Is it kind to bequeath debt to your children?
The theme of New Zealand’s approach to the pandemic Covid-19 is “be kind”.
It motivated a prolonged lockdown requiring $22 bln of government spending commitments and a further contingency of $39.3 bln. Since borrowing is a core part of this policy, it is reasonable to ask if kindness will determine how we deal with the debts the policy creates?
Living in interesting times
The government approach to the Covid-19 pandemic prioritised the lives of the elderly over economic activity. To do this they required most people in work to go on leave and offered them an advance on future wages funded through additional government debt. An academic industry is undoubtedly forming to understand if this and other responses were optimal.
Currently all we can say with confidence is that the New Zealand government’s approach appears to have worked on its own terms. The cost was that it left the country with substantial extra debts.
Graph 1
Source: Politik using NZIER and Treasury data.
Debt is just a tool of government policy. The tool can be used badly of which Robert Muldoon’s fight to maintain New Zealand’s as a colonial economy that drove the increase in the 1970s and 80s being a good example.
It is hard to think of a better reason for taking on debt than tackling a once in a hundred years global pandemic.
Does the government debt matter?
Sometimes personal intuitions do not work well when thinking about government finances. (If the government prints money it’s called quantitative easing, if you do it’s called forgery.)
Government debt is more intuitive. Debt matters to governments because after the initial capital is spent, the debt limits what they can do.
In the short term this means diverting income to finance the debt. Thus, even in what now seems like the good old days of 2019, debt financing cost $4.3 bln, or more than triple the $1.2 bln spent on Oranga Tamariki, the child protection agency.
As with individual borrowing, if government debts are not repaid they accumulate and lenders tend to charge more.
While these lenders do not threaten to break our fingers, the price they charge can be extortionary. The graph below shows the proportion of national income the New Zealand government spent on debt financing and compares it with spending on education and health. You are not reading it wrong. Between 1984 and 1991, New Zealand spent more on financing government debt, basically bonds the relatively wealthy use to improve their savings and pensions portfolios, than it was spending on either health or education. Debt can be useful, but lenders are rarely kind.
Graph 2
Source: https://treasury.govt.nz/publications/information-release/data-fiscal-t…
What can we learn from the last time we flattened a curve?
One of the few silver linings in the long grey cloud of Muldoon’s premiership is we learned how to reduce debt from over 50% of national income to around 5%.
The reduction had two components: running a balanced budget while the nominal value of the economy grew and directly repaying the debt. From 1992 until 1998 the government did both, leading to an average annual reduction of more than 5.1% per year. If we had continued at that rate we would have reached the minimal debt achieved just before the GFC by 2002/3 and had the entire debt paid off by 2004.
Graph 3
Source:NZIER ( https://data1850.nz/) with calculations by the author
This did not happen because policy softened and balancing the budget became the main instrument. Reductions in debt as a proportion of income between 1999 and 2008 were at 2.2% per year, less than half those in the first phase. Had this been the policy from 1992, the debt level when the GFC struck in 2008 would have been around 20% of GDP, or close to its peak after the GFC. The Covid-19 response would have taken New Zealand government debt to more than 70% of GDP. It is unlikely our current leaders want to hear this, but the ease with which they could be kind in 2020 is largely due to Ruth Richardson’s budgeting in the early 90s.
One important difference between now and the 1980s is that finances costs worldwide are considerably lower and falling. This means we are in the counterintuitive position that short run finance costs will fall as the amount of debt triples. The Treasury budget modelling predicts this happy coincidence will unwind over the next fifteen years, with costs increasing from the current 1.3% of GDP to 3.2% by the mid-2030s.
A less benign difference is greater uncertainty about New Zealand’s economic growth. The Treasury predicts two years of contraction followed by a, frankly, non-credible real GDP growth of 8.6% in 2021/22. (This is not far short of China’s growth during its boom years.) In fairness, the speed at which the once in a century pandemic emerged gave no realistic chance to improve the model in time for the budget. Their model is one for normal times, based on the economy suffering a shock and going “back to normal”. The BEFU is very clear about the uncertainty.
Graph 4
Source: https://treasury.govt.nz/sites/default/files/2020-05/fsm-befu20.xlsx
The most important lesson from previous experience is that debts from the Covid-19 response can be repaid before a new crisis. This time we will have less immediate financial pressure, but we will probably have to rely more on politically difficult direct debt repayment.
How are we going to prepare for the next crisis?
My daughter is in the latter years of primary school. Assuming she gets a tertiary education and does the traditional kiwi OE, she will be starting her career in around 15 years. How fast we repay the debt from this crisis is a decision on how much we want her and other primary school children to carry the financial risks associated with Covid-19 when the next crises come along. The 2020 Budget had nothing to say on this.
Like any other debt, the weight of government debt can be reduced by some combination of minimising the debt to be repaid, increasing income and decreasing expenditure. These are considered below.
Minimising the debt
In the 2020 budget the government set aside a contingency of $39.3bn. That would let them deal with one new national outbreak and several local outbreaks. In itself this seems completely sensible. However it will be a test of will to remain sensible in the face of pressures to spend that money if those contingencies do not arise. Virtue will have one reward: it is unlikely the government will muster the close to 90% support they had for their Covid-19 strategy for any other approach to debt reduction.
One more unpopular strategy has a potentially greater impact. The New Zealand Superannuation Fund (NZSF) is a government owned fund intended to make New Zealand Superannuation (NZS) more affordable when population aging increases the cost of NZS later this century. Those people it is meant to help are also those currently in the workforce at risk from the current economic downturn. Contributions are continuing and by 2023 this fund is projected to be worth around $60bn. It is frankly bizarre the government is still budgeting to contribute to the scheme over the next few years. This feels a little like saving money while not paying off your credit card bills.
More ambitiously, funds already saved could be used to pay for the Covid-19 response. Clearly this is a different use for the fund, but used in this way it is helping the individuals it was designed to help, just earlier than was foreseen when the fund was set up. Spending in the spirit of an initiative’s intent rather than following the bureaucracy of its setting up would seem a kind thing to do.
