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Gareth Morgan, founder of The Opportunities Party, has resigned

Party Leader Geoff Simmons has accepted the resignation of Dr Morgan from all roles, including the Policy Committee. It seems that politics is too similar to herding cats for his liking, and he can’t wait to sink his claws into his many other interests.

Dr Morgan started the party in 2016 to contest the 2017 election. His no-nonsense style and innovative, well-researched policy attracted followers from all ages. At the 2017 election, The Opportunities Party secured 2.4% of the party vote.

Party Leader Geoff Simmons explains the way forward for the party:

“The Opportunities Party is now truly a movement and will contest the 2020 election as a broad-based, member-led party. We will always be grateful to Dr. Morgan for the initial momentum he provided. Achieving his vision of a fairer, cleaner and more prosperous New Zealand for all Kiwis was always going to require more than the drive of one person. Some early policies have now moved into the mainstream, largely due to Dr. Morgan’s influence, but there are plenty of thorny issues that need fresh, future thinking.

New Zealand needs The Opportunities Party at the parliamentary table to address the larger, longer-term problems that most career politicians will not address. We want to thank Dr. Morgan for his foresight in creating the party and will honour his legacy by discarding irrelevant, outdated notions of political ideology and focussing on “Not left, not right - just doing what works.”

The Opportunities Party rebooted after the last election and its membership continues to grow - it lists around 4,200 core members and over 30,000 followers on social media. The Opportunities Party’s social media program garnered 5.5 million views within 6 months during the 2017 election.

These changes come at a pivotal moment which marks our transition from a start up political party to a broader based, member-led movement. The Party is now funded by our generous members and staffed by our skilled volunteers. This is how a political party should be - with large numbers of small donors rather than a few large (and potentially foreign) funders. A fundraising campaign is underway and the Board (Geoff Simmons, Donna Pokere Phillips and Matt Isbister) are working on a Campaign Strategy for 2020 which they will present to members in May, prior to the Annual General Meeting in August. 

We call upon anyone that recognises that our current political system does not address important issues like the Environment, the New Economy and Fair Taxation to join us and become part of the movement.

The conversation continues at top.org.nz.

About Geoff:

Party leader Geoff Simmons is an economist and author with experience in New Zealand Treasury, the UK Civil Service, as a consultant and heading up the think-tank The Morgan Foundation. He was co-Deputy Leader of The Opportunities Party and developed a lot of the policy used during the 2017 Opportunities Party campaign.  


6 Changes in Firearms Regulation that are Required NOW

The callous murders on Friday 15th March are a national tragedy, and a symbol of many failures. Our hearts are with those dealing with the very human consequences of this inhuman act. 

One such failure is our gun law, described in the Arms Act. The government has committed to making a raft of changes to prevent a tragedy of this nature happening again.

At the heart of this is whether people should be able to own semi-automatic firearms, many of which now on the market are based on assault weapons, such as the AR-15 used in Fridays massacre. The calls for an outright ban on semi-automatic firearms is loud, and seems well heard by the government.

Do we need semi-automatics in New Zealand? No.  

A semi-automatic rifle was designed as a weapon of war. There is no war here.

Recreational hunters who say that that they are necessary must be pretty crap hunters. Duck hunters too would be affected as semi-automatic shotguns are popular, but do you really need it to enjoy recreational hunting? No. Not at all.

There are a couple of outliers to that – pest management is a good example where a firearm is a tool. But there is a big difference between a semi-automatic .22 used for rabbit control and a 5.56mm semi-automatic rifle originally designed for military purposes.

At the extreme end of the debate, the notion of a ban is the first step to a totalitarian state, from which semi-automatics are viewed as protection. That logic defies the notion that the intent of the firearms for recreational purposes and enhances the need to make sure these weapons are severely restricted, if not removed altogether.

But, as observed both in NZ and overseas, changes to gun laws are not easily achieved. We may well see a set of recommendations that are a tightening, not an outright ban. This would be disappointing at a policy level and devastating at a values level.

In this case, if firearms are tightened but not banned, what are some of the things we need to see to have some assurance that firearms are better restricted??

Closing the MSSA logic black hole. Under the current regime, the classification of a what is functionally an assault rifle is mostly determined by its cosmetic appearance. Make a change to the cosmetics, and what was previously a firearm limited to those that hold an E category license can now be assessed by anyone with a general A-category license. This is nonsensical and needs to be eliminated.

