By Bernard Hickey
Back in May last year when the government announced the biggest tax reforms since the mid 1980s there was plenty of hope in the air.
The theory looked good.
Cutting the top income tax rate from 39% to 33% seemed to kill three birds with one stone.
Firstly, it encouraged those on middle incomes to strive for higher incomes in the knowledge they would keep more of it. Secondly, it removed the gap between the top income tax rate and the family trust rate to close down a big loophole created by Labour when the higher top tax rate was introduced a decade ago. Thirdly, those on higher incomes could afford to save their extra disposable income, which would in turn boost New Zealand's savings rate and give our capital markets a fresh kick start.
The increase in the GST rate was designed to help pay for the income tax cut and to discourage consumption, therefore encouraging saving.
The changes to the rules on claiming depreciation of buildings for tax purposes and the removal of Loss Attributing Qualifying Companies (LAQCs) as a vehicle for rental property investors were supposed to reduce the size of the tax subsidy for property investing and take some of the heat out of the overvalued property market. It was also supposed to force investors to look at options other than rental property.
The company tax cut meanwhile was supposed to encourage companies to invest here and employ more people. The combination of all these things was supposed to deliver a long term boost to economic growth, employment, savings and investment. All these would bring down the budget deficit and transform the economy from a consuming and borrowing junkie into an investing and exporting powerhouse.
That was the theory and it all seemed so promising at the time.
But what has actually happened since October? Earlier this week the second part of the tax package took effect, so it's worth doing a progress report on how the package is working.
Simply put, it's not working.
The shock of the GST increase, on top of rising food and petrol prices, has forced New Zealand consumers deeper into their spending shells. The GST increase has obviously hurt a swathe of society that could least afford, many of whom are in the middle. Companies are shedding staff and the predicted surge in investment is hesitant at best. Government tax receipts from the GST increase are well below forecasts because of the slump in spending growth after the October Bill Shock.
The benefits of the tax cuts for those on higher salaries has not been saved and invested in job-creating export industries. Instead, it is being geared up with yet more foreign-supplied mortgage debt to pump up the prices of luxury property.
Figures out this week from Barfoot and Thompson for property sales in Auckland showed higher salary earners are snapping up the more expensive properties after visiting their increasingly friendly banker for an even bigger mortgage. Sales of property worth more than NZ$800,000 rose almost 40% in March from a year ago, while lower priced property sales barely rose. Prices in the swanky central suburbs of Epsom, Mt Eden, Remuera and Herne Bay are surging. North Shore properties are also selling fast. Meanwhile, properties on the fringes, down in South Auckland and out West are stuck in neutral. It is the same in New Zealand's provincial towns and cities. Prices and volumes away from central Auckland and Wellington are flat to falling.
Meanwhile the government's deficit is blowing out to unprecedented levels, in part because of the drop in income tax receipts and weak GST returns. Company profits are also weak and are set to be even weaker after the corporate tax cut kicked in from April 1. ANZ forecast this week the government is likely to borrow as much as NZ$20 billion this year or around NZ$4,500 per person.
Our current account deficit is also set to worsen as foreign owned companies repatriate yet more New Zealand generated profit, thanks to the tax cut, and as government debt held offshore rises, increasing interest payments.
The New Zealand dollar, meanwhile, has surged back above pre-quake levels, making it even more difficult for the economy to transform into an exporting powerhouse.
The government would point out it's too early to judge the tax package and also point to the effect of the Christchurch quake on the economy.
But the early signs aren't good.
It's worth asking again: what was it all for?
We have a higher budget deficit, higher debt, weaker growth, a weaker current account deficit and higher unemployment. But a certain section of New Zealand is now much richer in both income and wealth through a tax cut and higher property prices.
119 Comments
"Back in May last year when the government announced the biggest tax reforms since the mid 1980s there was plenty of hope in the air.
The theory looked good."
Rubbish!. It made no more economic sense last year than it does now.
"What was it all for?". Essentially so John Key could look good and his party would likely be re-elected.
In reality the tax package reflected his poor understanding of economics and an unwillingness to make tough decisions i.e. a lack of leadership.
John Key appears to have very little expertise outside of forex speculation and as such he serves as an empty vessel for the opinions of vested interests. He is wedded to the now completely debunked mantra of growth through debt and appears to have no other strategy than to cling to the status quo as tenaciously as possible and hope like hell that we don't get a sovereign credit rating downgrade.
If the section of the population mentioned above buying ie those buying $800k houses are a) a small % b) probably voting National anyway....
It didnt ffect the ppl on $70k to $90k much by the look of it.....so what votes had it won for JK?
"poor understanding" "lack of leadership" um no....I think he knoew what was waht....he ididnt and doesnt care....this is a right wing wolf in sheep's clothing.....he looks warm and fuzzy so ppl like me will vote for him.....I odnt think we think he will do us any good its just the alternative in Labour is worse....JK succeeded in making National not too bad looking as an alternative....
regards
Colin - the truth of the matter is the Govt doesn't know what to do next - I would love to be a fly on the wall in the offices of English and Key
To seriously address the economy what are their options:
1. Cut spending a lot, including many civil servants. Some longer term savings, but short term economic pain
2. Increase taxes? Not going to happen. They have written off CGT / land tax.
3. Cut spending a bit and increase taxes a bit - the best option but won't happen.
I suspect all these spineless pollies will do is tinker with a slight pull back on spending, and promote things like PPP
I am not disagreeing with you, but will attempt to extend your ideas.
My perspective on this is that government (politicians and their ministries) see themselves as positive influences controlling our economy to benefit the country (or at least the part of the electorate that provides the government's political support base). In contrast, I see government as a necessary evil up to about 20% of GDP, and thereafter as a deadweight holding the economy back. I see recent/current governments not as providing solutions but as a major part of the problem. I mentioned earlier today that their efforts to "maintain confidence" are in effect destroying it.
So I agree with you - "the Govt doesn't know what to do next". But that comes from government thinking of itself as the provider of solutions rather than what it has now grown into - a damaging drain on the economy.
Uh no.....we have a public health service that serves NZers pretty well at half the cost in GDP compared to the Amreican system. We have a eductaion system that does pretty close to as well....so Govn is providing cost effective solutions to NZers needs at half the impact on our wealth.....
