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MAY 11

Another report highlights Government policy errors

The Organisation for Economic Cooperation and Development’s (OECD) Economic Survey on New Zealand presented a raft of problems in New Zealand’s policy framework. Unsustainable debt levels, a tax system that favours property over business investment and a persistently high currency were some of the same problems as mentioned by the International Monetary Fund and most other credible commentators. The OECD’s recommendations that New Zealand raise the retirement age and tax capital gains have again been rejected by the Government.

One line stood above the rest in describing the magnitude of the policy problem:

“The recovery stalled in 2010, despite record terms of trade.”

2010 and the beginning of 2011 should have been a time when an export led economy thrived on record prices bringing the economy strongly out of the recession. Instead an overvalued exchange rate meant that any gains made by commodity exporters were taken away from the rest of the export community and continued tax advantages for property investments meant that those who were cashing in were forced to address household debt levels rather than investing in the future.

($b) NZ overseas debt Agriculture Debt Household debt Housing value NZX value Managed funds
Dec 1995  75  9  45  183  49  34
Dec 2000  127 13  73  232  42  50
Dec 2001  135  15  78  246  43  49
Dec 2002  144  18  86  282  41  44
Dec 2003  146  21  99  370  50  47
Dec 2004  163  23  114  429  61  54
Dec 2005  170  27  132  506  60  57
Dec 2006  192  31  149  559  64  64
Dec 2007  217  36  168  614  62  65
Dec 2008  251  44  175  568  41  56
Dec 2009  241  47  180  606  49  62
Sep 2010  253  48  183  599  53  64
Change 1995-2010  237%  431%  307%  227%  8%  88%















 Source NZ Herald and RBNZ

This table shows how New Zealand’s mounting foreign debt has largely gone into agriculture and housing bubbles and the impact on productive investment. It is clear that our policy framework is badly misdirecting our economy.

The OECD also addressed this issue:

“Persistent saving-investment imbalances appear to reflect primarily national saving that has been well below OECD averages. At the same time New Zealand has long had to pay comparatively high real interest rates, which have driven up the cost of capital and deterred business investment. To the extent that such high interest rates reflect domestic demand pressures, rather than a risk premium, they may also contribute to a persistent overvaluation of the exchange rate, resulting in the decline in the share of domestic output for tradable goods and services experienced since the mid-2000s.”

Using land and houses as savings vehicles has not only caused private debt problems, but has also hit business investment directly by limiting capital available and indirectly through the uncertainty returns on that investment caused by unpredictable exchange rates.

The balance needs to be decisively and deliberately moved towards investment in the tradeable sector and away from unproductive investment in land and buildings. This means policy aimed at reducing medium-term fluctuations in the exchange rate and a capital gains and or land tax; Government inaction will lead to further economic degradation.

tags: oecd, superannuation, land tax, capital gains tax, household debt, agricultural debt, terms of trade
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