Increasing government income and decreasing expenditure
In an ideal world, the one where lions lie with lambs and all dog owners clean up the mess their pets make on the pavement, even in a crisis we would protect spending on the poor, the sick and children. The crisis response would be funded by removing palpably bad spending, such as abolishing sinecures like the State Services Commission, or ending subsidies to multinational corporations that use so much electricity to smelt aluminium they inflate the power costs of household consumers. Our next priority would be to consider cutting nice-to-have budgets, such as the culture and heritage spend. Only if this was insufficient would we decrease other spending or increase taxes.
It is difficult to imagine the Covid-19 crisis being a better opportunity than the GFC for us to see this ideal world. Kindness will probably go the way of austerity as a means to change the power of vested interest over government spending. With the honourable exception of the 1984-90 Labour government, governments that wish to cover new costs tend to increase taxes, have across the board sub-inflation increases in spending, or cut transfer payments.
The suggestions below are a compromise. They avoid the core welfare system but are biased to putting the cost on those with greater resources. The point of the suggestions is to provide a sense of the scale of initiative needed if politicians, of whatever political beliefs, are to replicate the stable financial base to deal with future crises created by their predecessors.
To start, the table below uses an adapted version of the Treasury Fiscal Strategy Model to assess the impact on the current government debt of previous approaches applied consistently. All assume that repayments do not start until 2023/24:
| Direct debt repayment (% GDP per year) |
Year debt <10% GDP | Year debt is zero | |
| Balanced budgets alone | 0 | Indefinite | Indefinite |
| Clark / Cullen approach | 1% | 2040 | 2045 |
| Historical average | 1.5% | 2037 | 2041 |
| Richardson approach | 2.5% | 2033 | 2036 |
Source: Treasury Fiscal Strategy Model adapted by the author
Note that these estimates do not include the incentive impacts on economic behaviour so should be treated as underestimates.
To make this more concrete, an initial assessment was made of the impact of the follow policies and compared to the goals of three approaches requiring additional policies:
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Capital Gains Tax proposed by the Tax Working Group chaired by Michael Cullen (page 67 of the final report). The group assumed a ten year year implementation period and more prosperous economy than is likely while we recover from Covid-19.
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Income Tax rises are targeted at middle and upper incomes ( those currently paying 30% tax over $48 000 and 33% over $70 000, respectively), with an equal percentage increase in both bands. (Treasury tax reckoner, % of GDP in 2019/20)
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Goods and Services Tax uniform increase (Treasury reckoner as previous).
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Increasing the age of eligibility New Zealand Superannuation from 65 to 67 modelled by Treasury for the 2013 Long Term Fiscal statement, averaging 2% of GDP annual saving when implemented.
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Convert student loans into a grant targeted at those from low income households and the remainder used to pay the government debt. (Figures adapted from 2020 BEFU)
| Increase government income | Decrease government spending | ||||
| Capital Gains Tax | Income tax | Goods and Service Tax | Convert student loans to targeted grants |
Increase eligibility age for NZS |
|
| Clark / Cullen approach | Requires other policy for 8 years. After 8 years would cover the cost. | 36% tax on incomes over $48 000 and 39% tax on incomes over $70 000 | 2% rise in GST | Average of 50% of loaned value converted to grants and 50% for debt repayment | Phase in increased eligibility age to 67 over 10 years would cover the cost. |
| Historical average | Requires other policy. After 10 years a CGT would cover four fifths of the cost | 38% tax on incomes over $48 000 and 41% tax on incomes over $70 000 | 2.5% rise in GST | Average of 30% of loaned value converted to grants and 70% for debt repayment | Increase in eligibility age to 67 would need to be phased over 5 to 10 years to cover the cost. |
| Richardson approach | Requires other policy. After 10 years would cover a half of the cost. | 44% tax on incomes over $48 000 and 47% tax on incomes over $70 000 | 4% rise in GST | All the loaned value used for debt repayment | Unphased increase in eligibility age to 70 would cover the cost. |
Who will be asked to pay for the Covid-19 response?
There is little that is kind about repaying debt. It is what has to be done for kindness to be more than a gesture.
The approach to repaying the debt will involve many seemingly small and technical decisions so the analysis above provides a benchmark for testing the seriousness of decision makers. The particulars will be different, but the scale of any strategy needs to be similar to the ones outlined above.
If nothing is done it means whoever is in New Zealand when the next crisis strikes will be dealing with the consequences of Covid-19 and the new crisis.
That does not sound particularly kind.
Dr Tony Burton was formerly Treasury Deputy Chief Economist and is now is an independent economist and writer. He can be contacted through: www.linkedin.com/in/Tony-
211 Comments
"Everyone else but me".
It's actually trying to move past that status quo.
I side with Milton Friedman on this one. Drop income tax a bit, increase a bit of land tax to balance. At least it is one tax that cannot be avoided, and it reflects the betterment land receives from society around it.
That's really the message here. Land value taxes have already been in place, as well as money supply growth being basically 1:1 with nominal GDP growth, and closely correlated to property price inflation.
The Government has allowed / become dependent on increased money supply growth, and funded welfare with the proceeds from tax revenue (which increases as nominal money increases).
The issue here is that it has been the private sector that holds the debt and pays the bill, i.e business and property owners, that the Government uses to fund its programs.
It has allowed (via loose regulations), private sector debt to expand to very large levels, in order to fund a large welfare state. Now that a crisis has occurred, Government & local body revenues have collapsed, as the private sector is struggling to support the dependent Government.
For anyone who says they want a land value tax. It's already there, and its been mismanaged beyond belief, and used to buy votes, which is an enormous failure of Government at the highest and most pervasive level, enough that it will undermine the trust in the currency (relative to today's levels). The reason there has been no capital gains tax, is with one, property prices & money supply growth, never would have risen at a high enough rate to fund Government revenue. I suspect that is what Ardern found when she investigated it, a nice bureaucratic note on her desk explaining the subsequent falls in growth of tax revenue, and fiscal austerity that would be imposed should a capital gains tax be in place.
When you engage in welfare spending, instead of growing the productive economy, you force a dependency on more debt. In the short term, there is a large, (dependent on welfare spending) voter base, that the Government chooses, due to it's bureaucratic structure and size (this includes both National and Labour, but each party dresses things differently).
If you spend on welfare without drawing from a productive sector to fund it, you need to bring more purchasing power forward from the future (credit), house prices are simply a symptom of those increases in credit. It's been a system that works for the Government as a single entity overall, as there has been a lack of significant crisis to destabilize real economic activity. The result has seen Government and private sector debt explode, and house prices explode upwards as a symptom.
