By Murray Brewer*
It’s hard to get your head around how much money the government has. The slew of spending announcements in the run-up to Budget Day makes it seem as if the coffers are bottomless, not to mention the huge amounts of cash allocated on the day itself. A $95 million programme to train 3,280 new teachers over four years sounds great, but what does that mean and what proportion of the whole does it account for?
Instead of thinking of the $85 billion in tax the government will collect from us all this year, let’s condense that down to $85 which the government will spend at the supermarket for the entire year. There are certain basics that have to be paid for. In the welfare aisle, it will spend about $29 on benefits, of which about $15 will be on national superannuation welfare’s 800,000 or so recipients. Another non-negotiable is $18 on health. Then there’s education $15 and $5 on law and order and the defence force $3, not to mention roads, railways and other essential infrastructure. Add in initiatives such as the Provincial Growth Fund $1 and very quickly there is not much left of the original $85.
The government’s Wellbeing Budget must be seen in this context. Its wellbeing initiatives are small change, with the vast bulk of its yearly spend soaked up by essentials and must-haves.
Kiwis see the likes of universal superannuation and free healthcare as their birthright. Yet these same New Zealanders are known to wring their hands in outrage over social good spending such as Treaty of Waitangi claims. The fiscal reality is that two months of this year’s superannuation payments would cover the last 20 years’ worth of Treaty settlements.
There is a name for this emotional response to money. Mental accounting is the theory that people think of value in relative rather than absolute terms.
Stick with me because it explains a lot, and the recent extreme reaction to the government’s plans for a capital gains tax (CGT) is a good example. The groundswell of opposition was so strong that it forced the Ardern administration to back away and declare it now won’t be happening on its watch. Similarly, successive governments have not dared to touch national super aside from intermittent attempts to tinker with the age of eligibility.
Groups such as residential landlords with a handful of rental properties were vehemently opposed to a CGT. Their arguments against it ranged from unfairness that their hard-won assets should be taken away through to ‘I’m benefitting society by providing these homes to tenants’.
Their reaction demonstrates a gap in empathy and a failure to see the big picture. Because we don’t tax wealth in New Zealand these landlords have had it good for a long time, and they are not looking back down the road at the younger people coming through who are struggling to buy a home in the country’s overpriced property market.
The mental accounting theory works like this. You have five people who are entitled to a share of a profit pool. Think of my own profession where partners in an accountancy firm might get paid a base monthly salary and then divvy up the remaining profits each year based on their individual contributions. One person may be entitled to 50 cents, while the other four are in line for $5.
The person getting 50 cents is far more likely than those getting $5 to say, ‘let’s not allocate anything this year, I’d be happy if there was no bonus’. Even though they are giving up 50 cents, they would rather that other people don’t get ten times as much. We are relative in our behaviour rather than absolute. In short, we are jealous.
If you think of this in terms of the CGT example, small-time landlords were aghast at the idea whereas commercial property developers and investors tended to view it as an inevitable cost of doing business.
At some point the tide is going to turn in New Zealand. We pay tax on what we earn, not on how wealthy we are. There is an unevenness in how we all chip in to pay for the likes of universal superannuation and free healthcare. PAYE earners remain an easy tax payer target, but many in this group struggle to pay their bills. Unlike many of our trading partners, New Zealand has no capital gains tax, wealth tax, death duty, stamp duty, or compulsory and tax incentivised retirement savings. The recent failure to introduce a CGT indicates this isn’t going to change anytime soon.
If everyone keeps objecting to every version of a wealth tax, eventually we are going to run out of ways to raise money. With an ageing population and increasing immigration, we have a massive and growing queue of people whose pensions and healthcare will need to be paid for out of that $85. This is not a new concern. Treasury warned the government of this funding bubble in 2016, noting that the amount the government can spend isn’t going to increase anywhere enough to match the much larger increase in the amount it will need to spend on health and superannuation.
With only $85 to spend we will need to whip out the credit card to pay short term bills. But longer term it’s not a pretty picture.
The Tax Working Group’s recommendations, including a CGT, were an attempt to create better social cohesion. Younger people are being left with the burden of funding the retirement bubble plus paying for their own education and trying to get on the property ladder. If nothing changes there will be a massive gap in economic wellness between the younger and older generations. Already we have one of the highest standards of living for retirees in the world, and yet we struggle to fund the upkeep of infrastructure, health and education, while nodding uniformly that universal super is a given.
If older people aren’t prepared to share the pie around in a more even fashion while they’re alive, perhaps it will have to be death duties.