You might think the Govn is holding our economy back, but where is the evidence? do tell...but really there isnt any....sure the Govn or rather the Pollies are damaging us, this is becasue they are stuck on the mantra of the pie will get bigger so trust them that everyone will get well off as it does.....Reality this hasnt happened in 30 years, only the rich have got wealthier and have done so while probably damaging the global economy......and most other ppls income.
So sure they are clueless right now this is the problem of having the wrong Pollies in charge of govn not having too big a govn.
regards
Believe that if you wish, but I still see it as an example of government as a deadweight holding the economy back.
I could have answered your comment with one word of four letters starting with "C" but that may not have been constructive.
I will address your other points of contention (government roles in health and education, and questions of quantity versus quality of government) tomorrow.
Steven - there is clear evidence the government is holding the economy back in not providing enough decent jobs for the wider NZworkforce. Too many skilled/ talented Kiwi’s have to leave the country to make a good living overseas. Imports by the government in the bIllions could be manufactured rigt here in New Zealand - with massive benefits for NZcompanies. In stead of having a clear economic strategy the government (Joyce, Brownlee, Hide) get carried away wasting billions for new roading projects in stead of investing, in public transport strengthening and developing new production industries.
I dont see it as the Govn's job to provide [decent] jobs. Thats what happens with private industry.....we are too small to make everything, it makes no sense, better to make things we can use here and export in areas we can do well....
eg how often do we buy trains? rarely it makes no sense to make trains here....we cannot and should not subsidize every private endevour.....the Govn is certainly poor at picking winners and can end up subsidizing losers.....neither is Govn's job IMHO.
regards
Steven - more efficient, diverse production has to come from somewhere, New Zealand cannot economically and financially afford to continue with it’s course otherwise young Kiwis leave or/and (youth)unemployment is skyrocketing.
..and how to reduce the account deficit- when we don’t start producing widgets we need, but order overseas right now ? Green industries !
..and what about independency, national security etc. ?
..and what about research – questions after questions – and we just don’t have an answer to the dilemma, but continue with a very unbalanced - even risky economy.
All we hear is more roads, dairy farming, selling houses to each, broken finance businesses and the government bailing out companies - what a poor economic performance.
Gee, no one would ever accuse you of rushing in where fools fear to tread, Bernard, would they? These tax cuts have been in place now for what, all of 6 months and you are already declaring them a failure? That’s very brave of you I must say. I wonder if we came back in 3-4 years time what we might find then? It wouldn’t surprise me at all to find your prediction ranking right up there with some of your other predictions, such as NZ house prices would fall by 30%.
And by the way, where is your proof that high income earners are using their tax cuts to leverage themselves into more expensive properties? Just because a few more houses in the $800,000+ bracket are selling in Auckland and more loans have been written by the banks doesn't mean it’s the tax cuts of high income earners alone that is responsible. If you want to accuse somebody of wrongdoing, then you need to show the paper trail.
Or is that just your supposition?
As the market goes up in specific areas you can see some have money and are putting it into their house....the Q is why....
One, The well off need to protect their capital/cash its pretty obvious that there are tax rises coming, there simply is no choice, so the Q is how? Land tax and a CGT seem likely though less likely on the "home" so it makes some sense to put your $ into your home.....
Two, the second way is to gift capital to their kids who in turn put it into their hosues...oh look gift duty is going, thanks Dunne....
Three, JK wants to "house" foreigners money here and not tax it as long as it isnt spent here....that just reaks of tax avoidance on a massive scale......
It really adds up to anticipating whats ahead....I dont for a minute believe the rich are rich because they are stupid....
regards
"How about pointing out what else it could be?" Possibly people relocating to Auckland? You might not have noticed where you live but the first big Chch earthquake was on Sept 4th. In addition to the damage caused, it was followed by a huge number of large aftershocks that had many people on the edge. Admittedly less people fled Chch after Sept 4th than after Feb 22nd but some people did move north around the same time the tax cuts took place.
Also, any immigrants who arrived around September or a bit later would have clearly been more inclined to stay in Auckland than go to Chch.
Of course the demand in Auckland has been exacerbated even more in the last 6 weeks or so with so many more fleeing Chch.
And finally, the people able to buy 800K houses were unlikely to have needed a few extra dollars in tax cut to afford them to start with so putting the slight increase down to the tax cuts doesn't make much sense to me.
"you can see some have money and are putting it into their house....the Q is why...." Maybe because they enjoy having a nice house?! I have one and I sure enjoy it every single day. Compared with being cramped in a small 3bed/1bath poorly insulated, poorly designed and poorly orientated old house, it's changed our life (and that's not an overstatement).
Re your "one", I thought that CGT and land taxes had been ruled out repeatedly so at this stage they don't seem "likely".
Re your "two" - so if you were well off, would you rather gift some of your money to your kids to help them out (and if they use it to get into their first home, good on them) or would you rather gift the money you've worked so hard to save for many years to the govt (that already took its share by the way, by taxing it once when you earned it, then taxed any interest you earned on whatever was left). I know what I'd rather do and I can't wait to do it.
"I dont for a minute believe the rich are rich because they are stupid...." I completely agree with that.
Are you saying the "rich" are all selfish and greedy?
If you have skills people want and get offered a good income to put them to good use, would you go "oh, no, seriously I can't accept that" (knowing it'd just be more tax-free profit for the company)?
What if you happen to not be that interested in spending everything you earn on crap and prefer to save instead so you don't have to count on others to 1. pay for your lifestyle when you are retired 2. pay for your children & their education 3. pay for your lifestyle when something goes wrong in your life (unemployment, partner's death, divorce etc). Is it stupid to save instead? Is that greedy and selfish or just plain responsible?
Elly,
This article is about the increasing sales of $800k homes....no one on $70k can buy a $800k home.....not unless they are paying 0 tax and have a huge hidden income, or cash.
RIght now its very likely that those on $100k are facing a higher tax rate, maybe even down to $70k, its just a Q of time.
Rich are not ppl on $70k, this is salaries in the $150k plus range and well upwards.
regards
It seems to me that too few in here seem to understand that not every person (or couple) who buys a house worth 800k+ does so with a 95% mortgage. There may be many who do so with a 150-200k mortgage (or less) so an income of $75k ($150k - couple) makes that quite affordable. Tax cuts or no tax cuts.
