By Bernard Hickey
Treasury Secretary John Whitehead has warned in a wide-ranging speech that New Zealand's economic growth has been the slowest in the OECD since the 1950s and it faces an exodus of 410,000 New Zealanders in the next 15 years if we don't improve our growth rate and reduce our indebtedness.
Whitehead told a Russell McVeagh luncheon in Auckland that Standard and Poor's decision to put a negative outlook on New Zealand's credit rating highlighted how financial markets wanted to see an improvement in the nation's debt levels.
He referred to a chart showing New Zealand's level of net foreign debt being similar to those of Portugal, Ireland, Greece and Spain, although much of that debt is private debt owed by banks rather than the government.
"As this chart shows, our net foreign debt position, as a country, is one of the largest in the developed world, at nearly 90 per cent of GDP at last count. And the company we are keeping in this respect may ring some alarm bells," Whitehead said.
"Many countries with similar levels of external indebtedness to us are now experiencing severe fiscal and economic stress," he said.
"While New Zealand’s low starting level of government debt appears to be an important differentiating feature, our government debt is rising. This trend, and the vulnerability to another external shock associated with our high national level of indebtedness, suggests that action is warranted."
New Zealand's average economic growth rate of 1.3% since the 1950s was the lowest in the OECD, he said.
"In 1950 we had the third-highest GDP per capita ranking among OECD countries. Last year we were ranked 22. Tumbling down a league table tells us that our competitors are doing things smarter and better. Imagine the outcry if a sports team suffered such a decline?," Whitehead asked.
New Zealand would need to crank up average growth to 4% over the next 15 years to catch Australia, he said.
"That’s more than double New Zealand’s average rate since 1992 and more than triple the average rate since 1950. But this is the kind of target that I think New Zealand needs to be aiming for."
Increased private sector saving and a reduced budget deficit would reduce New Zealand's vulnerability, Whitehead said.
He also pointed to a chart showing how rental investment was taxed at a much lower real effective rate than investment in term deposits and bonds, local shares or foreign shares.
"This warrants additional examination, and so too do the high rates of effective tax for savings over time due to the taxation of accumulated income from savings, which is accentuated by the effects of inflation," he said.
Lower corporate tax rate? Capital Gains Tax?
Whitehead said more needed to be done to compete internationally for capital and labour to boost New Zealand's growth rate than just the GST/Income tax switch announced in this year's May budget. He pointed to New Zealand's corporate tax rate being above the OECD average.
He also said Treasury had recommended a Capital Gains Tax in the past.
New Zealand also needed to improve its regulatory environment. He referred specifically to the Resource Management Act and the Hazardous Substances and New Organisms Act (HSNO) from 1997, which had been crucial because of the implications for primary sector productivity.
"The HSNO legislation is crucial because of the implications for innovation and primary sector productivity. The number of genetically modified organism trials and outdoor developments spiked significantly just before HSNO came into effect, and has diminished following its introduction," he said.
"These trials and outdoor developments are critical for innovation in biotechnology, a rapidly developing field where New Zealand has significant expertise. However our regulations under HSNO are more restrictive than a number of other countries. And it may be time now to review the Act to test whether or not it is striking an appropriate balance between economic opportunities and protection of the environment and public health."
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34 Comments
Anyone who thinks the current falling of house values in New Zealand is going to stabilise or reverse in this current national economic situation has rocks in their head. Values are going to keep falling and for some time to come. Sell now if you have to as you will get less if you hesitate. Don't buy now especially if you are borrrowing and wait for things to stabilise and borrow less then. Investors should just continue to sit on their hands.
ex agent .... you can bet your bottom dollar that the last 2 groups that Key and English want to upset are of course, the banks and residential property investors. So although IMHO what is needed is a capital gains tax on each and every extra property (outside the family home) BUT this WILL NOT happen because:
a) they do not want to reduce the "value" (inflated as it is!) of residential property
b) they have a "vested interest" to protect property investors, as they see them as votes, so a ticket to "ride the gravy train". This is because most people are like lemmings and follow what everyone else is doing ....ie getting into property investment in the early - mid 2000's
c) they are so far in with the banks, so refer back to a) as this will reduce the bank's securities ... then watch the fireworks.
d) they have already weasled out of a capital gains tax before
The pollies are so short sighted and will not get off this path of residential property investment, as a key to support superannuation, so nothing will change .... new industries won't grow, savings will not increase, new employment opportunities will not be created .... UNTIL this country can see the "wood for the trees" and realise that 60% of net income going to the banks to pay a mortgage is good for it's economy ..... IT'S NOT.
I think this situation has a lot more to play out and for all you PI's out there, if you think that prices are going to turn around soon ..... because it has in the past or "it won't happen here because we are different" or "we are providing a social service" (biggest load of crap I have ever heard is that one) etc etc you are sadly mistaken and are pumping money into a depreciating asset .... and I'm sure your accountant would not like the sound of that.
We understand the problem with Team New Zealand , now what is the plan to up our game?
Diversify the economy ?
Reduce social dependence through a public works program?
Mining?
Become a financial services hub for investment funds like Isle of Man , Cayman Islands , Hong Kong, Luxembourg ?
Compulsory retirement savings for everyone entering the workforce from 2011?
We need bold decisions and a strong coach .
On the communist issue, there was a great little exchange in Parliament today.
English said the CEO of a major construction firm told him 90% of the firm's current work was government funded.
"Bunch of socialists over there," Labour's Darren Hughes yelled across. "Give the private sector a chance."
Now the question is ...why has Whitehead gone on the record more of less saying..."if the govt doesn't pull its finger out...the market will chop the bloody thing off?"
Either there is a war going on between Treasury and the RB or the govt has given W the go ahead to educate silly Kiwi, ahead of the budget in 2011....
How well does this sit with the Aussie banks who have been crowned the "safest banks in the world" by the media and the banking fraternity? Christopher Wood from CLSA once said that the a NZ property crash posed a massive threat to the Aussie banks and I can understand why given the size of the lending and the banks' reliance on wholesale funding.
There are some interesting international hedge fund "tips" out there regarding "shorting" the Aussie Banks that are most exposed to the mortgage market.
http://www.scribd.com/doc/29520921/How-to-Profit-From-the-Coming-Aussie…
Its like watching a train wreck in slow motion. We all know what's going to happen to NZ, just look at Ireland... the whole script is age old tried and tested.
Question is though ... will the dimwits in Govt on the day sell us out to the IMF or will they make the global bankers take a hair cut ?
And yet more jawboning today...
"While there were no obvious policy issues constraining national savings, a number of measures could be taken to that should improve national savings over the medium term, Dr Bollard said.
"Foremost could be a faster return to government operating surpluses than currently planned.
"The Government might also give consideration to moving towards a Nordic-type tax system where income on capital is taxed at a lower rate than labour income.
"Savings would also be enhanced by inflation-indexing the tax treatment of interest."
Also, more use could be made of the successful KiwiSaver scheme to promote a savings culture amongst New Zealanders and to reduce the fiscal cost of KiwiSaver, thereby improving its contribution to national savings, he said"stuff.co
So the govt and the RB are not applying policy to keep the property market awash with dosh to prevent the bubbles from imploding....yeah sure.
You will notice Bollard makes no comment about the poor savings being a consequence of property being seriously unaffordable either for rent or owning...nor does he suggest ending the bubbles as a way to boost savings......wonder why!
"...where income on capital is taxed at a lower rate than labour income." ".
So he favours higher taxing of labour and profit .. the productive parts of the economy, in order to lower taxation on surplus capital, or stores of capital accumulation?
Did I read this right?
I thought the private sector debt was decreasing rapidly - more rapidly than Bill English would like?
What a bunch of mixed messages.
Whitehead is a neoliberal ... he's talking up the neoliberal prescription, or "austerity measures" as they like to label them.... higher taxes and lower service delivery.
Basically, the IMF/central banking world order is gonna pick off all the low-lying fruit and NZ is in their sites.... they're in a bit of a hurry as they'd like to dispossess us of our assets before China pays for them.
RW has to my knowledge never earned a living in a productive capacity - he's a career mandarin - leaving this job for where - the World Bank or the IMF, wasn't it?
Strip him of all his accumulated assets and reduce his salary to the average wage - and then let's see what he recommends... at least it would then carry some credibility.
Debt ratings are a remnant of an elitist system and create a sense of failure among those deemed to have too much debt. Countries with high debt levels are not normally personally at fault and often come from a dysfunctional family background. S&P and Moodys should follow the example of the NZ education system by moving to a simplified system of ratings consisting of "Achieved" and "Not achieved". The latter category should comprise only Zimbabwe and the Republic of Ireland. Debt rating analysts should also be given more rating analyst-only days and have the number of countries they are responsible for rating reduced. It's not about the money.
"Debt ratings are a remnant of an elitist system and create a sense of failure among those deemed to have too much debt. Countries with high debt levels are not normally personally at fault and often come from a dysfunctional family background."
Bollocks. Almost all debt is the result of attempts to live beyond one's means. Dead simple.
We need to tax the equity in the family home. Graph 1 makes that abundantly clear. It's the only source of our 'savings' that is taxed at zero %, and where most of our national wealth lies. We must start charging an implied rent on all our homes. Not nice, I know. But that's what it boils down to.
Did you look at Graph 1? See the category of Owner Occupied homes....it's effective tax rate is...zero. That's not my, assumption; it's there in Whitheads' paper. So, no, rates aren't a tax. Combine a home equity tax with "The Big Kahuna" (say) and everyone over 18 gets an annual bullet payment to do whatever they want with; offset the equity tax, go to uni, stay home and don't work, have children ad infinitum. But one payment, once a year...and that's it.
Over time it comes slowly down to what I always said:
We all agree NZ must become more productive in order to become more independent and happier and proud as a nation.
Fundamentally we must produce and export not only more, but especially more valuable widgets/ products. As a nation we cannot afford the volume of imports. We must reduce our massive account deficit and change from consumption to a manufacturing culture.
Obviously NZ has a reasonable good education system to provide the necessary potential for our workforce. Unfortunately talented and skilful young people export themselves to other countries, because of lack of decent jobs here or more interesting and better paid job in others. Entrepreneurial skilled people setting up their businesses are often struggling to get access to resources – materials/ technology etc. in this country. As a nation this factors are economically suicidal.
Too many products/ components and knowledge must be imported working for our own industries. Segments in our economy are missing. This is one important reason why manufacturing is struggling to develop properly. Businesses cannot enough fertilize and help each other. Under these circumstances there is no wonder why the term “Debt” is very common for most businesses.
I’m a strong believer our economy needs to be redesigned. In the current and upcoming worldwide environment we need structural planning (not government intervention) involving the private sectors, strongly supported by government is essential.
Building a national “Eco Economic Parks” in a strategic favorable location could manufacture widgets/ products needed by all sorts of industries. It could be developed as the centre of niche market products and specialist equipment – especially supporting infrastructure demands here in New Zealand. The park could also be used for research, technical developments and engineering schools. Attempt for a “National Light Industrial Park” would open the door for a balanced and prosper economy. Diversity and branding “ NZ100% Pure” and sustainable business practices all around NZ are certainly successful long-term.
In today’s world a small country has to be smart to compete within international markets. The two biggest disadvantages are New Zealand is small and far away from the rest of the world. My view is that exercising “Market economy” on its own has it limits. We have to become more self sufficient and start producing a range of rather valuable widgets we need in NZ. We also have to become more aggressive by allocating contracts to foreign companies.
Please, read and understand this aricle in context with many of my others.
What about a "free enterprise zone"?
Politicians hate these because they show up what is possible.
Crazy Horse - I am not so sure about your dismissal of the Pollies considering CGT
The Govt have been making all the right noises about rebalancing the economy, the S+P report gives further impetus and mandate for them to consider things like CGT
The time is ripe for them to act in Budget 2011, whilst they are still way ahead in the polls
I'd love to see that chart re-done with "Public plus private" debt as % of GDP on the Y axis. I bet we'd be even closer to the middle of the "wrong bunch".
As someone else pointed out, too, Bill E is borrowing frantically to move us up in that bunch too. Wee haa. Portugal, Ireland, Greece, here we come. It couldn't happen to a nicer and balmier bunch of lands.
There was a lot of truth in what Henry George and also Rudolf Steiner said.
Letting "capital" accumulate in rising land values, untaxed, while taxing everything that actually produces anything, is economically destructive.
It is not so bad if the land value gains are truly "Ricardian" ones where the land value reflects increased income as the result of more efficient use of land. But where the gains are purely speculative, other forces of economic distortion need to be looked for. CGT's do nothing to stop speculative inflation in land prices, as the Japanese can tell us, and every international study of "housing bubble factors" reveals.
Hugh P is one of an enlightened minority internationally who will be acknowledged one day as having been right all along. I sincerely hope. It has been a pleasure to get to know about as many of these people as I have.
I agree with ex Agent and Crazy Horse. Our average residential property value is over priced compared with our average income. Housing affordability should be based on the net income instead of the pre-taxed income. Situation in NZ and Irish are very similar, where banks are overexposed to property loan to overpriced properties. Many pepople failed to understand the basic concepts of affordability, income, job security and real value. The only way forward is for the property prices to fall further. It is already affecting some farm values, I am sure the commercial and industrial property values will also be treding downwards due to the market conditions such as demand, affordability and oversupply.
"Superannuation entitlements and student loans are among the things the Government needs to look at in the context of lifting the economy's growth rate, Treasury Secretary John Whitehead says." herald..............then he was about to say..."salaries for senior civil serpents like me are way too high and need to be cut back about 30 percent".....but he didn't!...what a surprise.
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