at all. He explains why:
"The issue with National's proposal is that it will benefit businesses to varying degrees. For example, export oriented businesses, who mostly pay GST and only collect a minimal amount, will essentially miss out on any support. The proposal has made no attempt to ensure that all businesses are treated with any consistency.
As the Managing Director of a hi-tech manufacturing business producing sports equipment for Olympic-level athletes, our sales are predominantly to overseas customers (99%). Hence, a business like mine collects very little, if any, GST and will typically receive a refund when GST returns are due.
A GST cash refund - based off the GST the business paid in the 6 months to 1 January 2020 - is equivalent to gifting businesses money and my business would miss out for rather arbitrary reasons and not because we weren't impacted by the negative economic affects of COVID-19."
In short, it isn't fair. Some businesses will benefit hugely, especially those with high local turnover and low profits (probably because they have high overheads, rather than high numbers of staff). National is picking winners, and we have to ask whether these are the sorts of winners we want to pick? Aren't high tech, export oriented businesses like Mathew's the ones we want to encourage?
Normally when businesses buy capital items (think machines) they have to expense that purchase over many years as that item gets used to make stuff. Accelerated depreciation means they can write it off in the year they bought it - which means less tax to pay this year. The Government have already allowed this for goods up to $5000 in value. You can bet lots of laptops and phones will get renewed this year. National want to lift the spending cap to $150,000 per item for two years.
In short this is an incentive to invest in equipment. At first blush this seems like a better idea because Kiwi companies underinvest in equipment generally - partly because we like to invest in housing so much!
However, some people, like tax accountant Geof Nightingale, think that accelerated depreciation might cause businesses to buy stuff with a poor return on investment. In New Zealand, this probably means lots of farmers and tradies getting the latest double cab ute.
All in all, the jury is out on this one. It might work, it might not, depending on what equipment gets bought. If National did get elected and proceeded, it would be important to get it evaluated properly to see the results.
What Should be Done for Small Business?
Overall, it is difficult to come up with a stimulus package for business that is fair and effective. This is the same problem that Shane Jone's Provincial Growth Fund hits all the time - it favours some businesses over others for no good reason. That is no way to run a country.
In terms of stimulus packages the best thing is to give money to the people, and give them the confidence to spend it. This is why TOP is calling for a UBI (Universal Basic Income). Instead of bailing out businesses, we should bail out the people.
What can be done for small business then? Now is the time for Government to invest in improving the productivity of our small business sector. TOP is working on Innovation and Small Business policies that would do just that. Here are some ideas:
- make it easier for small businesses to work with vocational education providers to train staff on the job
- make it easier for small businesses to work with experts in our Universities on problems they face
- help more businesses make use of cloud computing and use algorithms to offer more support online (as Xero have proposed)
- helping more NZ businesses access the opportunities of public sector procurement
We will be releasing more detail on these ideas in the coming months.