Hon Dr MICHAEL CULLEN (Minister of Finance) : I move, That the Appropriation (2005/06 Financial Review) Bill be now read a first time.

• Bill read a first time.

Hon ANNETTE KING (Minister for Food Safety) : I move, That the Therapeutic Products and Medicines Bill be now read a first time. At the appropriate time I intend to move that the bill be considered by the Government Administration Committee, that the committee report finally to the House on or before 30 April 2007, and that the committee have the authority to meet at any time while the House is sitting, except during oral questions, during any evening on a day on which there has been a sitting of the House, and on a Friday in a week in which there has been a sitting of the House, despite Standing Orders 192 and 195(1)(b) and (c).

The bill is an omnibus bill. Parts 1 to 5 establish a new joint trans-Tasman regulatory scheme for the regulation of therapeutic products. Parts 6 and 7 repeal the Medicines Act 1981 and regulations made under that Act and replace them with updated legislation for controls on medicines, such as the scheduling of medicines, licensing of pharmacies, and prescribing rights, that apply after medicines have been approved for the market and are in the domestic supply and distribution chain. My colleague the Hon Pete Hodgson will speak to the new domestic medicine provisions.

In moving the first reading I would like to focus on the key aspects of the proposed joint regulatory scheme. This is, clearly, very detailed legislation, but underpinning it are some very simple, very clear, and very significant principles. These principles include the protection of public safety; the creation of a world-class organisation of international standing, effectiveness, and credibility; and the protection of New Zealand sovereignty and norms of parliamentary accountability.

I refer now to the agreement and joint scheme. On 10 December 2003 New Zealand and Australia signed an agreement committing the two countries to establishing a joint agency for the regulation of therapeutic products. This signing stemmed from work that began in the 1990s under the National Government. The primary objective in concluding the agreement was to safeguard public health and safety by establishing a world-class agency to regulate therapeutic products. The agreement also aims to reduce barriers to trans-Tasman trade and to enhance Australia’s and New Zealand’s profile and influence internationally. The bill I am bringing to the House today gives effect to that agreement.

Early next year the Australian Government will release an exposure draft of its own implementing legislation. The preparation of the Australian bill has been undertaken in conjunction with the development of this New Zealand bill, with the intention that both bills should ultimately be passed by the respective Parliaments at much the same time. This gives me an opportunity to acknowledge the commitment and assistance I have received from the Australian Parliamentary Secretary to the Minister for Health and Ageing, the Hon Chris Pyne, in this key initiative for both countries.

This is not the first time this House has considered the agreement and the scheme it anticipates. There have been two Health Committee reports that have discussed the agreement, an initial inquiry in late 2003, and a subsequent examination of the agreement following its referral to the Health Committee by the chairperson of the Foreign Affairs, Defence and Trade Committee. The Health Committee recommended that the proposed therapeutic products bill cover a number of matters, and I am pleased to record that the bill addresses the matters raised by the committee, particularly in respect of governance and accountability.

The joint regulatory scheme will cover the regulation of the manufacture, supply, import, export, and promotion of therapeutic products; the setting of standards in relation to the quality, safety, and efficacy or performance of therapeutic products; post-market monitoring of therapeutic products; and enforcement of the joint scheme’s requirements. Responsibility for regulating aspects of the therapeutic products covered by the joint scheme will be transferred from Medsafe to a new agency, the Australia New Zealand Therapeutic Products Authority. A two-member ministerial council will be established, comprising the New Zealand Minister of Health and the Australian Federal Minister of Health, and it will be charged with the overall accountability of the performance of the authority. Each Minister will be accountable to his or her own Parliament, just as the Minister would be if the body were a domestic body. Reporting to the council will be a five-member board appointed by the council and accountable to it.

In terms of international and trans-Tasman significance, in a broader context the establishment of the joint regulatory scheme and agency is a flagship in our relationship with Australia and the development of a single economic market. The new scheme will be a significant enhancement of closer economic relations with Australia and of trans-Tasman regulatory cooperation, consistent with the CER Agreement of 1983 and the Trans-Tasman Mutual Recognition Arrangement agreed in 1996. The Australia New Zealand Therapeutic Products Authority will be the first example of a true trans-Tasman authority. Contrary to what I believe is deliberate misinformation peddled by Green MP Sue Kedgley on Radio New Zealand today, the new authority will not be an offshore entity based in Australia; the new authority will be an agency based both in New Zealand and in Australia, with head offices in Wellington and Canberra. The new authority will replace Medsafe in New Zealand and the Therapeutic Goods Administration in Australia.

The establishment of the authority will see New Zealand’s profile amongst the international therapeutic community increase. This will facilitate the export of therapeutic products beyond Australia. It will offer more to other key regulators in terms of information sharing and will act as a potential partner in mutual recognition agreements with other key regulators, such as those in the US, Canada, and Europe. Greater regional and global influence over the development of international regulatory standards and harmonisation initiatives will also be provided. The new authority will regulate therapeutic products consistent with international best practice, which includes risk-based regulation of medical devices and complementary medicines. The joint approach aims to enable the two countries to combine their resources to ensure that the health and safety objectives are met while minimising cost to businesses and the Government. The joint scheme will also enable information sharing and an enhanced ability to retain and develop specialist technical expertise.

In the negotiations on the detail of this scheme, and in the drafting of this bill, issues have obviously arisen that have required Australia and New Zealand to reach agreed positions that acknowledge and protect the interests of both countries. One example of the success of this has been in arriving at a governance and accountability model for the authority that successfully accommodates the core requirements of both the New Zealand Crown Entities Act and the Australian equivalent, the Commonwealth Authorities and Companies Act 1997.

Another central issue for both countries has been to recognise and preserve the sovereignty of each country. In establishing the new authority, neither country wanted to repeat models that have been used in the past but found to be unsatisfactory in respect of sovereignty. This model is a clear and deliberate departure from the model of Food Standards Australia New Zealand, whereby New Zealand has a voice equal to the individual Australian states—that is, one voice in 10. This was a scheme put in place under a National Government.

Drafting the therapeutic products provisions of this bill has required ongoing detailed negotiation with Australia. Key to this was the recognition that it is fundamental that both countries’ bills be drafted in such a way as to ensure, as near as possible, identical outcomes in a seamless scheme. The bill has been designed to accommodate, as far as possible, the two country’s criminal justice systems and bodies of law, but, where necessary, New Zealand has taken a differential drafting approach. The bill accommodates some differences in the domestic settings of Australia and New Zealand in areas such as disallowance, judicial review, and merit reviews. However, there are new features, including tiered offences, and so on. The bill introduces a tool kit of lower-key options that provide an opportunity to avoid being taken to court—such things as, for example, enforceable undertakings and non-compliance notices.

There is too much detail in respect of complementary medicines to be able to cover today, but I do want to touch specifically on the place of complementary medicines in the scheme. There has been a lot of uninformed and, in some cases, deliberately misleading rhetoric about the place of complementary medicines and medical devices in the scheme. With this bill now entering Parliament, I look forward to seeing that debate move to the constructive environment of the select committee and this Chamber. The regulation of medical devices and complementary medicines in New Zealand is minimal. The lack of pre-market regulatory control on medical devices or adequate control, both pre-market and post-market, on complementary medicines has been a significant gap in the New Zealand regulatory framework. Internationally, we are well out of step in both these areas. I recognise that complementary medicines are a popular choice for many consumers and are often perceived to be a safe and natural alternative to conventional medicines, but they are not risk-free. It is important that consumers are protected from complementary medicines that are not safe and are able to make an informed choice about the type of medicine they wish to use. The scheme will enhance public confidence by subjecting medical devices and complementary medicines to a regulatory scheme that provides assurance about safety and quality.

The main risks with the use of complementary medicines are well documented in literature. These can include harmful ingredients, adulterated products, poor quality control during manufacture, interactions with other medicines—for example, interactions between St John’s wort and several prescription medicines—and inadequate information to guide safe use. The joint scheme, for the first time in New Zealand, introduces risk-based regulation of complementary medicines as a subset of therapeutic products, using an approach that will enable product sponsors to gain market authorisation by self-certification against the scheme’s requirements. This will enable minimum regulatory requirements to be applied to low-risk products such as complementary medicines and more stringent requirements to be applied to high-risk products such as new prescription medicines.

This bill does not include rongoāMāori. There is no regulation on products prepared in a traditional way for a patient, such as rākaurongoā. Commercialisation of rongoāMāori products for mass-market supply, however, would be regulated by the authority, for obvious safety reasons.

I commend this bill to the House. There is much in it. It now goes to a select committee. Can I just conclude with one remark: contrary to the remarks made by Sue Kedgley today, the managing director does not have the power to make rules. That is one more piece of misinformation that has been peddled on this bill over many years.

Hon TONY RYALL (National—Bay of Plenty) : The National Party opposes this legislation. This regime will be costly, restrictive, and is unnecessary. We are not prepared to jeopardise the viability of hundreds of small businesses, nor the choices of thousands of consumers by supporting this legislation. This legislation is a move that will cost industry and cost consumers. The Australian health products industry is one of the most highly regulated in the world, and applying its rules here will serve only to increase the cost of products, reduce consumer choice, and hurt many businesses.

There should be regulation of natural health products but not this bureaucratic nightmare. This is a costly regime. We know it is costly, because the only way the Government has been able to garner parliamentary support for this bill is to offer a 50 percent subsidy on those costs. If this were a low-cost regime providing the most efficient form of regulation in New Zealand, then why is the Government being forced to offer a subsidy in order to get the parliamentary votes from New Zealand First and United Future to get this legislation through?

Hon Annette King: There’s a 50 percent subsidy on animal products, which your Government passed.

Hon TONY RYALL: Annette King might pipe up there, but the fact is the only way this Government has been able to garner support is because of its appalling performance in offering this subsidy.

But I will tell members the most appalling performance here, and that is the performance of Annette King as the negotiating Minister. I tell the Government that there is no point in harmonising with Australia if it is to the cost and detriment of New Zealand. Annette King has destroyed the opportunity to have a cross-party approach to the regulation of medical devices, pharmaceuticals, and natural health products in this country. She completely ignored and denied the recommendations that repeated Health Committee inquiries and reviews have made. She did not consult with any other party in this House. She has treated this bill as if it were a health bill that she could push through just on the sheer weight of her huff and bluff and numbers in the House. The fact is she did not have the support. She had the opportunity to work with other parties in this House to get a regime that would be low cost and would do the job for New Zealand, but what did this arrogant Minister do? She ignored it.

This is how bad it is. In trying to justify her consultation, and in trying to justify the fact that she consulted with other parties, do members know what Annette King claimed? She said that giving a set of overheads to Richard Worth and another member of our caucus was consultation. She said she consulted with National because she gave two members of our caucus some overheads. That is what she said is consultation. The fact is, Annette King has destroyed the opportunity for a cross-party approach to develop rules and regulations that would be good for New Zealand. I cannot believe that the Prime Minister allows Annette King to negotiate such a deal that will be costly, restrictive, and unnecessary for New Zealand.

We want to have closer working relationships with Australia, but we are not going to do it at the cost of New Zealand business and New Zealand consumers. That should have been the bottom line. That is what we told Annette King, and that is why she will not get any support for this bill from National. She missed the opportunity to work with other parties to get a cross-party approach that would reduce costs, reduce restrictions, and provide benefits to New Zealand. There is no point in harmonising if it costs New Zealand. That is why there will be no support from National for this trans-Tasman therapeutic bill. We are opposing this bill because it is bad for New Zealand. It is selling out the interests of thousands of small consumers in New Zealand. It is selling out the interests of hundreds of businesses.

I tell the Minister that pharmaceutical companies and natural health products companies all around New Zealand are contacting parliamentary parties to say “We oppose this legislation.”

Steve Chadwick: The member is silly. What a retrograde step.

Hon TONY RYALL: Thousands of New Zealanders are coming forward. I tell Mrs Chadwick, the next mayoral candidate for Rotorua, what is silly. What is silly is that Labour has a Minister who had the opportunity to bring together a sensible option for the New Zealand Parliament of low cost, low restriction, and focus on the necessary. Through her arrogant disregard and her poor negotiating skills we have a plan being put to the country that will not provide what the Government says it will.

Hon Annette King: Yes, it is.

Hon TONY RYALL: It is not. It will be costly and restrictive, and it is completely unnecessary as it is proposed. It will jeopardise many hundreds of small businesses, and it will restrict the choices of thousands of New Zealanders.

I have to tell the Prime Minister that it is a very dangerous thing to put Annette King in charge of this bill—a very dangerous thing. Annette King has not performed at all well in bringing a deal that Parliament can support. She has bought off United Future and bought off New Zealand First with this 50 percent subsidy. Do members know that people are now starting to say that the ministry is beginning to be uncertain about what this 50 percent subsidy counts for. I bet members that United Future and New Zealand First members do not know that. There is now significant debate about what the 50 percent subsidy will actually cover. We have to remember that this is the party about which John Tamihere said it can change a word here and change a word there to change the entire intent of what is being proposed. I tell New Zealand First and United Future members to be wary of anything that Annette King is telling them.

This Government is missing an important opportunity to provide a regime in New Zealand that is low cost, effective, and designed to fix identifiable problems. Where is the Government on that? It is nowhere. Where is the Government on addressing the concerns stated repeatedly by the Health Committee about compliance costs? Where is the Government on addressing the concerns repeatedly stated by the Health Committee about the process and recognition of costs?

Darren Hughes: Name one.

Hon TONY RYALL: I am saying that to the Government. Name one part where it fixes the concerns; name one part of the concerns that it has fixed when it comes to this regime. We think that the Government should take on board the repeated criticism by the Health Committee and deal with compliance costs and the issues that have been raised.

This bill comes to this House on the back of a sordid little deal with two little parties whereby a Government that says this is a low-cost regime is being forced to subsidise it by 50 percent in order to try to garner parliamentary support. That is not a low-cost regime. It will interfere with the choices of thousands of New Zealanders. This is a Government that believes that the best way that consumers can care for themselves and take responsibility for their care is to delegate all that authority and control to the Government. That is what Government members think. They think that the best way New Zealanders can take responsibility for themselves is to delegate control and authority to the Government.

We want a health system that encourages New Zealanders to take responsibility for their health and to exercise control over their decisions about any supplements they want to take. We do not want the Government stepping in, over-regulating, and taking control of those decisions that thousands of New Zealanders exercise every day. Every day New Zealanders are taking supplements. Every day they are trying to protect and improve their health. The National Party says that New Zealanders do not need to have prices go up, and they do not need to have unnecessary and restrictive regulation on those choices.

We want New Zealanders to know that the regime is low cost, not restrictive, and that their choices will be protected. But this legislation does the complete opposite. That is why, as I know the Australians will know, this Opposition has repeatedly opposed this legislation and will continue to do so. The Government has missed the opportunity to negotiate a deal that New Zealanders could be proud of because, frankly, Annette King would not listen, would not talk to anyone, and would not consult. She was captured by a few bureaucrats and that is why we have a piece of legislation that New Zealanders know is not in the interests of this country. This bill is a sell-out, and it will cost New Zealand business and consumers.

Hon PETE HODGSON (Minister of Health) : That was a bad call by the National Party. With the Closer Economic Relations now over 20 years old, and with the building blocks of a single economic market between Australia and New Zealand being put in place one by one, I regret that a major political party in this Parliament would turn its back on this opportunity to further cement the relationship between our two countries, despite the National leader meeting with the Prime Minister of Australia just last week. It was a bad call. It was short-term politics. It was strategically hollow. It was sad, it was shameful, and it is straightforwardly wrong.

Then, because of the proclivities of National’s health spokesperson, Tony Ryall dropped to personality politics for most of the speech. It was not about the future of our health system, not about the future of our medicines regime, not about the future of the Australia - New Zealand relationship. It was personality politics only. He misrepresented, he misquoted, he was misconstruing, he was mischief. That is all. There was no policy, just short-term political mischief. He knows it was a junk speech. It was a bad call.

I would like to acknowledge the work of my colleague the Hon Annette King, Minister of State Services, on this Therapeutic Products and Medicines Bill, and thank her for her tireless efforts on progressing the proposed joint scheme with Australia and for her efforts to involve all political parties in this House—with greater success in some areas than in others.