Elly, these are not normally valued properties in terms of families on typical incomes such as say you or I, also we would see some sort of equal sales in Chch...I dont believe this is the case? Its not the fact that a few very well off are moving up elly, its the fact that quite a lot are....
above, one and two.....Im joining the dots, it might be a picture or spider scrawl....ie random....means nothing.
Gifting is a tough one, its I suppose, income.....im not sure its fair to re-tax on it I admit, I could be convinced either way. A the end of the day its not so much the doing away with it as the its being done now...
CGT, Land tax....has Labour ruled it out? I know the chances of Labour winning this year are slim (maybe 25%). Note however that I think we are getting into a situation that I suspect is grave and the present Govn isnt being honest with us about. Even if its not too bad immediately we are talking deficits for close to 5 years minimum and thats based on some sort of recovery and growth which frankly I dont believe will come along. So what happens if we are staring down an entire decade of deficits? we cant sustain that, we have to raise taxes and in the top band, or a Land tax / CGT.....nothing else will fly
Just looking at how things are going for National I think myself the voter isnt going to wear them looking after the top few % while most do worse and at the same time public services are cut......it aint gonna go IMHO....so if National dont budge this term and I dont think JK will he will be rolled by Labour in 2014.....
regards
strange how Labour don't seem to see value in a CGT (on second properties) and / or land tax in terms of policy. I mean the wealthy / property investors are hardly their typical support base are they?
BTW, English has come out this weekend and said low wages are a way for NZ to compete with Aus...what an idiot...this from a govt who said they wanted to close the wage gap
I agree the Nats will survive this election but will be rolled next election as the economy gets sicker... I think Labour would have a reasonable shot this election if they had a decent leader
Right, time to update my CV for Aussie jobs....
'Right, time to update my CV for Aussie jobs...." Seriously? I remember you'd said in the past that you still preferred NZ. Sounds like I'm not the only one who's been questioning our choice of sticking around here lately.
I still love the country as much but reading this website (not so much the gloomy part of it, more the fact that earning a decent salary/having some money is seen as dirty by so many), other news and seeing where we're headed to as a country, I've been questioning whether being stubborn about staying here is that smart. Not that I see us packing up but for the first time we've talked about it. What is likely to keep us here is that other countries seem at least as bad, although not necessarily for the same reasons :)
yep I'm serious Elley. As a foreigner you may be smitten with this country's undeniable charms, but I'm mid 30s and grew up here and have witnessed a lot of unbelievably poor corporate and political leadership these past 15 - 20 years. We are a country of cheapskates who don't do things properly the first time, then see massive consequences down the line. Our size is also a problem - its easier for Aus with 20 million to handle the Queensland floods than a country of 4 million handling the Chch earthquake
NZ - lovely country, pity about its leaders and general culture. I'm sad to say a country won't stay in the top-ish league when all it can base its "Wealth" on is flicking each other crap, overpriced houses. Since last week's bailout I believe NZ is firmly on the road to "Banana republic" status, and whilst I won't be making a rash move to Aus, I am seriously looking in a considered way.
I'm with you Matt on that, Leaving for California on the 15th. NZ is screwed! So too the US but........ atleast the US has forward thinkers just dying to get started on something new. I work in 'IP' so for me it's the place to be. I now wish I'd stayed in the UK instead of coming back to insular NZ for family reasons alone. NZ will just never get passed it's pre-occupation with non productive small minded activities and monopoly/duopoly control of everything. It's a lost nation who would rather spend millions on a stupid RWC than actually creating something productive & longterm. No more of my taxes will go to stupidity like bailing out finance companies and insurance companies and forever bottomless funding of silly little 'brand maor'i projects that are worth jack shit. No more paying for others to bring up their own kids, no more paying for CHCH being mistakingly built on a swamp, no more paying for teenage/solo mums to spend half the day sipping coffee at the local coffee house, no more .....................the list goes on and on
Later gators!
Hi Justice. I share some of your concerns. But rather than leave New Zealand I struck a blow for personal freedom and invested in property.
It worked for me. Try it.
Don't give up on this country yet. Perhaps you could start up a coffee house...get some of that money back off the solo mums.
The US is probably a good choice for you then, I think it's every man for himself over there.
We wouldn't gain anything by going to France in that respect. Higher income tax, more taxes in general, lots of "social" programmes etc. On the other hand, you get something back for your money (good & free medical care, good public transport etc). But I don't think we could stand the mentality for long, or the density of people, although it'd be nice to be closer to family.
What is IP? Information something? Personally I've never liked the Americans total lack of social programs such as for health. I think the Canadians have a nice mix of personal freedom and taxes/social programs. I think most of the time NZ does pretty well too, for all that we're so little.
I'm all for looking after the sick, the elderly, the unemployed. What I object to is tax money spent poorly, or less effectively than it could be, or redistributed unfairly.
Like Elly, I like the low population density here. I also like the climate. People are generally nice. Sure little NZ has it's problems, but read any countries discussion board and you pretty quickly see they all do.
http://www.huffingtonpost.com/bob-samuels/why-california-is-broke-a_b_8…
http://globaleconomicanalysis.blogspot.com/2010/01/why-is-california-br…
I hope you'll continue to post here after your move and tell us what it's like, especially after a year or so when the honeymoon wears off. :) I'm always interested in how other countries are doing straight from someone who is there and can compare it to where they are from.
“more the fact that earning a decent salary/having some money is seen as dirty by so many”
Of course, Ellery, you are right and it’s good of you to have noticed it. It is part of a spectrum of attitudinal problems that many New Zealanders have that actually contributes towards keeping this country poor, unproductive and lacking in innovation – but the people with this sorry attitude just can’t or won’t see it. In case you are wondering it has been around for decades. I am certainly aware of it in the 60s. My family was a well known to be well off. My sister and I were at times treated like lepers because of it. That’s just how small kiwis can be.
I wouldnt be surprised if we find Labour has some income from property....not to mention the MPs.....I seem to remember its quite a few.
English said that? URL?