Managing Magazines. The firearm itself is only half the equation. It needs a magazine to function. There are limits to the size of a magazine that a rifle can have to be legal, but there are no restrictions on purchasing bigger magazines. A regime should consider magazines and other accessories that can “up-class” a firearm, and ideally restrict purchases of these accessories to holders of the appropriate class of firearm.

Registration. The current registration system is non-existent. Registration of all firearms needs to happen, regardless of a ban, so that the ownership of firearms is known. A registration should also consider registering ownership of key accessories such as magazines.

Graded licensing. Creating a more functional and risk-management based approach to different firearms types needs to be a cornerstone of any recommendations. A regime needs to be based on what particular class of firearm is functionally capable of, and manage risk accordingly, rather than what a particular rifle looks like.

In practice, this could be a specific class of license for semi-automatic firearms, subject to a higher degree of scrutiny. This graded classification model could also look to manage the number of firearms that can be legally possessed or traded

Exemptions for certain types of firearm could be managed through this, for example .22 semi-automatics – firearms that have a viable use case for things like pest control may remain available to A-class holders.

Ammunition. A firearm control regime needs to consider the procurement of ammunition. One of the major risks is illegally procured or owned firearms, which under any licensing regime would be undeclared by an owner. So, the regime needs to consider ammunition, and ensure that people are only buying ammunition for calibre of firearm they are known to own. That would be an immediate red flag to the police – this person has only registered that they own a .22, so why are they buying 5.56mm ammunition??

Gun Clubs. The role of gun clubs seems to have not been well understood by the broader community. A regime needs to consider the culture, environment and membership of these clubs on a more overt basis. Gun clubs are key to ensuring that license holders are acting as responsible owners of good character – we need to be sure that this responsibility is being met.

Again, a general ban on semi-automatics is the best overall response.  This would be ideal but may not be politically possible for a government. The gun lobby in NZ is vocal, powerful, and for some reason or another, has been reasonably successful in the past at limiting the scope of change. That’s not to say it is impossible – Australia has previously implemented such a ban. But if 50 deaths are not enough to force change, then one must seriously question the mindset of those opposed to change.

What we do not want to see is a situation such as in the USA where any attempts to tighten gun laws fail and get caught in a partisan all-or-nothing proposition. We want change and we don’t want to see another tragedy unfold because we didn’t act.


The Tax Working Group Report: The Good, The Bad and the Predictable

The Tax Working Group Report: The Good, The Bad and the Predictable

The Good

Let’s start with the good stuff, and there is a bit of that, mainly around the environmental tax proposals. The Tax Working Group has acknowledged that the notion of a ‘circular economy’ has informed their recommendations.

The proposed changes to the Emissions Trading Scheme (to reduce carbon emissions) and congestion charging all seem positive. If done well they could help shift us to a sustainable economy by making polluters pay, and rewarding sustainable businesses. However, the devil will be in the detail. For example the revenue from the Waste Levy seems to have been poorly spent in the past, so we have to think carefully before we raise it further.

Congestion charging hasn’t been used yet, but is a much better alternative to petrol taxes to raise the money required for transport projects. By charging for congestion we can ensure that those using infrastructure under pressure pay more, encouraging people to change where and when they drive and help raise money for that infrastructure to be upgraded.

The concept of putting a price (not a tax) on water use and pollution is sound but has been previously ruled out by NZ First. This is bizarre when we are simultaneously talking about how to allocate a scarce resource and looking for funding to clean up our waterways. Surely water bottling companies, irrigators and electricity companies should be paying for the water they use. Similarly, polluters should be paying for the pollution they cause.

The one exception to the generally good environmental tax suggestions is the proposal of a fertiliser tax. This is a blunt tool. The issue of nitrogen is vastly different in different catchments. As the report notes, instruments based on outcomes are a superior approach. 

The Bad

With that comes a lot of bad stuff, particularly around the Capital Gains Tax. Top of that list has to be the impact on business. Apart from inequality and rising house prices, the key problem with our economy is that there is a strong incentive to invest in property speculation rather than productive businesses that create jobs and grow our incomes.

Unfortunately this proposed Capital Gains Tax will apply to business as well as property. The extra tax burden and compliance costs for business means that there is no more incentive to invest in business over housing.

Given these downsides to business, the least damaging option would be to apply this Capital Gains Tax (CGT) only to the treatment of land based assets (including farms). NZ First seems set to rule out including farms, leaving us with a CGT only on investor property. You have to ask if this is worth the bother.