I will focus my comments on Parts 6 and 7 of the bill, which are the parts that relate to New Zealand only. I will also comment on direct-to-consumer advertising of prescription medicines. The bill updates the offence provisions in this country to ensure that they are consistent with the proposed enforcement regime for the joint scheme. Parts 6 and 7 contain similar search and seizure provisions as do those in Parts 1 to 5. The bill retains the ability for officers, under the Medicines Act, and for the police to obtain a search warrant in respect of offending against the Medicines Act, whether or not the specific offence features a term of imprisonment.

A new continuum of penalties is introduced to reflect the seriousness of each specific offence and to make penalties comparable with other modern legislation in this country. Penalties range between a fine of $5,000 for an individual, up to a fine of $250,000 for a body corporate, and 12 months’ imprisonment for serious offending. The bill includes two new offences, one to prohibit the prescribing of prescription medicines by individuals who are not prescribers, and another for persons who do not dispose of medicines in the manner prescribed in regulations made under the legislation.

The bill confirms the Government’s policy on pharmacy ownership. It incorporates recent reforms to the licensing regime for pharmacies, made to the Medicines Act in September 2004, in conjunction with the passage of the Health Practitioners Competence Assurance Act 2003. The bill requires operators of community and hospital pharmacies to be licensed by the Director-General of Health. Ownership of pharmacies is restricted to pharmacists, who must hold at least a 51 percent share of a pharmacy. Companies may also operate a pharmacy, as long as a pharmacist or pharmacists own 51 percent or more of the company’s share capital. Neither a pharmacist nor a company may hold a majority interest in more than five pharmacies. Pharmacies legally carrying on business when the bill comes into force will be deemed to have a licence to operate.

It is proposed that xenotransplantation be covered by the joint scheme, but until new controls are in place to govern the safety of the practice, regulation needs to be covered by the Medicines Act. The provisions will expire on 31 December 2008, allowing sufficient time for the new controls to be in place under the proposed joint scheme. The bill does, however, provide for this date to be extended by Order in Council should the need arise. It is important that there is no gap around this challenging technology.

The bill continues to allow direct-to-consumer advertising. The Government’s preference was to ban direct-to-consumer advertising. However, it is clear that there is not the necessary support within Parliament for that to happen at this point. Retaining direct-to-consumer advertising means that advertising and promoting prescription medicines direct to consumers will continue to be permitted in New Zealand. The Government is concerned about direct-to-consumer advertising and its effect on the appropriate use of medicines. I am assured that under a proposed Australia New Zealand Therapeutic Products Authority advertising code, advertisements for medicines will need to meet standards for content, including that consumers be provided with balanced and truthful information. This will ensure that consumers are better informed about the benefits and risks of medicines and therapeutic health treatments, so that they can make better informed choices.

Feedback on this proposal will be sought when the draft advertising rule, under the proposed joint regulatory scheme, is consulted on. In March of this year the Ministry of Health consulted on direct-to-consumer advertising. Of a total of 115 submissions received, 69 were concerned about direct-to-consumer advertising. Although direct-to-consumer advertising can provide consumers with more awareness of health conditions and treatments, branded information in advertisements does not provide further benefits to consumers. Direct-to-consumer advertising can result in discussions between general practitioners and their patients becoming focused on one particular choice of treatment, rather than assessing the advantages and disadvantages of all treatment options, including non-prescription treatments and lifestyle changes.

These changes to the Medicines Act 1981, along with the provisions in Parts 1 to 5, will ensure effective regulation and enforcement across the joint scheme and domestically. The result will be more modern and seamless legislation for the regulation of therapeutic products, and a still closer relationship between the nations of Australia and New Zealand.

TIM GROSER (National) : In the light of what has already been said, I think it is of some importance to work out what the difference of view about this bill is about or is not about. It is not about whether we need appropriate regulatory frameworks in place for pharmaceuticals, for complementary medicines, and for the other products covered by this bill. I would be astonished if there were a single member in this House who would argue that we should have an unregulated market and that we do not need appropriate regulations. It is not about that. This debate is about the level that is appropriate to fix the scale of the problem.

Nor is this debate about closer economic relations, although we have just heard a great deal along that theme from one of the Ministers. It was a National Government that initiated the closer economic relations negotiation in 1979. It was a National Government that oversaw the negotiation right throughout that process, which I spent 7 years of my life on. It was a National Government that put in the 1988 review clause precisely because the Government of the day foresaw the need to continue to allow the closer economic relationship to mature, to keep it up to date, and to respond to the needs of the day. So it is not about who is committed to closer economic relations and who is not. The next National Government will be as committed as any Government has ever been to continuing the tradition of establishing with Australia the right type of policy frameworks to carry our two countries forward in the age of globalisation. That is not what the difference of view is about.

The difference of view is essentially about the level of regulation required to fix a problem. It is also about how we manage—or in this particular case I would have to say mismanage—an international negotiation and the democratic processes around that negotiation. Let me tell members how we manage a negotiation properly, by referring right back to the founding document for closer economic relations. What happened in that case was the most intimate connections and involvement between a group of Ministers and a group of officials on both sides of the Tasman. We established a joint working party on an inter-agency basis. Hardly a week went by without officials checking not only with their individual vote Ministers but also collectively with what was then the driving political force of the Government of the day—the Cabinet economic committee. This process of interaction between the community, the political leaders chosen through the democratic process, and the officials responsible for the negotiation gave us, under very delicate circumstances, a very workable framework. That is how one manages responsibly an international negotiation.

What I think we have here is a perfect reflection of a sickness that is not just in the health sector but in the State sector in particular. It reflects a bureaucratic mindset, a sledgehammer to crack the proverbial nut, and it comes from leaving the matter over to officials and expecting that a few reports to the vote Ministers is sufficient to achieve some liaison between the people who are affected by this and the actual end product of this negotiation.

What we know is the following: we have in our health sector officials who are wonderful public servants and who are dedicated to the public interest. We applaud them, we will always need them, and we admire their commitment. But if we step back from that unquestionably fair and true assessment of the state of our health bureaucracy and look at what has happened since the year 2000, in order to understand how it is possible that we could have negotiated this enormous bureaucratic monster, we just have to consider the following facts. First of all, since 2000, although the number of general practitioners per 100,000 New Zealanders has declined from 87 to 73, the number of managers—and I think I am using an exceptionally polite term by using that word—has increased by a fraction under 25 percent. Expenditure on their salaries has increased by 34 percent. Their total salary bill is half a billion dollars. We could build a stadium for that—not necessarily on the waterfront, but possibly somewhere sensible elsewhere in New Zealand. What benefits New Zealand derives from this downgrading of the core services and the upgrading of the bureaucratic element is a very wide subject and beyond the compass of this particular bill, but it is precisely that tendency that has produced the massive document here with us today.

In case people do not understand exactly the culture that this bill comes from—the “managerialism gone mad” culture—I will quote again, in case people missed it at the time, what the retiring chief executive officer of the Waitematā District Health Board said on precisely the cultural problem this bill represents. Dr Crombie stated: “The amount of compliance of auditing and monitoring is gobsmacking, really. It has become an industry in itself. What we are doing is demonstrating that it should be safe by showing the paperwork”—like this bill—“whereas we should be putting more of our energy into changing some of the systems.” It is exactly this mindset that has produced this bill. There are only two possibilities. One possibility is that the Ministers were deeply involved—and this bill does indeed reflect their own personal predilections and approach to policy formulation and negotiation. The other possibility is that it was done with a very light regime over the top of officials, and that this was presented as a fait accompli at the end of the process.

Steve Chadwick: What a strange speech.

TIM GROSER: I just heard the point made about Australian officials. I have spent years working with Australian officials and, with the exception of the Australian Treasury and some sections of the Australian Department of Foreign Affairs and Trade, I can tell members that their mindset and regulatory frameworks are, if anything, more bureaucratic than the typical default option of most New Zealand public sector workers. If people do not believe me, they should get hold of any publication issued by the Australian Productivity Commission and comb through its reports. There they will find abundant evidence of why our negotiators should have gone in on an inter-agency basis with their eyes wide open as to what would happen in this negotiation, and of why Ministers should have been involved intimately and continually throughout the negotiation process.

We have here a mixture of legislation that unquestionably does some useful things—let us be clear about that. But on the other hand, it contains a whole lot of unnecessary overlay of sectors—

Darren Hughes: Like what?

TIM GROSER: —well, like the complementary medicines sector, if members really want to know—that is simply not required to fix the problem. Nobody has explained to the New Zealand public precisely what the problem is in the complementary medicines sector that this bill is intended to fix. What is the dimension of the problem that requires a one-size-fits-all, heavy-handed approach to regulation? I personally am not a great user of natural medicines. I am rather more inclined to be a folklore sceptic, I will use the phrase.

Darren Hughes: Like John Key on climate change—don’t worry; you’ll change.

TIM GROSER: I was deliberately doing that to set the member up. I prefer to rely on the European Enlightenment and the science that it produced. But I do recognise that those are my views. Health is a very, very personal matter. We know that increasing numbers of New Zealanders hold different views from mine, and we know that many of those people will deeply resent the vastly increased costs that this will impose on that particular sector once the subsidy regime has come and gone.

I was simply astonished, by the way, when I heard the political fix. This is from a Government that wants to talk the talk on all occasions about reducing compliance costs and speeding up regulatory frameworks, but on every occasion when we come down to the wire, we find that Government members cannot walk the walk. When I found out that the fix to get this legislation through the House was a subsidy to offset the cost of implementing the scheme, I simply refused at first to believe it, but this is the approach we are landed with.

I would like to see the following: if this bill is indeed enacted into legislation—which remains to be seen—as it passes through Parliament and the select committee process, the National Party will be looking for signs that we can put down as a marker for the future, when we can address all the cost compliance issues that, unfortunately, we are certain this legislation will involve.

BARBARA STEWART (NZ First) : I rise on behalf of New Zealand First to support the Therapeutic Products and Medicines Bill going to a select committee. This bill has had a long and complex history. The idea of a joint agency to regulate pharmaceuticals, medical devices, and complementary medicines has been around for over 6 years. It is not new. During this entire time—and even today—it has been a topic of hot and impassioned debate, but also one where the facts have often been ignored.

We must be clear about several critical aspects of this matter. The first is that the pharmaceuticals and medical devices industries are generally supportive of this move, while the complementary medicines industry is totally divided. New Zealand First has been lobbied by both sides, each urging us to support or not support this bill. We have heard from manufacturers of therapeutic goods, consumers, and lobby groups.

New Zealand First has held several well-publicised concerns about the establishment of a joint regulatory agency with Australia and has worked with the Minister to have these concerns resolved. The very first of our issues was the issue of sovereignty. We were very concerned about this particular issue. We were not content to see New Zealand confined to the status of an Australian state in any regulatory regime. That is the case under Food Standards Australia New Zealand—we have only one voice, whereas we should make up half of the total number of the committee. This issue has now been resolved and, under the proposed regime, New Zealand will have equal status with Australia. A range of checks on the new agency will be held in New Zealand hands, including the ability to have the agency appear before a select committee.

This is where much of the misinformation on this proposed agency kicks in. This is not an Australian takeover; we are assured of that. It is a genuine joint agency, with New Zealanders looking after New Zealand interests and Australians looking after their interests, despite the information that is being heard to the contrary. The most crucial aspect of this shift is that it has fundamentally altered the way that Australia will enter its negotiating position on joint future regulatory regimes—that is, no longer will New Zealand settle for anything less than equal status. We want equal status. This is a significant shift, and it is one that New Zealand First has helped to secure.

The other issues relate to the cost of the proposed agency and the impact of this on the local complementary medicines industry. Two background matters have to form part of these considerations. The very first is that the situation of an unregulated complementary goods industry would have ended, one way or another. It would not have continued. If the joint agency did not proceed, then a local regulatory regime was to be implemented. Both would add costs to the industry. Both would see some products removed because they did not meet the regulatory standards. From a health and safety point of view, this is vital. Consumers need to know that what is written on an ingredient label is what is actually contained in the product, and at the level specified.

The costs need to be put into perspective. The total cost of the proposed new agency for complementary medicines is around $9 million. A 50 percent subsidy has been offered, which brings the cost to $4.5 million. Given that 60 percent of New Zealanders use these products—we have heard in the House even today that some people do not use them and some people do—this equates to a minimum cost per person per year. A cost of around $2 per person has been estimated, which is an increase, yes, but not the huge increase that some people are making it out to be. This will also be phased in over 5 years; there will be time to adjust.

We must also acknowledge that the complementary medicines industry does not appear to be unified, and that the claims and counterclaims of all sides are quite exaggerated. Regulation was going to come anyway, and the new agency provides a high standard of regulation at a lower cost. Some parts of the industry want to join the joint agency, and some want no regulation at all, which is not an option. Those companies that export to Australia and Europe have to meet equivalent standards, and they are generally supportive of the joint agency. For many years the complementary products industry has been caught up in smoke and mirrors and has been fighting shadows associated with this proposed agency. At last, the legislation is on the table so that it can actually be discussed. It needed to happen.

New Zealand First has ensured that those opposed to the regime have a further chance to have their say at the select committee. This bill is not being rushed through under urgency, so submitters have an opportunity to have a say. Ultimately, this is a case of balancing widely different views on the way forward. For New Zealand First, the achievement of a 50 percent subsidy and the protection of New Zealand’s sovereignty tips the scales in favour of supporting this bill going to a select committee so that constructive debate can begin. We look forward to the public and those most affected by this bill having an opportunity to put forward their submissions.

SUE KEDGLEY (Green) : I have utmost respect for the last speaker, Barbara Stewart, and I feel very much for her, because she has opposed this legislation for many years and has been rolled by her leader. She has confirmed that the Therapeutic Products and Medicines Bill was to be debated under urgency and that because of New Zealand First it will now be sent to a select committee.

Steve Chadwick: You’re hearing things!

SUE KEDGLEY: That is what I heard her say, and that is very interesting. The grave concerns that New Zealanders have about this legislation are threefold. New Zealanders understand that, despite all the spin and all the flannel, by passing this legislation we will transfer power over dietary supplements, medicines, and medical devices to this offshore entity that is based under Australian legislation. The entity will have its headquarters in Australia, and it will be staffed by Australians. The Minister for Food Safety, Annette King, is trying to say that this is not true, but I have sat through two hearings on this issue, and we have been told that this will be an offshore entity. That has been confirmed. The bill states that the agreement will be set up under Australian law—it is all there. I have another document that points out that there will be 550 staff, of which 93 percent will be Australians and 7 percent will be New Zealanders. So there is all the spin and all the flannel, but the truth is that if that is what New Zealand First understands by equal status, having an agency—

Steve Chadwick: The head office is in New Zealand!

SUE KEDGLEY: Sure, there might be a little office set up in Wellington, but the headquarters will be in Canberra. I visited the headquarters; it is a huge, bloated bureaucracy. That is where the headquarters will be.

Basically, once we hand over the jurisdiction for this agency, it will be beyond the reach of our democracy—much as our food laws are. When I went to introduce legislation that there should be mandatory GE labelling in New Zealand, I was told by the Clerk that our Parliament has no jurisdiction over this because we have handed it over to Food Standards Australia New Zealand. That is exactly what we are doing with this 385-page bill. It states that it will give effect to the agreement. This legislation does not actually set up the agency; that has been set up under the agreement that has been signed between Australia and New Zealand. The treaty has been signed, and that is where the details are all outlined; we are giving effect to the treaty. We in the Health Committee know exactly how the treaty will operate, because we examined and rejected it. We urged the Government not to proceed with the trans-Tasman agency—

Steve Chadwick: No, we didn’t!

SUE KEDGLEY: If the member over there can contain herself, I will tell her that we had a select committee inquiry into how to regulate dietary supplements, and everyone agreed that, yes, we need better regulation. I agree wholeheartedly—we need better regulation of dietary supplements. We urged the Government not to go down the road of this trans-Tasman agency, and we were unanimous in that. Of course, the Government signed the treaty 2 days before a unanimous Health Committee report came out urging that it not proceed with the legislation. This is what we said in our report on the treaty: “The power given to the proposed agency, and in particular its managing director, is unprecedented, both in law-making terms and in terms of powers of monitoring and enforcement.” By the way, most of the details of how this new entity will operate are unknown; they are all in the rules and orders that are being consulted on. Passing this legislation without knowing the details is like signing a contract without having read it first.

