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.
Bob Ford and Peter Jarrett said:
- Inflation targeting doesn’t need to be pursued exclusively in the short term
CPCPI not the only game in town
- Many countries have a more nuanced approach to inflation than New Zealand
- Capital gains tax a fundamental setting required for New Zealand
Bob Ford and Peter Jarrett are in the Economic Division of the OECD. Both have been involved in the OECD Economic Surveys of New Zealand, indeed Peter’s analysis of New Zealand’s tax bias towards property was insightful at last year’s Reserve Bank and Treasury conference.
It is clear that the OECD remains of the view that the absence of a capital gains tax is a substantial reason behind the imbalances in New Zealand’s economy. This must be fixed. There is also support for a land tax (which is not Labour Party policy, but which I note the Chair of the Board of the Reserve Bank, Arthur Grimes, has supported).
Bob Ford emphasised the importance of the control of inflation, and reminded us of the mistakes in the 1970s when pre-inflation targeting and loose policy aimed at driving down unemployment ended up with both high unemployment and inflation. But he says inflation targeting is a long term goal, that doesn’t need to be exclusively pursued in the short term.
The need to look through imported price shocks was acknowledged, which is of course a weakness of CPI inflation targeting. For example, CPI targeting encourages higher interest and exchange rates in response to higher imported oil price rises, at the very time when exporters are less competitive.
We discussed the weakness of recent settings allowing the huge run-up in private debt and house prices. There is a good argument that house price inflation should be included, but it’s difficult to implement as there’s a question of what weighting to give to asset price increases compared to costs of goods and services.
Bob and Peter’s views on implementing targeting while taking into account exchange rates and other issues are more nuanced than the debate in New Zealand.
I was told that Norway is “exquisitely sensitive to exchange rate effects” and Canada is also sensitive to exchange rates. This is also what Ambrose Evans-Pritchard was saying when he said the old primacy of inflation targeting was dead.
A much more interventionist approach comes from Canada and France who use loan terms to control liquidity flows into housing.
Canada and France change the principal requirements, requiring table loan repayments over a maximum number of years. I was told Canada has reduced the number of years a loan can be repaid over, effectively increasing the principal repayments in a way which decreases the ability to pay higher prices for housing. To me this also has effects akin to compulsory savings, in that there is a requirement to repay loans and increase equity.
I’m not advocating any of these approaches directly but given that the higher interest rates we have experienced in New Zealand have driven the carry trade and demand for our currency, we should take these varying examples seriously. The alternative recently pursued in New Zealand, to alter the capital requirements for different lending classes, has different effects, including increasing the costs of business lending.
Our discussion of the difficulties for non-dominant exporters in smaller countries covered the advantages and disadvantages of our currency being pegged to a currency or basket of currencies, and discussed how we are suffering from a rise in the currency relative to the US dollar and Euro unrelated to our exports prices. We discussed the effects of unorthodox practices overseas, an issue which our outgoing Reserve Bank Governor Bollard has recently discussed.
In terms of the effect of our dominant exporter on the currency, Bob Ford recommends New Zealand return to substantial government surpluses of around 2 per cent of GDP, with these to be invested off shore as has been the case with the Cullen fund. He notes the benefit for Chile and Norway of this approach, and thinks government surpluses important given our high levels of private indebtedness.
Of course, in my view better settings for exporters would also aid in the reduction in that private debt.
We left agreeing that the capital gains tax issue is a fundamental setting that needs to be fixed, and were provided with another copy of the April 2011 OECD Economic Survey of New Zealand which made this point.
It’s nice that you’re using your opportunities to travel wisely David, I think it is very refreshing when MPs go out into the world and learn more about their portfolios.
An across the board capital gains tax will screw the economy. Period. You’re going to get another housing bubble as the market shrinks while landlords hold on to stock. If I am going to get screwed for CGT, why should I sell?
@Monique – because CGT is not just on real estate, and with its implementation, you are going to come up with other gaps to fill in your (hitherto) endlessly expanding portfolio of assets.
Besides, my understanding of the 2011 policy was that it would be “grandfathered” on real estate.
The international experience is that the sky doesn’t fall on countries that use CGT. Period.
Now how about another glass of wine?
@Tim G,Why on earth would CGT on real estate be grandfathered when this has not occured in legislation set by previous governments? The most recent example being the non-grandfathered LAQC and depreciation schedule changes by National. So that is rubbish.
It’s not clear to me what you mean by your first paragraph but I would suggest there is no market in NZ for other assets such as art or jewellery and you’re on a hiding to nowhere with CGT on farms and other non-residential property.
@monique, deliberate untruths fatally weaken your stance. As you very well know, you’re not going to be ‘screwed for CGT’ when you sell what you now own, but you will pay if you sell what you’ve bought after the policy is enacted. Then you’ll think twice about continuing to buy houses for their capital gain, endlessly driving up house prices for those kiwis looking to buy one house simply to shelter their family. Your over use of the word ‘screwed’ hints that you’d rather these people rented from you so you could continue to ‘screw’ them.
Perhaps another glass of vinegar may be more appropriate.