The biggest concern in this scenario would be that it hurts the poor. Modelling suggests that house prices would fall a bit as some landlords sell up to first home buyers. The downside is that the rental market would shrink, and given that rentals have higher occupancy rates than “family homes” we could see rents rise significantly. Such a narrow tax will probably not raise enough revenue to compensate the poor for higher rents, so they would be worse off.

Some other problems from the CGT are likely to include:

  1. Exemptions for the family home, the family farm, rollover relief, reliance on valuations and deductions for improvements make for a complex system that will be costly to administer and provide gainful employment for accountants and lawyers. 
  2. The revenue for government will be unpredictable, and could even turn negative in a downturn.  
  3. Taxing on realisation (sale of the asset) provides an incentive to not sell the asset (business or house) which is bad for the economy. The concerns around cash flow motivating this approach are not consistent with other parts of the tax system (e.g. foreign shares and rates). We will talk more about this in coming blogs.

The Predictable

The Achilles Heel of this review has always been the Terms of Reference with the Labour led Government excluding the family home. Ultimately that will hamstring the effectiveness of any change.

We can see the likely effect of this tax overseas. Australia is second to last ahead of New Zealand in terms of housing affordability. Australia has a CGT excluding the family home. This is not even a second best policy, it is a second to last policy. 

Excluding the family home excludes 3/4 of the value of our housing stock. A 33% tax on 24% of the market is an 8% tax. This may slow the rise in property prices slightly, but certainly not stop it. If anything there will be an increased incentive to invest in owner occupied housing because of its tax free status. This is called the "Mansion Effect", which we have seen in Australia. 

As a result a Capital Gains Tax may slow the increase in inequality (depending on what happens with rents), but certainly won't stop it. Remember that housing - house price and rent rises - is the main driver of increased inequality in the last 20 years.

The Opportunities Party Fair Tax Reform provides an alternative that would reduce income taxes substantially (making 80% of people better off), kill off property speculation and encourage Kiwis to invest in businesses that actually grow our incomes. The key to achieving that is to tax all assets equally – including the family home.

We don’t need to tax capital gain, we need to end it.


How Will National Improve the Environment Without Making Polluters Pay?

Simon Bridges has hit out at the Green Party for their lack of progress on environmental issues, claiming National made more progress in Government. But they have also hit out at the recommendations of the Tax Working Group report's proposed new environmental taxes. This begs the question of exactly how National plans to tackle environmental issues without making polluters pay? 

Was the Last Government Really Better Than This One on Environmental Issues?

National is trying to buff up its own environmental credentials by rewriting the history books of their last term in Government. To do this they are picking on the one area where they did better than the current lot are - the marine space. While he may be right on that count, the fact is that across the other big environmental areas - climate, fresh water, conservation and waste - National were behind the 8 ball. The Blue Green arm of the party have released a new discussion document but there are few concrete ideas in there as yet to claim they have real environmental credentials. 

Of course he does have a point about the Green Party. This term has shown the problem of being shackled to the side of Labour. They have no bargaining power compared to NZ First, and so are unable to get any real wins. As a result we have seen little progress on substantive environmental issues other than those that were already in Labour's election manifesto. 

Polluters Should Pay

What is more worrying is that National have come out swinging against the environmental taxes proposed in the Tax Working Group report. 

Now there is plenty to debate in the detail of these proposals. Ideally they shouldn't be taxes, but rather 'prices' on our scarce resources. Where water or the right to pollute is scarce, we should use prices to decide how those scarce resources are allocated. This is basic economics that National shouldn't disagree with, except of course that it applies to their farming voter base. 

There are also big questions over where the money goes. Ideally it should be used to repair the environment and reward businesses that are acting in an environmentally friendly way. That way the money raised stays in the industry and region. Environmentally friendlier businesses will also have higher profits to show for their efforts. These are "corrective taxes" or prices, and again they are pretty standard economic theory that National shouldn't be able to disagree with. 

Those are all things to debate. However what we can't do is pretend that we can improve the environment without someone paying. Under the previous National Government it was the taxpayer that picked up the bill. The Opportunities Party believes that it is the polluter that should pay. 

All environmental issues involve activities that impose costs on others. Unless we take account of those costs then we will have too many of those activities than is ideal. So the basic question is who is going to pay for these costs? If the polluter pays, then they have an incentive to reduce the activities that create the costs in the first place. Ideally they can do those activities in another way that creates fewer costs.