Thats sort of frightening that he thinks this is NZ's way forward....it isnt, well it is if you are part of the super rich class and believe that having 95% of your fellow countrymen in poverty.....I guess....but it doesnt work, you need an eco-system around you.....The French has a great way of fixing that problem....a sharp way.
The economy will get sicker, there is no solid vision of recovery, its quick sand as is the Govn's estimates especially Treasury's they are right wing blinkered.....so instead the recpvery is disappearing into the distance...
regards
yep he said that and here's the proof (note his pathetic attempt at wriggling out of his comments when later questioned):
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10718419
Societies running out of real money.
I think it is an illusion believing in other countries the situation is better. It is even going to be worse in places with high standards of living/ high(er) wage countries. The upcoming recession following by a possible depression will hit with delay, but the fall is far more severe and rather suddenly for their economies and societies. Countries such as Norway/ Germany/ Singapore/ Switzerland will suffer. E.g. -what will people do, earning SFR 6’000.- p/m, but who pay over $ 1’000.- p/m to rent an apartment/ $ 1’000.- p/m pay health insurance/ $ 1’000.- etc. - when suddenly without a job ?
New Zealand will of course badly struggle, but it is a creeping process, which already started almost 2 years ago. People here have time on their hands to adopt to the situation and can easier go back reducing their life standards. Shelter, space and food are always provided.
what the economists seem to be forgetting is that the eventual boost to ChCh from the rebuild will become a drain on the rest of the country, especially Auckland, by far the biggest economy in Nz. We will see a number of mid to large-ish infrastructure projects in the Auckland region canned, and the construction sector is far from restarting here - diversion of resources / labour and higher costs will make it even longer before building works picks up in Akld
Retail remains very sick
If anyone can name one sector in Akld where things look promising in the next couple of years then I would love to hear it
In that context hard to see how this temporary "blip" in Akld house prices can be maintained
Steven, I agree that these are not average properties. That said, with 2 x 70K incomes one can save a significant amount of money (assuming a couple with no children). Also many immigrants have quite a good amount of savings when they arrive here so if more choose to stay in Auckland instead of going south, it could make a noticeable difference in the demand for such houses.
Sales in Chch? Well, people aren't really able to sell at the moment. Even if their house isn't damaged, who'd want to buy in a city where the sewerage system is on the brink of failure, roads are damaged and jobs hard to get. There doesn't seem to be much point in putting one's house on the market. But if I believe the headline on our local papers, there has been a significant increase in house sales in Nth Canterbury (Rangiora in particular) in the last month, and lots of people enquiring who say they'll buy here as soon as they get their EQC/insurance claims settled.
"Its not the fact that a few very well off are moving up elly, its the fact that quite a lot are...." So are you agreeing that the reason for the increase in sales of houses 800K+ is not so much the tax cuts but the fact that a lot of well off people are fleeing Chch (these are also likely to be the most mobile)?
You're right on Labour not having ruled out CGT/land tax. It just didn't occur to me they'd be in power anytime soon. (Not that I'm very impressed with National. Like a few people have mentioned, I'd like a "none of the above" choice on the voting papers in October).
I think one of the key reasons we have seen more 800K+ houses moving is because some wealthy people are simply getting very good "bargains"! Heard of several places selling in Remuera recently for more than $1million, but well down on asking prices and CVs
Kind of paradoxical real isn't it...wealthy people buying expensive properties for much less than they are valued pushing up overall median prices!
The prudent savers out there must take note that the govt is using the Reserve Bank to debase the Kiwi$..stealing from savers to reward and bailout the indebted splurgers....the rate of theft is over 3% pa average...expect over 5% this current year....you are being screwed.
So what can you do?
First off pay down debts. Then get your money into silver or gold or aussie dollars or mining companies using the ASB online trading facility or quality NZ companies that will not be bashed about in a downturn and can raise their prices because the public must buy their stuff...usually this is means the utilities. Do not put your cash in long term bank deposits or bonds.
You should also expect a govt to pull the immigration lever to pork the property and building sector...count on that happening soon...under JK or whomever replaces the Goofy cunliffe klinger king farce. So if you can get good property now at 20% below 08 valuations..without becoming a debt prisoner of a bank...buying would be an ok thing to do.
Just don't expect policy from Key or Bollard that will support you if you are into saving and if you are debt free...they are focussed on protecting bank profits and debasing the debts.
Wolly, you should be careful someone doesnt think the thought you are a financial advisor.....
;]
Pay down debts I think is a solid idea....if things get better well increase your debt up....I cant see how its a losing idea.
Shares, gold, silver, mining.....gold I think is over-valued, its a bubble waiting to pop.....ditto mining is an even bigger one....OZ mining only booms as long as china wants it....if china goes bust the OZ economy goes bust with it.....ie there is a risk.
Quality NZ companies...try naming one....there is a good reason the "share market guru's:" out there want the SOE's listed....there is nothing of value left in NZX private companies, they have been gutted by short term CEOs and institutional shareholders...and loaded with debt......
Savings, ie deposits I dont agree, its pretty low risk and I expect a depression, Obama etc is pretty much making that certain IMHO. Then savers will be happy as we see deflation and their savings become worth more....
If I could see an investment thats very low risk and hedges or is robust against deflation and inflation, yep that's where I'd go....cant see one myself....
Houses at 20% off....no seller will sell at that......not yet....given the stupidity that is the USA Im not sure now just how long we have before we get there.....2012 is Obama's Waterloo....he will be destroyed by the Republicans and good riddence....
You are off mark on Bollard IMHO....its not about saving the banks its about saving NZ its just you are incapable of seeing that....Banks could go its the debt they are middle men for is the problem....look at Ireland for that end game.....
regards
We aim to please....I'm offloading my cash this year....some into land and the rest into growth stocks with positive returns fully imputed and near monopoly positions in the market...with nett income around 5.5% and another 7% taxfree growth. It's what the National pollys are doing!
I have to say, as one who believed that interest rates would fall, as we followed the rest of the world, I am tending towards your previous view of mortgage rates over 20%, again- soon! Even the ECB and the BOE are coming around to your established way of thinking.Perhaps you have been 'too right, too soon'!
