Labour on Capital Gains Tax
September 14th, 2009 at 5:57 am by David FarrarNZ Herald reports:
Labour leader Phil Goff says his party is prepared to discuss a capital gains tax with the Government, opening the way for an accord on a tax that has long been a political hot potato.
Mr Goff said the party’s bottom line would be that the tax would not apply to family homes.
This means it would effectively target investment properties.
The issue is being considered by a Government tax working group, and neither Prime Minister John Key nor Finance Minister Bill English will rule it out.
A capital gains tax on property investment is seen as one way to reduce the tax advantages of rental housing, curb house price inflation and send investment into productive sectors of the economy.
It is commendable that Labour are not ruling such a tax out, and saying they will judge any proposal on its merits. That will allow the Government to have a sensible consideration of the pros and cons.
My strong expectation is that any revenue from expanding the tax base, should be offset by reductions in existing tax rates. Certainly that is the remit of the Government taskforce looking at the tax system.
I hope Labour’s flexible stance will extend to the merits of a land tax also.
Related posts:
- Treasury talks capital gains tax
- Kerr on Capital Gains Tax
- Capital Gains Tax
- Forgetting the cost of capital
September 14th, 2009 at 6:40 am
Bridgecorp anyone?
Seriously where would you invest?
We have a tiny sharemarket, dodgy financial companies, an underperforming bond market, a stagnant economy, a very small manufacturing base, low deposit interest rates, etc.,ect.
Maybe that is why dairy and wine is progressing, at least they have some sort of a ROI.
Property taxation is the stick, where is the carrot for alternative (and a rewarding) investment?
Vote:September 14th, 2009 at 6:44 am
So it looks like we will get another flip flop from the Nats. then. Capital Gains tax just on property is clearly unjust and discrimination against a preferred investment class and will simply mean that those that are speculators will buy pork bellies or shares or vintage cars or gold. It should be remembered that speculators are already caught in the tax net and rightly.
This just exemplifies the basic lack of principle involved in all things politic.
Anyway if Labour are supporting such a move that would be good enough reason to run like hell the other way.
Vote:September 14th, 2009 at 7:04 am
Land tax, land tax? Oh! Thats right….its currently called RATES.
Capital gains tax – just introduce a stamp duty FFS and get on with the real work at hand.
Vote:September 14th, 2009 at 7:07 am
DPF. Its well proven in NZ that if we reduce the tax rates then the economy grows and the Govt. tax collection goes up. So the question is why haven’t we done this?
Oh that’s right we have a recession so the answer is to maintain the current penalty taxes and suppress the economy and lower the taxable income so we can borrow more so we can inflate our interest rates and ensure that NZer’s remain poor. One in six now born into poverty. Can we not see this cycle is flawed?
Its not rocket science its lack of intellectual foresight.
Its a continuation of Clarks control freak mentality.
Why NZ isn’t a good place to do much.
I have a simple patented device(just about finished) and marketable in a lot of countries. I have a workshop capable of making said device. But I received my staff ACC bill the other day. Never had any claims for work and looked at the amount and said to my wife. Why oh why would we employ people to make said device when I can get it made in China for about 25% of the price?
Its goes completely against what I believe to do this for I have 9 grandkids who will all be wanting jobs in the next few years, but really I don’t seem to have much choice do I.
That’s the problem for NZ.
We not only have commercial competitors but we have to try to beat the Govt. first.
[DPF: In 2008 and 2009 around $3 to $4 billion a year of tax cuts were delivered. Unless you want massive tax increases in the future, then further tax cuts in the short term are unlikely until the deficit is under control]
Vote:September 14th, 2009 at 7:40 am
> investment into productive sectors of the economy.
Does the Herald really believe that the housing market isn’t productive? I guess the thousands who work in that market are not in “real” employment and are not doing a “real” job. The jobs created by the building of new homes are clearly an illusion.
Vote:September 14th, 2009 at 7:42 am
Of course Labour will accept such a proposal, it is unlikely to affect its core membership too much.
National has to watch itself here for fear of alienating core supporters. Part of the reason National stuffed itself up so badly in the late 1990′s was that it did daft things such as introducing a highly punitive IRD regime which tended to alienate core supporters (self employer, small businesses etc). It talked about privatising roads – effevtively a ‘land grab’ of the street outside one’s house (this being driven by people thinking streets were just for motor vehicles). This was so bad that National had no hope in 2002, which in turn seriously handicapped its base for 2005.
National MP’s need to ponder very carefully just why moms and pops invest in residential real estate – it is because they do not trust other forms of investment, and no amount of beating them around the ears with punitive taxes is going to change this.
