So what is wrong with National’s economic approach?
Here are a few quick starting thoughts for a Saturday afternoon: our economic future has to be about more than the “farm and the mine” if we want a high value, high wage economy (farming is of course core, but undifferentiated commodities are notoriously vulnerable to exchange rate swings, and the margins are often low).
Sustainable competitive advantage is about developing that something special on top that keeps the margins up and the value coming – that in turn requires innovation, intellectual property rights, and the smart use of technology, capital and skills to leverage our underlying resource base.
I am afraid all we have seen from National so far is a dumbing down of that debate by focussing on “deregulating” – essentially a passive hope that if govt gets out of the way, a thousand flowers will bloom. In a small, arguably subscale economy it just ain’t that simple, or easy, folks – otherwise we would all have become billionaires years ago. A more active partnership between government and business is required to fast track high value opportunites and align resources.
Secondly, and controversially, ownership matters. No point in getting farm or factory productivity up if the financial system captures all the gain and bleeds the value offshore. About 3/4 of NZ’s external deficit is not the balance of trade but the value of financial flows. The four Aussie banks typically send home more profit each year than is made by the entire NZX 50 companies. To fill the gap, the National Government is poised to flog off even more assets and further liberalise the already very liberal overseas investment regime. Selling Godzone by the acre.
We can’t solve that problem without getting savings up. Way up. Shame National gutted Kiwisaver. Nor can we do it with an outdated monetary policy that targets inflation alone using one tool (the OCR) that makes the housing bubble worse, or at best is not sufficiently focused to fix the bubble without immense collateral damage to exports. We need a bigger sovereign stake in our own economy, before it irretrievably becomes someone else’s.
Is it too late to fix? No I don’t believe so, but every year matters in our race against time. We can’t afford another three years of a National administration that barely understands the problem, has shown itself devoid of ideas, and patently can’t make a decision the latest focus group doesn’t like. We can’t turn this boat around steering by focus group. NZ needs clear goals and a plan to get there. Mr Key may be able to read a map, but he clearly has no compass.
I could go on, and I intend to, as we build up to one of the most crucial Budgets in New Zealand history.
Agreed.
Shudder, I’d almost forgotten about the budget. 
I was beginning to think the ‘right’ loved deregulation so they could stay in power longer. Think about the arguments politicians had when they owned and controlled the rail. They were no good at it, but the electorate blamed them for poor service, broken machines, high subsidies, and they had to keep wages high, etc. Answer, as we see with the cleaners, “Its not up to us ask the CEO”.
David, for your point about overseas ownership read ‘The crisis of global capitalism’ by George Soros (1998). The basics is how we make money by buying assets. As prices rise we need credit, which pushes prices higher. To stay competitive we need to borrow more. Financial services get more & more “savings” in & need to find somewhere to invest leading to more risky loans. This leads to crash. The risk of these loans is borne by smaller institutions (and economies) and large institutions are too big to fail, top exec’s know they will get bailout as politicians don’t want depression (leads to more risk taking). The trail of money then flows back to the financial centers (London, Tokyo, New York). These institutions newly flush will then pick the bones of the medium economies (Australia) who having sold their silver look to the small economies (NZ). They buy low and then use the crash as an excuse to drive down wages, increasing profit (wages) for same exec’s. This brings even more capital (Loans & Control) to the centers, then boom time they sell (high) back to the periphery, providing the loans & selling to middle with second loan (profit, control, no personal risk). Repeat every 10 years and personal fortunes are bigger than some countries. He also rails against the IMF and the mutual fund industry.
I hope you will have the stones to introduce a CGT David that the Nats don’t…
I was recently in Australia and the news reported that their baby boomers will have well over a trillion dollars saved by the time they retire, that is $1,000,000,000,000 due to the introduction of compulsory super in ‘93…
The most needed reform in NZ is compulsory super and it was needed yesterday (actually 20 years ago), the Cullen fund will not even come close to cutting it and if one isn’t introduced very, very soon as a skilled 26 year old I will be off to Aussie to take advantage of not having to pay for someone else’s retirement when no-one is going to pay for mine…
Can Labour also take introducing manufacturing back into the NZ economy seriously, given the rise of secondary oil supplies and dwindling supplies of cheap oil the motto of business in the next couple of decades will be “distance is money”, jobs will be returning home but given our location in the world we MUST get a head start on this…
Thanks Jeremy for the Soros book tip. I haven’t read it yet but will get it.
Jeremy Harris – thanks for the connection with (limited) CGT and comp savings. We have not yet finalised policy around these issues, which needs to include both the caucus and the wider party….but whatever policy we decide will be clear before the elction and will be designed to fix the problems that many now acknowledge are obvious. Monetary reform also obviously has to be part of the mix.