@monique @michael
My understanding of the CGT policy at the last election was that there would be a “V” day (valuation) day for business assets, the gain from this day would be taxed. The assets would include businesses (or shares to be specific), second homes, and farms (minus the x amount of land apportioned to the family home).
@David, I am interested why CGT is considered “a fundamental setting that needs to be fixed”? What is it you hope to achieve with this policy, and are we clear on the reasons.
To make a couple of points:
It is strange for most financial policy makers to look at NZ & Turkey and see no CGT (conventional wisdom), I do wonder if they have actually studied the effects of the tax in these economies or are making educated guesses based on their conventional wisdom that has never seen an advanced economy without CGT.
Is this a base broadening tax move that will lower the burden on PAYE? Then why not spell this out to the electorate?
IF all the countries with CGT have experienced dramatic boom bust cycles, including the last then obviously you are not claiming that CGT will reign in the property market.
Even with a 20-30% CGT a leveraged property investment still returns more than a mutual fund/small shareholding can reliably deliver. There will be other lifestyle advantages such as being your own boss in your own company and having no ethical concerns over employees (as they are all contractors). There will always be a reason why more kiwis feel comfortable investing in property than being taken on someone elses ride on the sharemarket or risking all in manufacturing. Do you really think that CGT will drive funds away from property. Don’t you think a good old fashioned crash would work better?
Nah @Michael, I don’t a wanna screw no-one over.
The rapid property price inflation was caused by a number of factors stemming back to the late 90′s. Property inflation was virtually guaranteed once it became possible for the trading banks to settle overnight with the Reserve Bank and the OCR became the major tool of choice to effect monetary policy. . Other factors were reasonably open immigration policies, higher tax rates causing a large number of property owning trusts to flourish, one generation (mine, X) looking for their first homes and another generation (the babyboomers) looking for investments in their old age. Some of the baby-boomers got served theirs on a plate when they invested via finance companies and this will provide some incentive to manage investments directly in the future. The key factor is not reducing the pool of available houses for first time buyers, and this is what a CGT will do. It may not even be a major factor but it certainly won’t be helpful to upcoming generations in getting into their first home, apart from an early blip where those who were going to sell anyway sell to avoid the tax.
“The key factor is not reducing the pool of available houses for first time buyers, and this is what a CGT will do.”
Once developers realise they have to pay tax on monies they earn through property, just like everyone else does on their income (excluding, obviously, the 50% of most wealthy kiwis who declare earnings of less than than 70k), what’s the point of holding the asset anymore?
I would venture that a CGT would free up a shed load of lower value properties, the type favoured by slumlords, and service the huge demand from first time buyers.
“it certainly won’t be helpful to upcoming generations in getting into their first home”
Because letting developers inflate the prices of starter homes hasn’t had any impact at all, and there isn’t a housing crisis in NZ anywhere.
UFo fail, monique.
Have another wine.
@ Th eAlien
Developers already pay tax on earnings from properties. It’s called income or company tax.
The biggest private property “investors” never sell and never pay tax, the trick is to live on perpetual revolving credit. I heard a guy talk about this about three week ago; estimate he was worth 40-50mil.
Income and company tax can be manipulated beyond belief, much harder with CGT, given the above example it could be worth considering a stamp duty on Capital Gain Draw downs against property.
@Aliens
“Once developers realise they have to pay tax on monies they earn through property, just like everyone else does on their income (excluding, obviously, the 50% of most wealthy kiwis who declare earnings of less than than 70k), what’s the point of holding the asset anymore?”
Developers don’t hold. They are by definition traders in property (AKA a dealer). Speculators, developers, renovators all “should” pay tax as they buy and sell, they are just as any other retailer, except the retailer who owns the building is not tainted should they wish to move.
Long term investors, the rent is the income, they CG is incidental (as when you pimp your car/home and sell it). If they treat property as a business have a limit of how high they will pay based on current/expected rents. Where we have a problem is high income earners buying over the odds to avoid the PAYE, making a loss (paper or real) to convert the taxable income to untaxed gains. I personally have not seen any figures (nor expect to) that would indicated the relative sizes of each type/motivation of investor.
P.s.
Norm Kirk was talking on telly about 22% annual growth in the property market. His solution – build more state housing and release land to the public. So simple the Nats even get it.
If I owned a few rental properties, bought on the cheap a decade ago and then sold them now, how much tax will I have to pay on the huge profits I’ll make?
10 year rule would apply so one, although one would assume that rents are now covering costs so you would be paying on the rent, unless you bundled together a portfolio designed to loose money, the only reason for this being to avoid PAYE.
But the point we were making is now you would not be a developer as they make their income from buy & sell as quick as possible. Developers improve the value somehow, making a profit by selling high, speculators make a profit by buying low and selling at market quickly with no improvement.
Developers will still develop as there will be no change for them (as far as I understand), they will have a reduced pool of investor buyers maybe? Perhaps this would increase sales to homeowners. I would speculate it may become harder (not impossible) to sell multi unit buildings and start these projects, but there are different rules & motivations for foreign based investors that may fill this gap?
So that’s no taxes paid on a huge windfall.