I just do not see that there has been a real estate ‘bubble’ except in certain parts such as shoebox apartments in Auckland or modest housing in low socio-economic suburbs. In general the price of housing is driven by the cost of brand new houses in ‘greenfields’ subdivisions. This is in the same way as the price of electricity is driven by the cost of the ‘next’ power station and the ‘as new’ cost of transmission and distribution networks. For example the Wellington real estate market has shown no more than a few hiccups in the last year or so.
Vote:September 14th, 2009 at 7:43 am
I think that this is real leadership from Labour, but I expect that their default auto-opposition response will kick in soon.
The current tax structure gives investors a disproportionate incentive to invest away from interest-bearing assets and towards assets that receive untaxed capital gains, ie into housing relative to other assets.
The reduction of our reliance on income taxation and a concommitent move towards a broader tax base are important, although given the problem that there is so a low savings rate I’m not sure that taxing the fruits of investment will boost savings.
Unless capital gains tax is coupled with real spending cuts we will simply see a reduction in income tax now and then an increase later, ie Capital Gains will just be another revenue stream.
Vote:September 14th, 2009 at 7:44 am
As an aside, I work in the property industry. Property investors are typically looking for a bargain (and to make money). Therefore, those investors buying existing properties are probaby helping to drive house prices down, not up!
Vote:September 14th, 2009 at 8:00 am
Typical, the problem is our capital markets are rubbish and still not policed properly and perfom at a mediocre level thats why people invest in real estate. So instead of addressing the issue and joining the rest of the developed worl lets tax something instead !
NZ has a problem with NZX being the regulator as well, the commerce commission are totally useless, the companies office dont seem to mind people having 90 odd companies and think nothing of it.
Vote:As an investor you need confidence in NZ you dont have it that why we go the DIY route and buy rentals.
September 14th, 2009 at 8:03 am
John Key has just told Mike Hosking this morning that a capital gains tax is not likely. He said he was not convinced that a CGT was worth the trouble – it took a lot of organising – and that it would not be effective.
Vote:September 14th, 2009 at 8:18 am
Viking2 (666) Vote: 2 0 Says:
September 14th, 2009 at 7:07 am
Why NZ isn’t a good place to do much.
I have a simple patented device(just about finished) and marketable in a lot of countries. I have a workshop capable of making said device. But I received my staff ACC bill the other day. Never had any claims for work and looked at the amount and said to my wife. Why oh why would we employ people to make said device when I can get it made in China for about 25% of the price?
And how many of the chinese factory workers could then afford to buy your product?
Henry Ford was many things, not all of them good, but he at least understood that increasing the volume of cars he could build was pointless unless he also increased the market’s capacity to buy those cars. He did that, not by fucking off to China, but by paying Ford workers wages that were sufficiently high to allow them to live AND buy Ford cars.
Guess you’re no Henry Ford, just another bitter “I want more for me” knuckle dragging capitalist.
Vote:September 14th, 2009 at 8:26 am
A land tax? Well if you want to destory livestock farming in NZ why don’t you just say so…
Vote:September 14th, 2009 at 8:28 am
“Henry Ford was many things, not all of them good, but he at least understood that increasing the volume of cars he could build was pointless unless he also increased the market’s capacity to buy those cars. He did that, not by fucking off to China, but by paying Ford workers wages that were sufficiently high to allow them to live AND buy Ford cars.”
So the guys who makes Rolls Royce must need to be paid millions. This is one of those myths socialists bring out all the time (on the repeat it often enough theory). Even a cursory undertanding of manufacturing economics would show why it just isnt so.
Vote:September 14th, 2009 at 8:32 am
KiwiGreg, another knuckle dragging capitalist dupe – The Ford Model T was a mass product for a mass market. The Rolls Royce?
I blame the education system, all that emphasis the capitalists wanted on preparing children for the workforce made lovely little drones like KiwiGreg with no room for thought in their brainwashed minds.
Vote:September 14th, 2009 at 8:45 am
Thats it, a capital gains tax; excellent.
So then small investors like me with 4 rentals think there’s no point and get out of that market.
Less demand for houses means lowering house prices which means Labours “Mum and dads” who have been slowly building up equity all their lives see a chunk of that equity go out the window.
Excellent.
Vote:September 14th, 2009 at 8:55 am
NEWSFLASH – LABOUR HAPPY TO VOTE FOR A NEW TAX HAHAHAHA
this would be a story if ACT! said they would vote for a new tax. but labour? they hate home owners ffs.
Vote:September 14th, 2009 at 8:58 am
razork – thats the problem. if the govt does anything to reduce house prices, it fucks the middle class.
but in not acting, our quality of life isn’t as good as it should be. house prices should be half of what they are.
Vote:September 14th, 2009 at 9:01 am
I think that capital gains tax is the right and just thing.
I do not understand why income from work is taxed and income from real estate investment is not.
