Recent Post Comments
I am sorry but this comment section has been disabled due to spam. My contact details are easy to find, please contact me if you want to comment or discuss anything on this blog.

SEP 10

Idea cherry picking equals incoherent policy framework

The Government’s thirst for working groups to consider contentious policy issues has the benefit of opening public access to the debate, but scope restrictions handed down to create bias in working group reports, and the Government’s cherry picking of the proposals is building an ever more incoherent economic policy framework. As a Savings Working Group is commissioned the interaction across these ad hoc policy changes need to be considered.

The Tax Working Group was a case in point where its members went to great lengths to provide a number of well thought out and coherent proposals for the Government to choose from, according to their own preferences and political bias. All of these potential tax packages addressed their key areas of concern which were fairness (taxing all income sources the same) and coherence (aligning rates to avoid tax evasion). The Government selected three main policies: increasing GST, cancelling depreciation entitlements and decreasing corporate and personal tax. While all of these measures were recommended by the working group, this combination of reforms did not correct the major problems identified by the Tax Working Group. We still have a system that fails to tax asset income and overloads personal and corporate income, and there remain significant differences between corporate, personal and trust tax rates. The Tax Working Group started with the assertion that the tax system is broken and at the end of a lengthy process that is still the case.

The restrictions imposed on the Savings Working Group are likely to produce similarly distorted initiatives. How savings can be considered without looking at tax issues which determine where savings are likely to be invested, and superannuation entitlements which determine how and when savings will be spent escapes me. Hopefully the working group will ignore these restrictions and take a more holistic approach. Yes, we need deeper capital markets in New Zealand, but if there are better returns offshore because fiscal policy disadvantages domestic investment, more domestic savings will do little to improve domestic investment – ‘just tell us how to fight the alligators, and don’t worry about the swamp’ is a pretty deficient scope.

According to the Inland Revenue Department an estimated 56 percent of funds are invested in New Zealand assets and 44 percent in overseas assets. If the Government legislated to force Kiwisaver providers to invest only in New Zealand this would threaten the ability of the fund managers to manage for the best return. The reasons why there are limited investment opportunities in New Zealand need to be investigated and corrected. How can a comprehensive answer ignore tax and entitlement issues?

The tax problem in particular needs to be addressed. The absence of taxation on asset gain weighs investment decisions towards property and reduces the pool of capital available to productive businesses (this capital is tied up in land and buildings). It also reduces returns, via corresponding over-taxation for those that do make productive investments in New Zealand. There has been a lot of talk about how New Zealand investors lack the knowledge to make sound choices; investors have in fact made very sound investment choices funneling their money into the one sector where their gains are tax free.

Changes to encourage savings need to look at both the level of saving and the areas where these savings can be effectively invested. Simply setting a compulsory saving rate is only half a solution that will not see benefit flow through to the real economy.

tags: savings working group, tax working group, kiwisaver, capital markets
I am sorry but this comment section has been disabled due to spam. My contact details are easy to find, please contact me if you want to comment or discuss anything on this blog.