Basically, all the powers will reside with the unelected official, the managing director, who will have virtually unlimited powers to make delegated legislation, in the form of orders—yes, orders—and rules. All the way through, the bill refers to orders and rules. These will have direct effect on our Parliament and on New Zealand, but they will not require the approval of Parliament. These rules have sweeping powers. We said in our report that many of the things that are left to the rules will be significant areas of policy-making; these will be delegated away from Parliament. We said that many of the matters that are proposed to be dealt with by rules and orders should be dealt with in primary legislation. Once one of these rules has been passed, the only thing that we, as members of the Regulations Review Committee, will be able to do is move a motion of disallowance in this House. The only problem is that there never has been a motion passed in this House to disallow a rule. So that power is there, but it is a complete, utter nonsense. That is why, if one reads the fine print, one realises that we are transferring powers to this agency.

This agency will have not just the power to regulate, as the trans-Tasman food authority has, but also powers to police, to search, and of seizure. This is unprecedented. In no other agency in the world does an offshore entity have such powers over an industry in another country—namely New Zealand. The agency will have the powers of search and seizure and the power to police, so that some in the industry here may hear a knock on the door and find that an inspector from this offshore entity has turned up to close down their business.

I make it clear that the Green Party wants to see a flourishing natural health industry in New Zealand. We want to see natural health products widely and safely used. If we thought that regulating them through this agency would help to achieve those purposes, we would embrace it. We have scrutinised this legislation. I sat up last night reading this 385-page Therapeutic Products and Medicines Bill. We have come to the conclusion that it will impose a pharmaceutical-type model for low-risk dietary supplements. It will result in increasing pharmaceutical control of natural health products. Those products will become more expensive and difficult to access, small New Zealand businesses will go to the wall as a result of the excessive compliance costs of this agency, and there will be reduced consumer choice, as some ingredients will not be available in the future.

I will give the House an example of this. The majority of Chinese herbs are not available in Australia. A Chinese herbalist, for example, has about 282 herbs. If those herbs are not on the approved list—they are not on that list at the moment, and are unlikely to be, because of the extensive bureaucratic procedures and the fact that herbalists are required to produce a Western medicine, pharmaceutical-type analysis for Chinese medicine, which is not based on the Western medical paradigm—they will become illegal if this bill is passed. So we will face the prospect, in about 5 years’ time, of dietary supplements that have been safely used around the world for centuries becoming illegal in this country.

This is what is causing huge unease. It is the fact that we are transferring power across to this Australian-based offshore entity. Spin it as you like, it is Aussie rules. This is an Australian-dominated agency—93 percent of the staff will be Australians. Spin it as you will, New Zealanders know that this is the truth. They know that those health products will become increasingly expensive once the little bribe—yes, the Government has come up with a bribe—of paying some of the costs for 5 years ends. Anyway, that money pays for only a tiny amount of the costs. The products will become more expensive and small businesses will go to the wall. We will basically have a pharmaceutical-type takeover of our natural health products industry.

The Treaty is not mentioned in this entire bill. What a great way of circumventing the Treaty! If a Māori practitioner wants to sell some of his or her traditional Māori products, why should he or she have to seek approval and get a licence from a managing director—an unelected official—based in Australia? It is absolutely outrageous. The Minister has confirmed that if a Māori practitioner wants to sell a product—a Māori traditional product—he or she will have to get approval from this offshore entity. That is absolutely scandalous, and it breaches the Treaty of Waitangi.

TARIANA TURIA (Co-Leader—Māori Party) :Tēnā koe, Madam Speaker. Tēnātātou katoa. Yesterday the Crown commenced its presentation of evidence on the Wai 262 flora and fauna case to the Waitangi Tribunal. That is the inquiry concerning the indigenous flora and fauna and cultural intellectual property right claim lodged by NgātiKurī, Ngāti Wai, Te Rarawa, NgātiPorou, Ngāti Kahungunu, and NgātiKōata. Over the next fortnight, all ears will be on that hearing as the Crown responds to the claim by presenting evidence on the environment, conservation lands, intellectual property laws, health, contemporary policy, and legislation. Yet, here we are, just over the road and at the same time, debating the Therapeutic Products and Medicines Bill in which there are issues central to that very claim.

The Māori Party has been well aware that Māori have been so concerned about the proposed agency for therapeutic products and medicines that they called for an urgent application to the Waitangi Tribunal specifically around the consultation process. Concerns were expressed that the claimant groups were not consulted during the 3-year development period for this bill. Instead, they had to call an urgent meeting with the Waitangi Tribunal in order to get their comments on the record. On 3 October this year the tribunal confirmed that the interest claimed by Māori under the Treaty of Waitangi was legitimate and well within the guarantee of tino rangatiratanga represented in article 2 of the Treaty. It is profoundly disappointing, again, that this Government has been found seriously lacking in its capacity to truly, deeply, and fully engage in the process of consultation.

So the Māori Party comes to this bill with some mixed feelings. On the one hand we want to give credit where credit is due and acknowledge the impressive approach taken by the Minister, Annette King, and her officials throughout the long gestation period of this bill. Although it is not usual, perhaps, to name officials, I want to commend Selwyn Kātene, of Ngāti Toa and Ngāti Tama, for his excellent advice. The Minister has engaged with Māori Party members over the last year, providing us with copies of the draft rules, listening to our views, and providing us with comprehensive briefings. Indeed it has, without exception, been the type of process that we would like to engage in with every bill—being able to be fully informed about the detail long before it is on the Order Paper. We have greatly appreciated those efforts that were made. Indeed, I reiterate the comments made earlier by the Minister of Health, Pete Hodgson, in commending the Minister for Food Safety for her tireless commitment towards progressing this policy. Tēnā koe, Annette.

That level of involvement, however, has been eclipsed by the intensity of concerns expressed by tangata whenua about the probability of an Australia New Zealand Therapeutic Products Authority. As recently as yesterday over 30 rongoā practitioners affiliated to NgāRingaWhakahaere o te Iwi Māori travelled from all over Aotearoa to share their concerns from our matua tūpuna about those taonga. Their concerns—concerns we have frequently expressed to the Minister—are that the specific rights that flow from article 2 demanded that there needed to be dialogue and agreement between the Treaty partners. In its findings the tribunal concluded that the Crown’s efforts so far to establish dialogue were disappointing. Indeed, it described them as creating the conclusion that “the consultation process is little more than procedural damage control”; rather than the oft-quoted principles established in law for the dialogue to be genuine, open-minded, and aimed with a solution in sight.

This House needs to start talking seriously about the nature of consultation. Consultation is not about rubber-stamping at the end when all the decisions have been enforced. To be real about consultation, tangata whenua must have access to all relevant documentation. There must be a willingness to meet face to face and to know that their views are respected. Indeed, as I have heard it said by another political party, there is nothing to fear from tangata whenua, and maybe that is a message the Government may be prepared to accept.

I sat with the rongoā practitioners yesterday, and I can say that their concerns are clear. They are concerned that the Therapeutic Products Authority will be above te Tiriti o Waitangi, that it will set down its own guidelines, that it will be above New Zealand parliamentary authority, and that it will not recognise indigenous interests. They fear it will cut at the very heart of sovereignty. They are concerned that rangatiratanga will be further compromised by decision making moving offshore. They are angry that there has been no consultation with hapū and iwi Māori, and that, consequently, there are no mechanisms in this bill to protect the appropriation of Māori and indigenous knowledge. Their concern is that there are no Treaty of Waitangi provisions included within the agreement, and that the regulation of rongoāMāori, their taonga tuku iho, will be made by a non-Māori body.

Tangata whenua have spoken passionately about the threat that the bill poses in undermining the claim of kaitiakitanga made by whānau, hapū, and iwi claimants. I have been very clear with them, as the Minister has been clear with me, that non-commercialised rongoāMāori will be exempt from the proposed scheme. In saying that, I am firmly of the view that all medicines and rongoā, whether commercially prepared or not, should be deemed to be safe. Accountability and health protection should be our paramount concern, and we must never compromise on public health. However, I cannot hide the truth that there are a number of crucial qualifiers around this exemption that create uncertainty. The tribunal noted that the current exemption of rongoā under the Medicines Act could not be guaranteed to continue. It described the exemption as ad hoc and certainly not discharging the Crown’s Treaty obligations to rongoā producers and practitioners. The draft medicine rules do not guarantee such exclusions to a satisfactory level, and for this reason the Māori Party wanted complementary medicines, including herbal medicines and other nutritional supplements, traditional medicines such as rongoāMāori and traditional Chinese medicines, homeopathic medicines, and aromatherapy oils removed from the Trans-Tasman therapeutic goods authority. We wrote to the Minister recommending this.

The nub of the issue for the Māori Party is the question of whether we can have faith in the Government, let alone the Australian Government, to adequately protect rongoāMāori, when those same Governments have not been able to support the rights of indigenous people at an international level. The Crown has advised that Māori will be able to have input into the regulations that will determine the actual operation of the relationship. But the issue is really around trust. Can we be sure that the New Zealand Government will have the authority to continue to enforce the exemption on non-commercialised rongoā and to uphold this in the future? This Government’s own Māori health strategy, He Korowai Oranga, explicitly acknowledges rongoā—herbal remedies—as being a valued component of Māori traditional healing. It is therefore disappointing that the policy intention has not yet benefited from the resource to enact the commitment into real, tangible strategies to support their developments.

I was interested in the comments of the New Zealand Health Trust, which saw the Government being determined to ram the legislation through. We are concerned about the establishment of a regulatory entity to manage the development of medicinal and intellectual property rights for rongoāMāori. Rongoā is the manifestation of our tikanga and our kaupapa. It has been handed down by our tupuna. It has mana and tapu, and that is why it demands respect. A trans-Tasman body would have limited capacity to appreciate what is meant by mana and tapu; that is not a judgment but merely a fact. Rongoā is a total way of life, upholding tikanga Māori to achieve holistic health. It is a healthy mind, a healthy body, and a healthy spirit, and it springs from an absolute belief in total well-being. The preservation and protection of rongoā and traditional medicines is of such critical importance to Māori that we cannot take the risk of supporting a bill when some fundamental questions are still uppermost in our people’s minds. It is that uncertainty that has led us to oppose the bill. Tēnā koe.

JUDY TURNER (Deputy Leader—United Future) : I rise on behalf of United Future to speak to the first reading of the Therapeutic Products and Medicines Bill. I have to say that this was the very first issue, on arriving in Parliament in 2002, that hit our desks. All the letters and emails—and I mean all of them—were from consumers of complementary products. In fact, we were so thoroughly lobbied by complementary medicine consumers that it took me some weeks to discover that the proposal actually included pharmaceuticals and medical devices, as well.

I am a regular user of complementary products, so I was shocked at the thought that the items I use to maintain my own personal health and well-being could be ripped off the shelves or out-priced from the budget of average New Zealanders. That complementary products could be bought out by pharmaceutical companies and then shut down was the message of fear that I was fed for weeks and weeks. I was told that New Zealand would sign away all say on these matters, and our very existence as a nation was under threat.

So United Future then supported the inquiry called by National’s Dr Lynda Scott to see whether a joint regulator was the best option. We supported the findings of the select committee that New Zealand should self-regulate. However, current opponents fail to remember that the recommendation from the select committee was predicated on Australia’s willingness to mutually recognise our regulator, so that industry stakeholders would not have the expense of doubly registering products and ingredients. Well, Australia will not mutually recognise. Why not? It is because, as it pointed out to our officials, it cannot recognise a regulator that does not exist and does not have a robust history that it can put its trust in. Because we cannot get mutual recognition in a deal with Australia, the recommendation from the select committee is idealistic and unachievable.

However, United Future was keen to stay informed in two directions; firstly, that we monitor the ongoing negotiations between the Government and Australia, and I thank the Hon Annette King for allowing me to have observer status at her ministerial advisory committee meetings, even though during that process I never gave her any reassurance of any future support. I would also like to thank, as the Māori Party has, Selwyn Kātene for his work and advice during this time. I also mention at this time, as someone who observed many of those meetings, that those representing the complementary medicine sector regularly—certainly at every meeting I attended—advocated very strongly on behalf of small industry players within the New Zealand context. The second area we sought to stay informed on was the ongoing opinions of those within the complementary sector who were intensely suspicious and resistant to the proposal, unlike those from the pharmaceutical and medical device sector.

Until recently our position was that we would support only legislation that did not include the complementary medicine sector and in no way did away with direct-to-consumer advertising. What has changed our minds is that we have now been victims of a barrage of mixed messages from the complementary industry. It is now clear that a large sector of that industry wants this to proceed, as it is now largely satisfied with what the deal is as it now stands, not as was originally proposed. So United Future is committed to supporting the first reading, because we see this as being the only way that the divided camp of the complementary health products industry can use the select committee process to sort out what it wants. We will then revisit our position after we have heard from submitters, officials, and the committee.

I say to the consumer lobbyists, however, that I am singularly unimpressed with the current bully-boy tactics and threats, and that they do their argument only harm as they present themselves as fringe extremists, not rational contributors. One aspect of the debate on which there has been general agreement from all sides of the argument is that those therapeutic goods currently unregulated in New Zealand should be regulated. Let us remember that it is both medical devices and complementary medicines that are currently unaccountably unregulated within New Zealand.

To move from an unregulated to a regulated environment is a very scary thing for the people involved, because it will require extra costs, and those will be passed on to consumers. So the question remains as to how we can appropriately regulate substances, commensurate with the risks they pose, in a way that is both affordable and that protects consumer access. My growing concern—and something that I am keen to have answered by the select committee process—is that there are some who appear to be taking a very blinkered approach to a New Zealand-only regulator. Also, that those in the industry accept that New Zealand manufacturers will have to pay two sets of compliance costs if they want to export their products. Guess who will be picking up the tab on that? It will be the consumers.

Unlike some of the information that is circulating at present, I am heartened by the fact that, as this proposal has proceeded, and we have now four offices established and recommended. One office will regulate prescription medicines, a second will regulate over-the-counter medicines, a third will regulate medical devices, and a fourth office will regulate complementary health products. Each will have its own regulatory model based on the risks that those products pose. This is not about imposing a pharmaceutical overkill model on to herbs, as is currently being touted around the country.

United Future is very keen to make sure that what we decide is based on facts not on emotional rhetoric. I mentioned this to someone who rang me yesterday. We started out with a very calm and logical discussion and I was very interested in what he had to share. But at one point he then deteriorated into what I call holocaust language which, quite frankly, I found emotive and unacceptable. We moved right away from the facts of the issue and into emotionalism.

I do not want to see complementary medicines taken off the shelves of this country or see people lose access to the fine products that they now enjoy and use. I am one of those consumers and self-interest alone determines that I want to see New Zealand get this right. United Future is very happy to support the first reading of this bill so that the debate can be had and the facts can be brought to light.

HEATHER ROY (Deputy Leader—ACT) : I rise on behalf of the ACT party to talk on the first reading of the Therapeutic Products and Medicines Bill. This bill has a very long history, as has already been pointed out in this House. Like the member who has just taken her seat, Judy Turner, it was the first issue that arose on our agenda as members of the Health Committee when I came to Parliament in 2002. The history should, perhaps, be remembered in the course of the debate, because it has been very contentious and there has been huge public interest on both sides of the debate. I, like everybody else who has spoken, have received all the emails. I received one this afternoon, which I thought summed up beautifully the issue involved, from my perspective and from that of those sitting on this side of the House. It stated: “The proposed Australia - New Zealand Therapeutic Goods Act will stifle innovation of natural or complementary products and medicines in New Zealand, simultaneously taxing the resources, time, and finances of small businesses.” That, to my mind, sums up the intent of what we must remember is validating legislation to a treaty that was signed on 10 December 2003.

However, the history goes back even further than that. The issue that I talked about that I was first involved with when I came to Parliament in July 2002 was an inquiry into the proposed therapeutic goods joint agency. The select committee undertook a very rigorous process during that inquiry. We called for submissions, and there were a large number of interested parties. Everybody was given a very full and thorough hearing—I think there would be little disagreement by those who were on the select committee at the time about that.

We were, however, hindered in our inquiry by Annette King, the Minister who was in charge of the issue at that stage. When she moved from the health portfolio to become Minister for Food Safety she kept this issue as an area of interest for herself and showed what could be described only as disdain and contempt for those who did not think the same way as she did about it. The select committee inquiry was pre-empted in releasing its findings, which was scheduled to happen on 12 December 2003, by the then Minister of Health, Annette King, jointly signing an agreement with the Australian Minister of Health on 10 December 2003, which was, as she knew, 2 days before our inquiry was about to be reported on. She pre-empted the impending outcomes and suggestions that we had put forward as a select committee.