Now that one is here, there isn't a large enough productive base, due to failure over 30 years of Government policy, to support or draw down on savings in times of crisis. The result is collapsed revenue for all, and possibly a banking crisis; as saddled with debt for 30 years, the middle and upper class will find the real bill of that debt too high, thus the banks take the hit, then the deposit base, or the Government if if finds it cannot bear a bank failure.
There will be new laws written once the effects of this 30 year policy failure, and end cycle/crisis are truly seen. The Government will find that welfare spending, and productivity failures, are absolutely extraordinarily expensive in the end. I cannot emphasize enough how much of a drop in purchasing power there will be in order to pay it all off.
There are perverse incentives.
For example, when Govt. policy allowed land banking monopolies and council consenting and infrastructure monologues to happen, this increased the price of the sections by tens of thousands (even a hundred thousand plus) of dollars without adding any extra value.
As new land housing costs, especially on the city fringe set the price of all homes, including existing houses going back into the centre. The increase in fringe section prices automatically gives a free windfall gain up to the same amount for any existing property. They receive this money for doing nothing.
BUT rather than calling to tax these windfall gains, what we should be doing is putting in law changes that stop them from being created in the first place.
CV19 might just reduce prices enough so this distortion of non value-added pricing is removed. This would be the perfect time to enact legislation to remove rentier monopoly incentives.
This would mean all that money that was going to pay for overinflated housing costs, in a boom going forward, which is mainly the debt you carry in your mortgage and interest costs, is now free to be used in other more productive ways, ranging from retirement savings, education and health costs, AND yes some of it to pay more tax, or fairer user charges to help pay back the cost of covid.
Between 1984 and 1991, New Zealand spent more on financing government debt, basically bonds the relatively wealthy use to improve their savings and pensions portfolios, than it was spending on either health or education. Debt can be useful, but lenders are rarely kind..
Hmmmm... obliging the bond owning, minority rentier class. We certainly know how QE improves the immediate value of these assets while undeniably raising the present value costs of the tax paying underwriters' future liabilities, who as it happens are the majority and generally asset deficient.
Wealth effect or wealth illusion? The other therapeutic effect of lower-for-longer interest rates is the wealth effect. By driving up the value of future cash flows with lower rates of interest, all manner of assets – stock, bonds, and houses – increase in value and, thereby, can stimulate our marginal propensity to consume. More simply put, the imperative was to make rich people richer so as to encourage their consumption. It is not so hard to imagine negative side effects.
There are the obvious distributional effects between those who have assets and those who do not. Returning house prices in California to their 2005 levels may be good for those who own them, but what of those who don’t?
There are also harder-to-observe distributional consequences that flow from the impact of lower-for-longer interest rates on the value of our liabilities. This is most easily observed in pension funds.
Consider two pension funds, one with a positive funding ratio and one with a negative funding ratio. When we create a wealth effect on the asset side of their balance sheets we also drive up the value of their liabilities. Lower long-term interest rates increase the value of all future cash flows – both positive and negative. Other things being equal, each pension fund will end up approximately where they started, only more so.
The same is true for households but is much more ominous, given the inequality of wealth with which we began the experiment. Consider two households: one with savings and one without savings. Consider also not just their legally-defined liabilities, like mortgages and auto-loans, but also their future consumption expenditures, their liability to feed and clothe themselves in the future.
When the Fed engineered its experiment to promote the wealth effect, the family with savings experienced an increase in the present value of their assets and also an increase in the present value of their liabilities. Because our financial assets are traded in markets and because we receive mutual fund and retirement account statements, we promptly saw the change in the value of our assets. We are much slower to appreciate the change in the present value of our liabilities, particularly the value of our future consumption expenditures.
But just because we don’t trade our future consumption expenditures on the stock exchange does not mean that the conventions of finance do not apply. The family with savings likely ends up where they started, once we consider the necessity of revaluing their liabilities. They may more readily perceive a wealth effect but, ultimately, there is only a wealth illusion.
But what happened to the family without savings? There were no assets to go up in the value, so there is no wealth effect – real or perceived. But the value of their future consumption expenditures did go up in value. The present value of their current and expected standard of living went up but without a corresponding and
offsetting increase in assets, because they don’t have any. There was no wealth effect, not even a wealth illusion, just a cruel hoax. Link-pdf
There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a manner which not one man in a million is able to diagnose.
"Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuate wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery."
If you feel that the wealthy are accumulating too much of the money that the government creates through its spending then the fairest way to remedy that is through taxation. Having the government reduce its spending and thereby inflicting austerity on the poor and increasing inequality as is mostly done around the world at present is not a just way to solve the problem.
Whilst the repayment of debt is admirable, we shouldn't be in a position that this is required.
We were too slow to move and went too far in our lockdown. If we had implemented a quarantine in mid-February, we wouldn't be in the hole for >40b government spending. But we are where are, so time to solve the problem.
This debt repayment approach isn't addressing our actual problem. We need to grow our GDP per captia, not take a larger part of it in tax revenue. I just don't understand how this is such a complex thing to understand.
There are very real consequences if you tax incomes, 10 - 20% more, even in this base scenario (27% to 36% @ 48k+ PA). There is a reason New Zealand has the second highest citizen diaspora globally at 16% (behind Ireland). We will force our talented people away from New Zealand to create a better future for themselves.
We must change our economic thinking. We need to either be the best place in the world to create a business or operate business in. We are already doing well in aspects of this. We must go further to grow our tax revenue pool, not just tax the existing base more.
A key part of this is keeping our best talent and attracting the best talent in the World. Those income tax rates wont do it when peoples OTE is very low versus the rest of the World, particularly once FX is factored in.
Attract talent, create value added business and attract further business investment. Grow the pie, dont cut it into more pieces.
"We need to grow our GDP per capita"
Sounds about right. And the best way to do that?
Keep the 'capita' bit constant - use the people we already have here, first and foremost, and import only those crucial to the development of the country.
It's time for us to press Pause on the General Immigration button for a while until we have the 'GDP per..." bit adjusted.