It would be great to see the government introduce meaningful tax incentives to encourage personal retirement saving. Currently income is taxed in full before money is invested into KiwiSaver or similar schemes. Our close trading partners, including Australia, provide meaningful tax incentives even though most of their retirement savings systems are compulsory. It’s no coincidence that Australia’s capital markets are stronger than ours and nor is our dependence on their banks.
If nothing changes and we continue to hold our breath, then we will eventually get to a point where universal superannuation and healthcare services will need to be cut, or at least means tested. The population demographics and the size of our tax base don’t compute in the longer term. If treasury was a little bolder and was prepared to roll the dice to encourage relative behaviours in the area of personal retirement savings through tax incentives, then it might give the politicians more courage to make change to improve the longer-term health and wellbeing of the economy.
The teacher strike today is an indicator that the system and people are under pressure. It’s easy to ignore this for a while and to focus on other national headlines such as resolving the inconvenience of Waiheke Island super gold card ferry congestion. But with so many of the benefits New Zealanders enjoy locked in socially, it may take an economic meltdown before politicians and voters are forced to make principled decisions to effect meaningful change. In the meantime, the protection of political capital seems to be the main concern across the board.
*Murray Brewer is a tax partner at Grant Thornton. This article first ran on The Spinoff and is used here with permission.
70 Comments
Another article missing the point. Until the monetary system is changed we will always end up with unfair outcomes. Our stupid inflation targeting and money creation system have arbitrarily transferred wealth to asset owners and robbed workers and savers of their income and savings. Let’s just have a fair system for starters, all of this has come about from government intervention and it won’t be fixed by more government intervention - only made more complex.
You know, what we used for thousands of years before we switched to pure fiat money in the 70’s....
sound money has historically been backed by a tangable asset most commonly gold. This holds its value and stop interference from governments, banks etc.as they can’t create money from nothing.
The gold standard was no perfect system. Monetary expansion (and thus inflation) were dictated by how much metal you could dig out of the ground. Fiat systems addressed this by allowing banks to create currency via lending, putting currency expansion in the hands of thr economy. We can't move backwards, any new monetary system would need to be an improvement on the last.
Correct it wasn’t perfect but it is better than what we have. The problem the author is talking about is an problem created by governments using fiat currency, why continue that? That’s why whether national or labour are in power we get the same outcomes in general. As someone pointed out in a thread recently, an ounce of gold has equaled the price of a cattle beast (more or less) throughout history. Having stable prices is infinitely more valuable than forever increasing prices - hence the issues in the article.
Withay,
Keynes called it a 'barbarous relic' and he was right. You are right that the present system is unsatisfactory,but gold/silver or any other commodity is not the answer.You need only read some economic history to see its deficiencies.
What none of your posts do is explain how you would get from here to 'sound money",however you define that.As i am sure you know,the NZ government owns no gold,so we would have to acquire it. From whom and how much? I believe that we will continue to have fiat money,but what we could do is change the banking system. As the US economist Irving Fisher proposed in the 30s,we could have what would in effect be Narrow banks. As he wrote;"The checking deposit department of the bank would become a mere storage warehouse for bearer money belonging to its depositors and would be given a separate corporate existence as a Check bank".These banks would do nothing else and be fully backed by sovereign money. Everything else that banks do now would not have that backing,nor any special supervision.
After the GFC,this became the subject of a study by the IMF,which found that testing its consequences using a formal mathematical model strongly corroborated Fisher's argument that it would lead to greater macroeconomic and financial stability.
No banking system will ever be perfect,but that would be a significant improvement on the present system and the absurd OBR that NZ lives with.
We need to separate two roles of money: medium of exchange and store of value. Fiat currency works fine as a medium of exchange. What we need is a free-floating neutral reserve asset that can function as a long-term store of value for savers, otherwise you end up with asset bubbles. Gold could perform this function, but not a traditional gold standard.
When bank credit is used for productive investments, such as the implementation of new technologies, measures to increase productivity or the creation of new goods and services (whose value is higher than the mere sum of their inputs, thus adding value), then such new money creation – which always happens when banks grant credit –will not result in any form of overall inflation – neither consumer price inflation nor asset price inflation. This is because the new purchasing power that is created is used to produce higher value added output and hence the extra demand due to the money creation is met with a higher supply. By ensuring that money and credit are only created when something real is created, i.e. for productive purposes, one can achieve very high economic growth without inflation, without crises and in a relatively equitable way: This is how the East Asian ‘miracle economies’ of Japan, Taiwan, Korea and China, developed so quickly. Link
I understand the idea however I would prefer our systems were set up to be as idiot/malicious idiot proof as possible. Giving the banks power to create money is too open to abuse as we are seeing now. Sound money breaks up power and distributes it to individuals rather than banks or governments. There were still plenty of productivity gains to be had under gold standards as we have seen historically.
