Labour proposes a cut in everyone’s after tax income

April 29th, 2014 at 2:00 pm by David Farrar

David Parker has announced:

Introduce a new tool – a variable savings rate or VSR – allowing the Bank to vary savings rates (which would be universal under ) as an alternative to raising the OCR to take the heat out of the economy. This VSR would mean Kiwis would pay money to their retirement savings instead of higher mortgage payments to overseas banks.

Something that people should be aware of is that only a relatively small proportion of households or earners have a mortgage. While a VSR will impact every single person who earns money, by lowering their take home pay to reduce inflation.

What this means is that the Reserve Bank could lift the employee contribution rate to KiwiSaver from 3% to 4.5% (it will be compulsory). If you’re earning $40,000 a year then your take home pay will drop by $600 a year. The biggest losers in this policy are likely to be low and middle income earners who don’t currently have a mortgage. They will face a reduction in their after tax income.

This doesn’t mean the policy is a bad one, just that it creates both winners and losers – and the losers are low to middle income earners without a mortgage.

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61 Responses to “Labour proposes a cut in everyone’s after tax income”

  1. geoff3012 (56 comments) says:

    Yeah….but those low income people will be exempted and us rich pricks will have to pay…..

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  2. wikiriwhis business (3,883 comments) says:

    It’s a universal tax and much the same as newly announced Oz deficit pay back tax

    What goes around comes around.

    I can see National adopting it after the election.

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  3. Barnsley Bill (982 comments) says:

    Marvelous, and this will be in addition to the sweeping tax increases that they will not mention unless they fluke a win in September.
    There will be a lot of far left fringe groups to buy off if Labour win and we all know what that means. Spend baby spend.

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  4. NK (1,128 comments) says:

    And of course if the policy failed, and interest rates rise regardless, mortgage holders will face a double-whammy of less take home pay, and greater mortgage repayment costs.

    Oh for monetary policy to be that simple.

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  5. Kimble (4,406 comments) says:

    This doesn’t mean the policy is a bad one,

    No, there are any number of other reasons why the policy is a bad one.

    Save us from these inept tinkerers.

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  6. Rightandleft (655 comments) says:

    This is the worst kind of policy Labour could put out there, doing the most harm to their supposed base, low and middle income earners. It will force people to lower their standard of living now so they can have a higher standard of living in retirement, but that is not the right choice for everyone and it should be left up to individuals to decide how to spend the money they have earned. Typical leftist view though: the government knows what’s best for you and will even direct how you spend your own money. It will also likely fuel inflation as the dollar drops, adding insult to injury.

    I had been wavering on voting for National recently but this policy pushes me firmly back into their camp.

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  7. OneTrack (2,798 comments) says:

    “And of course if the policy failed..”

    But how could it fail. Parker and Cunliffe spent “hours” on it last night at the BackBencher. Matt and Deborah helped too. And they used two beer coasters.

    Ok, maybe not hours, but a good half-hour anyway. What could go wrong?

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  8. dog_eat_dog (761 comments) says:

    You’ve missed something here DPF. The RBNZ can recommend rates be lifted. It would have to be agreed to by Cabinet. They are being given the power to write a report, nothing more than that. It’s hardly the revolutionary step people are making it out to be. Another non-event from Labour.

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  9. georgebolwing (679 comments) says:

    One big difference between the OCR mechanism and the VSR is that as a result of an increase in the VSR, all members of kiwi-saver funds will not only have a reduction in after-tax income, as DPF notes, but will also have an increase in assets, in the form of higher balances in their kiwi-saver account. This may blunt the impact of the policy, since savers could increase their borrowing, knowing that their net position would be unchanged.

    The whole point of modern macro-economics — the so-called “rational expectations model” — is that people aren’t stupid. Keynes though they were; his policies relied on people not changing their behavior in the face of shifts in monetary or fiscal policy, while the rational expectations critique was that they would.

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  10. tas (596 comments) says:

    Compared to the other policies Labour has announced, I’d say this is pretty good (although that’s not saying much).

    They have promised to preserve Reserve Bank independence and only tinker with it’s mandate. And, all else being equal, I’d prefer a compulsory savings scheme to a tax hike.