Thing is Snarly, the low rates are not a market setting...they are a result of Reserve bank games with printing dosh to buy govt bonds....a stupid game because the longer it goes on the harder it is to escape the cycle....fail to escape and you die.
Expect Bernanke to see the demise of Obama ahead and he will move to raise and to cut back on playing "I can be a fool" with his mousemoney productions. The rise in rates will be staggered as Bernanke injects loot every time the speed of the rise picks up. But rise they will and the rush to escape the bond collapse will see trillions trying to squeeze through a tiny doorway to cash....they haven't got a hope in hell...some of the biggest losses on the bond market in history are soon to be handed out by Mr Market.
Wolly, dont jump to soon. For what its worth, I always expect it to crash sooner and recover quicker. I would rather wait and see asset prices turn and lose %5 than jump too soon.
I think immigration will be tempered by a lack of jobs and those on benefits need to be delt with. Creating jobs is going to be a big problem for whichever party has a majority and I have no idea how to help create jobs, without dropping costs and that implies a rise in unemployment.
I think we still have a year or more to wait before we need to start buying assets, Im in no hurry but then again I dont hold $NZ. The money pouring into Queensland is doing wonders for the Aussie$ and soon the same effect will come into play due to the chch quake. If Benake rises rates then consumption will collapse and commidities will fall.
In the big short Michael Burry who made millions shorting the banks was going into Farmland as he thought that ag commodities would be the next bubble. I bet he's getting out about now and going back to his classical guitar.
Agree.....Wolly is moaning over small losses while enjoying minimal risk and is going to jump out to get "acceptable" income but with un-known risk....there is no sign we are at the bottom and lots of signs we can turn down again....but hell its his $.....
regards
The one move not yet made is to boost the capital inflow by wrapping it in a NZ passport and setting a lower paye rate for these loaded migrants for a number of years...that way you get the feelthy rich building mansions and the like on the golf courses up and down the country....for sure a % will decide it's a better place to retire to for 6 to 9 months of the year.
So it would boost the building sector and inject new capital into the economy. A better solution than selling the Chathams or Scott base to Beijing. Just make sure the influx is at the top end so that the Bill's low wage workers remain a drawcard for ausie firms!
Seriously though, there is little wrong with encouraging the best of best to come here and stay...not the gadafi shite...just nice people...maybe even the odd banker!
Could it be managed to prevent another madhouse bubble?....only if Bollard gets the nod.
Take note that this sector of people will have decided their middle east 5th homes are for the birds.
I sense unease in your thoughts, Wolly. Rememeber your "Mr. Market" is actually bigger and badder than any Central Bank can be over anything less than the shorter term. Witness Portugal. They should be at German interest rates if the authorities could hold an interest rate environment. And they aren't, because official policy settings are weak in the face of an entity the size of the capital markets. Especially when you are talking an economy the piffling size of ours!
Bearish yes Gummy...market is too toppy and dependent on Bernanke pork...plus the Chinese economy is in for a correction...low grade ore mines are always the first to be closed down. Expect the ECB and BoE rate rises to put a crimp in the world markets...and when Obama gets the bums rush, all hell will let lose...a bond rout is on the way.
Wolly, if inflation or hyper-inflation happens, why the advice to pay down debts? Say you have a 100K loan. If the Kiwi$ loses value (everything increases, including salaries), doesn't it mean that a good chunk of your loan is getting paid for you without having to make any effort as 100K is now worth a lot less than when you took on the loan to start with (but the bank can't adjust its value to take the high inflation into account)?
As you say, debasing the Kiwi$ rewards and bails out people in debt so I'm kinda thinking it'd be a good time to take on debt?
When inflation begins the climb and this has started...the banks raise the cost of credit to stay ahead..so if you owe them, expect to make a saving only for the term of your loan...then the reset will suck back any gain you made v the bank...the bastards never lose Elley.
To assume everything increases is a mistake. Yes the Sir Humphreys will always get the extra pork along with the corporate failures et al....but not the low wage lot.
The evidence is there on the mortgage front...look at the maximum term you can get...why are the banks not doing 25 year mortgages!
Your conclusion is very wrong....this is a bloody dangerous time to take on debt...unless you can get it at 6% for 25 years...good luck on that !
Meanwhile Granny is being robbed by Bollard who has given the green light to banks to bash down the oncall and short term rates. Well done that man.
Ah well, I love not having to talk to the bank so I'll keep keeping away from debt.
Actually, we found the max loan term you can get here very surprising. In France, people negotiate their home loan for 25-30 years and that's it. Of course, it is not always to your advantage but at least you can have the certainty (of repayment amounts) if you want it.
Pretty simple really. No one is prepared to lock they savings / capital / funds call it what you want for that period of time.
Where are the banks going to source the long term funds from?
No one offfshore will lend it to us for that term and kiwis don't like long term. Look at all the negative comments about Kiwisaver as a long term savings.
Most kiwis would prefer to roll their term deposit for 90 days, then another 90 days, then another 90 days ............................................
Hi,
If the USA and some EU countries can do 25 year fixed term as a norm almost then there must be capital interested in it maybe if its not offered here no one asks, catch 22....from the other side I certainly would be / have been interested in such a long term loan. Given how unstable I see the world over the next 1 or 3 decades its worth seriously considering if its at a sane rate, ie less than 8%....given terms on Govn bonds are usually a few % at most I would think sucha long term would be reasonably "priced".
Kiwisaver - well lets look at its performance...mostly if it wasnt for the Govn matching your $1000 with another the returns would be mediocure for most and actually lose....or even lose money. Where do kiwisaver companeis invest? same places you can....shares etc...
Take a real world example, me. When I was 17 I took out some life insurance / profit scheme...to start with it returned well, then was sold and sold again and frankly did poorly....I was locked in, I couldnt move....in 2008 after 30 years of saving via it, it lost 22% in one year........Now at least kiwisaver offers the ability to move, but thats jump from one medicore ship to another, ie they all invest in the same thing. Meanwhile when I came to NZ I decided to buy shares ie do it myself....Ive also been paying down my mortgage based on an interest rate of 10.5% so Im over paying...Last year I sold my shares I didnt do to badly, I made a decent profit and right now those shares are worth less....