There was a great deal of grumpiness in the select committee about that by all the Opposition members at the time, including members of two parties, United Future and New Zealand First, which are now supporting this validating legislation. We held what was widely agreed to be an unprecedented press conference. Members from all sides of the House—apart from those in the Labour Government—came forward and were united in their contempt. I might add that those Labour members were left to hold the fort on their own in the select committee and they were grumpy about that. It is a great shame that members of those two parties who were so vocal in their opposition to this agency have now changed their minds, but that has happened for a variety of reasons and I will come to them, too. Needless to say, the ACT party remains steadfast in its opposition to this validating legislation for the treaty.

Further down the track, the treaty came to our select committee. Again it was heard in full. A large number of people wanted to submit and many of the same issues were discussed, for very good reason. Again, the recommendations made by the select committee were largely ignored by this Government and have been overridden. So those of us on the select committee who opposed these issues feel that we wasted a good deal of time and effort, and I think those in the industry would agree with that.

This is a huge piece of legislation, with 380-something pages. It is no longer just about the pharmaceuticals, the dietary supplements, the complementary therapies, and the medical devices. It is, in fact, about a wide range of topics. We have finally reached the point where, after 3 years of trying, the Government has managed to introduce this legislation, which was supposed to come before the House 6 months after the treaty was signed. Three years down the track there has been a great deal of wheeling and dealing to get to this point where the bill can be introduced into the House.

It includes all sorts of things that, in the initial stages, were never intended, such as direct-to-consumer advertising. I have to say I support absolutely the direct-to-consumer advertising recommendations in this bill, but I cannot support the bill overall. Xenotransplantation, pharmacy ownership, and designated prescribers—amongst other things—are now all rolled holus-bolus into this legislation which, essentially, was supposed to be about regulation for the safety of New Zealanders when it comes to complementary therapies. We have all sorts of things rolled into one here so that, in the final instance, this bill can be introduced into this House and pushed through.

Many comments have been made in this House today and I would like to recognise some of those. Tim Groser spoke on behalf of the National Party, Sue Kedgley spoke on behalf of the Greens, and Tariana Turia spoke on behalf of the Māori Party, and I agree with all of the points they raised. As I have said, it is unfortunate that two of the parties who opposed the legislation until a very short while ago have changed their minds.

I come to a few of the points that have been raised. ACT is absolutely in favour of closer economic relations. I agree with the comments made by the National Party member Tim Groser, who said that this is not a debate about closer economic relations, as was put forward by the Minister of Health. It is absolutely not. It is about pushing forward regulation—heavy-handed bureaucratic regulation—on the New Zealand industry. There will be many Kiwis, both consumers and producers of therapies, who will be severely disadvantaged by this process.

Those supporting the bill present it as a fait accompli. They say it is going to be wonderful, there will be offices everywhere, and Australians will recognise what we New Zealanders want. Well, let us just see what happens when the legislation gets there, because I am afraid I do not share their faith in the outcome of it.

Perhaps the biggest thing I am absolutely opposed to in this legislation, on behalf of the ACT party, is the suggestion of a subsidy to offset the cost of regulation. We are supposed to raise our hands and shout “Hallelujah!”

Tariana Turia: A bribe.

HEATHER ROY: It is absolutely a bribe. Let me say that we in New Zealand were world leaders in getting rid of subsidies. New Zealand has been there. We have done that. We rejected the concept, and the world, in part, followed us in getting rid of subsidies. But here we are today, at the very end of this parliamentary session this year, saying that subsidies are a wonderful thing; let us have them back again. Well, that is a retrograde step for New Zealand—a step we should not be even contemplating.

The New Zealand First member stated that she wants equal status for New Zealand and Australia. I have already touched on this point; I share very little faith with her that equality will be reached. I think that we will see heavy, burdensome bureaucratic regulation imposed on an industry that is quite prepared to look at other solutions without having that cumbersome approach put in place. The industry, for all of the 3 years that we are talking about and that we have debated this issue, has always shown an absolute willingness to cooperate with what it sees as reasonable regulation. It is in favour of self-regulation, which many other professional bodies have, and it wants to see regulation to protect its products from those put forward in a shonky way—those that are unsafe to consumers. It, too, because it has pride in its products and believes in them, wants to ensure the safety of the New Zealand consumer. Instead of having the opportunity to have this discussion, to talk about professional self-regulation, and to talk about other forms of regulation that could have happened without the involvement of this heavy-handed bureaucratic joint Tasman agency, the industry has been denied the opportunity to do that.

The Minister for Food Safety, Annette King, also said in her initial speech that she wants to see this bill go to the constructive environment of a select committee. Well, if only she meant that, I would feel a little assurance. However, I talked before of her disdain for the select committee process, which we have already seen twice before. Firstly, there was the inquiry into the complementary therapies. There was a very constructive environment in that select committee, but the Minister completely ignored the findings from that inquiry. Again, she treated the select committee with a great deal of contempt in relation to the signing of the treaty, but she also showed contempt when we went through the thorough process of examining that treaty in detail.

ACT New Zealand opposes, vigorously, this bill at its first reading.

STEVE CHADWICK (Labour—Rotorua) : Today I will be covering two issues of interest relating to the Therapeutic Products and Medicines Bill. I chaired the Health Committee that conducted the initial inquiry and reported back in 2003, and the subsequent examination of the agreement between Australia and New Zealand. In that capacity I will be speaking to two issues of concern.

I mention first, that the Green Party referred in the House today to a unanimous Health Committee report, but failed to mention the rider to the committee’s position—that it did not become a party to an agreement between Australia and New Zealand for the establishment of a scheme unless the committee’s subsequent recommendations were met in any implementing legislation. I have heard about the disrespect for the Health Committee’s recommendations by the Minister, and I refute that absolutely.

We put forward 13 recommendations when we reviewed the treaty; 12 of those recommendations are in this report. I think that that is absolute acknowledgment that where the committee saw we could get better things through the agreement, our recommendations have all been implemented in this bill today. That is not showing disregard for the efficacy of a select committee. Amongst those recommendations were issues we were concerned about—of rongoāMāori protection, and of governance and accountability. I understand that only one recommendation—that is, a partial disallowance of rules in each country—is not included in the bill. That is the only recommendation not implemented in this bill.

I want to go quickly to the issue of rongoāMāori, because my colleague Annette King mentioned it earlier. This authority, I must stress, is a new authority. The Australia New Zealand Therapeutic Products Authority is not the old Trans-Tasman therapeutic goods agency. Effectively, rongoāMāori will be treated in this bill by the new authority in the same way as it is now under the Medicines Act of 1981. In respect of the arguments I heard from the Hon Tariana Turia, I say that I do not think we want to confuse whatever findings will come up from the Waitangi claims; I think that they need to be considered at a later date and not get confused in the machinations of this bill.

Products used in the practice of rongoā are currently exempt from the requirements of the Medicines Act, and I think that is really important. They are not given under prescription, they are not restricted, and they are not pharmacy-only prescribed now, so this same arrangement will remain in this same way under the scheme. We will not bother to define rongoā in this scheme, because its products are exempt. So the products used in the practice of rongoā will not be regulated, nor will the relationship between a rongoā practitioner and a patient. Likewise, where rongoā practitioners prepare rākaurongoā, they will be exempt from manufacturing licence requirements. I hope that as the select committee goes through this bill, those issues will be covered, and covered also by those who submit on the bill.

The Australia New Zealand Therapeutic Products Authority will bring significant benefits to manufacturers, opening up the Australian market for exports without the added regularity costs involved in the selling of products in Australia. Mutual recognition agreements between the authority and other national regulators will be likely to increase export opportunities further. So I just wanted to cover off what I had heard about rongoā in the House, and members’ concerns with this bill.

The next issue I want to cover quickly is that of accountability, which is a crucial aspect in ensuring good governance and the legitimacy of public power. I have heard members across the House show concerns about that. A strong accountability regime ensures Parliament and the public that public resources are being used efficiently and effectively. The simple truth of this new arrangement, and the new authority, is that New Zealand could never have afforded to go it alone in order to continue to meet the needs of regulating this industry. During the select committee deliberation, as others have said, no one argued with the need for regulation. It would have been far too expensive for New Zealand and Medsafe alone to advance regulation of these products. We did not have that capacity, alone, in New Zealand, so the joint agency offers that shared expertise and capacity.

I will quickly cover off the accountabilities of the new agency. It has to provide an annual report and a statement of intent. It will be a Crown entity like any other Crown entity, and its reports will be tabled in Parliament in New Zealand. Its representatives will appear before select committees for financial reviews and inquiries, like any other Crown entity. It will be subject to scrutiny of its regulatory decisions by the courts through a merits review process and judicial review, and it will be subject to other legislative requirements that stand in both countries. That includes the Official Information Act, the Australian Freedom of Information Act, the Privacy Act, and the Ombudsmen Act in both countries, and scrutiny by both Auditor-Generals. I find that to be very strong and robust accountability. The agency will be a Crown entity and subject to rules and orders.

We have heard ridiculous assertions about the powers of the managing director, but the accountability arrangements of that position have been set to ensure that the managing director is equally accountable to both the Australian and the New Zealand Ministers of Health, which will happen through the joint ministerial council. The executive is not able unilaterally to alter the arrangements, and we will cover that off in the scrutiny of the select committee process. There will be a complaints system, and there will be a review tribunal. So I feel that the spurious concerns that have been tabled in the House about accountability are simply not true.

I would like to say a lot more, but in conclusion I just say that the Health Committee did agree that a risk-based regulation of medical devices and complementary medicines was needed to ensure public safety, efficacy of therapeutic products and their claims, and a new regulation model commensurate with risks. The model is not the Therapeutic Goods Administration or Food Standards Australia New Zealand; the model will protect sovereignty through its governance mechanisms.

This bill is about CER. The assertion from the member of the Opposition that this has nothing to do with CER is ridiculous. He is clearly flying in the face of the Australian Prime Minister, who supports this regulatory agency. I remind members that the beginning of this proposal was in National Party policy in 1999—and we have to sit here and hear a hysterical refusal to accept that the 3 years of work since we put the inquiry on the table shows we have developed a new authority altogether, with very strong governance and accountability mechanisms.

Dr JACKIE BLUE (National) : This could have been a proud day for the New Zealand Government, but it is not. The Government has wasted a golden opportunity. The Therapeutic Products and Medicines Bill, which introduces legislation to establish the Australia New Zealand Therapeutic Products Authority, could have been a first, with true multiparty support, cooperation, collaboration, and agreement. But that has not happened, and Annette King, the Minister in charge of this bill, is to blame for that. Her dismissiveness and lack of consultation has shown no bounds. She has refused to consult the National Party every step of the way. The Hon Tony Ryall informed us today that Annette King considered that handing over some overheads to two National MPs was consultation. What a joke!

I have been a member of the Health Committee over the last year, and on numerous occasions we have invited Annette King to personally address us on this bill. She refused to do so on each and every occasion. Not once did she appear before the Health Committee. I have been so concerned about her indifference to this bill that in a parliamentary question I asked her whether she had been requested by the Health Committee to personally brief the committee on progress regarding the issues surrounding the proposed Australia New Zealand Therapeutic Products Authority, and, if she had, how many times she had been invited for a briefing. I asked whether she had briefed the committee, and, if she had not, whether she planned to do so. I also asked her why she would not want to brief the Health Committee. Three weeks later I received a nonsense reply, which was that it had not been possible to obtain the information required to enable her to address that question by the due date. What a joke! The answer was really simple: she had never been to the committee and had no intention of addressing it.

The response from Annette King goes to prove that this Minister has not taken seriously the concerns of Parliament’s own Health Committee, of thousands of New Zealanders, and of the hundreds of fledgling natural health-care businesses. The Minister has ratified the treaty without the mandate of this Parliament and against its wishes. This bill, which had its origins under the last National Government, was a good idea. But, sadly, there has been a lack of consultation, and the Government, like most things it gets hold of, has made a complete hash of it.

Our National Party is most concerned about the inclusion of natural health-care products. We consider that the Australian natural products industry is one of the most highly regulated of those industries in the world. Forcing its rules on New Zealand businesses will serve only to increase the cost of products, reduce consumer choice, and hurt many businesses. National believes that natural health products should be regulated, but that this legislation is not the answer. The Government has been attempting to introduce this legislation for years, but until recently it has not been successful. It did not have the political clout or numbers to do so, but it is clear that it has now done a deal with New Zealand First. The thousands of New Zealanders who will have choice taken away, and the hundreds of businesses that will be affected by compliance costs and bureaucracy, can thank Winston Peters for the fact that they will have to keep on fighting against this restrictive legislation.

It did not have to be like this. Only 6 weeks ago, on radio, Winston Peters reaffirmed his party’s opposition to the bill, and if he had kept his word this bill would not be being debated today. In the lunch break today there was a rally against this legislation. It was a very sad sight to see Winston Peters defending his betrayal of New Zealanders to the crowd. They could see through him by a million miles. He did not convince anybody; he was booed and jeered. The fact is that the Labour Government had to offer a bribe to New Zealand First. It had to offer a 50 percent subsidy on complementary medicines in order to get the parliamentary numbers for this bill, which goes to prove that this regime was far too expensive to begin with. The 50 percent subsidy is for only 5 years, and then what will happen? Let us make no mistake that businesses will face escalating compliance costs after that.

The Minister has gone against the recommendations of Parliament’s Health Committee. In December 2003 the Health Committee recommended that the Government strengthen domestic regulation as the most appropriate method of governing complementary health-care products in New Zealand, and that it pursue a mutual recognition regulatory option rather than a joint agency with Australia. Yes, 3 years ago the Health Committee recommended that a local solution should be sought for complementary health-care products. That is what the industry wanted. Four years ago the New Zealand health industry presented Medsafe with a low-cost, economically viable, full-recovery regulatory system that was acceptable to the entire industry. Sadly, that was not accepted, and the only aspect of mutual recognition in the whole of this bill is the one that the National Party insisted on—that is, for medical devices. A number of medical device companies in New Zealand export internationally, and, as a result, they already have to adhere strictly to rigorous international licensing regimes. It is absolutely appropriate that those internationally respected licensing bodies are recognised by the proposed trans-Tasman agency.

In 2004 the Health Committee again reported on the treaty. The National Party provided a minority report, stating: “We consider that the Government should not have gone ahead and signed the treaty when the main finding of the Health Committee inquiry into complementary healthcare products was that a proposal to regulate complementary healthcare products jointly with Australia ‘should not proceed’.” We have not changed our position; we have stayed steadfast in keeping the same position. New Zealand First also wrote a minority report, stating it had three concerns. The first concern was one of sovereignty. The second was that complementary medicines should be treated separately. The third concern was about how the proposal would impact on small businesses. What a complete U-turn there has been by New Zealand First! The complementary medicine sector had every right to feel sold out and betrayed by this Government and New Zealand First. This regime will be costly, restrictive, and unnecessary.

National is not prepared to jeopardise the viability of hundreds of small businesses or the choices of thousands of consumers. Annette King’s handling of this issue has destroyed any chance of cross-party support. There has been no consultation with other parties in the developmental stage, and she signed the treaty against the wishes of other parties. Her handling of this issue has jeopardised a significant improvement in trans-Tasman governance. National is opposing this bill in principle. Annette King has negotiated a bad deal for New Zealand. We believe that for complementary medicine there should be a low-cost local solution. National believes that New Zealand should harmonise with Australia only when it is in New Zealand’s best interests to do so. This Government is selling out small businesses in New Zealand and taking away choice from thousands of New Zealanders.

JO GOODHEW (National—Aoraki) : I rise also to oppose the Therapeutic Products and Medicines Bill, along with my National Party colleagues and others on this side of the House. My opposition to this bill will focus on the barriers to health-care options that this bill brings to Parliament and the people of New Zealand—those of cost and choice. The bill will impose significant costs on small and not-so-small businesses within the framework of therapeutic products. New Zealand has a 95 percent reliance on small to medium enterprises or businesses to keep the economy of this country chugging along. It is an unwise Government that does not take notice of how important those small businesses are to New Zealand. Those same businesses have been hammered repeatedly by compliance cost burdens in the last 7 years. It is no wonder the small businesses that will be affected by this bill are crying foul.

Before the supporters of the bill can claim otherwise, I want to assure the House that I am not supporting the sale of unsafe products to members of the public, but, as is so often the case, this Government charges on, blindly ignoring the risk of unintended consequences, and without due care to prevent this legislation from bringing some businesses to their knees. This bill should be called the “Therapeutic Products (Anti-small-business) Bill”.