    It’s not a vote-winner, but I think it’s good work from Parker. It shows Labour aren’t completely bereft of sensible-ish economic ideas.

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  11. stephen2d (67 comments) says:

    I’d like to know how will the employees and (especially) employers work out their budgets for their business if the contribtuion rate by both of them can go up or down willy-nilly, every month potentially?

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  12. JeffW (324 comments) says:

    The real driver of inflation, of course, is government expenditure. But I doubt that Labour (or National for that matter) will propose some sort of automatic cut to government expenditures if the economy overheats.

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  13. NoCash (256 comments) says:

    Just reposting my comments on this topic from GD today :-)


    In a short term controlling the compulsory saving rate via KiwiSaver would work to a degree. However, not everyone puts all savings into KiwiSaver and any increases could be offset by people who also have savings and investments outside of KiwiSaver.

    I would hazard a guess that people who would be greatly affected by the KiwiSaver rate would be the ones already with the least discretionary spending power, hence have less influence on price inflation from a demand side perspective.

    Using interest rates is the most neutral method to encourage saving and discourage borrowing and vice versa, and in turn to control the money supply.

    Relying on KiwiSaver rate will also mean more work for accountants and would have far less effect on non-salary earners.

    ————————————

    As thedavincimode pointed out, hiking the KiwiSaver savings rate while keeping interest rates low encourages borrowing by robbing savers to subsidise the price of credits.

    Banks don’t make more profit out of a higher OCR. In fact, the opposite is the case as banks rely on the volume of loans to earn profits out of the difference between paying interest to depositors and the interest charged on loans. The OCR affects mainly the short-term rates of both deposits and loans especially floating rate loans. It has very little impact on mid to long term fixed rate loans, as they’re mainly funded from overseas.

    If you want the banks to make less money, then either borrow less or repay your loan faster.

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  14. Chuck Bird (4,756 comments) says:

    I heard Parker on the radio this morning. He mentioned as part of their policy was to have the LVR only to apply to areas like Auckland, Christchurch and Queenstown. That would help first home buyers who were prepared to move out of those high priced area and also help regions like Waikato. Even a stopped clock is right twice a day so I guess they occasionally come up with a good idea.

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  15. srylands (392 comments) says:

    Interesting reaction at The Standard.

    There are two camps:

    1. They love the policy – they think it will hit the rich (go figure)

    2. They hate the policy – they have figured out it will take money out of the pockets of the poor. (This camp are advocating a monetary policy of “print money” – yes literally.)

    I posted this response to a member of Camp 1.

    “Chill out Jimbo this monetary policy is heading in the correct direction and is designed to correct 40 years of the pendulum swinging to far in favour of the wealthy.”

    srylands replied:

    I don’t think so.

    The policy has merit and I would like to see it implemented. But it has some disadvantages.

    Firstly, it favours wealthy people with mortgages. I would MUCH rather increase my savings via Kiwisaver than pay more interest on my mortgage.

    .. BUT if I was forced to increase my compulsory savings I would probably reduce my voluntary savings. This would negate the effects of the policy.

    Thirdly, if you do succeed in forcing people to save more, their net worth rises. This enables them (other things being equal) to borrow more. This would also negate the effect of the policy.

    Fourthly, the policy is regressive – it reduces the income of low income earners who do not have mortgages (remember only a relatively small proportion of the population has mortgages)

    Fifthly, Labour shockingly glosses over the impact of lowering the dollar (if this is what happens) on cost of living, especially for low income earners who spend a large proportion of their income – if you are a low to middle income renter with a car to run in South Auckland this policy will hit you hard. Lowering the dollar by 15% will put up the price of petrol by about 15 cents per litre (give or take).

    So it does have merit, but it is unlikely to replace the OCR as the main lever, and it will be welcomed by high income earners with a mortgage. If Labour’s core constituency is capable of understanding the likely effects of the policy, I think they would be concerned.

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  16. Jaffa (83 comments) says:

    Looks like another winner,………..for National!

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  17. thedavincimode (6,589 comments) says:

    [Parker]mentioned as part of their policy was to have the LVR only to apply to areas like Auckland, Christchurch and Queenstown. That would help first home buyers who were prepared to move out of those high priced area and also help regions like Waikato.