So really kiwisaver is a way to prop up the lousy Insurance companies IMHO.....its not that good for joe public....education and investing yourself is better......at least when you see a fall coming you can bail.......ie you have control.
And the best saving scheme of all? Pay down your mortgage or any debt just as fast as you can and then switch to saving that $ when the debt is clear....why dont we see schemes that encourage that? because Govn's dont like savers, they like spenders, spenders keep money churning and at every transaction money gets taxed.
These days personally I think the entire invetment market is ocked up by the likes of Goldman sach etc....so really a single person is at their mercy.....so not much hope there....I know one thing I wouldnt touch kiwisaver passive trackers, shares and commercial property right now with a barge pole, someone has to be left holding the baby when it all goes pear shaped....
regards
"if it wasnt for the Govn matching your $1000 with"......guess what...money stolen from other taxpayers or borrowed from overseas....so Kiwisaver is a giant scam...a big fat rort....a genuine attempt to bribe people to vote for a govt prepared to carry on with the thieving.
90 days....only with the GG in place...thing is MM if you can get half a percent more for a far longer term, by the time the thieving tax is taken off...is it worth the risk of being stuck in a 2 year term watching rates blast off with Bernanke in a bunker.
The smart people aim to keep their tax to a minimum and their non taxed growth to the max.
....maybe you have never had to pay a mortgage when its up around 20% and of course food is going up at a simialr rate and your wages are not.... and that isnt even hyper-inflation territory....
I would suggest right now zero debt is good as I see deflation and recession/depression. In that situation and with dropping wages as a result debt becomes crippling. On a brighter note if us despressionists are wrong you can always take on more debt easily, just walk to the bank....30mins...done.
regards
$NZD monetary supply = 200billion http://en.wikipedia.org/wiki/Money_supply#New_Zealand
$NZD total debt = 253billion http://en.wikipedia.org/wiki/Economy_of_New_Zealand
At an estimate 5% interest you need to borrow 12.6billion just to cover the interest, another 7.5billion to pay some principal (assuming it's a 20yr loan) just to keep the monetary supply the same. (actually once you borrow it increases the monetary supply but you get my point.)
If NZ inc attempted to have ZERO DEBT it would be a mathmatical impossibility.
If you stop borrowing you guarantee deflation/bankruptcy etc. etc.
As incredible as it sounds the only way for NZ inc to keep up with it's debt obligations is to keep borrowing/creating money http://en.wikipedia.org/wiki/Fractional-reserve_banking
If the serfs wont do it then the Govt is more then happy to oblige.
It's working for me. I just got a slight pay raise and the new tax threshold means I keep more of it. We've reduced our spending as much as possible so aren't hit too hard by the increased gst. Since my hubby and I get zero money from the gov. for anything the tax cut was extremely welcome and one of the few gov. initiatives we benefit from. Also, my bank account is beginning to grow for a change. We are (as a family) better off for the changes.
Now if they'd just get rid of WFF and get students to pay back what they owe and implement some of Bernard's suggestions maybe we could finally have decent social programs for those who genuinely need them without breaking the bank.
Edit for spelling
JD
I earn a "high income" and I must say all that has happened for me is that the extra cash in hand has simply covered the increase in cost of living since the tax cuts came in - I consider myself no better off in net terms
Perhaps you are childless, I think those with children would have noticed the increased cost of living more
Incorrect
Figure in:
- multiple trips around Auckland taking son to soccer practies /games: big effect on costs with increase in petrol: increase per week in petrol bills of circa $20-$25 compared to year ago
- increases in groceries for family of 4: circa $20 pw
- other cumulative increases: probably $10-$15
- total increase circa $60: wipes out much of tax cuts
Nothing to do with money management, everything to do with inflation!
Yea but Matt in Auck, the tax cuts mean you get to keep the money in the first place, and that means you have options with it.
Those options are where better management of your money will see you improve your situation.
Inflation only becomes a factor after you choose what to spend your tax savings on.
Therefore you can't blame inflation.
Oh I didn't say I didn't notice the cost of living. It's horrible. The cost of petrol is a killer for sure and food prices are way up. I'm just not sure that those are directly related to GST and would have happened regardless. So I think what the government did was a good idea. (except I'd like to see no gst on food...it hurts everybody but especially the poor-maybe even if they just cut it on fruit, veggy, eggs and milk)
Hubby only buys yoghurt on sale, we cut back on milk, he goes to the supermarket really early on certain days to get the bargains on chicken, we are growing veggies and fruit like mad which is pretty tiring with both of us working full time. When we do buy clothes it's second hand but we're not even doing that now. I'm banking money for the next rainy day instead. I'd say our main luxury is internet for me and a gym membership for him which I realize is out of the realm for a lot of NZers so yeah, I know I'm lucky.
The husband just bought an inexpensive motorbike off trademe. He's using the price of petrol as an excuse. Yeah, right.
What I do think is families are really hurting, but I don't see WFF as the way to fix that. Where I live I see a lot of very hard working poor. The trouble with WFF is once you have something like that, even if it prooves to be costly to administer, a disincentive to work full time and not directed towards those who need it well enough, it is DARN hard to get rid of without looking like the Bad Guys. I hope the government is attempting to come up with something better. Taking GST off food would be a good start. :P
"Firstly, it encouraged those on middle incomes to strive for higher incomes in the knowledge they would keep more of it."
Does it?
It made no difference to me........all it did allow was for me to knock my mortgage a bit more....
While Im sure there are some ppl who only work for, and think of, money, I for one want a work / life balance....I dont want to work 50 or 60 hour weeks for more money and as an aside even more due to a bit less tax....that is not why I am inNZ...
If money was it I wouldnt be in NZ.
regards
A comment about unemployment -There is little unemployment of skilled labour, even in US where it is at 2.5% for skilled labour. But unfortunately the unskilled are a long-term structural unemployment isssue now. In the likes of Portugal, where there is only 30% who have a High Schol graduation, there is large-scale unskilled structural unemployment and of course the economic situation reflects this.
A comment about immigration - if there is a flood of unskilled people from northern Africa, from the likes of Tunisia, Libya etc, expect more Europeans to look to migrate to the likes of Canada, NZ, Australia. Despite the negative nelly type comment we get from people on this site sounding off about NZ, we are a pretty attractive proposition, just as we have been to South Africans wanting to get out of there in recent years.