This bill will create a barrier to health-care options by reducing choice. Choice reduction will follow the inability of small niche products to survive the processes and costs associated with this bill. National’s opposition to this regime is because of its costly and restrictive nature. National is not prepared to jeopardise the viability of hundreds of small businesses, nor the choice of thousands of consumers—in fact, over a million consumers. Small-business owners in my electorate have pleaded with me to oppose this bill. They know that their viability is at risk, and, just as important, is their concern for their clients. I have had lists of people who rely on being able to access a product that works for them. I have been offered those lists but I have taken the word of the business people who have talked to me.

It is time perhaps to ponder, for a moment or two, on Annette King’s performance on this issue. She truly has destroyed the opportunity for a cross-party approach to solving this issue for New Zealand.

Dr Jackie Blue: There was no consultation.

JO GOODHEW: We had Labour-style consultation. We could have ironed out some of the fatal flaws in this legislation but Labour did not take up that opportunity.

Dr Jackie Blue: No consultation.

Darren Hughes: That’s not true.

JO GOODHEW: Let me tell members more of the history. The Health Committee made repeated attempts to garner more information about this bill, but those attempts failed. Speaking as a member of the select committee, I tell Mr Hughes that that is the truth. Such was the lack of consultation by the Minister.

Darren Hughes: Did you ask a question like Jackie Blue did?

JO GOODHEW: Jackie Blue has told this House that she asked the question and got a nonsense answer. What more could we expect! Annette King signed the treaty, against the wishes of other parties. This bill is Annette King’s pride and joy. This is something for which Annette King has authorised the spending of millions of dollars over the past few years, and she really does not want to see it fail. So she had to call in some very big favours.

Darren Hughes: It’s called consultation.

JO GOODHEW: From the minor parties, New Zealand First and United Future, I suspect that that is not proper consultation, but arm-up-the-back style consultation. Annette King’s handling of this bill has been more about her philosophy of getting it through and less about meeting the needs of New Zealanders. Had the Government listened to New Zealanders, it would not have ignored the interests of small business.

But I must applaud the Government for having listened to New Zealanders in keeping the direct-to consumer advertising in the bill. But it is not enough. This anti-business Labour Government and chums—United Future and New Zealand First—have ignored the powerhouse of New Zealand, those small businesses, They ignored the guidance of the Health Committee, not once but twice. The committee twice advised against going ahead with this joint-agency concept.

The timing of the introduction of this bill has been described as sneaky, and done under the cover of the silly season. That is a pretty fair description, because it has come at this end of the year, but Annette King’s tactics will not stop National members taking every call available to us to protest about this bill.

I have already said that the New Zealand Health Trust has the numbers. It has quantified the impact of this bill and has talked about the over 1 million consumers who will be affected by lessened choice and increased costs. My colleague Tim Groser has rightly spoken about CER, and we want to refute the suggestions that our stance is anti-Australian. Of course, it is not. Tim Groser is eminently qualified to understand the intricacies of what this means for New Zealand. He correctly described the Australian Government’s approach as a bureaucratic mindset and a sledgehammer approach. He also correctly alluded to the changes in our health services, which make complementary health-care options, therapeutics, the choice of thousands of New Zealanders.

National feels very strongly that New Zealand must not subsume its own identity by handing over control to an agency that is, of course—the size will determine—dominated by Australia. New Zealand should harmonise with Australia, only when it is in our best interests. We do not want to sell the family silver. We do not want to be subsumed by Australia, but rather work with Australia for the benefit of New Zealanders, rather than to sell them out.

Dr Jackie Blue reminded us that mutual recognition was the recommendation made in 1993 by the Health Committee. That recommendation has been ignored, in favour of this bill. We were reminded of the minority report that came out of that Health Committee, and I speak of the New Zealand First minority report, which has been consigned to the dustbin. I do commend Barbara Stewart from New Zealand First for how well she dances on the head of a pin! After not supporting the bill in the select committee, poor Barbara Stewart has had to accede to her colleagues’ wishes and do a flip-flop, a U-turn. How painful that must have been. It is not enough that the New Zealand First member was rolled by her colleagues; she has also to live with the fact that her leader, Winston Peters, trumpeted on radio that his party had stopped this bill in its tracks.

The “Prince of Spin” attributes of Winston Peters have resulted in an aggressive about-turn. We know the spin the New Zealand First leader has put on this. He says that it is someone else’s mistake, not his. Oh, no, not his! But then, an aggressive response to describe a flip-flop or U-turn on Mr Peters’ part is not necessarily surprising. How uncomfortable he must feel to have portrayed himself as the saviour of the users of complementary medicines, and now to have to show that he was leading them astray!

As a former nurse, I am certainly not advocating, or supporting, that the risks that currently exist—however small—for the users of therapeutic products and medicines, be ignored. I make the plea that we be given something that keeps the costs down and does not kill the businesses.

I see this bill as a real risk to our health system. Many New Zealanders will end up at their general practitioners, as some of the alternative therapies that work for them disappear from the market. This prospect is frightening many people, and they have come to see me in my electorate office. Many of them are elderly people, who rely on, and trust, these products to give them symptomatic relief.

I also commend Tariana Turia, who has exposed the lack of consultation that has been inherent in the long preparation of the bill. As a new member, I have been interested in how many emails I have received strongly opposing the bill. So I join with my National Party colleagues in strongly opposing this bill.

Hon PETE HODGSON (Minister of Health) : I move, That the Therapeutic Products and Medicines Bill be considered by the Government Administration Committeereferred to Government Administration Committee, that the committee finally report back the bill to the House on or before 30 April 2007, and that the committee have authority to meet at any time while the House is sitting, except during oral questions, during any evening on a day on which there has been a sitting of the House, and on a Friday in a week in which there has been a sitting of the House, despite Standing Orders 192 and 195(1)(b) and (c).

Hon PETER DUNNE (Minister of Revenue) : I move, That the Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill be now read a second time. The main feature of this bill is a comprehensive reform of the taxation of income from share investments, whether those investments are made through intermediaries such as managed funds or made directly by individuals. It is a long overdue reform that will put the tax treatment of different types of share investment on a similar footing. That means not only greater fairness for investors but also reducing the distortions in investment decisions so that tax is not the deciding factor in people’s decisions about how to save or invest.

It is generally acknowledged that our tax rules on share investment operate very unevenly and create a number of biases. They overtax lower-income people who invest through managed funds, they favour direct investment over investment through intermediaries, and they favour investment in some countries over investment in others. To remedy this longstanding problem the bill introduces a whole new set of tax rules for managed funds, now to be known as portfolio investment entities, and another for offshore portfolio investment in shares.

The first set of new rules puts investment through managed funds on a similar tax footing to that of direct investment in New Zealand and Australian companies. It is particularly important to get the tax treatment of managed funds right because they are the first investment choice for many ordinary investors, whose numbers will increase from July next year when KiwiSaver begins. The proposed portfolio investment entity rules achieve parity of tax treatment of managed funds in two ways: one, by not taxing them on their Australasian share gains, and, two, by taxing income earned at investors’ personal tax rates if lower than 33 percent.

The Finance and Expenditure Committee reports that the main concerns expressed in submissions on the proposed portfolio investment entity rules were that they were too prescriptive, particularly as regards the criteria for eligibility, and too complex. Taking into account those concerns, the committee has recommended several changes to the draft legislation. They include streamlining the eligibility criteria and allowing portfolio investment entities greater flexibility in the way they operate. The committee has also recommended deferring the application date of the new rules to 1 October 2007 to align it with the date that KiwiSaver providers start to receive contributions. That will give funds more time to prepare for what will be a major changeover for them.

Comprehensive changes to the tax rules on offshore share portfolios are the second limb of the reform of the taxation of income from share investments. This is the area that has overshadowed all else in the bill, and the area that has elicited the greatest number of submissions. The main problem of the current offshore tax rules is that they provide incentives for New Zealanders to invest directly in companies resident in eight “grey list” countries, all of which are considered to have tax systems similar to New Zealand’s. The “grey list” countries are Australia, Canada, Germany, Japan, Norway, Spain, the United States, and the United Kingdom. The tax problem arises because, under our tax law, income from share investments is generally taxable only on dividends, and companies in “grey list” countries do not generally pay high dividends. Therefore, investment in them attracts little or no New Zealand tax. Meanwhile New Zealand investors in companies resident in other countries—for example, Singapore and India, to name two growing investment destinations—have a much higher tax burden. They must pay tax in New Zealand on 100 percent of the increase in the value of their shares each year. That is a major inconsistency in our tax law, and it creates a disincentive to investing in many of the world’s most dynamic economies.

The fundamental principle of the reform proposed in this bill is that New Zealanders should pay tax on their investment income regardless of where it is earned. Geography should not come into it. As introduced, the bill proposed removing the “grey list” distinction and taxing up to 5 percent of the value of offshore share investments each year. Gains in excess of the 5 percent cap were to be carried forward to be taxed in later years, with losses being deductible in a similar way. The many submissions on this part of the reform were critical of that proposed method, which was seen as too complex and as taxing unrealised capital gains.

In response to those concerns as well as to suggestions in a number of submissions that a deemed rate of return method would be preferable, the Minister of Finance and I suggested to the committee that it consider replacing the original proposal with a fair dividend rate method—a form of deemed rate of return. That method would tax investors on 5 percent of the opening market value of shares held at the start of a year. However, individuals investing directly and through family trusts would be able to pay tax on their actual returns if they were lower than 5 percent, with no tax payable when returns were negative. That would deal with the concerns of some people that their offshore investments would be taxed, even if they made a loss in a particular year.

We saw the fair-dividend rate as a sensible replacement, both on grounds of simplicity and of fairness, because it would tax something close to a reasonable dividend yield rather than target capital gains. In a second round of consultation, the committee found general agreement that the fair-dividend method was preferable to that originally proposed. Nevertheless, many of those who were consulted preferred a lower fixed rate of between 3 and 4 percent, on the grounds that it was more representative of average offshore dividend yields. The counter argument was that a 5 percent dividend rate would be more suitable because it would approximate the dividend yield of Australasian equities. One should remember here that many other countries have tax rules that discourage dividend payments, which creates many of the inconsistencies that have made this reform necessary in the first place.

Having listened to all sides in what was an extraordinarily technical debate, the committee has recommended adoption of the 5 percent fair-dividend rate method. Consistent with the idea put forward by Ministers, it would not tax individuals in family trusts in years when they made a loss. Under this approach, managed funds will pay tax on a flat 5 percent of the value of offshore investments, even in years when the return is less. Although some may argue that this creates a disadvantage for managed funds relative to direct investors, the reality is more complex. Under the new rules, managed funds have a number of tax advantages that direct investors do not enjoy, including a tax rate that is capped at 33 percent and Australasian capital gains exemption. It is also very important to remember the major tax disadvantages that the managed funds currently face. At the moment they pay tax on virtually all their capital gains from onshore and offshore shares, and they face a flat 33 percent tax rate, even though many of their investors are on a tax rate of 19.5 percent. These reforms sweep away virtually all those disadvantages.

The significant net improvement in the tax position of the New Zealand managed funds sector, under the reforms, is supported by recent analysis by the savings industry. That analysis shows that under a fair-dividend rate method most investors in New Zealand managed funds will enjoy a reduction in the tax they pay on their offshore investments.

I think the committee has done a magnificent job of forging a consensus where there was none midway through the process. Whether the fixed rate is 5 percent or 3.5 percent is actually almost a detail. The important thing is that the committee has come up with a big picture solution that most can accept. That is a considerable achievement, and I congratulate the committee members on that. The committee has also recommended a number of changes to other matters in the bill, which I fully support but which I do not have the time to go into in detail here. Those are set out in far more detail in the committee’s report, which members will be familiar with.

In addition, a Supplementary Order Paper that I released today extends the tax exemption from employer contributions to KiwiSaver to other registered superannuation schemes. This is a further measure to help New Zealanders save for their future. The exemption will apply to schemes and sections within schemes where the benefits paid depend on contributions made and on their returns.

I conclude by thanking the Finance and Expenditure Committee for its hard work on this very complex bill, and I commend its report and the bill to the House.

Dr the Hon LOCKWOOD SMITH (National—Rodney) : This is very important tax legislation. It has the potential to impact severely on investment in this country. The Finance and Expenditure Committee was told, for example, that this legislation has the potential to divert even more investment into residential property in New Zealand—an area where New Zealand does not need more investment. So it is very important legislation.

Quite contrary to what the Minister of Revenue has just said, the process the Government has gone through, I would argue, is not how we develop sound legislation, at all. One respected submitter to the select committee said that this was legislation through media statement. I want people listening to this debate to know that most people who are interested in taxation matters in New Zealand have had no opportunity to make submissions on this legislation that we are debating tonight. Sure, they had the chance to make submissions on the legislation the Government introduced, but that is totally different from what we are debating tonight. The Government introduced legislation that would shrink the number of “grey list” countries and introduce and impose a capital gains tax on 85 percent of the gain on foreign portfolio investments. When I say portfolio investments I mean where New Zealanders have investments and shares offshore and the ownership of the company is less than 10 percent.

The legislation as introduced is what the public and those interested in taxation matters were able to make submissions on. Tonight we are debating something totally different. Tonight we are debating this 5 percent fair dividend tax that the Government has now come up with, halfway through the process. What makes this a bad process is that most of the 2,226 submitters on the original legislation—and, of course, 99 percent of them were against it—never had a chance to make submissions on the subject of our debate tonight. About 12 of those 2,226 submitters on the original legislation were invited by the select committee to make submissions on this totally changed legislation. That is just unfair to the so many other people who made submissions on the new capital gains tax that the Government proposed to introduce. It is so unfair to them that they never had the opportunity at all to make submissions on this 5 percent fair dividend rate tax. Those who did make submissions pointed out that there is nothing fair about this 5 percent fair dividend rate, and there is nothing about just taxing dividends in this 5 percent fair dividend rate. When we look at the international weighted dividend yield, a 5 percent rate clearly taxes capital gains.

This Labour - United Future - New Zealand First Government has to decide what it intends to do with this taxation of portfolio investments offshore. Does it intend to tax capital gains, or not? This legislation that we are debating tonight does still tax capital gains. I will get into that detail.

What makes it even worse is that today a Supplementary Order Paper was introduced. The Minister did not even refer to it in his speech.

Hon Peter Dunne: Yes, I did.

Dr the Hon LOCKWOOD SMITH: I apologise if he did. Today a Supplementary Order Paper has been introduced that makes yet another last-minute change. This is the second time we have seen that. With the KiwiSaver legislation the Government made a last-minute change that no one in the public had the chance to make a submission on, and, again, no one in the public has a chance to make a submission on this very significant last-minute change to this legislation—a change that will extend the exemption from specified superannuation contribution withholding tax from employer contributions to superannuation schemes other than KiwiSaver schemes. Although I accept that that move is something National would support, it is still a matter of principle in New Zealand that the public should have the chance to make submissions on legislation to ensure that the quality of the legislation produced is acceptable.

I want to look at some of the detail of the measures in this bill to impose this 5 percent fair dividend rate. The select committee’s commentary on the bill sets out the Government’s objective. It states: “The objective of these changes was to tax portfolio investments in offshore companies more consistently, regardless of whether the investment was made through a managed fund, or made directly, and regardless of where the investment was located.” This legislation we are debating does not achieve that objective, at all.

Managed funds and individuals’ portfolio investments in companies overseas are treated totally differently. For example, if we invest through a managed fund, we are taxed on a 5 percent return, regardless. If we invest as individuals in portfolio investments offshore, we will be taxed on the actual return from those investments in any one year on up to a 5 percent maximum return. It is totally different treatment. If the objective was to make managed funds and individuals’ taxation the same when investing offshore, then it would have been quite simple to change that and to make the two policies consistent.

The provisions to enable individuals to be taxed at a return below that 5 percent flat rate for managed funds are complex. I will mention this exchange, although it is probably a bit unfair to one of our advisers. At the select committee we asked a very senior adviser who knows this legislation inside out whether he would bother to have his portfolio investments offshore taxed at an actual return rate. This very experienced adviser indicated to the select committee that he probably would not. He indicated that the provisions are so complex that it would not be worth the candle to do it, and that he would probably just pay the tax on the 5 percent flat return. When a senior adviser who knows the legislation inside out suggests that it is too complex to bother trying to get the benefit of being taxed on less than that 5 percent return, we clearly have very, very complex legislation and, I suggest, totally unsatisfactory legislation.