J M H.
The only way we can get benefit from compulsory super (hope you voted in the Peters referendum) is by excluding those over 40. Very serious problems will come when Australia WITHDRAWS over a trillion dollars from their sharemarket. Add in the bigger funds in US Japan and Europe. We are best placed to buy quality companies as their share price crashes. As for CGT it seems you want the Govt to take most of the retirement savings that we have got in this country. The reason that it wont be done is the economic chaos it causes on introduction, plus no effect afterward (see all other OECD countries that tried it).
Once you have done some research you may realize that kiwis do have the same wealth and preparations as Aus or OECD counterparts, but we have a DIY mentality behind it. We don’t just hand our money over to someone else to loose it, or take any profit as fees.
Of course the problem with being “foreign owned” is that every time company tax rates fall, more money leaves the country.
Labour should point out the nonsense of matching any fall to 27 cents company tax in the dollar by Oz, if we don’t have the same level of R and D tax incentive – that is not actual equivalence. We won’t grow the economy without incentives to invest in local innovation and access to cheaper finance for businesses (and beyond the value of their homes – loan insurance?).
A BOP problem is inevitable if local property ownership comes from loan money supplied offshore. The RB has done something by requiring banks to hold more local money, but only active government policy intervention is going to encourage property investors to reduce their debt levels (leading to lower prices and thus lower foreign debt). The signalled end to depreciation allowances and ring fencing property losses is only a tentative start on that process.
Perhaps property investors not paying taxes on their trading profits should be limited in their mortgage cost expense claim? A few ideas.
1. the mortgage expense claim could be for only 90 cents in the dollar
2. the claim is only to be made up to a maximum mortgage of 50% of the property value, this determined at either the time of the original purchase or when the tax policy change was introduced – this prevents landlords borrowing more if the property rises in value.
It’s rather ironic that the calls for Gen X & Y to book the next one-way ticket out of NZ seem to be ringing louder now than when the infamous ‘Generation Lost’ poster came out several years back.
I get the feeling that property speculators – more accurately described as the Quarter Acre Cartel – are NZ’s equivalent of subsidised farmers in France. Both are increasingly seen as unsustainable corporate welfare recipients, but no-one has the cojones to challenge them.
David Harris, the Dunedin-based creator of Pegasus Mail, wrote the following in 2002, and it’s more relevant than ever:
“New Zealand is in real danger of becoming a McDonalds nation – nothing more than a bland plastic replica of suburban USA – simply because we can’t seem to believe that we are as good as we are, or that our own culture and expertise have the value they do. As long as we remain focused on the trap of being “Little America”, we’re ignoring our greatest strengths: our individuality, our number-8-wire approach to finding novel solutions to problems, and an inherent humanity that believes that there might be more or better reasons for doing something than just the bucks in the bank.”
Half the problem with the ‘dumbing down’ is that we don’t have a proper investigative news/business based program on telly. The only people respected enough to comment are “successful” people, and of course the basis of their success becomes the vested interest. That is why we have dullards asking Mark Weldon, Garth Morgan & Don Brash (Kiwisaver managers) about the property market.
Simple formula, look overseas. Sweden did the ring fencing of losses. result property crash, business loans called in. Wealthy better off as only ones who could afford a home (cheap but low loan), and rents higher as less home ownership, more foreign ownership. Ireland tinkered with Depreciation, property no longer treated as any other business. Again higher rents and lower values, and key point less fluidity. If you had portfolio you kept it rather than sell, if you were starting out it was much harder. Again favored the wealthy and foreigners.
How bout we balance the market like the US and offer homeowners tax deduction on the family home as well? How bout we value a house when its built and carry a book value for depreciation on the Council property report. As renos of changes are made we can bump up this value too.
What most people are missing SPC is that traders do pay tax on their profits, its called income (same as any buy/sell business). Interestingly, IRD has said they are owed 300 million (Tax evasion), or more than the much publicised “loss” from the property market, which itself was a snapshot of the worst year since 1987 (higher interest rates/break costs higher prices not balanced by rent).
Also why does no one mention that the depreciation ‘tax breaks’ are subject to depreciation recovered. It is therefore a timing issue that can assist someone in getting over the early unprofitable years before they can spin a profit.
Back to journalism in this country, good quote Deep Red, what many of us do not realize is just how well the NZ economy is doing, and how well we are doing overseas. As an example few people crying about foreign ownership realized that at one point NZ (Carters etc) owned 48% of Canadas forests. So well managed they got bought by mutual funds, or that Mulddons think big projects are now hugely profitable and energy is our 3rd largest sector.