Is there any real reason for this?
Vote:September 14th, 2009 at 9:11 am
maybe they should get rid of the negative gearing tax break instead.
Vote:September 14th, 2009 at 9:13 am
Yes, because work is not good for you and bad things (alcohol, tobacco, driving, etc) are taxed. If work were good for you, the rich would keep all of it for themselves, rather like their speculative property gains.
Vote:September 14th, 2009 at 9:18 am
why is it only the “rich” that make speculative property gains?
some of us flicked a house or two on our way up! enabled us to buy businesses etc. better ourselves. things the left love
Vote:September 14th, 2009 at 9:34 am
billyborker wrote
So someone is trying to develop and sell a new product, but you’re going to abuse them unless they try, against all economic reality, to manufacturer here, in order to single-handedly raise the living standards of NZ and thus create a market for the uneconomic product?
Have you had any success with this technique?
Anyway, when Henry Ford started out he didn’t need to FO to China, as you say. There was plenty of cheap labour where he was.
Vote:September 14th, 2009 at 9:39 am
They all got it wrong. The problem with the attractiveness of housing as an investment vehicle arises from a disturbed market for housing and that problem is on the supply side. Get rid of the RMA and of all the other red tape that frustrates development and building and the prices would come crashing down, solving all the other problems at the same time.
Vote:September 14th, 2009 at 10:11 am
Peter asks
The IRD does tax income from property transactions. While the average home owner does not pay tax on the capital gain made from their property, if you make that capital gain your income you will pay income tax.
Problem is defining the line where the capital gain becomes income.
Now most property developers run a company to take advantage of the tax and liability protection gained by having that company do the transactions. And as such would pay tax on the income generated.
Butr there are loopholes that need closing and I would suggest that these would generate far more taxes then any land, capital gain, or housing tax.
Vote:September 14th, 2009 at 11:03 am
It would be easier just to tax property transactions. Or even removing interest deductions for property. If I were Key thats what i would be doing.
Vote:September 14th, 2009 at 11:04 am
Billyborker – now driving is considered a bad thing? Why is that? Too much freedom for the proles? The bourgeois definitely have too much freedom and must be curtailed, for their own good of course. Does driving allow choices that are not controlled by you, your commissar comrades or other assorted bed wetters?
Given the power grasping left’s fixation to approve all human activity, there must be an “approved” list for driving; such as bus drivers (unionised members only of course), push bikes and peasant tractor drivers. Please illuminate the great unwashed with what you and the global left wing crusade approve of and do not approve of.
A capital gains tax must appear on the local approved list now the Red Brigade have endorsed it. Can you check with your overlords and let us know the official word.
Ford
Vote:September 14th, 2009 at 11:16 am
No DPF, it’s not a binary equation. The public service in Wellington swelled by 13 hectares of cubical farmed policy analysts, advisors and useless commissions over Labour’s reign.
I want them gone, and I want to pay less tax.
Vote:September 14th, 2009 at 11:56 am
bchapman,
While it would be easy to tax property transactions, would you excempt any income generated from the property transaction as tax free?
While not an accountant I could very easy see that from a company point of view the tax paid in the transaction would be offset against company tax payable.
Not see easy for the individual to do without expensive accountancy input.
Removing the tax deductable interest paid for a property would be easily deducted from any overall company tax liability.
It is a hugely complex “problem” not easily solved by just taxing property. It has a huge flow on effect on say manufacturing business transactions and viability (including farmers) if they could not deduct expenses related to the property infastructure they require to carry out the business.
You can claim depreciation on plant. Will you be able to on property?
Vote:September 14th, 2009 at 12:30 pm
This misdirection of New Zealanders’ savings into housing rather than into the productive economy is a huge drain on the whole country – especially because people borrow so much to do so. That borrowing mostly comes from overseas, and that’s where all the interest flows back to.
We live on a merry-go-round of ever-rising house prices and the faster it goes the more of our wealth is spun off to our neighbours by the centrifugal forces generated. As a national we cannot afford to let that continue – however inconvenient it may be for those who are getting rich from it.
It is true that there needs to be work on the supply side – reducing the barriers to new house construction. But that is only half the equation. Demand is excessive because not only do we have all those who want a house to live in out to buy a house, but also thousands more who already own homes out to buy a second or third as a rental property.
I sincerely hope that Key and English can come up with something to fix this problem (and I recognise it is a complex issue). And credit to Labour for recognising the problem and being (maybe) willing to co-operate on a solution.
Vote:September 14th, 2009 at 1:10 pm
There is no doubt there is a problem, billions have been rorted by the LAQC system, the property market speculation is one of the main reasons economies are in the shit they are in. Someone pointed out, where else can you put your money? Certainly not finance companies who seem to be mainly dodgy money lenders lending to dodgy people. The share market is massively overvalued and ripe for a fall. Have a look at the increase in P/E ratios, they make no sense.