Another big difference is a $50,000 de minimis for individual investors. In other words, individual investors have a $50,000 zone of investment offshore on which they are not taxed. If they invest through a fund, they do not have that. Funds will be consistently taxed, therefore, more than the investments of private individuals. That $50,000 de minimis means there will be no tax to pay on a $50,000 investment. If $50,001 is invested, the full tax rate is paid on the lot. The effective marginal tax rate on those extra few dollars above $50,000 is thousands of percent. The result is that wives, children, and pets will all be listed as having shares offshore, because no one in his right mind would pay those kinds of marginal tax rates.

The select committee was advised that managed funds in New Zealand will migrate to Australia because, with the complexity of these rules, it just will not be worth being involved in New Zealand. If we invest in private companies offshore, then either those will have to be revalued every year or we will have to pay tax on an assumed 5 percent gain. We were told at the select committee that this legislation will make it hard to recruit highly skilled people internationally. It was pointed out to us that if the value of the New Zealand dollar drops, people will be taxed just if the currency shifts. If people get a New Zealand return, then they can be taxed just on a New Zealand dollar shift. The New Zealand dollar value of offshore investments may go up if the New Zealand dollar drops, and people would be taxed just on that currency shift. If the value of people’s investments drop this year, they will not be taxed. If next year the value returns to the same level it started at last year, then people will be taxed on that gain, yet their net position will be unchanged. They will be no better off, but they will be taxed on that gain just by the value returning to where it started.

But the most serious thing, as so many experienced funds managers pointed out to the select committee, is that this legislation will distort investment. It will provide a serious disincentive to invest offshore in a diversified portfolio. This legislation will provide an even greater incentive for New Zealanders to bring back their money from overseas and invest in residential property here in New Zealand. People get the capital gains free and the returns are far better, so why would they not? This is bad legislation because of all those complexities and distortions.

R DOUG WOOLERTON (NZ First) : New Zealand First supports the Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill, and we do so because it is a genuine attempt to make investment fairer across the board. Members will know that we have not had complete agreement in our caucus. I think members can take from that that we in New Zealand First have had a very, very robust debate on this issue, have not come to our conclusions lightly, and have not given the bill just a once-over-lightly. We have gone into it in depth.

It has always been iniquitous that what I like to call managed funds in New Zealand have been taxed at a rate of 33 percent, whereas other investments have been taxed at the taxation level of the investor. Under this bill there will be a flow-through effect for those people who are on a lower tax rate and who invest largely in managed funds because they either do not have the expertise to invest for themselves or do not want to be bothered with it. I have said in earlier speeches that when the current leader of the National Party, John Key, was on our Finance and Expenditure Committee, he seemed to come from the angle—and I do not blame him for it, because this is his area of expertise—that every person who invests is an expert, every person who invests comes from a background of expertise, but that is way beyond the actual case in New Zealand. This bill, for the first time, makes an attempt to look after the mum and dad investors. We have to do that, because there is a flow-through effect for KiwiSaver. The bill recognises, even then, that there are some small differences, and, at the end of the day, we have had to accept a few compromises in this bill, which we knew we would have to do—that was always recognised.

It is pretty rich for Dr Lockwood Smith—who has been a valuable member of the select committee, I might say—to say that there was an unprecedented number of submitters on the original bill, and that not much diligence was shown in producing the modified bill as set out by the Minister of Revenue at the beginning of this debate. I would suggest most strongly that that is the proper response of a proper, democratic select committee. If there is a whole bunch of submitters—and on this bill there were close to 3,000—and there is significant opposition to a bill, surely the right thing to do is to change that bill, and to change it substantially in line with what the submitters require. That is exactly and precisely what has been done in this case, yet Dr Lockwood Smith criticises that.

We know that National members are not absolutely staunch in their criticism of this bill, because they too recognise that, although it is in some ways a compromise, it is a huge step forward. We know that, because those members have said that if they were to come to power some years hence, they would not change it, they would not kick this bill out, and that is politics-speak for saying that they actually agree with it.

Rather than criticise the select committee and the Government for changing the bill, I applaud the select committee, of which I am a proud member. I applaud the chairman of that select committee, the officials, and the Minister for listening to submitters. It would be a very barren Parliament, I suggest, that did not listen to close to 3,000 people on an issue such as this one.

Something that I, certainly, can take away from the select committee process is an insight into the issues that surround financial investment. I was impressed by the level of investment that people in this country make, and the level of care and foresight that they put into looking after themselves in their old age, looking after their families, and, in fact, looking after their grandchildren, by way of investment. It was quite touching, actually, to see people come to talk to the select committee not only on their own behalf—although most did that, I must say—but also on behalf of others.

• Sitting suspended from 6 p.m. to 7.30 p.m.

R DOUG WOOLERTON: In the 4 minutes and 30 seconds I have remaining I would like to speak about the fair dividend rate, which is something the select committee settled on to take care of the conundrum of taxing equally everybody in the investment market. Dr Lockwood Smith has criticised the fair dividend rate of 5 percent, saying that it is not fair and is too high. I point out to him that in actual fact the deemed dividend rate, which he and his party would have supported—and I know this because of conversations in the select committee—would have worked out at about 3.4 percent in normal circumstances. I am sure the Minister will nod at me if I am correct. So the fair dividend rate of 5 percent is not too far away from the 3 percent deemed dividend rate that National would favour. But the fair dividend rate does not tax an investor in the year of a loss, whereas the National Party’s proposed 3 percent deemed dividend rate would tax the investment even in years of a loss. Dr Lockwood Smith fails to mention that National would support a regime that taxed people when they made a loss. We in New Zealand First—dare I say it, we on this side of the House—would never agree to such a situation, because tax not only has to be fair but also has to be seen to be fair, for people to participate in a voluntary tax regime that we run in New Zealand.

Just before I run out of time, I want to endorse, this time, a statement made by Dr Lockwood Smith, but I want to endorse it from a different perspective. We believe that most people, instead of going through all of the calculations required to pay this tax on their investment, will just forget about doing that. They will not bother with accountants, they will not bother mucking around, and they will not worry about the infinite detail; they will simply pay the 5 percent on a regular basis at the beginning of each year. What does that tell us, and why do I mention it? If people really thought this fair dividend rate, at 5 percent, was unfair—as they are proposing tongue-in-cheek—they would not do such a thing. They would hire accountants, and go to the end of the earth to do whatever calculations it took to avoid paying that amount. But they see it as fair, and I suggest—and it is certainly the view of the Government members on the select committee and those of us who support the Government—that by and large it will be paid straight up by most people. They will pay the 5 percent rather than muck around working out the calculations.

It is true to say that most submitters would have favoured no change at all. Most people who presented to the select committee were direct investors who get tax rates that are not available to what I call the ordinary Kiwi. That is what this bill sets out to redress, and it is no wonder, in that case, that most people who submitted were opposed to the bill. Given that, and given that the select committee made the changes that most people would have wished us to make, it is fair to say that New Zealand First members are pretty confident in supporting this bill.

Hon BILL ENGLISH (National—Clutha-Southland) : I think the previous speaker, Doug Woolerton, just showed how bereft the Government’s general approach to tax policy is becoming when he set forth, for the benefit of the House, the rather radical idea that this legislation is good because it is too complicated for people to get fair taxation, so they will go for the simple version, which means they will pay more than they should. Well, that is a bad principle of tax policy. It should be the case that any taxpayer is able to understand their liability—that being a fairly calculated liability. Instead, New Zealand First have decided—maybe it was intentional—to make the alternative so complicated that all direct investors will end up paying the higher rate when they could have got a lower one. This is actually a bad principle, and it raises the issue of just what tax principles the Government now adheres to.

We know this is a difficult area. I can recall giving speeches on tax measures related to exactly this problem almost 10 years ago—1986, or 1987, I think; maybe it was 1998—when the whole thing fell over, partly because of the complexity that is now built into this law. In that case, the member Doug Woolerton may be interested to know, it was his party that pulled the plug, for exactly the reason that he said that he supports this bill. Last time it pulled the plug because it was too complicated for an individual taxpayer to be taxed at the right rate. Today he said that he supports the legislation because it is too complicated for an individual taxpayer to be taxed at the right rate. Well, I guess that is just politics and the passage of time. So I acknowledge that this is a difficult area, and National does to.

Actually, a significant number of taxpayers will be better off. The Government has given up what looks like about $150 million of revenue by taxing people in the managed funds at the right rate—that being their own rate—and it will stop taxing capital gains. Those are good things. But the Government’s tax principles are getting harder and harder to divine. Certainly, this process has been a mess, just like the KiwiSaver process was. The only saving grace is that this result is better than what would have happened if Government members had not changed their minds, and completely bypassed the generic tax policy process to get a result.

Just when I thought maybe it was worth the effort, today the Government announced a major change directly relevant to this regime, saying it will extend exemption from the specified superannuation contributions withholding tax to superannuation funds that meet the criteria. The generic tax policy process stood the test of time, and it is a real pity the Government has abandoned it—a real shame—because in the long run it will undermine the confidence of tax practitioners and taxpayers in the policy-making process. It might suit the Government in the short term—and we are seeing this fading Government take more and more short-term measures—but in the long term it will lead to greater complexity, less compliance, and less certainty about our tax system. Any Government needs consistent reminding by taxpayers about the impact of tax measures on them, and those taxpayers need real and active opportunities to help shape the policy, because that is what buys them into it. I would like to hear from the Government tonight as to whether it intends all its tax measures to now bypass the process.

We are seeing an accumulation of multiplying complexity in our tax system. From the day the Government decided to put the top tax rate up to 39c, we have seen a whole industry redevelop—one that I thought we had got rid of. It used to be the bad old days when people spent as much time working out their tax liability as they did creating wealth. Well, particularly when it comes to anything to do with international taxes, and anything to do with savings and superannuation, people are now back into that business. There is more and more complexity for no obvious or well-specified benefit.

I cannot help thinking Dr Cullen has fallen into the trap of his own cleverness. He has now moved away from the basic, sound tax principles of broad bases, low rates, and no holes. He has now decided that he is the tax magician. He is sitting there in his office, pulling a credit here, an exemption there, a deduction there, a concession over there—and New Zealanders are the rats in the laboratory, who are all meant to follow around according to the particular incentives and signals that Dr Cullen is trying to send.

The abandonment of the generic tax policy process is a symptom of the fact that the Government is losing its rationale for how it is operating the tax system. It has become totally focused on ad hoc decisions driven by political forces, and on trying to square up revenue, when it knows it could actually afford to give it away. So that is the problem with the Government’s principles.

To return to the Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill itself, is it not fascinating to see how our perception of different policy measures can change. When the McLeod Tax Review first came up with the idea of taxing deemed returns, it was regarded—by probably most people—as quite radical. It is quite a logical idea, but at the time that report came out, back in 2001, there was really no political interest in it. Yet, here we are where the same kind of measure—not exactly the same, but similar—has turned out to be the one way of rescuing one of the long-running tax problems that the Government has had to deal with. I give the Finance and Expenditure Committee some credit for coming up with a better solution, because if they had not, this, of course, would have been a disaster.

It is also clear from the select committee process that the Government vastly underestimated how many Kiwis were behaving in a rational way and directly investing savings overseas. I do not think the Government actually believed anyone was doing it; or it believed that if they did it then they were rich fat cats and deserved to get slugged. But, of course, the select committee was overwhelmed with several thousand submissions. Is it not ironic that Dr Cullen lectured us endlessly about not investing in housing and about the need to diversify and to get into financial investments, but remained completely unaware of the fact that thousands of Kiwis were already doing it? That is a serious question. How did the Government ever conceive that its original measures would be acceptable? It could only be because Government members were either ignorant or stupid: ignorant in that they did not know the scale of direct investment by New Zealanders, or stupid in that they knew and thought people were going to wear the original proposals—and, of course, those people did not.

I am particularly concerned about the Supplementary Order Paper that the Government has put down that extends the exemption to employers’ superannuation schemes. Dr Cullen is now put in a position where he looks like he never thought of it. He came up with this measure, did not think about the implications of it, then, at the last minute, realised that he was going to skew investment patterns if he did not have the same exemptions for employers’ superannuation schemes as he had for KiwiSaver. Now, is that not sloppy policy? One would have thought that in any regime in which the Government was looking at changing the regime on taxes on savings, the connections from one bit to another would have been thoroughly examined and understood, and built into the original proposals.

Some of this legislation does represent progress. But I would have to say that the environment in which it has been pushed forward gives me real concern—both because the Government has abandoned good principles of tax policy, and also because it is clear from its very significant last-minute manoeuvre to extend the exemption to employers’ superannuation schemes that it had not thought through the policy. It just had not thought about the connections, which are pretty obvious. There is a whole Inland Revenue Department full of officials over there, and Treasury, and, apparently, the smartest Minister of Finance the world has ever seen, yet they had never thought of it until yesterday.

JEANETTE FITZSIMONS (Green) : There are certain principles that a good tax system ought to try to observe. They would include having a broad-based system with a wide range of tax sources so that none of them needed to be taxed at too high a rate. They would include having a system that was fair in two senses: first, that people in the same situation were treated the same and, second, that people were taxed according to ability to pay. A good tax system should be easy for the taxpayer to understand and comply with, and it should be easy for the Government to administer.

The present tax system does not meet those tests, and neither does the tax system set out by the Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill. The bill does address some anomalies, but in doing so it creates others. Overall, it replaces a dog’s breakfast with a different kind of dog’s breakfast. The Greens would like to vote for the annual rates and for the pass-through rules for managed funds, which we strongly support. But we would like to vote against the overseas investment rules, which are, overall, no more fair or simple than the present system. We will therefore abstain at this reading and at the third reading.

The current system of tax has some major faults. We currently tax all those activities we want most to encourage: work and enterprise. We currently leave untaxed those activities we most wish to discourage: waste, pollution, use of scarce resources, and speculation. However, this bill does not address those issues at all—they are not on the Government’s radar, despite our efforts. So I will turn to those matters that are addressed by the bill.

The current situation does not treat taxpayers who are in like situations in a like manner, so the system already breaches that principle. Overseas investors are treated differently depending on whether they are in countries on the “grey list” or in some other overseas country. Investors on a low tax rate pay more if they invest in managed funds than if they invest directly. Investors who are on a 39c tax rate pay less tax if they invest through a managed fund than if they invest directly. Investment in property is treated quite differently from investments in the sharemarket, and, I believe, strongly biases investment towards property, which has a lot of other side effects. Some investments pay no tax at all because they pay no dividend and all of the gains are paid out as capital gains, which are untaxed. So looking at that particular dog’s breakfast, we can see that the bill solves a few of those problems.

The look-through rule for the portfolio investment entities is a very good move, and we support it, but if people’s tax rate is 19c in the dollar, then that is all they should be paying, regardless of whether they invest directly or through a managed fund. However, the bill does not address the fact that people on a 39c tax rate are still advantaged if they invest through a managed fund.

The bill tries to deal with those UK entities that pay no or little dividend and that provide all the benefit through a capital gain, but it does not deal with them very well. In the process of trying to solve those problems, the bill creates more anomalies. As the bill was introduced, it removed capital gains tax on New Zealand and Australian investments and put it on investments in countries on the “grey list”—those eight countries that have previously been exempt. That created far more howls of protest and outrage than the revenue effect actually justified. The bill provided an exemption, after negotiation, for one company that had particularly skilled lobbyists. It also provided exemptions for people with investments of less than $50,000—but many KiwiSavers will find that as their savings accumulate they will shoot through that ceiling of $50,000 and become liable for tax on those investments.

There were a huge number of submissions. The Finance and Expenditure Committee sat for weeks and weeks to hear them, and they were very similar. As a result of those submissions we suddenly got a Supplementary Order Paper. After all those weeks of getting our heads around the incredible complications of the capital gains tax regime, we then found overnight that the capital gains tax regime had gone—

Dr the Hon Lockwood Smith: Sort of gone.

JEANETTE FITZSIMONS: Sort of gone. We still have an exemption for one company, which still has its very skilled lobbyists, and we still have the exemption for investments up to $50,000. The system still treats Australia and New Zealand differently from the rest of the world, and one of the anomalies we have now is that that creates real boundary problems. What is a New Zealand company or an Australian company? Can it be defined? Submitters suggested to us that it would be very difficult to determine whether a company was a New Zealand company or Australian—what about its parentage, its subsidiaries, and so on? The system still treats investment in property and investment in shares on quite a different basis. So the bill has made a good attempt to address some anomalies, but it has created others in the process.