    OK, I think I’m starting to get it. In order to get your interest rate subsidy, you would need to move to Auckland, Christchurch, Queenstown – which presumably means that this will create less housing demand and reduce house prices in those regions. Hmm. That’s pretty lateral thinking – I think.

    Chuck, was there any mention of providing family support incentives or otherwise compensating for income reductions for those who sell up in Auckland and Christchurch to move to the Waikato if they can’t either get work there or the work pays less. Surely these people deserve some financial help for making such a noble sacrifice in the national interest.

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  18. Dave_1924 (98 comments) says:

    OCR is a good tool to target an overheating ecomony at a Macro level. Hits all borrows by raising the floor rate for interest rates.

    This VSR as a tool to dampen an economy is just a Trojan horse for the real policy – compulsory Kiwisaver at a high rate – I guess tending to the 8-10% of earnings level

    if Labour want to target markets or sectors that they think are out of kilter, overheating – why not targeted rate premiums on those areas. The Banks could relatively easily deploy that on say the Auckland Housing market..

    Not an economist so doubtless they are holes in that idea, but VSR seems like a poorly designed weapon that would reduce the tax home pay of the very people Labour are suppose to be representing the already hard pressed low-middle income families of NZ…

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  19. s.russell (1,580 comments) says:

    I have lost count of the number of idiotic policy proposals Labour has made. But this is not one of them.

    Using the VSR instead of the OCR spreads the burden of tightening money supply much wider because more people are income earners than floating mortgage holders. It might be more effective with a smaller rate change than the OCR would be.

    Also, hiking the OCR transfers money between people: it takes extra money from borrowers and gives it to savers (mostly overseas). Hiking the VSR does not take money from you, rather it simply delays the spending of it.

    Remember, this is part of a policy package then includes making KiwiSaver compulsory (else it would be far less effective). Compulsion has some positives, but also a lot of negatives and I do not endorse it. But if you DO have compulsion, a variable Saving Rate makes a lot of sense, and is worth serious consideration.

    Note also: This is not a completely off the wall idea. Singapore has a VSR too.

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  20. ROJ (100 comments) says:

    Where’s Winnie on this?

    As a policy it hits his constituency big time – keeping down interest rates on savings. About the only way it doesn’t hit the elderly is that they don’t have Kiwisaver – even then they won’t have the supposedly enlarged savings

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  21. RightNow (6,838 comments) says:

    Labour to make Kiwisaver Compulsory

    That’s what the headlines should be. Dave_1924 is right, this is a Trojan horse policy to introduce compulsory KS.

    I suspect a few key Labour staffers have a lot of money wagered on Labour losing this election, and are making sure of their investments.

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  22. Huevon (211 comments) says:

    From an economics point of view, coming from Labour this policy isn’t completely retarded. We have a current account deficit because we spend more than we earn as a nation. However, is the solution to compel people – even people who can’t afford it – to save? How about reducing govt spending and giving us tax cuts. That would give us the opportunity to save more and respect our personal liberty.

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  23. Alan (1,077 comments) says:

    What I don’t understand is how this reduces inflation in the longer term.

    Surely all this does is boost incomes of retired people who will spend it, thus increasing prices.

    The money isn’t destroyed, it’s simply locked away till a later date when it’s released back into the economy to be spent.

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  24. unaha-closp (1,137 comments) says:

    s.russell, 2.58pm:

    Also, hiking the OCR transfers money between people: it takes extra money from borrowers and gives it to savers (mostly overseas). Hiking the VSR does not take money from you, rather it simply delays the spending of it.

    Hiking the VSR takes money from savers (increasingly NZers) and gives it to borrowers.

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  25. Grendel (972 comments) says:

    This pisses me off.

    As an adviser with hundreds of clients in kiwisaver, I know the balancing act many of my clients go through to manage thier budget so that they can afford kiwisaver.

    Many of my clients are distrustful of govt intervention and investing in general and to have govt be able to alter their contributions so ofte is not going to help. Previous increases are announced at thr annual budget and have plenty of lead in time for me to explain to my clients and give them time to adjust thier budget.

    And will it just be kiwisaver? Wgat about alll the exempt or qualifiying schemes out there? Like the ssrss and other work supers will labour mess with them as well?