It points to a bigger problem that has been building for many years in Western countries. We a great extent we have stopped being the makers and creators of “stuff”. We carry too many non productive units in society. Our financial “industries” have climbed from less than 5% of our GDP 30 – 40 years ago to up around 30% – 40% depending on which OECD country you look at. Too many people are employed in what are realistcally non productive sectors. They sound good but the create fuck all squared in a box in the way of real products or services.
We can’t compete (yet, eventually theirs will come up to ours, that’s the way it works) with labour rates in Asia, India etc so somehow we have to be smarter and more innovative. How the fuck we do that I’ve got no idea but we can’t keep going like we do.
Vote:September 14th, 2009 at 1:21 pm
I tend to agree with those who want to stop negative gearing and LAQC’s being used to offset rental losses against other taxable income.
In cases such as this the state is effectively subsidising people’s investments, why not just stop negative gearing instead of adding on a whole other layer of beauracracy and tax.
If this was done then hopefully we would see money shifting from this sector of the economy and more into productive enterprise, entrepreneurship, investing in the stock market etc.
Vote:LAQC,s and negative gearing are the main reason for the property bubble.
September 14th, 2009 at 1:32 pm
Yes Nickb, fair comments except I would question how “investing” in the stock market helps our country become more productive? I am no financial expert so correct me if I’m wrong, but Joe Public buying and selling shares in a speculative manner (which is what many do) doesn’t help anyone. The money doesn’t go to the company to invest in plant and equipment or for employing more staff to increase production does it?
As someone is sure to point out, I haven’t got a clue what I’m talking about when it comes to the stockmarket but speculation for the sake of it is what has fucked up our markets and put us in the nice position of taxpayers having to guarantee many of the people doing the speculating in the first place.
I’m anticipating Sky City coming out with a similar scheme, I can hardly wait as I am a dab hand at Blackjack so with a guarantee scheme behind me I should be unstoppable. Roll on retirement!
Vote:September 14th, 2009 at 1:40 pm
Yea thanks kaya, I’m no expert either, but I would be meaning more along the lines of a company floating some shares in an effort to expand, buying shres this way in NZ companies would seem beneficial to the economy anyway.
I just don’t like the idea of the taxpayer subsidising investment, of course to remove negative gearing we would need to cut income tax rates as well to make things more just, as a lot of people would be hit in the pocket. But this would seem to fit more into the lines of personal responsibility, and choosing investments more wisely.
Vote:September 14th, 2009 at 1:51 pm
kaya 1:10 pm,
Absolutely agree Kaya.
As a mechanical engineer, who has spent most of his carreer working within manufacturing companies, I have seen the ever decreasing number of companies that manufacture in NZ. Fisher and Paykel, and the likes. Of course many others have simply shut up shop. This is the trouble with a global free market; with no protection for local industries then the only way for these industries to be competitive is to pay workers at similar rates to offshore labour rates (ie 50c an hour type comparisons), or to simply move the company offshore to access cheap labour rates. Either way we lose both jobs and expertise within NZ. Without some form of local (and perhaps internationally agreed first world labour rates) industry protection (tariffs on imports, whatever) then I really wonder how NZ is to generate ‘export’ dollars. It can’t just come from the dairy/meat industry and tourism. Too many eggs in one basket leaves NZ far too exposed.
If first world countries try to trade blow for blow with emerging or third world economies, then our future looks bleak indeed. Maybe ‘we’ will become the ‘new’ third world economies of the future. If things continue to progress as they are at present then I really see no other alternative.
Vote:September 14th, 2009 at 1:51 pm
kaya / nickb, one of the problems I see (anecdotally to be sure) is that lion’s share of the capital to fund growth of successful kiwi companies is coming from offshore. I’d say that most of this is equity funding rather than debt funding, meaning that an increasing proportion of dividend payments are being repatriated to the country origin. I heard one commentator observe that NZ SME’s are being systematically ‘hollowed out’ by Australian private equity concerns. It would be good if this capital was available, and not too expensive, to source locally.
Vote:September 14th, 2009 at 2:04 pm
“Our financial “industries” have climbed from less than 5% of our GDP 30 – 40 years ago to up around 30% – 40% ”
Is that why they want the plebs to raise their productivity, to support the gambling overhead?
Vote:September 14th, 2009 at 2:14 pm
Cerium 2:04 pm,
The analogy between the financial “industries” and gambling is actually quite a good one – especially in light of recent events.
Vote:Some may even go as far as to say that it’s all just a house of cards (couldn’t resist).