If the polluter doesn't pay, someone else has to. That someone else usually ends up being the taxpayer, or the environment. This is a worse outcome because there is no incentive to do things better. 

Many other OECD countries have much higher levels of environmental taxes. They have shown that they can have successful economies by making polluters pay. If it is done well it encourages innovation, and that innovation can ultimately be sold and profited from. In short we have nothing to fear from making polluters pay. 

It is a real shame that the debate about the Tax Working Group has focussed on the problematic Capital Gains Tax. The environmental proposals are worth looking at in a lot more detail. 

 

 


Five Reasons to Support the Climate Strike

There has been a lot of negativity from politicians about school children taking time off school to protest inaction on the climate change. Here are five reasons why The Opportunities Party is 100% behind it. 

1. It is their future

The school children of today are the adults of tomorrow. They will be the ones that have to deal with the consequences of our actions (or inaction) today. They should rightly be concerned about the world we are leaving them. According to the World Economic Forum all the biggest risks the world is facing are directly linked to climate change.  

2. They have no other voice

What other way do young people have of voicing their concerns? They have no vote, no other way of having their voice heard. 

Many young people I know are immensely distressed with the problems that the world is facing. What point is there of studying and working hard when the world as we know it may end? 

If there was ever a good reason to lower the voting age, climate change would be it. 

3. We aren't actually doing anything about it yet

Prime Minister Jacinda Ardern claimed that there is less concern for protest here

Really? 

Sure, this Government has a plan to make a plan. That is better than the last National Government did - they only really started planning in their last term when Paula Bennett took over as Minister. 

The trouble is that we haven't really done anything yet. And even getting a plan to make a plan has been painfully slow going. 

The international Climate Action Tracker still rates New Zealand's actions as insufficient. We have nothing to be smug about, successive governments have done no more than fiddle at the edges. 

4. We haven't even started talking about how to adapt

Aside from action to reduce our emissions, we have another massive challenge we haven't even started facing yet. 

Regardless of emissions reductions taken here, our climate will continue to change. By how much depends on how quickly the rest of the world acts. Let's be frank - right now restricting warming to even 2 degrees looks unlikely. 

We need to start planning for a changing climate. We need to be more self sufficient for energy. We need to reforest erosion prone land to protect it from extreme storms. We need to plan for rising sea levels. We need to work out what we will do when boats or planes of refugees appear on our shores. We need to start doing all that now, rather than leaving all these issues for younger generations to deal with. 

5. They will learn something...

The concern from many politicians is that these students won't learn anything from a day off school. 

I disagree. They will learn plenty about how democracy works: if you don't stand up and make your voice heard, you don't get anywhere. During my time in South America last year their culture of activism was evident. I even witnessed one school block off the roads for an hour to protest climate change on World Environment Day. I bet those students will remember that experience. 

If nothing else, after this action the students involved will certainly value their vote when they get it. That alone has to make it worthwhile. 

Let's stop treating them like kids. When it comes to future issues like climate change it wouldn't surprise me if many of them know more than the politicians. 


Should Rents Rise?

There sure have been a lot of squeals from landlords lately. New rental regulations and the prospect of a Capital Gains Tax – both years away from implementation – have led to claims on the right that rents will go up to compensate. Of course this has led to retorts on the left that landlords make enough money and should be more worried about their tenants. As usual, both positions are glossing over the real point

A Capital Gains Tax – thanks to the exclusion of the “family home” will likely see some landlords sell up. House prices might drop a bit, before continuing their inevitable march higher – the Tax Working Group predicts increases of 3% per year. This drop will see a few more owner occupiers enter the market than would otherwise, but it will come at the expense of fewer rentals. Rents will rise as a result – helping the remaining landlords look to maintain the return on their asset they are losing through the tax.

All in all, the CGT would be a small bonus for first home buyers, but this comes at the expense of the worst off in society – those locked into renting. Given that renters tend to squeeze more people in the same property than owner occupiers do, the pressure on accommodation could also rise. A CGT would not be a win for the poor.

On the other hand tougher rental regulations are clearly a good idea. The toll of our cold, damp housing on the health of our growing children is massive. We know that insulation improves kid’s health and is worth the extra investment.

Of course the real long term solution here is our building code. We are quite simply building crap quality houses and we need to do better. This is the one hope of Kiwibuild – it won’t add much to the housing stock but if it can increase the benchmark for building standards that would be one positive thing.

The argument against improving the building code is the same as the argument against better rental standards: cost. But we already know that the long term cost in terms of energy bills and hospital visits easily justifies the short term extra cost of building (or retrofitting) decent places to live.