The alternative; and most favoured historical answer to repaying Debt is mass immigration - more taxpayers to pay off the debt at the current PAYE brackets.
That may work on a nominal basis, but the necessary " GDP per capita" you write of - will become just another forgotten, good idea.
I agree wholeheartedly, but keeping the capita broadly stagnant is only one element. We need to shift mix of immigration, while greatly reducing overall levels. We shift that mix through incentive, hard to incentivise high capability with low wages and rapidly increasing cost of living.
We have great reference points to view in close allies, Singapore and Ireland. There is no reason whatsoever we can steal with pride from their models. Lower tax environments for individuals and businesses alike. Progressively move income tax rates lower, while target being tax neutral with CGT, the numbers can be adapted to meet that neutral tax amount.
We then need to build a business environment that is highly desirable. Look at business tax relief for startup business (no tax first five years as an example) and investment into small, medium and large capitalisation businesses that are willing to commit to either a global or regional hub in New Zealand. This could be funded via PPP model or NZ Super Fund (think Boeing in USA or Renault in France).
The above seems like a lot of work for very little net gain in tax revenue at face value. But what it does do is significantly shift the health of our overall tax system. It provides more incentive for high capability individuals in all tax thresholds to stay in New Zealand. We can then grow the demand side for this talent to grow existing business or create new businesses through a Government investment vehicle.
This model of course isn't perfect. It is infinitely more progressive than where we stand of more bodies in the door. It is also a future New Zealand I'd want to live in, where people can create better futures for themselves. One can dream.
No we don't need foreign capital, but it would be good to have more foreign business establish big businesses here. We have low to zero corruption in a relatively strong OECD economy, if we get the operating environment for business right we could entice a number of 'anchor tenants'. More of the recently announced Microsoft Datacentre investment.
It would be great to see Callaghan Innovation create a strong business incubator setup, using New Zealand capital. Investing 100M NZD in globally scalable businesses would drive strong outcomes for us. It isn't like we aren't dabbling in this either, Callaghan Innovation is currently funding significant R&D investments, it just needs to go further to grow businesses faster in a sustainable way.
Did you read my original comment when I mentioned "OTE (opportunity to earn) is very low, particularly when FX is factored in"? You are making my point for me.
We can't reasonably compete on opportunity to earn, so we have to compete on net income. This is where we can overcome those markets due their 48.5% and 45% top tax rates respectively. If we get to a top tax bracket of 25%, plus our purported high living standards we can establish a pretty amazing economic environment for the best talent and business globally.
I suspect you are remembering these Treasury figures quoted by Bill English in 2014:
"The Treasury estimates that this year households earning over $150,000 a year – the top 15 per cent of households by income – will pay 49 per cent of income tax."
"But when benefit payments, Working for Families, paid parental leave and accommodation support are taken into account, these 15 per cent of households are expected to pay 74 per cent of the net income tax."
"And that is before New Zealand Superannuation payments are counted."
"It also excludes the impact of other aspects of the tax changes in 2010, including tightening property tax rules and compliance, and increasing GST.
By contrast, households earning under $60,000 a year – which is just under half of all households – are expected to pay 9 per cent of income tax."
Horrific, really.
Meanwhile, $150k per annum is not that significant a salary vs. house prices and house price rises...and National as property investors thought nothing of central sponsorship of that tax-free income to property investors while leaving those $150k productive households to pick up the bill. How appropriate that English's first name is Bill, as that is truly the "sign of our success" his legacy has left upon the country.
Mlennial,
"we need to grow our GDP per capita". Well yes, but the problem has been around for decades, so you need to explain in some detail just what needs to be done to solve it. You state that we force our talented people away(because of high taxation), but what actual evidence do you have to back that up? I suspect that the answer is none.
How about a reference article from interest.co.nz as the first link from Google? https://www.interest.co.nz/news/98882/expat-community-over-one-million-…
Never did I mention that income tax was the sole reason. I even mentioned OTE in the original comment. Something isn't working when 20% of New Zealand citizens live overseas at any one time.
NZ didn't implement a quarantine untl we were already mid way through level 4 lockdown, when it caould have, and should have been done lot sooner. But what other countries did it quicker than NZ? IT is more a case that there weren't coordinated global systems in place to deal with this sort of traveling bio hazzard
If the NZ governement hadn't cut healthcare costs over the years, and our contact traceing systems were gold standard originally, we also may not have had to go into a level 4 lockdown, as per what one of NZ top Epidemiologists said,. Australia didn't have the same strict lockdown, but then again Australia still have community transmission occurring, and are today still under a more locked down country than NZ. Also Oz have far from eliminated it , and they expect cases to continue over there until a vaccine comes along, which may never happen. So much for a travel bubble with them.. NZ is one of only a few countries that may actually eliminate the virus, and will should be able to have travel bubbles with pacific islands that are virus free. The last thing NZ wants to do is risk the pacific islands countries getting the virus, which is a risk if we open a travel bubble with any country that hasn't eliminated the virus. .
Having one of the best responses in the world isn’t enough for some people!
In hindsight we could have shut down our border and a big chunk of our economy (tourism) sooner and put ourself into recession just because the Italians got it bad, but likewise we could have also done that with SARS, MERs, Ebola, etc too and in hindsight those would have been wrong.
You seem to forget that exporters of logs and meat and others were shut down prior to any lockdown. I dont believe, no matter how it was handled, there was any chance of a differing economic outcome, covid was a catalyst that sped up the balls that were already on play.
FB, it is attitudes like yours that is the reason there is the chaos in America!
Your thoughts should be kept to yourself as you sound like an ungrateful person and should feel privileged to live in NZ.
Landlords are not greedy at all and are hardworking genuine people who are providing accommodation to people that need it and that the government is not able to supply.
The crap state houses that are provided is a disgrace but then a lot of the the tenants we wouldn’t being accommodating in property!
NZ does need a reset. It is called get rid of the socialism that is going to be the root of much trouble going forward.
People should be responsible for themselves more rather than relying on everyone else to support them!
Dumbandbroke, yes thank you for appreciating us for providing accommodation to people.
Yes we run it as a business, however our tenants seem to appreciate what we do for them by putting a roof over their heads!
Yes we make a profit, would you be far happier if we made a big loss?
If it makes you feel better, then I will say that we make a huge loss each and every week!
