I am travelling to the US and UK to discuss my ideas on monetary policy with some of the best economic minds in the world, including former World Bank chief economist Joseph Stiglitz, Harvard academic Jeffrey Frankel and IMF chief economist Olivier Blanchard.
Jorgen Elmeskov says:
Exchange rate competition heating up globally
Turkey’s short term risk policy for investors of interest
Lack of a capital gains tax is a fundamental reason for New Zealand’s over investment in property
Over two days I’ve had a series of meetings at the OECD. This meeting is with the OECD’s Deputy Chief Economist Jorgen Elmeskov and two of his off-siders Jean-Luc Schneider and Boris Cournede.
This was an interesting discussion on the influence of measures to control inflation. The meeting started and ended with their suggestion that, faced with a prolonged current account deficit and high net international liabilities, factors like export competitiveness are proper concerns.
I was glad to see they readily conceded that increasingly governments and reserve banks are focusing on the competitiveness of exchange rates. Something I’m most concerned about.
It was also interesting to note they don’t oppose a medium-term (ie three to ten years) monetary policy “to stand against an inflated currency”.
They had interesting ideas on the effects of serial short term investors on currencies, a big issue for New Zealand. Turkey was a case in point.
By allowing a wider band both for expected exchange rates and interest rates, and expressly announcing their intention to change both the width of the bands and the place they favour within the bands without notice, they are trying to create risk for traders which will push against short term trading in their currency, reducing upward pressure.
Another option was to tax inflows of money which can put upward pressure on the exchange rate. Brazil has done this recently (with support from the Economist magazine). But they noted the politics can be difficult.
We turned to New Zealand. They were aware of our poor savings record, but were quick to say that just because traditional monetary policy settings in the last two decades have seen a blow-out in private debt, that does not mean it will happen again. That, of course, is true but is hardly a stout defence of the orthodoxy.
They agreed the lack of a capital gains tax is a fundamental reason for our overinvestment in property and inadequate savings and investment in non-property assets. They were surprised we did not have one, yet allowed tax deductibility of interest.
They proposed an interesting solution to the ‘Dutch disease’, where dominant resource-based exporting industries boost the exchange rate and lower the competitiveness of other industries.
They said where natural resource exports have currency effects, the resources used should be taxed, not as an increase in total taxation but as a tax substitute. They favour resource taxes recycled into offshore investments (as the Norwegians do) to limit the currency effects of resource extractive industries on other parts of the economy.
An interesting discussion but their knowledge was weighted towards the larger economies that dominate world affairs, and they had few suggestions for how New Zealand’s circumstance could be improved. I did find their knowledge of New Zealand a little scant, after all we are a member of the OECD and help fund it.
Maybe we could look at how Fonterra , a company with $20 bill sales , has its only tax liability a $200 mill tax refund each year !
Again, I am delighted to read that at least one NZ politician is focussing on what I estimate to be the most pressing issue that requires addressing. (There are a handful more politicians signaling that they consider this high on the agenda)
Good on you Mr D Parker
If this issue around finances/currency trading/futures and derivative market activities and the way that credit is not flowing into productive activities (rather it is zipping around the ether in what appears to be a high speed game of gambling), if this issue were addressed then I feel certain that a lot of the other issues we are facing would fall away.
I hope NZ has the courage to start making this the focus of political debate.
Let us be the leaders in addressing the white elephant in the room of Western political and financial arrangements.
The reason why the OECD has little knowledge of New Zealand was that our economic record under your government was so bad, David. Remember how you promised to get us into the top half of the OECD, and ended up taking us down near the bottom? Remember how our productive sector went into recession in 2005, and your response was to introduce huge public sector spending programmes that the country couldn’t afford? Remember how the rest of the economy went into recession a year before the Global Financial Crisis? Or have you completely forgotten that your government left us neverending deficits when you were leaving power?
Our over-investment in property is as much to do with the value it returns. Why do people keep talking about this and ignoring the huge scandals in our other financial products or our dismal domestic sharemarket? The number of people who refuse to hold shares solely because they were burned in 1987 must be a significant factor alone. And how will these shares and instruments be any more appealing when their already meager returns are taxed at the same rate as property?
We need to concentrate on the productive sectors of the economy, the ones that actually produce a tangible product.
Floating state assets are a lazy man’s way of raising cash, and are purely cashing in our future.
“Lack of a capital gains tax is a fundamental reason for New Zealand’s over investment in property”
So David you fell the lack of controls, reporting and those groups/agencies charged with regulation, compliance, protection and policing have nothing to do with it?.
Look how we see finance coys none disclosure of intercoy transactions, trading whilst insolvent etc with minor if any penalties. Whilst many have lost their meagre savings. The same wild west operated in the mid 80′s that resulted in the share market crash.
http://www.interest.co.nz/saving/deep-freeze-list
Where else can savings be invested? The bank with RWT and inflation results in real terms the deposit losing value.
There already is a means to tax property gains, unfortunately there was no appetite by governments. If laws were lacking or uncertain to stiffen them either thru court decisions and case law or amend legislation based on court decisions. and physically resourcing the IRD. As land transactions are registered and the info captured in a database the information has already been captured.
Also how can we save? As from a comment on Sunday last night made by young kiwi woman now residing in Aussie (Paraphrasing). In NZ you pay 1st world prices but earn 2nd world wages. This with the high property prices & high interest rates how can we in NZers get ahead? The moment a family earns $70k they can be taxed at the highest marginal rate possible.
With half of all tenants receiving the Accommodation Supplement you want less investment in property?
With a lot of commercial, industrial, and residential buildings earthquake prone you want less investment in property?
Sheesh.