The ppl I talk to from the UK occasionally, they wouldnt dream of coming here these days as, unlike 15 odd years ago it isnt cheap to live anymore....one of the main ones is housing....so if we see huge drops, sure the British might come.... but usually seeing skilled ppl coming here isnt that likely the pay drop is substantial....and then there is the re-training....A british person cant do plumbing here for instance....
SA's coming here, somewhat different and seems to be a lot, but they come with nothing, but they are now safe....
regards
Just about everyone here is missing the point, and Bernard is expecting too much, too quickly .
What we are actually experincing is a structural adjustment , and these things take time .
Firstly , many people are using the savings from lower taxes and lower interest rates to pay down debt, before investing . And they are correct to do this .
Secondly , ten years of Labour exploitation of the so called "wealthy'" had left us much, much poorer. It got so bad , they ran out of wealthy people tp tax , so they attacked the middle class.
Those with some capital and savings, have been using this window of lower taxes to save and re-build their wealth .
Since National came to power , New Zealand has bumbled for one crisis to the next , the GFC , Collapse of Finance Companies, a mining accidents , two earthquakes, the collpase of our biggest insurer.
And remember its better and fairer to tax someone's spending than tax their ability to earn, tax their ability to create wealth , or willlingness to work.
You cannot help the wage earner by destroying the wage payer
You cannot help the poor by impoverishing the wealthy who pay most of the taxes
In the last few days Bernard has written an article suggesting the government print dollars to inflate away our debt, as he thinks the USA is doing.
Now he complains the "rich" are using the tax cuts to splurge on property.
Well, a clever "rich person, who pays attention to Bernard (now, that might be a oxymoron you may think) would be entirely rational to splurge on property if he thought Bernard had any influence on economic policy.
Property would be a great hedge against Bernard's inflation.
You seem confused in your views Bernard.
Back to topic.
Bernard ponders why the tax changes haven't spiced up the economy.
In short, the Government fired all the bullets straight at their feet. What they should have done is saved them for a harmless discharge during a property led spending boom.
Why increase consumption taxes during a period where individuals reducing debt and saving was proving a drag on the domestic economy? Perhaps in order to stifle the economy?
Why make inconsequencial changes (in terms of tax revenue) to property investment taxation during a period of near record low investment in housing and new construction? Perhaps to create negative sentiment and stagnate the market, constrain new building, and make everyone depressed?
Why make changes to GST that severely impact on property developers (and their receivers!) in the midst of a downturn, devaluing their unsold inventory by 2.2%? Perhaps simply because not all changes are thought through?
So what are they doing now that the economy is in the doldrums and Christchurch is in disarray? They are sitting idly by, without any leadership, any decent ideas, and a one-eyed authoritarian view that by locking people out, then pulling down their buildings that they are creating a recovery. Businesses are folding daily. Very large numbers of shops in undamaged locations are closing, simply because uncertainty is stopping all but essential spending. Uncertainty also is causing a mini exodus. The PLT departures/arrivals figures for the next few months will be telling - their release is already delayed (I can't see why when StatsNZ ChCh is up and running and those numbers shouldn't be hard to collate).
Easily before the next election unemployment will top 8%, growth will be subzero (not good) and confidence down in the mud.
"In short, the Government fired all the bullets straight at their feet. What they should have done is saved them for a harmless discharge during a property led spending boom."
I agree. The tax policy changes would have been helpful and perhaps even effective anytime between 2002 and 2007, but in 2010 were just plain stupid.
Why those tax changes were made in 2010 remains a good question.
Not sure if people saw this the other day, but I thought it was quite good.
http://www.ritholtz.com/blog/2011/04/must-read-apropos-of-everything/
Overall a good analysis. Only piece missing is the ill-conceived cut in the OCR that is fuelling the AKL realty bubble instead of helping Canterbury reconstruction.
However, all of this is by design not by mistake or due to incompetence. John Key is part of the monied "elite" and ensuring that he and his ilk continue to have a jolly good time. Simple as that.
Bernard - my concern with an article like this is that many of the uninformed will use it an amunition to hike the top personal tax rates again.
Do you honestly believe that high marginal tax rates on those paying PAYE will solve NZ's problems?
Don;t throw out the baby with the bath water.
A lower, flater, broader tax base is much better. In fact, the top income tax rate should have been reduced to at least 30%, preferrable 28%.
The mistake that National made was to increase GST instead of introducing a low, flat, all inclusive land tax. The beneit of a land tax is that it is inelastic income (i.e. it is pretty much guantanteed income, difficult to avoid). It is also progressive in that those who are wealthier, own more land and hence pay more tax. There are a large section of society, who pay no taxes but benefit from core Government services. A land tax, like rates, ensures everyone pays a portion towards the Government services they enjoy.
One other benefote is that the Goverenment would not have had to increase benefits to compensate for GST increases.
So in conclusion - be careful Bernard. The media and people listen to you and unless your propose valid alternatives, you will be taken out of context and used as a supporter of hiking the personal tax rates. Unless of course, you believe that this is the best solution.
Pretty much agree GG.....on land tax etc....but the simple solution is PAYE will have to go up....all the while National's core beneficries dodge that with fancy tax ppl....ditto if Labour wins, PAYE will go up....the middle is quite simply the easy target of either side....
There is some worry on a land tax though and thats its now too late to look at it, ie the property market is now so weak that a land tax could cuase a collapse.....while PAYE earners can probably absorb 2 or 3% more tax...
I dont agree on your view of BH, and PAYE is an alternative option its just not a good one....but its the most likely outcome....
This budget should be interesting....
regards
Land tax, capital gain tax, higher PAYE tax, more tax… - it makes me cringe when I see “normal” ordinary people suggesting that even more tax is slapped onto them. The less tax you pay the better! The less tax you pay the less of your money if going to be wasted and the more money will be left for you (not the Gov’t, not an “independent” task force or “expert commission”) to decide what to do with it!
My vote is for a lower flat tax rate and cutting the Gov’t size and its services / expenses down to the what’s only absolutely necessary and leave people to spend / allocate their money the way they want to.