After hearing submitter after submitter say that the bill was unfair because it did not treat like investors in the same way, that it was hugely complex and people would need an accountant and a tax lawyer to comply with it, that taxpayers would find it hard to follow, and that finance companies and managed funds would find it hard to comply with, I eventually started asking questions of those submitters. I asked quite a number of questions. I asked whether it would be fairer and simpler if instead of all this dog’s breakfast we had a straightforward capital gains tax on all income from capital gains across the board, with no exemptions. All the submitters to whom I put that question said that that would undoubtedly be simpler but that politicians would never go there. I wrote down the answer that John Shewan gave me. He said we would not be sitting here today if we had a comprehensive capital gains tax across all types of investment. So I am disappointed that the Government has chosen, yet again, not to look at that possibility. It would not be very hard to sell it to the public if it was made clear that additional tax would not be taken and that a broad-based capital gains tax would enable tax rates of other sorts to be lowered, particularly income tax rates. The Greens’ preference would be to use the tax to provide a tax-free band at the bottom of the income tax scale, which would mean every taxpayer got the same rebate. However, the Government has not gone there.

The absence of a capital gains tax is distortionary in other ways. It certainly is a big contributor to the overheated property market and to inflation, and that has been identified by the Governor of the Reserve Bank. The absence of a capital gains tax makes things very difficult because it distorts investment behaviour into property. People’s second homes and investment properties push prices up. Young families cannot get housing and cannot get their own homes. It would be entirely possible to exempt the primary family home for every family from capital gains tax but to charge it on all other kinds of property investments. That would stabilise property prices, stabilise the housing market, enable young families to get into housing, help with the inflation rate, and help with New Zealanders’ level of indebtedness, whereby they are borrowing against these ridiculously inflated house prices in the assumption that prices will go on rising, whereas we know that a day will come when they will not.

SHANE JONES (Labour) : Kia ora anōtātou. Firstly, I acknowledge the efforts of my committee members on this marathon task of dealing with the Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill. However, I must say that when we prepared to break into a subcommittee and hear from the four winds what the various submitters had to say, no one was more vocal than John Key about insisting that we spend the time and give concentration and effort to the people from Auckland, particularly the submitters, because they are high-quality, very influential, and likely to offer very coherent views that might influence the Government’s policy. It came as a great disappointment, but not as a surprise, to Doug Woolerton and others that the very person who never showed up to any of the hearings was John Key.

I give full marks to the deputy chairperson of the Finance and Expenditure Committee—my fellow Northlander—who, when we became bored of talking about tax, compared notes about bulls. Before I talk about anyone else in the committee, I pay a vote of thanks to Robin Oliver and his team. We were served up an array of problems, and the committee went through a series of permutations, but I must say to Mr Oliver and his team that they attended to our every need, answered all of the questions, and followed us from Auckland, Wellington, and down to Christchurch. So I pay a vote of thanks to them. Irrespective of who the Minister might be, or, perish the thought, who the party might be, we are well served by Robin Oliver and his team.

Let us move to the lame, very vacuous assertions that have been made by Mr English and others that we abandoned process. Let us get a few facts on the table. Fact number one is that no one less than Sir Roger Douglas recently commented to me, when I saw him at a social occasion, that this problem has bedevilled many Governments. It caused him some consternation and it defeated Ruth Richardson. Indeed, we have employed and seen a host of experts come through the process and offer us their views, such as my good friend Rob McLeod and Mr Stobo, and it fell to this committee to craft a suitable and reasonable solution to a longstanding problem.

In crafting this solution, I remind everyone that there have been about eight policy documents over the last year, or slightly longer, so anyone who is suggesting to the public—who, no doubt, are riveted, listening to these speeches at the end of the year—that due process was destroyed is not dealing with the facts. At the end of our process we provided an opportunity for nigh on 15 to 20 of New Zealand’s experts to give us their view about the fair dividend rate model. Of course, there are a host of other aspects to this bill, but the fair dividend rate model worked most people into a lather, and it was all based on misinformation.

I cannot say with any authority that that misinformation was fed by the Opposition, but there was gross misinformation that was no doubt aided by the accountants whose capacity to add value is inversely related to the costs they charge. However, absolute opportunity was created for the experts throughout the commercial community. Prior to that, we heard from all members of the submitter community who wanted an opportunity to put forward their submissions or to speak to their submissions.

It became apparent to the long-serving, highly productive, and industrious committee members, aided by Mr Woolerton and our friends from the minority parties, that this bill, in the context of MMP politics, aided with great advice from the officials, could be improved upon. That is the essence of parliamentary democracy. One is served up legislation on a select committee, and nothing is incapable of being improved upon. We heard from the submitters that the model we dubbed the 85 percent model was certainly capable of being enhanced. We had the opportunity to hear from Mr John Shewan from PricewaterhouseCoopers. He promoted the model of a deemed rate. Initially, that model gained some favour. However, he himself lost his enthusiasm to advocate for it, presumably because some of his own clients did not like the idea—they wanted to pay zero tax.

From out of the atmosphere that comprises parliamentary democracy we received a letter from the Minister of Finance, the Minister of Revenue, who invited us to study the fair dividend rate model. This particular part of the bill generated most of the submissions, and we concentrated on it—some might say disproportionately, but we gave it a suitable amount of effort and time—and we have delivered what, I think, is a reasonable compromise at this point in time.

There have been earlier references to the importance of simplicity. The 5 percent model for the funds industry is a paragon of simplicity. To take into consideration the anxieties of the direct investors, we have maintained the de minimis. We have also given them the opportunity to pay on that which they actually earn.

Throughout the entire process, Mr Woolerton, myself, and—indeed—Mr Copeland, asked individual submitters what they were actually earning when they put their dough into international equities, and why were they content to continue leaving their investments marooned at a 1.5 percent to 2 percent return. Of course, we never got a satisfactory answer. In many cases we were led to believe that the full return on that investment was actually wrapped up in a capital receipt, rammed back home to escape the tax net. How, if we let that happen, are we going to meet the cost of hospitals, roads, and a whole variety of other public-good investments?

There has been some loose and very ill-informed language about this being a capital gains tax. Nothing—nothing—in this legislation suggests to me that it is a capital gains tax. It is a tax on the dividend and on that portion of the dividend that sits in the growing equity, and it takes an approximation of what a reasonable person is going to earn. Who on earth is putting millions of dollars overseas for anything less than 5 percent? As no one less august than Winston Peters has said, people may as well leave their money in the Kiwibank. Those are words that obviously reflect many years of wisdom as a long-term parliamentarian.

However, I would like to say, in wrapping up, that the select committee worked together well. We had our differences, and part of the bill is supported, and part is not supported, by our friends from National. But we were there as legislators and agreed to park the adversarialism in the House and endeavour to do the best that we could with the hordes of submitters writing to us and wanting to speak to us. In levels of interest—some I hope as a parliamentarian never to see again—Bruce Sheppard looms very large on that list. No doubt, in what passes for my career, we will see a lot more of him. But we have a great deal of support out there amongst the professional advisers and the investment industry, especially those coming from the funds industry, because they have certainty, they have simplicity, and I think, in time, they will come to love what they have been served up.

TE URUROA FLAVELL (Māori Party—Waiariki) :Tēnātātou katoa. Amidst all of the fanfare that came with the 2006 census figures last week, there were a couple of facts that are relevant to the debate today. Fact No. 1 is that for Māori aged 15 years and over, the median income is $20,900. For all New Zealanders the median income is $24,400. That is a tangible difference between Māori and everyone else of $3,500. Fact No. 2 is that 10.2 percent of Māori have an annual income of more than $50,000 compared with 18 percent of all New Zealanders.

Some members may be familiar with a gentleman by the name of Henry Ward Beecher, a Presbyterian minister who, like his sister Harriet, advocated for the abolition of slavery and for the right to social justice. One of his sayings was: “In this world it is not what we take up, but what we give up, that makes us rich.” Looking at the situation described in those census statistics, and being mindful of the ever-increasing gaps between rich and poor in this land, the Māori Party comes to the Taxation (Annual Rates, Savings Investment and Miscellaneous Provisions) Bill wondering what this Government will give up in order to make all New Zealanders rich.

The Māori Party taxation policy is driven by two key forces: manaakitanga and rangatiratanga. The application of manaakitanga would be evident in acknowledging the mana of others as having importance that is equal to or greater than one’s own, through the expression of aroha, hospitality, generosity and mutual respect. In practising rangatiratanga, there is an emphasis on following through on commitments made, and integrity and honesty are demonstrated. So it is that manaakitanga and rangatiratanga lead us to address the 1.9 million taxpayers in this nation who are on an income of less than $25,000. Those people are paying a massive $3.5 billion in tax while at the same time the Government accumulates surpluses that, in the last financial year, have totalled an amount of $11 billion. So we look to those people in any initiative that is seemingly designed to enhance the economic position of New Zealanders.

The central feature of this bill is meant to be a reform of the taxation of income from share investments—New Zealand - based managed funds or direct investment—with the clear purpose of removing inconsistencies. The Māori Party is certainly supportive of any initiative that can act in a way to enhance fairness and consistency in savings policies. We know that the current taxation rules on share investment have needed an overhaul for quite some time. The treatment of individuals and companies has been, at best, uneven. Direct investment by individuals appears to have been favoured over investment through managed funds. Some investors are overtaxed. So this bill was intended to place the taxation treatment of different types of share investment on an equal footing. The bill is branded as introducing greater fairness into the rules and reducing the distortions that are evident in current taxation policy. Well, that is all well and good. But does it do that?

In order to understand the reform, we need to take the widest possible view. To look at only part of the picture will inevitably short-change those New Zealanders who are looking for greater fairness in the way their investment income is taxed. Despite the stated purpose of reducing the taxation distortions on investments, the bill introduces an ad hoc capital gains tax regime rather than one that has consistency. The bill also attempts harmonisation between Australia and Aotearoa, allowing equity between investors operating in both countries. In effect, that means New Zealanders can invest in Australia instead of New Zealand without a taxation penalty. We need to ask what benefit it will be to the nation if people invest elsewhere. The bill suggests that from next year, people who invest in New Zealand - based managed funds will see greater fairness in the way their investment income is taxed. The new rules will remove several taxation disadvantages for people who invest through managed funds, many of whom are described as ordinary, middle-income savers.

Into that mix, let us throw the humble New Zealand pie. We are not talking about the mince and cheese variety. The pie introduced in this bill is a portfolio investment entity, which comprises any savings vehicle that elects to go into the regime. The bill removes the current major taxation disadvantages from New Zealand managed funds: the full tax on capital gains and overtaxation of low-rate investors. By treating those funds in a similar way to direct investment by individuals, the disadvantages are removed. Investors in actively managed funds who invest offshore would be significantly better off under the fair dividend rate than under the current rules. Alongside that, the Finance and Expenditure Committee reported that investors in actively managed funds who invest offshore would be significantly better off under the fair dividend rate that it has recommended than under the current tax rules. We note, too, that for individual investors and family trusts, if the return on investment is less than 5 percent of the opening market value, individual investors and family trusts will not be taxed at the fair dividend rate—5 percent—but at a lower rate, or they will pay no tax. So we are in the same situation, again, of some people paying tax and others not.

We are also concerned about the tax increase on superannuation contributions that faces lower-income earners, who are being made to offset the risk of “salary sacrifice” by higher-income earners. It is those people who form the “not” category that we speak of today. Although we support the removal of the different taxation rates from those who invest directly and those who invest through managed funds, our primary concern is about those New Zealanders who struggle to put kai on their tables, let alone to contribute to a savings culture. Every dollar of a poor person is taxed, including the dollars of those persons on benefits. However, this bill determines that those on high incomes have the means to benefit from asset value increases, which are non-taxable. We have to ask whether that is fair.

Our other key concern around the whole concept of a savings culture is associated with our concerns around the concept of the genuine progress index. That is the argument that says we need to broaden the tax base, so that taxation is also used as a valid means of demonstrating the real costs of pollution and environmental damage. In the context of the capital gains tax, for example, we know that investors are receiving taxation concessions even though it is not known whether any actual income is being made. If income were calculated on the full cost basis, the actual capital gain might be negative, but investors have no idea of how much depletion of, or damage to, the environment is occurring. There is a good chance that capital gains are overstated, and a good possibility that there is no capital gain. Thus, although a company may be able to claim a positive and growing wealth, it is a false claim, a false measure of wealth, because it has failed to take account of all the costs involved. The notion of gain and wealth masks potential, because that is not really accounted for. The market response to that argument is that the market knows, and that it takes all of that into account. The genuine reply to that is to ask how the market knows, because it is not being measured.

Finally, it is appropriate to refer to the recent study, released last week, by the World Institute for Development Economics Research. The Helsinki-based institute has estimated that the richest 2 percent of adults own more than half of global wealth, while the bottom half of the population own a mere 1 percent. If 2 percent of adults have more than half of the world’s wealth, including property and financial assets, in their hands, I ask whether that is fair. Is it just that in Aotearoa the proportion of all children who are in severe or significant hardship has increased from 18 percent to 26 percent since 2000? Is it socially desirable that the people who suffer the greatest poverty in New Zealand are our children, with 38 percent of them in the hardship categories? I remind the House of the statement I made earlier: in this world it is not what we take up, but what we give up, that makes us rich. What are we prepared to give up in order to enhance wealth creation for all citizens of Aotearoa?

I advise the Minister that the Māori Party is a little ambivalent with regard to this bill. Our concerns regarding poverty and the big picture lead us to vote against it at this point in time, but we are prepared to consider other views further on. Kia ora tātou.

GORDON COPELAND (United Future) : In my maiden speech to Parliament on 29 August 2002, I stated that one of my goals in coming into Parliament was to overhaul a discriminatory tax system that skews New Zealand investment in the direction of housing while starving business of much-needed capital growth. That was something identified for us by Sir Ivor Richardson, one of New Zealand’s tax experts, in the 1988 Royal Commission on Social Policy. The United States, for example, has 34 percent of total household assets in housing, and 66 percent in other investment assets such as stocks and bonds. New Zealand is diametrically the opposite, with 61 percent in housing and just 39 percent in growth-orientated assets. So immediately I came into Parliament, I began working on this issue.

Prior to coming into Parliament, it was obvious to me that saving through interest-yielding bonds, stocks, and shares, etc., through superannuation funds and other managed funds were greatly disadvantaged in New Zealand when compared with the alternative of investing in the rental housing market. I was well aware of those realities, because during the 1980s when hundreds of New Zealand corporates were busy winding up their staff superannuation schemes, I was busy setting one up for the Catholic Archdiocese of Wellington. I well remember the disappointment of staff members over the next few years that the returns achieved through the fund, which was managed by a large financial service organisation, were below their expectations.

Disadvantage, of course, is a relative thing, but I am here referring to the high degree of overtaxation on investment through superannuation and other portfolio investment funds, when compared with the alternative of investment in the residential rental housing market. I will briefly outline the three major disadvantages, because when this taxation bill becomes law this week, they will all have been overcome.

The first was in relation to the taxation rate on employers’ contributions on behalf of their staff superannuation funds. Those contributions, when I came into Parliament, were taxed at a flat rate of 33c in the dollar, which of course greatly disadvantaged the many staff saving through those funds, whose marginal tax rate was just 19.5 percent. Still, to this day, 75 percent of all New Zealand taxpayers pay tax at 19.5 percent or less. However, the top tax rates on such contributions had remained capped at 33c. Early on in the last Parliament I took that point up with Dr Michael Cullen, and the tax on such contributions was adjusted to the marginal tax rate of the saver, in the 2003 Budget. The first disadvantage had been removed.

The second problem was that savers’ earnings in portfolio investment funds were also taxed at a flat rate of 33c in the dollar. Others have mentioned that Roger Douglas grappled with that problem. Various Ministers of Finance during the 1990s grappled with that problem, but when I came into Parliament such funds were still taxed at a flat rate of 33c in the dollar. That, of course, also greatly disadvantages the vast majority of New Zealanders, who have a marginal tax rate of 19.5 percent. On this issue, early in 2003 I worked very constructively with both Dr Michael Cullen and Vance Arkinstall of the Investment Savings and Insurance Association. We looked at how we could practically ensure that those savers were taxed at their correct marginal tax rate—again, leaving in place the 33c cap. The issue is fairly technical, and previous attempts to resolve it during the 1980s and the 1990s had not managed to crack this difficult nut.