Hmmm...a bit more history
During the decade of the seventies, there was an opening. The Bretton Woods system had largely failed in 1960, but gold exchange lingered onward until August of 1971. Long before President Nixon acted in defaulting on US obligations, however, global currency liquidity had increasingly been supplied through other means. Read more
A bit more history for what? Countries were committing fraud by not sticking to the gold standard. It was fraud then but now we actively encourage that exact same thing?? I’m not saying it’s perfect but at least it is caught out sooner rather than later I.e. the French trying to collect their gold as they didn’t believe the US had it.
Further to my comment, citizens savings would have held their value nicely if the standard wasn’t abolished in that instance as well.
Could you elaborate, maybe I’m not getting your point? Global credit demands would respond to gold, it’s not gold that responds to global credit demands (as it can’t and that’s the part of the point). And for those who say there’s not enough gold in relation to money in circulation, that’s a fallacy. It’s just a matter of price.
The gold standard is when a country ties the value of its money to the amount of gold it possesses. Anyone holding that country's paper money could present it to the government and receive an agreed upon amount of gold from the country's gold reserve. That amount of gold is called “par value.” The United States ended the gold standard in 1971. Link
Unfortunately, paper money is relatively non existent versus the values of banks' virtually non convertible digital liability ledgers (deposits).
Agreed, there would be some sort of revaluation or reset. Looks like we could be heading to some sort of reset anyway.
The banks ledgers are the biggest part of the issue (money creation) so something will have to happen there.
And of course digital money could be backed by a tangable asset, where’s the issue there?
For instance, does the NZ government have the resources to underwrite the purchase of said tangible assets? We are talking about bank liabilities in the region of ~$450 billion.
Am I correct in assuming that you feel any move to sound money would require sound money to work in with the current system? Our current system (banks liabilities for example) has only gotten to where it is due to an absence of sound money. The reversion to sound money would require as I’ve said above, a reset or revaluation.
I am in favour of small steps to rectify the wreckage of unfettered credit creation devoted to assets rather than productive enterprise. I am emphatically against resets and revaluations where depositors incur haircuts or total loss of their savings - they have already paid with perpetual state enforced reductions in returns that are not commensurate with the rising risks associated with so called "stimulus".
It will never happen as the politicians are really only interested in winning the next election. The period between these elections is too short for anything meaningful to happen regarding long term planning. Doing something unfavorable (CGT anyone?) will be perceived to be too fresh in the minds of voters come next election and likely to ruin the chances of winning!
I really like the infographic, although I can't help wanting to make it clearer still.
The article misses the point really, it just says that if we keep doing silly things we will squabble more.
The central issues seem to be more about us choosing inflation and immigration rather than productivity growth.
Without productivity growth we will just keep getting poorer and squabble more.
National and Labour have both failed us. The 2% inflation target has succeeded in inflating house prices at 2% a year more than wages. It has taken away the incentive to figure out the difficult reforms that we need to make. Instead we bring in more people and more money from overseas, either with the new people or though the Aussie banks. We have turned a productive economy into a Debt Farm economy.
We are at the beginning of the global supply chains, we produce mainly fairly simple stuff, food, minerals, pretty places to visit. We can do these things quite well and are getting better at doing so (think Sauvignon Blanc, Manuka honey, A2 milk and grass fed beef and lamb). We simply do not need the excess financialisation that we have been subjected to, or the virtue signalling of willfully destroying one of our very highest tech industries, or the flood of new people we do not have houses for.
Haha "unevenness in how we all chip in to pay"... how many people in NZ are actually net tax positive? I've had an applicant tell me she doesn't work, is on WINZ, has 1 child, did not name the father and gets $750 a week from the government. And now I hear the government is increasing the benefits even more? Is this how we "all chip in to pay"? How screwed up is this country? It's not about not wanting to pay. It's more about not willing to fund another piss-away-money contest after spending hundreds of millions of dollars in consultation because they have absolutely no idea wtf they are doing :)
Unfortunately not many.... more than a third of all spending goes on benefits. Then retirement age needs to be raised, we need to stop providing incentives for people to have children (working for families etc.) and if you cant find a job you should need to work for the benefit. We need to stop paying people to do nothing and use that money to grow our economy.
Sole Parent Benefit - $339 per week.
Accommodation Supplement - $131 per week.
Family Tax Credit - $113 per week.
Winter Energy Payment - $39 per week.