The economic illiteracy in this thread has come to a head with this comment. You get rid of landlords, you get rid of housing investment. Your desired world is one in which few houses get built, and to a low standard. Look to Europe for the results of what you want: everyone crammed into a tiny apartment which they don't own, but is instead owned by some housing collective which never improves the property without state coercion.
If you want a scapegoat, look to the Reserve Bank, not the people who provide you housing.
Yes it has.
But remember that the illiteracy is based on 'economics'.
Everyone could own a house, sans landlordery. They are merely parasites on tenant income (and I am neither, btw). The house would exist without the landlord, but he would have to tap into the resource/energy stream some other way.
No you don't get rid of housing investment actually. People will invest in their own house because it provides a fundamental need that all humans require. NZ housing standards are poor so property investment hasn't improved rentals either. I don't mind people investing in property as it has been profitable. What I absolutely loath is the ones who bleat on about how much good they're doing for the tenants and how they should be grateful they have priced them out of the market.
Speculators will be active in any market that they perceive to be rising. In the commodities market they provide the important function of liquidity. Interest rates are a main component of housing values, so when interest rates fell after the GFC it became obvious that housing values would rise - enter speculators. If all first home buyers and tenants refused to meet the associated higher costs those costs would have to fall but unfortunately most don't, and the market takes no notice of the minority who do.
TM2, landlords are not greedy, excuse me as I wipe my cornflakes off the floor after throwing up with, laughter actually. If you aren't greedy, I assume you let all your properties out at well below market rates, in line only with what your tenants can comfortably afford.
Reference your last line there TM2 - 'People should be responsible for themselves more rather than relying on everyone else to support them!'
Just remind me that it is the government paying tenants accommodation supplements and tenants paying you rent.
So everyone is supporting you right (tax payers and tenants)? Yet you tell others they should be responsible for themselves instead of others?
Any hypocrisy in your views by chance?
IO, couldn’t tell you how many of our tenants get an accommodation supplement at all!
We thoroughly check out all our tenants prior to accepting any of them, this way we reduce the risk rent loss.
Can confirm that we have only had to go to the Tenancy Tribunal once for rent arrears and of course they didn’t turn up.
Of course we won and the debt collectors are collecting the arrears plus being on their record will affect their chances of getting future rentals, providing landlords do the proper checks!
Do I feel superior to my tenants?
Not sure what you mean exactly!
Superior in what way?
If you mean am I better off financially than any of my tenants, then of course I am!
If you mean because I am financially better off so I can pick and choose what I what to do? Then of course I am!
Does not mean that I am superior to any of them, because at the end of the day we all can make choices!
From a moral and ethical perspective, yes I do in many instances. Especially if an individual or couple who pay minimal taxes (or in the past have been offsetting loses), owns 5, 10, 15 rentals and is receiving welfare payments from struggling NZ'ers in the form of rent. Who then come onto websites like this to gloat about how wealthy they are, while people sleep in cars.
There are exceptions of course, for example a property that has been received as an inheritance that people don't want to let go of and turn into a rental. But if a person/s decide to buy multiple properties and make $$ from landlording, while turning their fellow NZ'ers into serfs and the social and economic ramifications of those decisions, well we can each decide where our moral compass falls on that - but for many I think we've lost our signal and willingness to say where north might be on our moral compasses.
The good lady wife got an ird statement for last tax year and no bull, IRD paid her over 4500 for WFF. I have no idea why. So I made a note to call IRD tomorrow to let them know they have paid in error. Unless they pay WFF for our 4 puppies then maybe she has an extra child even she didnt know about.
what if instead of land/housing, it was water that was the investment dream of kiwis.
So everyone who is financially stable could buy a share of water infrastructure, maintain or it not (to the government enforced standards), sell those litres-per-day to the young or unlucky or dumb who need water but can't get themselves on the water-ownership 'ladder', to pay back our bank loan.
Water doesn't grow on trees, and maintenance is not free, so we would put prices up inch by inch matching incomes. The government might increase the water subsidy $50 a week so we would bump the price up to absorb that. As a ponzi scheme we make it a far fetched dream of the young to own their own water supply some day.
The point is, maybe just maybe it makes a difference that housing is something people need, and the ability to shop around for a fair deal is severely limited as there is not enough of it in desirable places. Government (and RBNZ) policy has quietly fed this culture to the detriment of everyone with 0 housing in their name, to the massive benefit of anyone with >1 housing in their name.
Its not wrong to want to make $$, it is perhaps wrong to not see how much more damage this landlording business can potentially do, compared to building your dentristry/meat cartel.
Yeah, I don't see much of an argument there.
People need meat, you can die from dentistry germs if you do nothing when your tooth breaks.
The answer to a lack of housing is (and has always been) to build more houses. The regulatory mess that makes that impossible (even for the government itself) is the core of the problem here. So I think we agree government policies have fed the mess. But I don't see the point in blaming landlords in particular.
The day you see any government tackle local government reform will be the day someone actually has a real interest in fixing things.
Disagree - you can build houses until your blue in the face, but if landlords and speculators show up to the auction and buy the house out under the FHB's feet because they've got equity and income in their favour, it just makes the ponzi worse (exhibit the last 15 years in NZ).
I dunno. Its unrealistic perhaps but - picture 5 new townhouse/apartment mix developments popping up in wellington and the hutt. 1000 units appear, at yep high prices 400K for a tiny one, 800K for compact luxury.
Tell everyone who is buying that there is no capital gain beyond inflation, based on the current government policies and plans to build a small number like it every year.
Couples and wellington above-median folk will get in no problem at 4% mortgages. Single folk will need to flat, big deal.
If landlords take them all, well... build another 1000. Now we have 1000 empty rentals. Are landlords still going to push FHB aside?
(Please dont attack my numbers, but the idea is worth proposing... more housing should block the ability for landlords to take-it-all.. shouldnt it?)
Through local government reform land prices could be halved. And if I then built one million houses the supply side shock would reset the entire investment class and your current rules would no longer apply.
P.S. Governments created the current price problem, not landlords.
It still amazes me that there are people on this forum who believe 'socialist' is a dirty word. What is so wrong with 'each according to their needs, according to their ability'?
Ok, so that's communism, but close enough.. And collectivism is fairly common here anyway..