United Future, therefore, advanced the matter with the Government in its Budget bids for both 2004 and 2005, and I am therefore truly delighted that the problem is resolved through the portfolio investment entity and see-through provisions contained in this bill. Henceforth, savers will be taxed at their correct marginal rates. Disadvantage No. 2 has been successfully overcome after a span of 20 or so years.

Disadvantage No. 3 was the fact that investors, through superannuation funds and other portfolio investment funds, were subject to capital gains tax on share investments. That reality is completely skewed, and was the principal tax distortion I mentioned in my maiden speech. It has now, for some two decades, been tilting New Zealand investment away from company equities and towards residential rental properties. We like to think that New Zealand does not have a capital gains tax, but that has not—at least, for the last two decades—been true of share investments through managed funds. We have had a capital gains tax on such investments for that period of time. Craig Stobo was one of those who, early on after my coming to Parliament, was a passionate advocate of seeing that distortion removed. I strongly picked up on the theme and, again, it was included in United Future’s Budget bid for both 2004 and 2005. That anomaly is also removed in this tax bill, so problem No. 3 is resolved.

The net result of those three disadvantages being overcome is that for the first time in a couple of decades we can now say that we will have something of a level playing field between investment in stocks and shares on the one hand, and investment in the residential rental housing market on the other. This is a great step forward for New Zealand and for New Zealand savers. In addition, this bill pretty much irons out any differences between individual investors—that is, people who invest their own funds using their own skill and expertise—and the much larger number of New Zealanders who save through portfolio investment entities.

These measures, combined with the KiwiSaver initiative, which will kick in from 1 July 2007, should see New Zealand at long last begin to build a far more balanced savings portfolio. That, in turn, will give new momentum and strength to both the New Zealand economy and to the financial security of New Zealanders and their families. It will give financial security to people in their retirement years and to families during a person’s working life as he or she prepares for retirement, as these two things come together.

Therefore, the second reading of this bill tonight is actually a moment to savour. It successfully, and at last, delivers on what various Governments of all shades—starting with Labour in the 1980s, moving on to National in the 1990s, and reverting back to Labour again in 1999—have failed to solve. At long last we have some real solutions to take New Zealand forward.

I want to talk a little bit about residential housing investment and emphasise that a lot of myths have circulated in New Zealand over, probably, the last 20 years in relation to this issue. I am talking here about books that have been written encouraging Kiwis to dump their funds into residential housing investment, some of which perpetuate myths about the tax system that are factually incorrect. For example, there is a myth abroad that there is no capital gains tax on investment in residential housing. Well, that is not true. It is true that when people invest in that area they can deduct the interest on the money they borrow for the house, then deduct depreciation on it and, therefore, gain a timing tax advantage as compared with some other forms of investment.

However, I emphasise that in recent times action by the Inland Revenue Department, with strong support from United Future and from Dr Alan Bollard of the Reserve Bank, has ensured that gains made through capital growth, and assessment of depreciation recovered when a house is sold, are taxed when a rental property is sold in circumstances where the owner, in the first instance, purchased the property with the intent of resale in mind. That has actually been the law of New Zealand for many, many years. Some of the myths that have been perpetrated in that regard have been singularly unhelpful in terms of the design of New Zealand’s overall macro savings situation. Undoubtedly, the great driver of the great majority of rental property owners is that they do buy those houses with the intent of reselling them at an appropriate time and making what they think will be a tax-free capital gain.

I want to encourage the Inland Revenue Department to remain vigilant in ensuring that the law is upheld in that way. Over the last 3 years the department has assessed literally millions of dollars extra in tax by looking into those arrangements in a little more depth. It is very, very important that it keeps that up so New Zealand can at last approach the situation I would like to see—that is, about 50 percent of assets are in housing and 50 percent are in other forms of investment shares, bonds, commercial property, and fixed interest investments.

RODNEY HIDE (Leader—ACT) : First, let me acknowledge Mr Robin Oliver from the Inland Revenue Department. I do not think anyone in the civil service has a tougher job than the man whose responsibility it is to keep his head right across our tax system and to keep up with those who would try to manoeuvre their way through the loopholes that inevitably exist. Mr Oliver and his team do an extraordinary job.

I think too that we politicians should recognise the point that we are not experts, obviously, in the technical detail of tax policy and legislation or its impact, and that the expectation of us in the process is really to set the broad principles and the philosophy within which Mr Oliver and his team can work. I feel that that is where we have been letting the tax system down. As I look back over the past few years at the changes that have been made, I feel that, in the main, they have been of a retrograde nature. Our tax system has become more complicated and has moved away from good principles of taxation.

I have to say that I always enjoy listening to Mr Copeland’s contributions, because he is a politician who does understand the tax system. Although I was unable to make a full contribution to the Finance and Expenditure Committee this time around, I can tell that Mr Shane Jones has grown in the role of handling legislation such as this and the changes it makes.

But let me cover some of the principles. The first one—and we heard this from Jeanette Fitzsimons—is that the tax be broad-based. By that we mean it should cover the entire range of what it is we are taxing, because to the extent that it does not we create an automatic loophole, and to the extent that we have a loophole we create a distortion. It will also mean we have a higher tax rate to raise the same amount of revenue we would otherwise have.

Broadly, we have in New Zealand two tax systems. One is a tax on consumption that is called the goods and services tax, which, in a sense, is a good tax—if there is such a thing—because it does not double tax investments. It taxes only consumption. On top of that we have an additional tax system that is a tax on income, which automatically is a double tax on investment, because when we earn a dollar we get taxed, then we get taxed again if we invest it. That is why tax economists favour a consumption tax over an income tax. Then we have a variety of sin taxes for people who smoke, gamble, drink, and do other things that we deem society not to want.

Gordon Copeland: Back the horses.

RODNEY HIDE: And back the horses. So we like the tax system to be broad-based.

We also—and Jeanette Fitzsimons made this point—like the system to be fair. There is always a debate about what is fair. One person’s fairness is another person’s injustice. When I think about fairness, I think that each person in the same circumstance should be taxed the same, obviously, and that those who earn more should pay more tax. I think that is not a bad principle. But I do not think it is fair that as one earns more money one goes into a higher and higher tax bracket. I do not see why a person who earns twice as much as his or her neighbour should pay four or five times the amount of tax. It seems to me that if we are to be fair, a person who earns twice as much should pay twice as much tax. Of course, if we are to do that then we are striving towards a flat tax.

I listened carefully to Mr Flavell, who said he was concerned about income distribution. That is true, but I make two points. The first is that it may well be that some percentage of the world, of a country, or of Auckland owns a large percentage of the wealth or receives a large amount of income. But how is that achieved?

Hon Member: Hard work.

RODNEY HIDE: Maybe, but it is not something that just fell out of the sky, necessarily. When we are thinking about redistributing wealth, we should understand that it is not smart to do it through the tax system, actually. Tax is a very, very blunt instrument with which to distribute wealth. Why? The reason is that when we tax hard the people who are on a high income or who have a lot wealth, then those people tend—and I will not use a profanity—to leave the country, or they tend not to invest here. Therefore, the economy is flatter than it would otherwise be. So it is not smart to be taxing people hard; it is actually better to have a tax system that raises the money needed, then provide for those we want to help with direct payments rather than by trying to corkscrew the tax system. By the way, if we try to corkscrew the system, we will not actually get very far, because people do not like being punished through the tax system. When Britain had a tax rate of 98c in the dollar, no rich person paid it. That was the reality. Actually, the income gaps in the UK widened with high taxes.

So I make the point that although we have a concern about helping those on a low income, giving that help through the tax system is not the smartest way. Really, if we want to be fair, we want one tax rate so that people who earn twice as much as other people pay twice as much tax. By the way, GST is a flat tax. It is a flat tax on consumption. If we spend twice as much as other people, we pay twice as much GST. That, again, seems to me to be fair. If we have a flat tax for GST, why not have a flat tax for income?

We also want a system that is easy for the Inland Revenue Department to administer. I say to Mr Copeland that that is what I am worried about. Imagine having a tax system that relates to the “intent” of a taxpayer. That is actually pretty tough, and I think we are giving a big job to Inland Revenue Department officials and to the courts, because people who truly want to rip off the system will know how to get around the intent clause—by being very careful about it. How can it be that a person’s tax is determined by what he or she intended at the time, and how on earth is an official to know, when looking at a tax return, what the intent of the taxpayer was when he or she made a purchase? People can make up a great cock-and-bull story about why they bought a house and are now selling it, and why they have done it 10 times over a year. At some point one has to accept the story; at some point one does not. It actually becomes an arbitrary system whereby Inland Revenue Department officials and the courts judge what is in a taxpayer’s mind at the time. I do not believe that it is necessarily a good system.

By the way, we also want a tax system that is easy to comply with—but the system has become a whole lot harder. Why? Because we have tried to hit the rich by putting the tax rate up to 39c. We have tried to screw the playing field around to encourage this and discourage that. The tax system has become so much harder in the last few years. If the Government wanted to make it easy, it would make it flat. That would make it easy and fair.

We also want a tax system to be efficient. By that I mean that the Government has a target of how much money it needs. In the case of the Labour Government, I think its target is way too high, given the surplus. When a Government is designing a tax system, it should be doing it so that it raises the amount of money with the least cost possible. The real costs are not in filling out the paper, in having an Inland Revenue Department to run, and in the court system; those are actually a small part of it. The big cost is the impact on the economy, on jobs, on investment, and on trade. That is the cost of tax. We want a system that raises the targeted amount of revenue for the least cost. As politicians we do not think about that enough.

I again ask Mr Flavell to think about this. If we have a costly tax system—a system that is making it hard to invest in New Zealand, is discouraging investment, or is discouraging business—then, over time, we will have an economy that is smaller than we otherwise would have. What gives us a costly tax system is, for example, our trying to register our wealth through it. If we try to do that trick, we are not helping the poor, at all. What we are doing is making the whole country poor. That is why I say that the efficiency of the tax system is a key point. We want a low, flat tax rate and a strong economy. To get that, the Government should set the tax rate for the amount of money it wants. It can set it at 10c, 20c, 40c, or 50c. It will have an efficient system for the amount of money it wants to raise, therefore it will have more money, and therefore it will be able to help more poor people and have more Government-run hospitals. If that is what it wants, it can do it. As politicians we have to ask ourselves about the principles and efficiency of the tax system. In terms of the technical side of things, I suggest that in Mr Oliver we are in good capable hands. Thank you.

TIM GROSER (National) : First of all, like Mr Hide, I would also like to thank Robin Oliver for his great contribution and advice over the years. My past career has not much run into his, although I have talked to him from time to time. But I have certainly been aware of his considerable influence and of the respect in which his advice is held in a number of important quarters in this country. I am not sure that I want to follow Mr Hide in congratulating Mr Jones on his chairmanship of the Finance and Expenditure Committee. That is not because I have any particular reason to doubt the judgment; I attended my first meeting of his committee only 2 working days ago. It is just that Mr Jones may have a significant role to play in the Labour Party’s political future, and whether receiving high praise from the leader of the ACT party is of great benefit to him is something on which I would pass no particular judgment.

I have been watching the political progress of this bill with a mixture of bemusement, amusement, and sometimes, I would have to say, amazement. The first question was—and I am really addressing here the question of the differing treatment of overseas investment income—whether there was a problem. Oh, yes, we have known for a long time there were a number of problems—a number of distortions. But the first-order question that would arise, because it really is an implied quantitative question, is about the extent of the problem and whether the problem was of such a dimension that attempting to fix it would not raise larger costs than those resulting from the problem in the first place. The second order, in any logical sequence of thought, would have been to ask about the optimal ways through to address that problem.

The deluge of submitters against the bill has really meant that this bill—a bill of extraordinary complexity—has undergone the equivalent of genetic modification: political manipulation. It reminds one very much of that clichéd joke about the camel having been composed or designed by a committee. In some parts, the bill looks as though it bears only a casual resemblance to its original life form, its original structure, and its original ideas. It has been pushed and pulled to assuage this or that submitter, this or that party in support of the bill, this or that opinion, and this or that new fact that emerged in the process of examining the bill.

That reminds me of something that is often said about ideas that run into trouble. They are said to go through five stages. The first stage is the first-mover stage. Somebody in Mr Cullen’s office—maybe Dr Cullen himself; I do not know whether it was him or an adviser in his private office—or someone from Treasury or the Inland Revenue Department would have drawn attention to this distortion and made the argument that something needed to be done about this problem. Stage two is, of course, growing interest in the proposal. Stage three is that the proposal is the new consensus; everyone around Dr Cullen’s office agrees that now is the time to move to reduce or remove the distortion. Everyone is on board. Technicians, perhaps in the Inland Revenue Department, who are aware of the vast technical complexity actually involved in implementing such a policy recommendation are very wise to stay quiet.

I think we are now at stage four of the idea, with one further stage to come. Stage four is the stage when an idea goes a little sour. Growing doubts appear about the wisdom of having embarked on the course of action in the first place. So now that the submitters have come in, we see water is pouring into the ship, and instructions have gone out to put out the political lifeboats and get ready to jettison some of the ballast that is not required. We have the extraordinary vision of Sir Ron Brierley, who has now, through the political process that I am describing, gone beyond the status of being a living legend amongst New Zealand investors to become, effectively, at least for some years to come, a de facto head of State in terms of taxation treatment.

We have not quite got to stage five. Stage five is, of course, the stage where the pernicious unintended effects of legislation like this come fully home to roost. Those who were not involved are rewarded, and those who were involved and were responsible for the idea are punished. Well, fortunately, we have a thing called the democratic process, and the people responsible for that are the New Zealand electorate. I took particular note of the point that Bill English made earlier in this discussion about the Government almost certainly being unaware of the huge numbers of New Zealanders—not just a few rich folk out there—who are affected by this bill, and I am sure Mr English was absolutely right. The Government had quite a shock when it found out the dimension of the problem that it had raised by stirring the swamp up on this particular issue.

The bigger picture here, frankly, is the need for serious tax reform rather than fiddling with something that could well have been left alone. We now see that we are in a position in this country where we have the fatal combination of bracket creep, in terms of taxation jargon, and unadjusted taxation rates. This bill, of course, does not want to go anywhere near that issue. We understand that, because we know there is a subsequent stage to come in the process of so-called taxation reform. It will come sometime before the next election, when an adjustment to the brackets is made in order to take account of the fact that in the last 6 years there has been a 50 percent growth in the number of taxpayers who fall into the $38,000 to $60,000 a year income bracket, where they move, because of the discontinuity in the tax break, from paying 19.5 percent of their income to paying 33 percent. So the argument will be made later on, the adjustment will be made, and then the New Zealand public, in a rather larger political debate than even this debate, will have to make up its mind as to whether, in the course of a 3-term Government, that amounts to a credible and continuing commitment to taxation reform.

The second bigger picture here is the need to do something about this country’s savings position. Like others, I am sure, in this House, I am aware of quite a complicated debate in economic circles—well, at some levels people say there is not necessarily a problem, and others define it in terms of the way that one measures savings flows. That often comes down to a question about whether a dollar invested in housing equity is equal to a dollar invested in a Government surplus is equal to a dollar invested in managed funds, and about the complicated economic effects that arise from those different forms of savings. Although I accept that there are differences of view amongst commentators on that, I do not think there is any serious question that a couple of things in that overall picture are of great importance to New Zealand.

First of all, if we look at the narrower definition of savings in financial assets, we see we do not look very flash. As time goes by, particularly in comparison with Australia, the situation looks increasingly less attractive from our point of view. That is factor No. 1. Factor No. 2, which I do not think there is a great deal of disagreement on, is the dismal picture on investment flows, which are—at the present moment, with our current account deficit being around 9.7 percent of GDP—the second-highest in the developed world, behind Iceland’s. That is a very serious problem for this country. Part of the problem, of course, is the huge imbalance in investment income. That is not an argument to put controls on inward investment. No, no, we should be very thankful that foreigners are prepared to fund a high level of consumption with their own savings.

But, of course, there is a problem here. In 2005 some $13 billion went out of the country in terms of investment outflows. That represents a return from investment in New Zealand assets. So it is a matter of some importance that we actually implement policy structures that are designed to encourage an outward flow of investment from New Zealand taxpayers, which will actually start to ensure that we have some reverse flows, to balance off that rather dismal picture overall.

Does this bill address that issue? Does it provide the greater certainty required for New Zealanders to invest increasingly more of their assets in overseas investments? I think not; I think decidedly not.