$622 per week. Just from using the online tool, assuming 1 child under 2, living in Auckland paying $300 a week in a private rental. Not quite $750 a week, but people can claim Temporary Additional Support and other assistance. Having a second child increases the Family Tax Credit to $204 per week.
.... And then there are all the extras through CSC (doctor, dentist even movies I think) only mugs (of which I am one) do the traditional work and tax thing.... eventually I can see the day, those who save for retirement through kiwisaver etc will be excluded from superannuation while those who couldn't be f...d saving will qualify for pensions. That said I would still rather work and earn and be independent.
The country suffers from being a bit player and low earner in every respect. As a consequence our natural default setting to everything is to think small, miserable, number 8 wire mentality when quite to the contrary our resources are actually quite abundant and we could easily acheive more if we changed that mindset. Case in point the history of the Auckland Harbour Bridge. Decades late, built far too small for purpose and still hopelessly inadequate. Why? Because we're too miserable and uncohesive as a society in this Country to do better. I blame it on our protestant forebears who largely speaking fled the old country to find individual freedom in this Country by exploiting it for their own individual ambitions. That sort of ancestry does not fit well with trying to operate a cohesive aspirational society. It seeks a dog eat dog, I've got mine so I'll be alright mentality, much the same as we have today in this country. If we were more generous as a people we'd have a kinder society. Speaking of implosions, Brexit Briton stands as a stark indicator of where we are headed if we don't change.
If the CGT proposal had been realistic at say 5% across all asset groups with no exemptions it would have had a fair chance to have been accepted. This would have raised an enormous amount and because everyone had skin in the game it would be fair. To suggest a rate of 33% with no inflation allowance was at best arrogant. It almost seems to me that by making recommendations so outrageous the Government could then backtrack because of public reaction.
I'm 49 and I don't expect to get Super !! You aren't going to need to wait 34 years.
I was talking to the Singapore based head of ASB in 2014, an Australian guy, and he said to me very emphatically, there will be no Super Ann in Australia as they currently know it, in 15 years. Reckoned it was simply fiscally impossible.
"fiscally impossible". What does that mean?
Governments can always buy whatever is for sale in their unit of currency. Their cheques do not bounce. Ever. In monetarily sovereign nations.
What matters is real resources and production. Can we produce enough to sustain the well being of an aging population with fewer workers? That's why we should encourage investment now in productivity by running the economy hotter via fiscal stimulus . Not penny pinch to save bits of paper for tomorrow.
Imagine the hit to demand that would occur if the government cut pensions tomorrow to further pay down debt and increase the surplus. Recession. Unemployment. Loss of productive capacity and human capital. Loss of investment in the face of excess capacity. All the things that won't help us in the further with higher dependency ratios. Because high dependency ratios are a real problem not a financial one for the government.
the big problem started in the early ninties, when the Bolger government did away with penal rates for weekend work etc, Australia still has this system, it gives the average Kiwi a chance to earn extra and money circulates in the community
Other governments including following Labour governments did nothing to fix the problem, and regrettably this present Labour government will do nothing either.
They seem to believe the trickle down theory, which is now proven to be false, if fact if the real truth is known
the round table want to make NZ into a THIRD WORLD county, ask anyone who has lived and worked in a third world country, they will tell you its awful, thats why so many are going to western countries
Problem is that there are so many that have no idea how to be socially responsible for their own actions.
The applications to rent properties that come thru are not funny so often.
Young, no jobs, kids and kids on the way!
They expect landlords to take them on?
Reality is that NZ is a country that you can do very well in, if you only used your brain.
Go with small units, then you get a completely different type of applicant. That's probably why in earlier decades the larger houses got split up into flats. I think today's regulations would kill that idea, anyway purposebuilt units are better than conversions.
I agree about the loss of weekend/penal rates, todays young workers (those who do the weekend and evening work) are taken for a ride. A few years ago we looked at buying a cafe and were stunned at the low rates paid to casual workers.
The writer of this article says >>>>>>"If older people aren’t prepared to share the pie around in a more even fashion while they’re alive, perhaps it will have to be death duties."
CGT was proposed, debated on, and decision was made to throw it so far away that our children wont stump on it ever.
John Key knew why death duties was only helping accountants and lawyers, not their clients and was therefore an "evil" that needed to be removed and removed he did. Now we not only want it back but together with CGT. I do not see this thing on CGT going away. "Scare school" will be out forever.
For me its because wealth (capital) is NOT income. You are already taxed on income from capital, just as labour is taxed. And the value of wealth is already tied to how much income it can generate. Try and think of an equivalent for taxing wealth in terms of labour - the closest i can come up with is removal of a limb!
You could argue for treating land seperately as it is scarce, we are already using most of it, and the government is hell bent on immigration. This goes against the spirit of private ownership in that it places an expectation that income is generated from the property. Not great when you want to retire and can't cross subsidise with your income from labour.
Brewer calls Treaty of Waitangi claims "good social spending" - really !! - they were never social spending good bad or indifferent.
Then if you think this spending is wrong it's an "emotional response".
Can he not credit folk for having a view, without using the emotive stuff to devalue their view.
If CGT was to be applied fairly, everybody pays including the family home, then it would work, THIS GOVERNMENT DID NOT, JUST TARGETED LANDLORDS, in spite and emotion, by people who have never worked in their lives, Greens, way out people, ex hippis etc, every thing must be fair
If you spent the money on services, yes. The scary thing is that if you spent your money on tangible assets (even if they aren't savings or investments), the state would still come after you for annual wealth tax on those assets. For example, TOP has confirmed that they would tax fancy recreational boats (not charter boats) year after year. People's wealth wouldn't be safe in any form, so there would be massive capital flight. This is one of the reasons the Scandinavians abandoned their wealth tax.
Yes it's one big ponzi scheme. Got to bring in more and more 'youngies' to pay for the 'oldies'.
And there was some landlord bashing in there. Again. But of course no alternatives mentioned like the government housing more people. Just you know, landlords have it good. Try it mate.
A tax on wealth is a penalty on people who have acted sensibly to put a bit aside to reduce their reliance on the state. The majority of these people started with little and got their earnings taxed a lot harder than high earners do today.
A CGT might have been swallowed if it had been remotely fair, but it was as punitive as the current tax regime on interest, as it taxed inflation. You could also query why a second bite by the taxman should be at the marginal tax rate. So talk about selfishness and hypocrisy is pretty empty.
Equity in society is a fair topic, but perhaps we would be better scrutinising why our legislation seems to economically favour certain professional groups. It'd be terrible if rent-seekers were in a position to criticize ordinary citizens struggling to get ahead, while they exploited their own political clout.
Taxing assets instead of income would be profoundly unpopular. Great way to encourage capital flight and discourage risk taking and entrepreneurship. The idea would make Marx proud though - the State charging you an annual fee to possess assets that technically belong to you.
People forget that to have wealth you have to have saved for it despite having every dollar you earn in NZ being taxed at a reasonably high rate BEFORE you do anything with it. Wealth has been formed despite this fact and after taxes. And yet a minority of people want to tax it again out of what, spite?
You can go on to spend that money..taxed again at 15%(GST), or you can chose to not contribute that 15 % back to the socialist welfare state and save it for yourself. The Gov. will then still be taxing the savings through interest rate/investment return taxes, which can be significantly higher than 15% depending on your tax bracket. If you own property (God forbid a dirty word to those who don't), you still get taxed in the form of rates, and even that tax is taxed again at 15% (GST), and your insurance is taxed, your utilities are taxed etc, etc. And all the money that was made to improve that property (EG. build a house/regular maintenance etc) was taxed multiple times during the material transfer stages ( Import/wholesale/retail/transport/ etc, etc.), that was paid for with AFTER TAX monies.
The thing to remember is that ALL this money is taxed even BEFORE any of these investments/bills are saved or paid for.
I fully believe in helping out the not so fortunate and I fully believe in taxes for necessary infrastructure and Govt. costs etc. But there is a limit before there are too many taxes. There has to be an incentive to improve oneself or the country might as well adopt communism.
It happened before in the 70's and 80's when second jobs were taxed around 70% making it not worth trying to better oneself. It is these people that have the mentality to work hard to help themselves that proponents such as this author are expounding need to have their after-tax wealth taxed yet again. People left NZ in so many numbers (70-80's) it created a crisis and that formed the basis of the now current immigration policies in order to bolster the tax paying base of the country by importing more tax payers because they screwed up in the past by over-taxing the population.
Socialism or Capitalism...the debate will continue..you just happen to have a socialist government in power right now....
CGT as proposed would not have addressed the wealth gap. Only a system where household wealth is assessed annually and then taxed would work as a way of allowing some PAYE earners to pay less. And that would apply to all households, not just us long-suffering much maligned Boomers. Try selling that one to the electorate. And of course it would spawn a whole industry based on tax avoidance. Really, a move to the Australian system of high, compulsory super payments for both employees and employers, with tax breaks, and means testing the state pension, is the only way of reforming super. The age thing is a tough one: accountants can work until they're 80, or until AI does them out of a job, whereas builders, labourers and agricultural workers may well be knackered before they're 65. We do bleat, though, and balk at paying for a decent, fair society. Our top PAYE rate is pitifully low.
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