So what gives? Why are we so obsessed with cost? Isn’t there enough money around to give renters a decent house? Of course many landlords are able to afford to improve their properties. However, that won’t stop rents rising in the longer term. 

The fact is that the biggest increase in the cost of both building new houses and providing rental accommodation is the price of the land underneath the house. Land is the one asset that has continually grown in value in recent decades – often without any improvement at all. It has proved to be the one of the best investments anyone investor can make.

Landlords have the right to make a decent return on the value of their investment. They are providing a service – they are a housing provider – and as long as they provide a decent service they deserve to be rewarded for that. If they can’t make a decent return – including the expenses and risk they face – they will sell up and invest in something else. As noted above that will push up rents anyway.

As land prices have risen year on year, it has been harder and harder for landlords to get a decent return through rent. Gross returns on rental properties have been usually around 3% - that is before expenses. Of course landlords have stayed in the game for capital gain from the higher land prices, but this isn’t sustainable. The more property prices rise, the greater the pressure to push up rents in turn order to make a decent return from rent.

The obvious solution here is to kill off the growth in land prices once and for all. Then landlords can focus on investing in their property in order to increase their returns. Instead of bidding up the value of land, new home builders could afford to invest in building better quality homes.

How do we do that? This growth in the price of land has happened largely because of our tax system. Land owners have benefitted from investing in land compared to other assets. This has pushed prices up in a neverending spiral.

A Capital Gains Tax as proposed won’t stop that spiral, largely because the family home is exempted. People will continue to landbank, but they will have an incentive to have their “family home” on that landbank.

The Opportunities Party proposes to drop income taxes by 30% and encourage people to invest in productive businesses, rather than speculating on land prices. We would do this by ensuring all assets – including land – pay as much tax as a bank deposit. The tax benefit of investing in land that has driven land prices higher and higher will disappear.

Under the status quo rents will go up. But don’t blame landlords. Blame our national obsession with making money off the value of land going up and up.

 

 

 


Video replay: TOP Tax Talk in Wellington 18 February 2019

If you weren't able to attend the Tax Talk on Monday, 18 February 2019 you can watch it here:

 

To view the companion blog piece with history and background click here


Why Our Tax System Favours Housing

Sources for this piece are the Tax Working Group Report on The Taxation of Capital Income and Wealth and Andrew Coleman’s piece on the Great Income Tax Experiment plus the work behind The Opportunities Party tax policy

To watch the Tax event held on 18 Feb 2019 and which is the result of this research, click here

Most people are worried about the amount of tax that they pay, but that isn’t what we are talking about here. The Opportunities Party doesn’t want to collect more tax overall, we just want to make sure it is collected in a fair and efficient way. Our goal is to use any revenue collected to reduce income taxes

For the economy the amount that one thing gets taxed relative to another is just as important as the overall amount of tax that is collected. If one type of behaviour is taxed less than another, then people will do more of the thing that isn’t taxed. If we want them to do that thing, that might be fine. But if we don’t want them to do that thing, we have a problem.

And that is the case with housing in New Zealand. The current Government is focussed on cracking down on investors and speculators. This may be popular, but doesn’t make much sense economically because the biggest tax break actually lies with the “family home” - otherwise known as owner-occupied housing.

The Government’s own Tax Working Group confirmed this in their report on Taxing Capital Income and Wealth:

See the low bar? The thing that is taxed way lower than everything else? That is the money that people invest in the family home. Many Kiwis struggle to believe this graph when they first see it. So maybe it would help to look at the history behind it.

 

A Brief History of Our Tax System

In the 1980s the Labour Government of the time revolutionised our tax system. The idea was to get rid of any tax incentives and loopholes so that tax rates could be lowered as much as possible. This is the mantra of the “broad-base, low-rate” tax system that is parroted by Treasury and IRD officials to this day.

This meant that almost all investments got taxed twice - once when the money for investment was initially earned as income, and again when that investment created a return. That applied to bank deposits, businesses (including shares) and retirement savings. Even the inflation component of returns is taxed, which is why the effective tax rate on most investments in New Zealand is up around 50%.

The one exception was housing and land. The income used to buy these gets taxed, but the returns from being an owner occupier of housing and land aren’t. Effectively when you live in the house you own, you are landlord and tenant and are paying rent to yourself. In most rental situations the landlord pays tax. But in this case, which is called “imputed rental”, no money changes hands so our tax system ignores it.

Housing and land based businesses such as rental property and farming pay tax on the cash returns they get, but not on the capital gain. In all, property based businesses end up paying about half as much tax as other investments. However we need to remember that capital gain happens because of higher expected returns in the future, all of which ideally should be taxed. So in the long run taxing capital gain is really unnecessary double taxation. The problem with property is that not all those future returns are taxed (the imputed rental problem), which can make a Capital Gains Tax attractive for that asset class.

There was talk of introducing a Capital Gains Tax as part of Labour’s reforms in the 1980s. However Labour imploded, National was voted in, and it was all but forgotten. That would have been the time to bring in a Capital Gains Tax (as long as it included the family home), before all the capital gain happened. But now the horse has well and truly bolted. Imputed rental would still not have been taxed, but at least housing affordability would not be as bad as it is now.

 

What Do Other Countries Do?

The result of this history is that the difference between tax treatment of property and other assets is the greatest in the world. How do other countries deal with this?

A few do something similar to The Opportunities Party proposal - taxing the value of living in the family home the same as you would a bank deposit. Iceland, Luxembourg, the Netherlands, Slovenia and Switzerland all do this. This eliminates the tax differential between the family home and other investments, so people have an incentive to invest in businesses.

The majority of European countries adopt another approach. They drop the ‘broad-base, low-rate’ idea completely. They hike up income taxes and use that money to reduce the taxes on other types of investments. The left of politics makes a big deal of the higher marginal tax rates in Scandinavian countries for example, which seem to have little negative impact on their economic growth. But they ignore the fact that the tax rates on capital - businesses, retirement savings for example - are much much lower than they are in New Zealand.

This approach again helps to reduce the differential between investment in housing and other types of assets, so people still have a strong incentive to invest in businesses. Of course property addicts like to point out that average people don’t have that many opportunities to invest in businesses. In these countries that role is played by retirement savings, which manage people’s portfolios on their behalf. Investments in retirement savings in particular are often untaxed when the income is initially earned.

 

The Impacts of this Experiment

As a result of this tax history, Kiwis have piled into housing. More of our assets are tied up in housing than any other developed country in the world, and house prices are a testament to that.  

House prices have risen faster than any developed country, leaving us with the least affordable housing of any developed country. Rents have followed suit, rising faster than prices or incomes as landlords struggle to maintain some level of return on their investment. As a result, ordinary people have to work more hours to pay for their rent than they did in the 1990s.

Housing is the key driver of growing inequality. Since the mid 1990s inequality has not really grown at all. Workers in general have been getting their fair share of rather mediocre productivity gains. However, when you take housing into account it is a different story. After housing costs inequality is rising.



Rents rising faster than incomes are the key driver of poverty at the bottom end. And higher house prices are the main driver of rising wealth at the top end. Once housing costs are taken into account, the bottom 10% of families are still no better off in real terms than they were in the 1980s.


It isn’t like this is helping our economy. Most of our investment is going into unproductive areas - bidding up the price of already existing housing. Countries don’t get rich together that way, some (namely asset owners) get rich at the expense of others. In New Zealand we have effectively seen a massive transfer of wealth from younger generations to older ones. Our businesses suffer due to lack of investment, which is why our incomes are so low. Meanwhile we all bear the risk of record high foreign debt.


Could Other Factors Be Driving House Prices?

Much has been made of the role of cheap credit and housing supply in the rise of our house prices. It is impossible to completely disentangle tax from these other factors. However over the long run these other factors cannot explain everything.

Firstly cheap credit. This has been available around the world for many years, yet New Zealand has topped house price rises since the Global Financial Crisis. And when incomes are taken into account, we really do stand out.



We topped the latest Demographia survey in terms of unaffordable housing in the developed world. Interesting to note that the two markets just behind us - Australia and the United Kingdom, both have a Capital Gains Tax excluding the family home yet are still well above what experts call “affordable”.

Housing supply is certainly an issue, particularly in Auckland. However many other markets in New Zealand have been unaffordable for some time, without a discernible supply issue. Auckland too was already unaffordable long before the shortage appeared. And again internationally we are not particularly unusual for our planning rules, yet we are a stand out on house prices.

The cost of construction is often raised also. However this is not the key driver of higher house prices - the price of land is. Land banking is the key problem, and this is driven by the differential tax treatment of property. Why develop land when you can make more money sitting on an empty section?



So What Do We Do About It?

If we care about inequality, house prices and the economy, we need to tax property the same as other assets. That extra income could be used to reduce income tax by up to one third. This would be a true broad base low rate system. Returning to the original graph, that would equalise all lines on the chart by lifting the lines on owner occupied housing and rental properties and dropping the others.

1-_Treasury_IRD_estimates_of_marginal_effective_tax_rate_on_real_return_from_various_types_of_saving.jpg

Of course, even if you understand that our tax system favours housing, especially the family home, you might think that is a good thing. Bear in mind however that half of Kiwis don’t live in a house they own. Around 40% of Kiwis own nothing at all to speak of. Aren’t they the people that deserve access to New Zealand’s biggest tax break? Instead, through their income taxes they end up paying a greater burden than many of us. This property loophole is particularly exploited by the rich. One third of the wealthiest people in New Zealand don’t even pay the top rate of income tax. That isn’t the idea of a progressive tax system, and it doesn’t fix the huge distortion that exists.

Nonetheless, if we don’t care about inequality and we want to keep our tax breaks on housing, then we need to at least abandon the broad-base low-rate mantra. We need to drop the tax on other investments to match that on owner occupied housing. This will solve our investment problem and obsession with housing. The downside is that it gives a huge tax break to people with assets - the rich. The question there is where the money comes from to pay for the tax break. Scandinavia achieves that by getting more income tax from higher incomes.

A Capital Gains Tax which excludes the family home achieves neither of these things. It hikes up taxes on rental property, but leaves owner occupied housing untouched. To make matters worse it hikes up taxes on businesses too - taking them over 50% of returns. As mentioned, higher capital values for a business are a sign of higher expected future revenues. Since revenues already get taxed eventually, a Capital Gains Tax effectively brings forward future taxation burden on business. Given the already high rates of business taxes, why would anyone bother to invest in a business then?


Three Basic Mistakes that will Hound the Provincial Growth Fund

I spent 3 years working in regional development in the United Kingdom. I started working there in 2005, 7 years after the Blair Labour Government first set up the Regional Development Agencies. This and other experiments in regional development have yielded some lessons that this coalition Government seem to have roundly ignored in setting up the Provincial Growth Fund (PGF).

Recent decisions have highlighted many of these problems. It has become clear that the Provincial Growth Fund was hastily set up, and now the focus is on shovelling money out the door. It was intended to be the jewel in NZ First’s crown but could prove to be an albatross around their neck.

Lesson #1: Do we even need the PGF?

Good regional development isn’t just about the money. It is about taking a holistic view of a region’s economy, seeing what the roadblocks are and how that might be overcome. Sometimes not much money is needed at all to solve a problem, it can be done by coordinating what different parts of government are already doing.

By contrast, the Provincial Growth Fund seems to be all about the money. Little thought has gone into what will actually make a difference to the target regions.

A good example of this is yesterday’s announcement that the Provincial Growth Fund will put $20m into Predator Free New Zealand. This allowed NZ First to make a song and dance about finding alternatives to 1080, but this announcement was really an acknowledgement of the failure of the PGF. Predator Free NZ is a great idea, and is already happening. Research into alternatives to 1080 is a great idea, and is already happening. Giving them more money is a great idea, but we didn’t need the PGF to do it.

This announcement was an admission that PGF has run out of ideas already. You have to wonder why it exists.

Lesson #2: Spending Money Well Takes Time

Regional Development in the UK started in a similar fashion to the PGF with money spent in a random, shotgun way. This is typical of new government initiatives where the pressure is to get money out the door. The easiest way to spend government money is by doing lots of little projects. This is usually not the way to get best value for money.

I started working for the Regional Development Agency 7 years after it was set up. My job was to look at all the things they had done on business support, and work out which had worked and which hadn’t. By the time I left, 10 years after they set up, that job was done and we were only funding the stuff that had worked. The short story is that we had a few, large, very effective projects.

By contrast the PGF has to get $1b out the door every year for 3 years. This doesn’t leave much time for careful thinking, and the lack of thought becomes clear when you look at what the the PGF has turned up so far. There are no clear outcomes for what different projects should achieve and how that should be measured. The cost per job of different projects is vastly different. It is hard to know what they are trying to achieve other than getting the money spent.

Lesson #3: How To Avoid Doing What Would Have Been Done Anyway

The last, and most important lesson is how to avoid funding stuff that would have happened anyway. The flip side to this is how to avoid funding stuff that shouldn’t get funded regardless - but this stuff eventually tends to come out in the media anyway.

Businesses make investments all the time without government help. The ones that don’t probably don’t deserve to be invested in. Which are the investments that should happen but would only happen with some government help? This is a tricky area and requires careful thought.

The short answer is that to justify government intervention the investments need to generate measurable environmental and social benefits alongside their financial benefits. The financial benefits alone might not be enough to justify the investment, but the social and environmental benefits might be. These sorts of investments are known in the business as “Impact Investments”.

A good example of how the PGF could have been used for Impact Investment would be to underwrite a Permanent Forest Bond. This would harness private sector funding to encourage landowners with erosion prone land to plant their land in permanent forestry by funding the up front costs of planting and fencing. Carbon credits and manuka honey can then give the landowner a return on their land while also paying back the initial investment. The community benefits through reduced erosion and cleaner rivers. If the government manages the carbon price and manuka honey industry well, they could make their money back or even make a profit on such a bond.

This is where the PGF could have made a real difference. Instead we see them putting money into questionable stuff that probably would have happened anyway, like thermal baths in Methven or a loan to Westland Dairy.

Good regional development takes time and careful thought. At this early stage the PGF seems to have neither, and little wonder when they have $3b to get out the door in 3 years. In short, it looks like a mad dash for cash than a well thought through approach to regional development.


Vocational Education Needs Same Status as University

We need to make vocational education as attractive for young people as University is now.

The Government has announced a reform of the vocational education sector, merging all 16 polytechnics and parts of the Industry Training Organisations into one national institution. Whether this will work remains to be seen – the devil will be in the detail on these reforms. The Opportunities Party will be looking at these details closely as they emerge, and will form our own position on this vital issue.

What is clear is that more successful economies and fairer societies than ours make vocational education a real priority. Is that where our Government is ultimately headed, or is this simply a cost cutting measure? If it does want to make this a real priority that will be difficult to fund, given how much money is going into Universities via the fees free policy.

Finland and Germany

In 2018 I spent a few weeks looking at the Finnish and German education systems. One of the starkest lessons from this was that they give a far greater priority to vocational education than we do.

The most obvious example is money. Vocational education starts at school, even in primary school. Schools have the money to purchase kit for students to use to learn practical skills – including sewing, cooking, woodwork and IT.

After school, these countries invest just as much in vocational education as they do in University education. Some courses are even more expensive because of the machinery that they use.

The crucial thing about vocational education in these countries is that it is done in partnership with business. In other words the study is usually done alongside work experience. Not all of the money goes into training – some goes towards paying the student’s wages in the early years when they aren’t very useful in the workplace.

One of the Government’s arguments for Fair Pay Agreements is that it will give the incentive for businesses to invest in improving skills through vocational education. In other words they are hoping to shunt businesses towards the Finnish and German model. If this were the real focus of the Fair Pay Agreements, surely it would have been better to sit down with business and talk about vocational education alongside these reforms?

But it isn’t just about money, it is also about status. Both Finland and Germany worked hard for many years to remove the stigma around vocational education. In these countries the vocational pathway is not seen as a “less skilled” option for “dumb people”. The sort of stigma we see in New Zealand simply doesn’t makes sense, because many people with practical skills end up earning more than those with University degrees.

This status issue shows up in other ways. It is a lot simpler for a young person to navigate the vocational education system in Finland and Germany than it is here. In New Zealand successive Governments have focussed on funding Universities instead of polytechs, which is why so many polytechs scrambled to become Universities.

Making vocational education a priority may be a one reason why Finland and Germany’s economies are more productive than ours. Certainly there is nothing oustanding about their University education system compared with ours.

However these countries don’t just invest for economic reasons, but for social reasons as well. Students of vocational education are more likely to come from poorer backgrounds compared to University students. High quality vocational education is not only a way to lift our economy, but also a way to break the cycle of poverty by offering those students a hand up.

Funding

Putting vocational education on a level pegging with University would involve extra funding. Finding that money will be difficult when the Government has already promised to give everyone 3 years of fees free tertiary tuition. Vocational education benefits from fees free also, but to a much lesser degree than Universities because Universities already received a higher payment per course.

Fees-free University is poor quality spending that wouldn’t get through any “Wellbeing Budget”. Given that University is generally populated by the children of the middle and upper classes, it would have been much better for the economy and society to put that money in bringing vocational education up to scratch.

Sadly it seems more likely that the Government will do this vocational reform on a shoestring budget and the truly needy will once again miss out because they are less likely to vote.