September 14th, 2009 at 2:56 pm
Kris K
This is an intuitive and common reading of how globalisation works, but there’s something missing. It doesn’t take into account the new industries and products. The moving up the ladder. It’s an availability bias – we see the big companies/industries which have closed or moved, but we don’t notice the little new ones and the subtle shifts in employment into new fields.
E.g. A friend here in Wellington has a company (15 people) writing software to optimise software for mobile phones etc. Another works for a company which writes software for airlines to track incidents with their planes. 20-30 years ago, none of these industries or jobs existed. Both NZ-owned companies.
The real sign that globalisation works is that we’re all* getting wealthier (on average). I was discussing this recently with a circle of friends (all mid to late 30s) and without exception we’re all wealthier than our parents. Or at least a lot wealthier than they were at our age.
*Unless you’re at the bottom of the heap. In which case you and your Chinese co-workers are still getting wealthier on average, it’s just that you’re above the average and coming down and they’re below average and coming up.
We’re living out the tail of WWII and the British Empire. We had the good luck to be on the right side (kind of). Lots of countries took the wrong path last century and now we’re getting the benefit of their relative poverty.
It’s going to be bugger when they catch-up.
cheers
Malcolm
Vote:September 14th, 2009 at 4:51 pm
A Capital Gains Tax won’t deliver. Look at Oz, USA, UK. Similar basket cases to ourselves where it pays to speculate on property despite their CGT.
Vote:While there are issues on the supply side of the equation the best policy on the demand side is a tax that takes ALL of the capital gain above the CPI inflation.
No genuine property investor would be hurt by this, in fact it would enhance real returns on property investment and rebalance the economy.
Speculators would lose, which many people would see as a positve thing for the Nation. Imagine our children being able to afford their own home.
September 14th, 2009 at 5:36 pm
malcolm 2:56 pm,
I know what you’re saying Malcolm, but those small niche type companies can never offset the likes of losing Fisher and Paykel et al for example. There just aren’t enough “new fields” to offset the sort of losses we’ve incurred to date. And of course there’s nothing to stop software companies coming on line in say India or China and stealing software development opportunities in NZ by simply undercutting them.
I really think the serious shit is still to hit the fan.
Vote:And of course the ‘Reference Book’ I source some of my info from tends to support my concerns.
September 14th, 2009 at 6:26 pm
Instead of imposing a tax on the sale of rental properties, wouldn’t it be better to tax other more productive investments LESS, and therefore make them more attractive to investors?
Bill.
Vote:September 14th, 2009 at 6:43 pm
Kris K wrote:
If that were true the unemployment rate would grow and grow and we would get poorer and poorer. But that hasn’t happened.
Actually F&P are a good example. Moving from whiteware (lower-value, commoditised) into medical (higher-value, more R&D, less manufacturing).
This doom and gloom about globalisation has been around for hundreds of years. But it never quite happens. If it did we’d all still be unemployed candle-stick makers.
cheers
Malcolm
Vote:September 14th, 2009 at 7:09 pm
malcolm 6:43 pm,
I think that’s exactly what’s happening in the US – and is likely to continue. I think other western nations are likely to follow suit.
All I can say is, ‘I hope you’re right’, but I fear we’re just starting to see the chickens coming home to roost.
Vote:Time will prove which scenario plays out.
September 14th, 2009 at 7:21 pm
Well apart from Silly Borkers abuse most of the discussion is at least polite. Borker the Porker got that way from troughing at the expense of the Knuckle dragging capitalists that were unfortunate enough to employ him and his not so nice attitude which is about consistent with his IQ. Clearly his thinking power and logic are sub piggy. Frankly I’ve seen pigs with more common sense.
If his intellectual discussion is the best we can do in NZ then its certainly time to leave. Better probably that he went off and joined Helen in some backward African country where he could abuse the natives all day.
My point was that high taxes are the greatest disincentive we have and adding to those already existing will make the situation worse not better. Unless we grow our economy in all its facets we have a problem. I’ll be fine because i can retire before much longer and then why should I give a shit. Well it so happens I do and I have been dismayed at the dumbing down and gutting of NZ at the hands of both major parties. Bolger wasn’t that much better than Clark in that respect.
I know so many people who have moved across the ditch because of our penchant for catholic politics and supression of peoples freedoms and spirit and enterprise and without exception they will not come back. They just have a so much better life.
Everyone of us knows this.
Today our friendly Govt. has agreed to raise our taxes again. Under the misguided brain power of the over zealous Mr Smith and the charm of the Maori party we have had a tax hike and a tax break all in the same breath.
We are going to have taxes upped on petrol, power, and so on but the good news is that it will only be half of what Smith actually wanted.
Now can someone please explain to the rest of us how that will increase or ability to be more efficient and to sell more product at a lessor cost than our Chinese competitors, who incidentally are not going to have this impost.