Jeremy, yes depreciation claims can be later clawed back – but the tax revenue basis for ending depreciation claims is that
1. It results in both a more predictable revenue flow and more over time (and at the moment increasing up short term annual tax revenues is an issue)
2. It increases risk (early years cost) for speculators and thus deters flows of money into buying up existing property assets
3. Any reduction in property values reduces our foreign debt and thus reduces risk to our lenders (improves our credit worthiness).
It’s a choice between a either CGT or ending access to depreciation claims and ring fencing property losses. The latter should IMO also later include moves to more directly restrain the amount of borrowing of money to speculate in housing.
And yes, it is important to note the different groups involved in the property sector.
Encouraging new home building is important and many of those buying and selling existing properties are those who renovate or sub-divide and on sell (and pay tax on their trading profits) – which is why I would not restrict mortgage interest claims made by these business operations.
But the status quo is not tenable.
It’s interesting that some countries acting to restrain high prices for homes achieved this, but as you say with it came with higher rents. I suspect that would have to result in rising levels of home ownership, which would be no bad thing. Fortunately we have the accommodation supplement to mitigate the short-term costs while people look to cash up from Kiwi Saver and buy a home. The obvious thing here of course is finding a way to maintain new home building while pushing home prices down (otherwise selling state housing while building new replacements).
Deepred great quote.
This is one of my bugbears too, that our Govt’s are so fixated byt he 3 year election cycle there is almost no compunction to take a risk and think cleverly, uniquely, number 8 wire(ly). The ingenuity of NZers still shines through in any number of fields of creativity BUT getting this to critical mass is difficult with Govt (successive) playing reactive politics, play safe politics, and follow the mistakes over overseas politics.
Jeremy
I have often wondered the impact on markets when mass number sof similar ages withdraw from it.
In my mind a lot of the arguments boil down to the philosophy of the National party. They sell themselves as aspirational but when you look at a lot of their policy’s they seek to keep and increase the wealth in the hands that already own it, and make it more difficult for people starting out. Hence we get property experts like Weldon, Brash & Morgan (sic) looking to take money out of direct investments (property, shares) and into indirect (mutual fund, savings) investment.
I do agree with the RB insisting on higher reserves but worry then about the cost of credit for investors,homeowners and business.
The figures that TWG picked in order to prove the system was ‘broken’ did not mention that in 2008 the interest rates rose sharply and many owners rushed to fix before they hit 10%, but then later in the year they had to pay break costs as the RB slashed the rate. Many investors also got caught forced to sell at a loss to rebalanced their portfolio.
This in addition to those traders that simply did not pay (I wonder if a lot are mums & dads renovators who did not know the rules?).
SPC points – 1) I would prefer that recovery comes just as people look to retire. Lots of boomers will be selling soon to keep a few debt free income properties. I guess this is opinion, but I think the Nats want to spend our tax now and leave nothing for future Govts (first move was to cut kiwisaver wasn’t it)
2) increases costs to long term investors. Speculators (and renovators) do not claim depreciation as it will be clawed back so soon it does not cover compliance cost.
3) If only your mortgage went down with your house value. Its a reduction of wealth for kiwis and as we become a negative equity country we have only foreigners and cash rich kiwis picking over the forced sales.
Additional point 4) why would anyone want to treat leasing of property differently to any other business (think about the effects of these changes on any other lease business, DTR, AVIS, Hirepool, Truck stops?).
Just why is the status quo not tenable? and exactly what behavior are we trying to manipulate.
Are you behind National who wants to steal extra tax or Labor who dare them to dump on 100,000 hardcore Nat supporters, and keep the tax when the Govt changes?
Jeremy it is traditional Labour policy to support widespread home ownership. This will not be successful while housing is at values unrelated to local incomes. If that means ending advantages to the landlord few, so that the many can own their own homes, so be it.
Your opposition to CGT, an end to depreciation claims, and ring fencing property losses is noted. Quite how this relates to people saving for their retirement I don’t know – given most people saving for retirement don’t actually have a rental property.
Disclosure of interest,
1. I don’t own a rental property, but even if I did, I would want other people to find affordable homes.
2. I vote Green and one reason is their housing policy.
PS. A mortgage tax rebate for mortgage costs was available until the tax reform of the 80’s – applying one now would only push up home prices further. But it’s something to consider once moves to push down and hold down values were successful. For doing so is that providing an accommodation supplement alone distorts the market in favour of landlords and tenants over home buyers.
This may be a little to the side of the central topic, but someone over at the Standard drew attention to the work of a Santa Fe economist called Samuel Bowles. The claim being discussed was that the rich/poor divide following from Chicago thinking leads to a “guard economy” in which the many people are employed in guarding the rich from the poor are rendered unavailable for more productive pursuits. This seemed to me to have particular application in NZ where the economy is small.
[...] – let’s be clear that Labour agrees that the economy is currently unbalanced (I blogged as much last [...]