NZ company profits on track to jump 60% over 2 years

Friday, 22 July 2022

Finance Minister Grant Robertson says the Government isn’t working on a windfall tax, but businesses that are performing well shouldn’t “unnecessarily” raise prices.

Corporate tax revenues in the year to the end of last month were on track to rise about 60% on two years ago.
That directly reflects strong company earnings.
Council of Trade Unions economist Craig Renney said all options should be on the table, including a tax on windfall profits.
An Auckland University economics professor believes rising profits show longer-term competition problems coming home to roost.

Accounts published by the Treasury in October look set to show corporate tax revenues have soared about 60% over the past two years, reflecting a jump in businesses’ profits.

That is despite some sectors such as hospitality having a rough ride.

Rising company profits appear to be an international phenomenon and have stirred debate over whether governments should impose “windfall” taxes on some industries, or toughen up efforts to crack down on anti-competitive practices.

Finance Minister Grant Robertson said the Government was not working on a windfall profits tax, but would expect that businesses that had performed strongly “would not unnecessarily lift prices”.

* Why are we not discussing a windfall tax?

* 'Time to tax' big companies who made windfall off wage subsidy

Former British chancellor Rishi Sunak announces a temporary windfall tax on oil and gas companies in May.

Crown accounts for the 11 months to the end of May, published earlier this month, estimated the corporate tax-take at $17.9b with one month of the financial year still to go.

That tax on profits was already far higher than the $15.8b recorded in the full year to June 2021, and the $12.1b paid the year prior.

It is also up on the $15.2b figure reported for the 2019 financial year, which was another healthy year for company profits.

The company tax rate has sat unchanged at 28% throughout that period.

Auckland Chamber of Commerce chief executive Michael Barnett said it had been clear that “the big end of town” and many exporters had done reasonably well over the past two years, despite Covid.

But many small businesses, for example in the hospitality industry, had done poorly “and government will be getting nothing from them”, he said.

The left-leaning Australia Institute think-tank said earlier this month that profit growth had been outpacing wage growth over the past eight years in Australia, and that trend had sharpened more recently suggesting “rising profits are now the major driver of inflation”.

“The rising profit share of GDP suggests that Australian firms have, for some time, been choosing to increase their prices faster than their costs have been rising,” it concluded.

Britain’s Conservative Government has been one of the first to respond with a windfall tax on profits.

Its former chancellor Rishi Sunak announced in May that large oil and gas companies would temporarily pay an extra 25% tax on their profits through an Energy Profits Levy until commodity prices normalised, in a policy it expected to raise £5b (NZ$9.6b) over its first 12 months.

Council of Trade Unions economist Craig Renney said the Government “should have all the options on the table to make sure New Zealanders are getting a fair deal, including a windfall tax if that was useful and desirable”.

There were some industries that appeared to have done “really well”, he said, singling out banks, petrol companies and building materials firms.

Consultant KPMG has forecast bank profits in New Zealand may have topped $5b in the three months to the end of June, while petrol companies BP and Mobil also reported bumper annual profits of $230m and $183m for 2021.

Auckland University economics professor Robert MacCulloch believes a jump in company profits suggests competition problems are coming home to roost.

Renney said the question the Government should ask was whether their profits were so significant that there was a need to make sure that they were not price-gouging “and if they are that the benefits are being redistributed”.

But it was important to note that although the past two years had been good for company profits overall, their performance had been very uneven, with the hospitality sector and firms exposed to tourism and international education clearly doing it tough, he said.

Robertson said better-than-expected corporate tax revenues reflected the efforts the Government had made to mitigate the impacts of the Covid pandemic through its Wage Subsidy Scheme and Resurgence Support Payments.

Those had allowed businesses to “bounce back quickly”, he said.

While a windfall profits tax wasn’t in the wings, the Government was “very focused on doing what we can to ensure that New Zealanders are paying a fair price”, Robertson said.

“We are closely monitoring margins in the fuel market to make sure savings are being passed on to motorists and we are taking action in the supermarket sector to boost competition.

“The Commerce Commission is also carrying out a market study into building materials to find out whether Kiwis are paying too much for supplies, which is due to be reported back at the end of the year.”

Auckland University economics professor Robert MacCulloch said the British government’s Energy Profits Levy was probably clever, given the combination of the war on Ukraine, “huge windfall profits”, concerns over the environment, and the fact people there were struggling with energy prices.

But he did not think broader windfall taxes were wise, because they risked scaring investors “in a major way”.

MacCulloch supported focussing instead on improving competition, saying both Labour and National governments had appeared excessively wary in tackling vested interests to date.

“I'm quite shocked in a way that at this time of high corporate profits, there haven't been ferocious attempts to make industries more competitive,” he said.

“Across a lot of our industries, there isn't huge competition.”

MacCulloch said that while it was not entirely clear why company profits were suddenly up so much, he believed the extra difficulty setting up new businesses in the Covid era may have been a factor and that longer-term competition problems in the country were coming home to roost.

“I could well imagine that the entrenched interests in this country could have become more entrenched over the last few years.”

Barnett said the Australia Institute’s argument that rising company profits had contributed to inflation could be true, but the New Zealand economy had been sustained by businesses that had done well during the Covid pandemic.

“There might be some windfalls in expected profits over the last couple of years and because of that you would hope there would also be an opportunity for some of those sectors to invest in themselves and the ‘long game’,” he said.