The bloody socialists are balmy, totally balmy.
Moving on to LAQC’s. There is a lot of hysterical bullshit written about the use of an LAQC. First being that they are just for housing which is not so and the second being that somehow they give people a tax break which they otherwise would not get. Well again not so, if one doesn’t use and LAQC, which is just an ordinary company with the ability to have and profits or losses distributed to the shareholders, the same result can be achieved by personally owning the same business, which seems for most peoples argument to involve rental houses. So CGT will not alter LAQC’s one iota.
If as some seem to think we should limit loses or disolve the right to negative gear then we would need to look at lots of businesses that employ many of you and certainly we would have to look hard at about the top 40 public companies on the NZ share market . Now that market is crap as it is so it would probably cease to exist. (for those who doubt me go to STUFF and go back and read Bruce Shepards blogs.)
As for house prices themselves. Well those that are proposing that house prices should go down and are too high etc. think about this. Most house mortgages are held by our 6 major banks. What would be the consequences if we decided tomorrow that house prices are 50% to high. Would the banks survive? Now given that 4 of them are in the top 20 in the world that would not save them from following so many banks world wide and NZ would be in a depression from which it would never recover. The reason that most of you still have jobs and houses is that those 6 banks didn’t face that sort of catastrophe. Be grateful.
If you don’t understand why house prices are so high then try building one. Oh and that just got more expensive today because of the extra taxes our friendly Govt. have seen fit to impose upon us.
We need to face up to the fact that our Govt. spending is 15% to high. Reduce our Govt. spending and reduce our taxes and make NZ a friendly place to do business otherwise all our companies will go, more and more will be on state assistance.You ask how high can it go? Well there are still a few people working and not yet on a benefit.
Reduce our Govt. spending and our exchange rate will fall and our interest rates will fall and then you will be able to afford a house because your employer will be able to pay you more but better still you will take more pay home. And you its not what you earn that matters, its what you get to keep.
DPF Re the so called tax cuts. 4 billion over 4 million kiwis is no great shakes. $1000 each i.e. not $20 per week each. Now I would challenge you to show me how any kiwi will be able to keep their increase in expenses per week to that or lower figure since those tax cuts were made. My rates and insurance for my modest house have risen by half that let alone our food costs electricity costs, registration costs, car costs etc. Need I go on.
English today said he had a plan to get NZ out of the situation its in and reprogram NZ for exporting. Well, if he has why won’t he tell us what that plan is? Actions speak l;louder than words and so far all we have seen is words. You see at this point its all secret squirrel stuff. After nine long years there’s no plan.
Vote:September 14th, 2009 at 7:21 pm
Kris wrote
The current situation is explained by the recession. These happen every 15-20 years, without fail. This one is particularly bad but that’s just because the preceding boom was particularly good.
I’m talking about the longer term. The underlying. If you’re right then the world economy would have ground to a halt hundreds of years ago. It never does. Something new always comes along.
It already has. What did you think would happen when NZ started getting rid of tariffs etc in the 80s? Where did all those CKD car assemblers and TV makers go? I have no idea, but they did something else and NZ moved on.
cheers
Malcolm
Vote:September 14th, 2009 at 7:34 pm
Viking2 wrote
That sums it up. Where’s Don Brash? He understands economics.
Someone on Nat Radio today said that the ideal taxation system is one which taxes everything, very little and very evenly. That way the government gets the cash without distorting the economy. Not practical, but an ideal.
cheers
Malcolm
Vote:September 14th, 2009 at 9:02 pm
Malcolm – “The current situation is explained by the recession. These happen every 15-20 years, without fail.”
You say that as if that is normal and something we have to live with. I don’t understand why that should be the norm?
As I said in an earlier post, I am definitely no financial expert but I have a reasonably logical brain. I have started taking an interest in our money systems in the last couple of years, just the whole concept of money and it’s history as a medium of exchange is fascinating. I am currently a third of the way through reading “The Lost Science of Money” by Stephen A. Zarlenga. I’ve only gotten to the 15th century! (740 pages long.)
Now I am not taking the piss here, can you read this article I read on the boom/bust cycle and tell me what you think of it? Especially the way they refer to the fractional reserve banking system which does seem to allow banks to create money out of thin air and charge interest on it. The piece is talking about the US but we are just tiny part of that bigger system it seems to me so it is relevant to us.
