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FEB 11

State of the Nation speeches lack vision

Selling assets and taxing the rich were the headlines from John Key and Phil Goff’s State of the Nation speeches. The focus of both was the distribution and reallocation of existing wealth. What both lacked was a plan for growing New Zealand’s productive economy.

Despite all the talk since the global downturn about rebalancing the economy there has been little change. We still have an overvalued and volatile dollar which discourages investment in exports and a tax system which incentivises investment in assets rather than productive economic activity.

John Key mentioned in his speech that in the past economic cycle, “High interest rates in turn led to an over-valued exchange rate which smothered the internationally-competitive sectors of the economy, like agriculture, horticulture and manufacturing”, and went on to say, “Our exporters found it hard to sell their products at competitive prices overseas because of the high value of the dollar.”

These comments are spot on but for one thing, there is no past tense, unfortunately the conditions John Key referred to are still in place. Nothing has been done to address the underlying policy distortions that create them. Our interest rates are still among the highest in the developed world, our banks are borrowing offshore and importing the loose monetary policy of others, and the NZ dollar remains the clear favourite of the speculators; all this undermines our export performance and competitiveness. Changes to monetary policy are needed to fix this.

Phil Goff reiterated Labour’s intention to reform monetary policy to include economic growth and employment as considerations for the Reserve Bank. It is unclear exactly what affect this would have considering that the RBNZ seems fairly resistant to change, but this shift at least provides a step in the right direction.

Labour also announced a clamp down on the rental property tax loophole and broader avoidance which is long overdue. As Goff mentioned it is unfathomable that a $200 billion dollar sector operates tax free. However, there was no detail on how this would be done.

There was also no move from either party on tax imbalances. Despite Labour’s desire to clamp down on the property market there was no mention of a capital gains or land tax. Moving the top personal tax rate up will again incentivise tax avoidance (something they were looking to avoid by clamping down on rental property).

For National’s part a focus on savings and investment is fairly empty without a look at the property tax harbour. The major reason we have a low savings rate at the moment is that borrowing on a property is by far the most tax advantaged way of building wealth. This method of growing wealth also increases our foreign borrowing (as the banking sector chases the lowest cost of funds, and in the process overvalues our currency) and starves our productive economy of capital and margin which would otherwise be available.

The Tax Working Group has identified this problem and the Savings Working Group more or less said so despite any work in that area being placed outside the terms of reference. It is time that both parties stopped hiding on this issue.

Overall the speeches were once again predictable, heavy in rhetoric but light in policy detail. Phrases like ‘savings and investment’, and ‘tax fairness’ are fairly meaningless unless backed up by action.

tags: state of the nation, exchange rate, asset sales, tax balance, rbnz
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