Bernard is right - Brian Gaynor's article on the weekend was good. The table he used clearly illustrated:
Govt spending up + Govt revenue down = huge fiscal deficit...and throw on top of that - 2 x earthquakes, leaky homes, AMI, SCF, middle class welfare etc. etc..
JK and Wild Bill are backed into a corner better come up with some good ideas fast.
Wonder if we can get Brian Gaynor to contribute an article now and again , to interest.co.nz ? ......... He and Fran O'Sullivan stand out , amongst the financial journalists of this fair land , girt by sea .
........ oh yeah , and you too , Bernard ........ ( ahem ! ) ........
30% of GDP in revenues and the Govt still doesn't have enough money. I want to know 'who's arse to kick'
Wolly - re. selling the Chathams, did anyone see the report on how much the Chinese are "lending" to prolific pacific islands? And the islands naively think that the Chinese will forgive the debts - no strings attached!!!
And NZ is borrowing from Asian sovereign wealth funds to build plastic boats.
That plastic crap is not a boat GG...it's just a shed that looks like a plastic waka...if Pacific nations get screwed by Beijing...who gives a rat's arse.
Pacific islanders are related to the Chinese anyway.
I reckon we could lease the Chathams to the Chinese Navy for 99 years. That would suck down the wealthy party upper class to see their ratings scrub the decks and Chch would do well from the R&R trade...and we could sell them the food they would need.
I was originally opposed to the Govt plan to reduce the top tax rate and, increase GST.
Re. the tax cuts... I get the impression that the Govt did have a plan. i.e. to equalise the tax rates between NZ and Australia, but to do so would mean a loss of revenue - So to help pay for that, GST would need to be raised.
Prior to the Canterbury earthquakes, and post tax cuts, the Minister of Finance stated several times that the 'books' will be in the black by 2014 - 2015. However, I could not understand how the Govt could bridge the $ 250 - 300 million budget deficit per week, post tax cuts, and so called 'balance the books' by 2014. As the Gov't apparently pays some $70 million per year in welfare payments, and has been vocal in detecting/eliminating fraud and reducing welfare where possible, I concede that if one person in 6 could be eliminated or weaned from welfare, that may appear to solve the deficit. If such a theory were originally possible, the additional costs associated with Canterbury earthquakes would extend the 2014 date considerably - something that could not have been forseenr. After all, the PM admitted on tv, after the quake/s that had they forseen anything so disasterous, the tax cuts may not have happened. The Question is: where to now from here.... ??????
To save govt monies, tThe Govt should curtail some of the departmental Plant & Works programmes for the forthcoming year. Where items are imported and have no NZ content, there would be nill detriment to the NZ economy postponing many items for at least a year. Many departments will 'defend to the hilt' the neccessity to replace their ''wish list' annually. I previously worked for for Gov't Department/Ministries and vividly recall the Govt curtailing an annual works programme during the late 1980's when Bill Birch was a Minister. The Engineering Officer involved in the Plant replacement programme, bitterly complained that without the finance, he would have no work. He then complained to the chief Accountant who subsequently sent a subordinate to interview him. During an hour of questioning, he managed to convince him that the place would virtually come to a standstill if the funds were withdrawn. I recall immediately, after the accountant left, saying to the works Officer, Look......... you and I know that they could do without half of that stuff...... The reply: You and I both know that, but they don't.
The moral.... Many Gov't departments are self serving and are not be realistic in their expenditure.
How about everyone getting some education about how their personal financial situation is impacting the country in general and do everything they can to improve their own circumstances?
We can only take the lead from the government for so long before we have to read how this applies to us and make steps and changes in our own lot for the better before we start blaming others.
A lot of blaming happens here on this site but very little reflection.
Mind you what do you expect when we are constantly drip fed 60-80% of the real story from the overly centrist moderator that runs this site.
"We have a higher budget deficit, higher debt, weaker growth, a weaker current account deficit and higher unemployment. But a certain section of New Zealand is now much richer in both income and wealth through a tax cut and higher property prices."
Given those facts, NZ cannot afford to have a "revenue-neutral" emissions trading scheme which puts no effective carbon price in the market.
The NZETS should either be reformed to bring in agriculture ASAP and to return the carbon price to the Crown's cofferes. This can be done by selling by auction ALL the emissions units to emitters instead of giving them ALL away to free to Comalco and other corporates.
Or alternatively scrap the NZETS and enact an all-sectors-no-exceptions carbon tax.
There was much talk about NZ Matching Australia in Incomes and Brash was given the job of investigating a strategy to catch up. But what was the Rationale of Increasing the GST to 15% from 12.5%, when Australia has a GST of 10%. Yes --I know it would increase the Governments revenue---- But you don't have to be a Rocket Economic Expert to figure that it would raise the Price of Food and all Consumer Goods in NZ --and therefore increase the attractiveness of Kiwi's to jump across the ditch to Oz where living costs may be cheaper.
If the National Government was serious about matching Australia --then National (if they were serious) would/should have reduced the GST.
Australia --though has future problems --and some experts think that Australia's future prosperity is not looking that good. In NSW there have been some huge increases in the electricity prices --which is similar to what we have already been through, and it may continue.
If you shift to Australia -- the living cost will depend where you go --and you may not be able to get a job. Jobs in Queensland are very tight ---- On the Gold Coast the AVERAGE price for a section is A$300,000 ---- even their own young people are having great difficulty buying a section and building a house there. You will find most young people renting.
NZ'rs elected National on a wave that they were sick of the Nanny State perception and media hype of Labour/Greens. What we have now got is a bunch of dunder-heads that have no vision on how to create business or increase jobs.
So Bernard expects a small tweak to the tax code to bring about a dramatic change in fortunes of the country within one financial year?
This after decades of neglect and under performance.
It's a pity Key has taken over the reins during a recession because the time to act was ten years ago when the economy had the room to adjust and benefit from the global economic conditions prevailing at the time. As it is we're stuck in this long recession along with most other countries in the world and must just grind it out.
Try telling an economy that's going gangbusters to slow down ( your, us 10 years ago?). Isn't it much easier for Key & Co. to do it now, when the rest of the world is also on its knees? "Look. It's not me, you undertsand, it's them" is much easier to sell to the electorate than, "Time, gentlemen, please...."
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