THE BOOM BUST CYCLE:
“The boom bust cycle is totally unnecessary and is the fundamental cause of the inherent instability in our economy. It is due to too-rapid increases in the money supply due to deficit spending and then the multiplier effect of fractional reserve banking and to lenders greedy to take advantage of such a system that rewards lending with more and more interest revenue; followed by a too-rapid contraction of the money supply (such as we are experiencing now), necessary to combat the inflationary effects of the former phase, both the direct result of the Federal Reserve Act of 1913. We urgently need to reform this system that rewards greed and results in ever-increasing swings from boom-to-bust – destroying ordinary businesses and farms in the process. We need to repeal or fundamentally reform the Federal Reserve Act of 1913, and to replace it with a system that eliminates the ability of private banks to “create” and multiply money as loans.
The major banks of this country – the ones the government is lending your money to, and from which the Bailout Bill proposes to buy their bad assets (wouldn’t you too like the opportunity to sell off your bad investments to the government!), are busily swallowing up the banks in trouble in this latest bust – one deeper because of more rapid prior monetary expansion and inflation. As after all prior bust cycles, they will emerge larger and more powerful, and fewer. Wealth will be even more concentrated under their control, which they will use in the next bust to further this process, until eventually no one will own anything but the ability to borrow – to go deeper into debt to banks than their neighbors. Not savings, but credit scores will determine the average American’s ability to engage in economic activity (such as buying a home or car). No one will dare breathe a word against such power, concentrated in very few hands, and our republic will end with a whimper.”
Now that does read like a conspiracy theory and as I say, I don’t fully understand economics but it sound like a reasonable statement. The fractional reserve baking system sounds like a big Ponzi scheme and when you see a graph showing the increase in the money supply over the last 60 years or so it looks more and more like a mathematical impossibility.
I am open minded on this and trying to understand how it all works, I would appreciate hearing what you think. Cheers.
Vote:September 14th, 2009 at 11:12 pm
Hi Kaya,
I don’t have a background in economics either. I’m just an engineer who’s read a lot of Economist magazines, books and stuff on the internet. And I enjoy having wildly speculative conversations over a few beers.
My understanding of boom and bust isn’t theoretical, just intuitive. To me boom and bust is an inevitable consequence of a normal economy and human nature, all getting out of hand.
Things are going well, the banks are happy to lend, businesses are growing, jobs aplenty, people feel wealthier and secure so they spend more, borrow more etc. So you have a nice virtuous cycle of growth. After a while people take it for granted, businesses just assume their new product will be a hit, homeowners just assume their house will keep going up in value so borrow more money to renovate, or buy another house, businesses expand into new areas because money is cheap and it’s sure to be a success. Banks get freer with money as everything is even rosier. Etc etc. People see other people making a lot money by buying and renovating houses (for example), so more and more people get in on it. House prices go up even more, which entices more people to pile in. Etc etc. Businesses are doing well so share prices rise so people borrow money against their house to invest in the sure thing of the share market. Etc etc.
Just human nature. Everyone wants some of the easy money. We’re natural optimists. What can go wrong? We’ll all be millionaires.
So the economy get over-inflated. Bad investments are made. Too much money is lent to people to buy Italian coffee machines to open too many cafes, businesses get into new markets they don’t really understand. Machinery is ordered to make new products that are sure to sell well. People buy over-priced houses to renovate and sell. Banks start selling bundles of mortgages as investments to pension funds and so on.
And it’s all running on confidence. Confidence that the economy will keep growing. And why not?
Then something happens. Somewhere someone loses confidence or thinks the market has peaked or the reserve bank tries to cool things down by increasing interest rates, a big business reports a loss, a government stops spending as someone forecasts a downturn, someone sells their shares, a new product flops, someone over-extends themselves buying houses and defaults on the mortgage. Some starts it, then the sentiment flips. There’s a crash coming. I had better stop spending so much on coffee. In a matter of months everyone is doom and gloom. People stop spending, the cafe goes bust, jobs get lost, products flop, businesses fold, sharemarket falls, etc.
Boom and bust seems like a very natural thing to me. Things go well, people and businesses over-reach or invest in the wrong place going for the easy money, something happens, the music stops and you’ve got a bust.
And the bigger the boom, the bigger the bust. The longer the boom goes on, the more capital gets invested in unsustainable projects, the more unsustainable jobs get created. We can’t all be real estate agents. So there are more things to correct, more businesses need to fold, more jobs need to disappear. More peole need to go back to normal jobs and stop thinking their house will make them rich.
I’m not sure if that explains it but, that’s how I understand it. Irrational exuberance.
It’s interesting to think about what the world would be like if we didn’t have boom and bust. It would mean that businesses never invest in the wrong product, people never pile into something when they see others making a lot of money, banks never lend too much money or to the wrong people, no new technology comes along which promises to change everything and make a billionaire out of the person who buys http://www.petfood.com and captures 1% of the US petfood market. Nothing silly every happens. No one gets carried away.
It’ll never happen. There’s always new people coming, new ideas etc. The only question is when the next bust will happen.