Maybe he is referring to the method of taxpayer commitment demanded by oligarch type owners of private US defense manufacturing companies. They seem to be price indifferent because of powerful political forces underwriting preferred place sitters on the right committees of power in Washington?
Most people that I know who are very rich either inherited it, got a good investment job through their parents connections or they got lucky as their house price went up exponentially under JK. Very few truly hardworking blue collar workers get rich. The system is set up to keep the elites at the top. The system needs to be reset.
Don't tell me.... they were all born at the right time to buy a house for peanuts, then they got a loan off the bank for a rental, both houses went up 500% so they got another couple rentals with the equity and became big-time landlords. Not really the same as working hard sorry, but you just go ahead and and believe you are a genius. It sounds better than accepting the fact you was just born early enough.
Shouldn't mortgages rates be rising signifincatly right now to reflect the higher risk of default by customers? e.g. pay cuts, unemployment etc. A higher risk premium for residential and commercial property lending.
Just because the risk free rate is falling, doesn't mean that the actual risk isn't rising. Probably the most risk on the mortgage market now of mass debt defaults - perhaps more so than ever, yet rates are falling. Makes sense...until it doesn't. Its a rigged game and the theory of risk right now is bull shit.
It's a bullshit set up. I have over 1m in physical saleable stock sitting on my shelves in my business - that's at cost, so converted to trade let's say its 1.5m. I have no debt against it. Guess what interest rate I can get on a loan secured against that ???? 8.5%. Its not like I have no equity, we have stellar financials.
The whole system is geared to property, it is a huge problem in my opinion.
The govt sponsored loan came through at 2.5%, I used this so I dont have to use the other facility through the winter. Thank god for covid.
FB, it is clear that you do have little experience with wealth generation, or the people that have generated wealth. Yes, some do inherit wealth. The usual rule is that it takes three generations to erase wealth. One generation earns it, the next generation inherits it, and attempts to keep it, and the following generation eliminates the wealth via spending.
The primary path to wealth is simply to spend beneath ones means. This is most important when one is young, small savings made when one is young ends up being large when one is old due to the magic of compound interest. Until three years ago, I had never bought a television. Three decades ago, I did have a hand-me-down TV (that had actual vacuum tubes) that I used for almost two decades. I bought one new car per decade, and drove each one around 400k km before replacing.
What needs to be reset is the work and saving ethic. Work so that your effort provides a benefit to your employer. Spend less than you earn so that you have something set aside so as to make it through challenging times, or better for your retirement.
The system is set up to make spendthrifts beholden to lenders for their life time. Save for the future, don't spend for the present.
That you think that some got very rich via their house price increasing is somewhat amusing. For the last few decades, housing has been a rather peestrian investment return as compared to investing in other areas such as the share market. As for housing price increases vs government, the median house percentage price increase was higher during the HK government that was prior to JK. Housing price increases are associated with both Labour and National, sadly neither party has done anything material in regards to reducing house prices, despite the usual campaign promises prior to election.
What is wrong with "from each according to his ability, to each according to his needs" - is that it creates incentives to conceal one's ability, so as not to have so much taken from one, and to exaggerate one's needs, so as to get given more. Everybody is actively disincentivised from doing their best.
Argentina, Greece, Venezuela are all pretty stark illustrations of the dangers it represents as the number of grasping hands starts to exceed the number of net contributors. In short the demand for a thing (govt largess) will expand without check when the price for it (loss of sufficient votes to lose electoral ascendancy) is zero.
Yes, I'm sure we'll see these pseudo-capitalists volunteer up their landlord subsidies and non-means-tested pensions any moment now. Until then, it's a little hard to take them seriously while they live up large off the wealth of preceding and succeeding generations.
You speak as if to be 'socialist' is like turning on and off a light in a room, all or nothing.
There are people on these pages who have said they would like to see collective/state ownership of various assets in NZ. Many have said they support central plans for the economy. These are both tenets of socialist economic theory.
NZ has a law that states the police can smash down the front door of your home without any warrant. That's what the Stasi did in East Germany for several decades as an example.
One trouble with socialism is it pretends to be able to dictate morality through politics. Which is very dangerous and people tend to die a to as a result.
Another is the consistent historical pattern of bankrupting countries, which is no fun to be a part of. And if they can bankrupt an oil rich nation like Venezuela then they won't have any problems with little NZ.
Family in OZ can't visit, but hey no worries. A historic flight from LA to Wellington was able to land and bring in vital medical supplies essential medical personnel stranded Kiwis a few folk from hollywood to make a movie.
Got to work all lockdown with no handouts for me or my employer, and emplyment forecast to remain well over 70%. Phew... thank goodness we gave handouts to over 60% of the population.
By staying at home, Good job, that meant we were able to sneak an extra few thousand in from overseas before the qurantine was activated at the border.
Mass panic due to the wuflu making it to NZ. She'll be right. In NZ you can't catch it
- If you go outside and walk around the neighbourhood, beach, or park 476,329 times a day .
- Congregate at the letterbox and talk about how "none of us" have it so fine to share a bevvy.
- Show a temperature, cough, and have a headache, but it's the weekend.
- Go to the supermarket with 100 other people, as opposed to those dastardly butchers with 2.
- You are the health minister.
Deadliest virus since the Bubonic Plague. Yep, that's the one. 0.32 per 1,000 chance of dying from it if under 65 and no underlying conditions. 0.02 per 1,000 if under 20.
As a net tax payer under 40 with a young family. I am so glad we were able to keep all the elderly and sick safe. In fact I am so glad, me and my kids will pick up the bill. Drinks are on us NZ - you deserve it!
No WFF here. No ACC, No benefits, No pension, no wage subsidy, no student allowance. No income support of any kind.
We provide the Govt with PAYE on income, RWT on savings and investments, and GST on purchases. We are not rich, we are just smart with our money.
Therefore we are a net taxpayer.
RE this comment: "It is frankly bizarre the government is still budgeting to contribute to the scheme (NZSF) over the next few years. This feels a little like saving money while not paying off your credit card bills" Why is it bizarre? The Fund has a higher rate of return on investments than the cost of Government borrowing. Financial planners advise people to start paying into their personal super funds as soon as possible and to keep paying into it even if they have a mortgage. With the ever increasing cost of National Super and the reluctance to adjust the scheme to lower future costs to NZ, the NZSF seems like a good investment to me at least.
Thank you for reading the article. I gave credit cards as an example because it is closer to the choice the government is making than having a mortgage. If you stop paying your mortgage, you do not stop paying for accommodation because you need leave somewhere. Even Hotel Mum and Dad eventually ejects non-paying children in work! It means the opportunity costs of not having a mortgage are very different from other debts.
On the other hand credit card debt has generally been built up paying for a good that, for whatever reason, we want or need immediately. In my case, it is usually something more frivolous than than protecting the country from a killer pandemic... Financial advisors invariably suggest that the best way to save money is, first, get out of debt, no matter how right it was to get into debt in the first place. One exception would be student loans while you are not paying interest, but that is exceptional.
I hope that answers your question
Tony
So what is government debt? it is actually defined as the money that the government has created through its spending but hasn't taxed back and cancelled. it becomes our savings and our net money supply.
The only other source of money is that which banks create when we borrow from them and they then charge us interest on it. Government money is free of charge for us to use until we return it in taxation, and the government actually pays us interest for holding it.
What about this guy's version (page 21-22 of 45 pdf), referenced by Paul Krugman?
In terms of taxation and spending the US Treasury must settle all transactions in its account at the Federal Reserve (which settles in outside money or bank reserves). In this regard, the Fed is the banker to the US government. But the US Treasury can only settle funds in its reserve account by first procuring funds from the private sector (taxing) in the form of inside money (the US Treasury cannot legally run an overdraft in its Fed account). It is best to think of this process whereby the government can only spend from its account at the Fed if it has already obtained credits via inside money transactions involving taxes or bond sales. This procurement of funds allows the government to then redistribute pre-existing inside money back into the banking system completing the flow of funds that starts with the banking system’s creation of inside money (in the form of loans which create deposits) and ending in a private bank account user being credit with the government’s spending.
Said differently, when the US government taxes Paul, Paul pays with bank deposits or inside money. This inside money provides a credit to the Treasury’s Treasury Tax & Loan account at a commercial bank. The Treasury will settle this payment by having the Fed credit its account in what is called the Treasury General Account (the Treasury’s account at the Fed). This flow of funds from Paul allows the Treasury to then spend a bank deposit into Peter’s account. From start to finish, this process results in inside money in (taxation) and inside money out (government spending).
Paul Krugman was discredited as an economist long ago. Read here what economist Prof Bill Mitchell has to say about him.
http://bilbo.economicoutlook.net/blog/?p=35148
It is rather a long read. I believe that there are errors in his understanding of how government finances operate. He suggests that taxation and borrowing comes first, (tab)s and spending then follows, rather than spending coming first s(tab). I prefer to gain my understanding through the lens of Modern Monetary Theory which I believe gives a truer understanding. Currency must first be created through spending before taxation and borrowing can take place. He doesn't recognise government money creation apart from supplying reserves for the banking system. MMT economist Stephanie Kelton is one of the best at explaining things I think. Listen to her here on YouTube.
https://www.youtube.com/watch?v=WS9nP-BKa3M&t=2s
When the government makes a payment the treasury directs the reserve bank to credit the account of the recipient, this is done simply by typing numbers from a computer keyboard into the account, the money never existed before this point, it was created out of thin air just as when a bank loans money and it creates it. The government though creates currency, (NZ Dollars) while banks can only create credit a different hierarchy of money. MMT describes it as vertical money and horizontal money and it has different abilities within the economy, for private savings for instance.
The RBNZ can only create reserves and currency. Reserves are not fungible with the private sector banking credit creation activities associated with citizen bank accounts. Reserves are freely traded between banks, the RBNZ and Treasury to facilitate private bank account transaction settlement.
It seems that you are agreeing with me? All government spending creates bank reserves as the money resides within the banking system until it is taxed away or drained through bond sales.The RBNZ can also create reserves and lend them directly to the banks if they fall short for the operation of their exchange settlement accounts.
Study MMT. Didn't you listen to Stephanie Keltons YouTube lecture. She has just written a book called The Deficit Myth. https://stephaniekelton.com/
Another useful site for information here. http://neweconomicperspectives.org/
Thank you for your comment.
Other people know a great deal more about monetary economics than me, but one thing I do know is that the money government uses is most certainly not free of charge. In a democratic society, government is usually meant to be looking after money voters have donated through taxation. I am aware the word donation here may offend some people (!), but my point is that even if you pay tax with alacrity, government is still a cost to you when pay the tax.
Yes, one of the defining roles of a sovereign government is printing money. Adding money has a cost to those who already own assets or have an income, including recipients of benefit payments. Monetary experts like Michael Reddell, who writes the Croaking Cassandra blog, have written extensively on how we might do this. I am not sure he is right but, regardless, that is not what has happened in New Zealand. In New Zealand, the government has borrowed money in way that is similar to taking on a personal debt.
There are real opportunity costs to governments holding debt. In less jargon, the interest on debt goes to people who have enough assets that their money can be lent to the government, usually with a bank or financial intermediary. Therefore money paid in interest is not being used on other activities, like supporting the poor, the ill, etc. Obviously New Zealand government took on the debt to help vulnerable people. But once that money has been used it is not so clear we should be indefinitely paying an income, through interest payments, to people who are not so obviously in need.
I hope that answers your question.
Tony Burton
Government borrowing is a policy choice and it doesn't actually fund the governments spending, economist Prof Bill Mitchell calls it corporate welfare, he suggests just leaving the money in the banking system and paying zero interest on it.
Taxation doesn't fund the government either it controls the money supply by returning money back to the government to be cancelled, but only when the government runs deficits are net financial assets created to finance our savings. Listen here to a short video by economist Randall Wray explaining how it works.
https://www.youtube.com/watch?v=zxDVRISfsls
I tend to think about it this way - imagine if we implement $60bn of QE and nothing bad happens, does that tell us taxation and fiscal prudence are not necessary? So, in my opinion there just has to be consequences, firstly a weaker NZ$ and following that domestic and imported inflation. I don't see asset prices falling at all.
I would be following inflation break-evens very closely.
A rough on the back of an envelope calculation using RBNZ QE purchase yields suggests the NZ 5-year/5-year forward inflation rate is ~0.35%.