Definately why NZ needs a CGT.
That’s money for nothing.
A bit like JK getting a 52k pa tax cut on his portfolios he’s not allowed to play with whilst pm.
And they go on about solo mums and people on the sick, taking from hard working mum and dad kiwis.
There is no huge windfall. @Alien. There was a property crash, remember? Look, some people will have got out at the right time and creamed it. It just doesn’t mean you should apply a CGT across the board and penalise upcoming generations, if for example they want to grow capital and launch a business off the back.
And you just can’t really knowledgeably comment on CGT unless you’ve owned assets, at the very least a packet of shares and understood risk and opportunity cost from a firsthand POV. Nobody wants to stay solely in property. It’s the crappiest game in the book.
And please don’t come back at me with some variation of, ” you suck and are selfish because you own property”. That is sooo boring and signifies cult mentality rather than an inclination for honest debate.
@ alien
What if you bought a painting, a classic car, gold, or a now rare book, or shares? There is no tax on them either unless you are a trader. Why the fixation on houses?
@ Monique Watson
There is a problem occurring in our Western societies where wealth is amassing into fewer and fewer hands. This disparity in capital and the disparity in income leads to many negative effects such as less social mobility and affects us all. For example less social mobility means that people are less able to improve their circumstances and more likely to be stuck in a poverty trap including stuck on a benefit cycle. To address the problem benefits us all.
You may argue that you do not want to lose a certain profit on your property investment. I consider those who are struggling to find a livelihood and have no capital to create their own livelihood, i.e that there are increasingly more people being challenged in getting their needs met, I would hope, factored into the equation of those worried about losing the ability to get their desires met.
I was of the understanding that this capital gains tax was a way to address this problem. I guess there will be people who are not exceedingly wealthy and lose out, however there are comments on this thread that indicate that this occurance can be mitigated.
It would be good if these factors were acknowledged in your debate about this matter.
@SJW. All I have is my experience with a bit of personal research to back it.
You are correct that I don’t want to lose a certain profit on my property (natural instinct), but I won’t because I am a ‘holder”, not a trader. I purchased property a decade ago. To do so I borrowed $5000 on a credit card.This was the deposit on a $45,0000 property. At first I was all fired up. Was going to make millions. Then I discovered the hard way,that unless you are able or willing to throw a lot of capital in,IE, a developer who has access to trade finance, or better yet, private financing, profiting from property is s long slow haul. The best I can hope for, is to pay my mortgages off and then use the taxable income to support me and my husband in our retirement years. He’s rich so I may spend it on cosmetics instead. Just joking. I’ll spend it on breast implants.
As for social mobility: I was fed from a food bank for most of my teenage years until the age of 18. I dragged myself off the sickness benefit as an addict, at one stage. I have started two successful businesses and have absolute faith in vocational education to meet the needs of those individuals that have lots of potential but that may fall through the cracks. I have real concerns that CGT (though possibly applicable if properties are traded in, in under ten years,) will stifle economic growth in my homeland of New Zealand
@ Monique Watson,
Am always impressed when someone manages to get themselves out of a rut, however feel a great deal of concern that ongoing political approaches are creating more obstacles than empowerment for people in tough situations. It needn’t be about hand-outs, removing obstacles to social mobility would improve matters.
The capital gains tax was to push investment into more productive sector, and this would stimulate growth, not stifle it.
It is not simply about houses:
“All capital assets (e.g. land and property, shares, financial instruments, goodwill, intellectual property) excluding the principal private residence and specific exemptions (see Concessions)” ~”Taxmail”, by KPMG
“Green Party co-leader Russel Norman, who has been outspoken supporter of a capital gains tax recently, says ‘an absence of a capital gains tax, the OECD found, has significantly affected home affordability, widening inequalities in wealth, and leading to disproportionate levels of investment into housing [which is] a relatively unproductive sector of our economy.
“A capital gains tax which excluded the family home would benefit the vast majority of New Zealanders through more affordable housing and jobs as investors take money out of housing and invest in the manufacturing and export sectors.”
Read more: http://www.3news.co.nz/Labours-tax-policy-capital-gains-tax-free-produce/tabid/419/articleID/218801/Default.aspx#ixzz25mYAfdMe
Enjoyed the humor your comment contained by the way!
@SJW
I totally agree with your first paragraph. What is needed is cheaper housing for first home owners but it’s residential home owners that drive the price up – the expectations of what you want in a first home is the same as 20 years ago but there isn’t the same unbridled development going on. Less desirable houses for a greater pool of families.
Now, if Christchurch went gangbusters you could end up with the situation where houses went for reasonable prices. This might have some population pull from Auckland to Christchurch solving both housing situations regionally.
Thanks for the link.
@ Monique Watson
Unclear how you arrive at it being residential home owners that drive the price up-I think you will find it is speculative activities which are creating price rises…in all markets.
http://money.cnn.com/2012/03/21/markets/oil-gas-prices-speculators/index.htm
I understood capital gains style tax to address this issue somewhat by encouraging other forms of investment which are more productive for our society.
…and
http://money.cnn.com/2012/03/26/markets/oil_speculators/index.htm