Bust serve a useful purpose. They clear out less efficient companies, lower the price of resources and generally clear the decks for the better companies to prosper.
Re the book you’ve quoted. I don’t really know much about this I’m sorry. It’s funny though because only last week friends and I were talking and someone got onto fractional bank etc, having seen some dodgy sounding Youtube video. Anyway after half an hour we agreed that none of us really had enough background knowledge and we were all groping around talking about things we didn’t really understand. Kind of like Kiwiblog!
Having said that, the text you quoted doesn’t sound like it was written by an economist. Too polemic.
I just read the Wikipedia entry on fractional banking. It’s very clearly written if you haven’t already looked at that.
cheers
Malcolm
Vote:September 15th, 2009 at 12:10 am
No I knew it wasn’t written by an economist but it sounded plausible, cheers for the help.
Vote:September 15th, 2009 at 12:34 am
I’ve had a bit of a read through that Malcolm, it is clearly written but it is very contentious. There are mainstream economists quoted at the end who claim fractional reserve banking is a rort! If you go to the section at the end of the page entitled Criticisms of fractional reserve banking there are some eye watering observations, here is just one that sounds scarily accurate:
“Effects on economic health
According to Michael Rowbotham the expansion of money through debt creates economic bubbles. This concentrates wealth in the hands of private banks as the populace is forced into debt simply to own a home and educate their children.[15] Debt expansion leads to price appreciation of assets through speculation as the financial market becomes riskier. Edward Chancellor compares this type of market to a ponzi scheme.[36]
The bust phase of this business cycle where “debt-based” money growth slows or contracts catches newly indebted businesses and consumers who are left out of the growth cycle.”
Sounds familiar! Other commentators are of the same view. If you get a chance get your hands on a copy of “The Money Masters” DVD. It explains the whole thing in terms I understand. When I hear an economist trying to explain it away with complex arguments I think it is just obfuscation. Logically fractional reserve banking sounds like a pyramid scheme, it is a mathematical impossibility. With the mess the US is in at the moment it looks like the “nays” have it!
Vote:September 15th, 2009 at 12:59 am
Malcolm – I read the rest of it. For balance you must read the criticisms.
http://en.wikipedia.org/wiki/Criticism_of_fractional-reserve_banking
They ring scarily true.
Vote:September 15th, 2009 at 1:20 am
“# getstaffed (3678) Vote: Add rating 5 Subtract rating 1 Says:
September 14th, 2009 at 11:16 am
[DPF: In 2008 and 2009 around $3 to $4 billion a year of tax cuts were delivered. Unless you want massive tax increases in the future, then further tax cuts in the short term are unlikely until the deficit is under control]
No DPF, it’s not a binary equation. The public service in Wellington swelled by 13 hectares of cubical farmed policy analysts, advisors and useless commissions over Labour’s reign.
I want them gone, and I want to pay less tax.”
Nor is it as binary as you think. Take into account the following:
Nationals chronic understaffing of the public sector which Labour had to deal with (not saying Labour is right, instead a steady average half way between what National would like and Labour would like would probably be best).
Population growth.
Correct for the stupidity of using office space size as a measurement.
Then tell me what the correct increase in staff should have been.
Vote:September 15th, 2009 at 11:33 am
kaya wrote:
Wikipedia is by necessity objective. They don’t say things like “Full Reserve banking is a really crap old-fashioned idea which libertarians like to bang on about because they hate the idea of a government running anything, let alone a reserve bank.”
I think the point is that there doesn’t appear to be any country in the world that has a Full Reserve banking system. If I understand it correctly it means that a bank is really just a deposit holder and can facilitate lending between two parties. They can’t lend your deposit money out. As soon as they do that it’s Fraction Reserve Banking. So under a Full Reserve system, if you want to borrow money you need to find someone who has money available for the duration you want to borrow.
Sounds very medieval. Probably worked fine when we were all peasants living a subsistence life off the land. But now we need credit to make prudent investments in cars, TVs, holidays etc
The stuff you quote just sounds too polemic to be credible. E.g. “this concentrates wealth in the hands of private banks as the populace is forced into debt simply to own a home and educate their children.[15] Debt expansion leads to price appreciation of assets through speculation as the financial market becomes riskier. Edward Chancellor compares this type of market to a ponzi scheme.”
It seems that some of the criticism of Fractional Reserve banking is that the multiplier effect creates inflation. But we currently control inflation by other mechanisms and have had recessions which have not been preceded by high inflation.
cheers
Malcolm
Vote:September 15th, 2009 at 11:34 am
“Wikipedia is by necessity objective”
Yeah, right.
Vote:September 15th, 2009 at 12:02 pm
KiwiGreg – it tries/aims to be. And generally carries a warning when an article is obviously not.
Vote: