A New Monthly Report by Dr Neville Bennett
An incisive hard-nosed monthly view of markets, personally prepared for select subscribers by Dr Neville Bennett (London School of Economics).
Economics Editor of the National Business Review, Director of Socrates Fund Management, Director of the Foundation of the Blind, Trustee of the Universities Superannuation Scheme and Consultant to Breaker Bay group.
Available Exclusive by Subcription Monthly from May 2009
An exclusive window into the future from the same economist that brought you the Aviation Index and other unique insights into the workings of the world economy.
Here is what Dr Bennett has said in the past in the NBR –
“The yield curve is rather flat and appears to be flattening ...Every recession has been preceded by a flat curve. There is a massive credit crunch taking place.” JUNE 2, 2006
“The market seizes the good news and runs with it. Sometimes there is somewhat negative news but that is overlooked. (The Dow) now surges every day. So did the Nikkei ... it rose to 28,000 in early 1998. It was convinced it was inspired by infinite expansion ... there is a disconnect between the finance and real world ... I have looked up other bubbles and it always ends in tears.” MAY11, 2007.
With the benefit of hindsight we can now see just how accurate Neville's analysis was back in 2006 / 2007. This report gives you specific in depth insight into the thinking that has produced these columns in the past.
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Property Outlook : Global and Local
The introduction in the UK of a 50% income tax should not be copied here. In New Zealand prosperity is very dependent upon internationally mobile people, companies and capital, so any extremely progressive income tax is foolish. Moreover, about half the population does not pay net income tax, so the tax system could have flatter, lower taxes.
Taxation is a very powerful tool for reshaping society. It works through incentives and disincentives. A useful start would be Treasury’s own idea of moving taxation away from internationally mobile bases like income and profits towards immobile bases like land, rent and consumption. This rewards the enterprising, and makes ticket-clippers share their good fortune.
A second theme is the necessity for a capital gains tax (CGT) on assets other than the family home (conditions apply). Originally part of the great reform package of the 1980’s, governments have shied away from CGT, leaving New Zealand as one of the few OECD countries without it. This distorts investment and its lack drove the recent housing bubble because gains were virtually tax-free.
Another general rule of taxation is to tax “bad things” to discourage them. Thus we have a tax on tobacco. Moreover, a tax system should aim at sustainability by taxing pollution. I would like to see progress towards taxes on carbon release and water pollution.
Another rule is to impose a single rate of tax on money that could be taxed in various ways. Many individuals could alter the way the pay tax on activities: income tax, corporate tax, or trust. It would make sense to apply a single rate of 30% (or 33% and eventually 25%). This would thrust a lot of lawyers and accountants into productive activity.
Government has no wriggle room
It would be utopian to expect Bill English immediately to introduce reform. There are huge constraints: New Zealand is the third most indebted country after Iceland and Hungary. Moreover, the OECD warns that any further stimulus, either fiscal or monetary, “could trigger a severe or disorderly exchange rate adjustment”. Moreover, our ability to borrow is constrained by the risk of a declining country credit rating. (NBR 24 April) A fall in our credit rating must be avoided to avoid a huge extra charge in interest. Slipping a notch would cost $600 million this year.
The OECD advocates a conservative policy; withdrawing stimulus funds when a recovery takes place, followed by “fiscal consolidation” which is some combination of raised revenue and reduced government expenditure.
At some stage Government must tell the public that the music has stopped. The financial crisis has altered the sustainability of public finances. It is very hard to return to fiscal surpluses when national income is down and debt servicing is increasing. Gross official public debt is projected to rise to an imprudently high 57% of GDP by 2023. The public will wrestle with the idea that required budget surpluses may be incompatible with society’s expectations of ever increasing health and education spending, and an unchanged provision of superannuation.
The National Party quite reasonably criticized the Cullen regime for creeping government expenditure and a lack of tax cuts. The criticism was still valid when a recession began in the USA in late 2007. Matters have been changed by the crisis, especially since September 2008 when the world economy fell off a cliff.
Since then, national income is lower than expected, and public spending has been driven permanently higher by a larger stock of debt. It may seem inopportune to introduce reform, but the Minister could tag new principles and cease Cullen Fund contributions until adequate fiscal surpluses exist.
Why change is needed
Treasury research shows that the present system’s high effective rates act as output disincentives (except for tax-planners). Personal income -tax revenues are high relative to other OECD countries when measured as a proportion of GDP. Income taxes recorded the second highest rate of increase in the OECD, 2000-2006. There is a weighting to high corporate tax too.
This tax profile of high income and corporate tax, coupled with low taxes on property, retards growth and penalizes the enterprising. A switch to a higher proportion of taxes coming from property and consumption would have less adverse effects on growth.
The system taxes different forms of saving at different marginal rates. Moreover, different tax rates distort investment choices towards tax -favoured investments, not the most productive investments. For example, a massive over-investment in housing was fueled largely by an absence of a capital gains tax.
New Zealand’s income taxes are relatively progressive. However, the effective channel of income redistribution is transfers (largely benefits). A Treasury table (4.5 see link below) shows that about half of the population has zero income tax liability as their benefits exceed tax payments.
Given the size of transfers, a progressive tax system is less important now than it was when the system was designed. I believe income tax could be lowered without raising undue equity concerns. A lower income tax increases work and output incentives.
I invite Treasury to investigate a land tax. It would encourage investment and productivity. At present a land owner is taxed only on income (less cost) arising from land. There is no particular incentive to use land productively. Land- owners, including life-stylers, can merely lightly stock their land and wait for capital gains. Capital gains in the South Island, 1990-2007 averaged 17% a year (NBR May1).
Japan had a much better system in the nineteenth and twentieth century. It imposed a land tax of 2%-3% of the land’s value each year. Landowners could not afford to leave the land idle. In consequence, land holdings were efficient in size, and output increased marginally over the years. Land was used intensively with high inputs of capital and labour.
New Zealand farmers maximize the size of their holdings for capital -gain reasons, and minimize labour inputs. It is inefficient and inequitable to avoid taxing land. A land tax would also be a useful source of revenue. Much can be done to encourage productivity.
http://www.treasury.govt.nz/publications/informationreleases/taxconference
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