...the 5-year/5-year forward inflation rate. This is derived from the difference between the other two, the 5-year TIPS breakeven and the 10-year. It tells us about longer run inflation expectations that are especially relevant and revealing, as I wrote three years ago:
The 5-year/5-year forward inflation rate, a calculation derived from the inflation breakevens of TIPS securities, is one prominent means for demonstrating this monetary stability. By measuring the differences of inflation expectations in a second five-year period above the first, it essentially captures market expectations for whether short- and intermediate-term concerns or trends embedded in breakevens are believed to have an effect on the long run. Prior to late 2008, no matter which direction the PCE Deflator went, the 5-year/5-year forward rate was remarkably stable, indicating that no matter what bond market investors largely believed the Fed had it covered in the short run so as to maintain the same stable long-term economic prospects. Link
https://ycharts.com/indicators/5year_5year_forward_inflation_expectatio…
But my arithmetic is suspect, possibly a revised NZ calculation might be around 1.04% - off the cuff calculations are always dangerous.
In a recent study using the Heritage Foundation’s Economic Freedom Index, New Zealand economist, Bryce Wilkinson, found that in 2018, individuals living in 135 out of 180 countries had a lower tax average than New Zealand. By count of population, that amounted to 94% of the world’s population living in a lower tax environment than we do!
I don't think they have any options except to spend at some high level.
Being an idealogical based government their dearth of experience in practical business or economics has led them to spend way more than was required and being so badly organised and rushed I expect enormous amounts to be wasted six ways to Sunday.
Until they realise that business people are not the devil incarnate they will struggle to create the environment required to create really good jobs in the volumes needed.
Does the government debt matter?
Yes, government debt needs to be enough to achieve public policy aims. What are Tony Burton's public policy aims? Sounds to me like he is stuck in a neoliberal "public debt bad" mindset without understanding that this implies a "private debt good"mindset. Growth in GDP = a growth in money, and the license to create money is only delegated to the RBNZ and registered banks. To get growth, it's either government debt, or household+business debt. And governments have completely different financial capabilities to either of the latter groups.
after the initial capital is spent, the debt limits what they can do
Wrong! First of all, government spending enters the economy - it goes to households and businesses. It flows around and around, evaporating out bit by bit over the long term as it becomes the governments future tax revenue. Secondly, the debt does not limit what the government can do in the short term because
the government prints [sic] money
By understanding that the entire construct of money is under complete legislative control of the government, we can focus on deciding what we want our spending and taxation to achieve as public policy outcomes. Once we figure those out, implementing those goals sets the correct level of government debt.
PS: this analysis works in NZ because we are a "monetarily sovereign nation": we control the NZD, we have a floating exchange rate, and all our public debt is denominated in NZD.
See: https://independentaustralia.net/politics/politics-display/modern-monet…
Thank you for your comment.
I think I have addressed some of your points in my reply to "treadlightly" above. A couple of things to add. I hope the paragraph in the article that began"debt is just a tool of government policy" and gave examples of good and bad uses made clear how I view debt (both government and personal). It is crucial we do not treat debt like a soap opera character who is either a "goodie" or a "baddie". It's better thought of as the equivalent of the plumber's wrench. It can be used to fix pipes, or bludgeon someone to death. In neither case is the wrench to blame for how it is used!
Money is not under complete legislative control of government. The reason early 1980s style monetarism had limited success is because government has limited control over the many types of money available in the economy. It can increase or decrease some types of money, but what happens next depends on institutions like banks and the state of the economy. To give an anecdotal example, I remember going Istanbul in the early 90s, when annual inflation was close to 20%. The city buses had a system where you bought a book of tickets and ripped a certain number off for each trip. Ordinary people were using the ticket books as a store of value because regardless of what cash notes were worth, you knew what you could get for your bus ticket. I can assure you that was not the government's intent!
I hope that helps
Tony Burton
Hi Tony, thanks for your reply.
Unfortunately it seems we are not on the same wavelength; your reply to myself and "treadlightly" above misses the thrust of our points. Perhaps this is because you have not had much exposure to the macroeconomic framework we are both using in our analysis. If this is the case, I would recommend you read some introductory articles about modern monetary theory, e.g. Modern Monetary Theory, explained and Explainer: what is modern monetary theory?.
You seem to misunderstand my point in the second part of your reply: my point is that the NZD is under complete legislative control of the NZ government - what people do within the parameters set by the NZ government is of course another question, which should feed into the design of public policy to ensure we don't reach 20% inflation. For example, "tax rates and other inflation offsets should be included in the budgeting process from the outset".
Let me leave you with an excerpt from a paper by Stephanie Kelton, which sums up how different this view is from the current status-quo thinking:
As Lerner (1947) recognized in an essay entitled Money as a Creature of the State, there is an important link between sovereignty over money and sovereignty over policy. Governments that control their own currencies can coordinate their fiscal and monetary operations and prevent financial markets from dictating the terms of finance. They can spend first and borrow later, as Bell (2000) and Fullwiler (2006) have shown. They can “afford” anything that is for sale in the domestic unit of account. They can sustain the debt at any level. They can restore growth and eliminate economic insecurity, implementing their policies in accordance with the principles of Functional Finance.
Thank you for your comment.
I think I have addressed some of your points in my reply to "treadlightly" above. A couple of things to add. I hope the paragraph in the article that began"debt is just a tool of government policy" and gave examples of good and bad uses made clear how I view debt (both government and personal). It is crucial we do not treat debt like a soap opera character who is either a "goodie" or a "baddie". It's better thought of as the equivalent of the plumber's wrench. It can be used to fix pipes, or bludgeon someone to death. In neither case is the wrench to blame for how it is used!
Money is not under complete legislative control of government. The reason early 1980s style monetarism had limited success is because government has limited control over the many types of money available in the economy. It can increase or decrease some types of money, but what happens next depends on institutions like banks and the state of the economy. To give an anecdotal example, I remember going Istanbul in the early 90s, when annual inflation was close to 20%. The city buses had a system where you bought a book of tickets and ripped a certain number off for each trip. Ordinary people were using the ticket books as a store of value because regardless of what cash notes were worth, you knew what you could get for your bus ticket. I can assure you that was not the government's intent!
I hope that helps
Tony Burton
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