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  26. WineOh (601 comments) says:

    It penalises oldies too- a significant part of the income for older folk who have set aside cash for their retirement is in low-risk, low-interest rate deposits. If you force a low-interest rate environment they don’t see any benefit of low mortgage rates but get hit in the pocket for their incomes.

    Why don’t they admit that interest rate movements cut both ways?

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  27. tknorriss (327 comments) says:

    So could someone tell me:

    If the RB can require money is put into peoples Kiwi Saver accounts to suppress the economy, does that mean they can also steal money out of people’s Kiwi Saver accounts when they want to stimulate the economy?

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  28. Manolo (13,514 comments) says:

    Parker, Parker, Parker, you are a colossal moron!

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  29. Colville (2,170 comments) says:

    If you are not a salary or wage earner how will they get you to do Kiwisaver?

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  30. Chuck Bird (4,756 comments) says:

    @thedavincimode

    I know a lot of people who moved from Auckland to the Waikato. The lower wages in many cases are more than made up by the lower cost of housing. There is not much unemployment here.

    People would move for their own self interest.

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  31. Dave_1924 (98 comments) says:

    @ S.russell: “Hiking the VSR does not take money from you, rather it simply delays the spending of it.” Well no it does take money away from you – it locks it away for a very long time for a 30 year old…

    I understand what you are saying with that statement but if i have earnt the coin i will spend it or save it how I wish…. I don’t need more government in my life.

    I have a high-ish disposable income so an increase in Kiwisaver rates wouldn’t hurt that much. It defers my spending and increases my wealth in the long term i suppose and I could cope with a small reduction in spending wedge

    But for John and Aroha, or Semisi and Janet, or Sina and Jack, or any other NZ family with kids just getting by and contributing the minimum to Kiwisaver your statement would be greeted with a hearty “X%^&*&**& how we going to buy shoes for the kids??” It takes away money they need NOW to run their households.

    VSR sounds ok – but in reality this is Labour forcing savings, which I am against on balance.

    And then enabling Labour to justified INCREASING things like WFF to help out the less well off a compulsory Kiwisaver and hikes in the VSR associated with it, would hurt.

    And how will they pay for that? I guess higher taxes on those “rich pricks” like me – so I get my disposable income hit twice…

    yeah, nah

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  32. dirtbag (22 comments) says:

    What’s to stop me simply taking a kiwi saver “holiday” every time they up my contribution? It’s well within the the rules. In fact I’ve done it several times when I’ve over extended with the bookies, hookers and various other fun activities!

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  33. unaha-closp (1,137 comments) says:

    Hiking the VSR does not take money from you, rather it simply delays the spending of it.

    Actually since they’d use a hike in VSR to defer a hike in OCR, the interest rate paid on my savings would decrease. So in fact a hike in the VSR would take money from me.

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  34. GMDI (71 comments) says:

    Can someone please explain to me the benefit to the individual savers of being forced to save more at an interest rate forced lower by the government to keep interest rates down for those who borrow heaps to buy an overpriced house? Isn’t that doubly penalising everyone? Forcing money into saving at rubbish interest rates that they could potentially be investing for better returns.

    When interest rates are high, borrowing goes down and saving up. When interest rates are low the opposite happens.

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  35. Albert_Ross (270 comments) says:

    dirtbag at 3:48, nothing. They’d have to change the rules so you couldn’t take a holiday. They need to be upfront about that.

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  36. Pete George (23,299 comments) says:

    “What’s to stop me simply taking a kiwi saver “holiday” every time they up my contribution?”

    The Government perhaps.

    @cespiner

    For starters, all opt-out clauses and payments holidays in KS would have to be removed in order for it to be effective.

    With interest rates forced low there would be extra incentive to opt out.

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  37. NoCash (256 comments) says:

    Reading the comments on Stuff
    http://www.stuff.co.nz/business/9988005/Labour-targets-KiwiSaver-with-variable-contributions

    It seems most people think that the higher the OCR the more money the banks make. How have we become so illiterate in finance and economics…

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  38. Grendel (972 comments) says:

    Are they going to force those who dont pay paye (so dont have co trivutions deducted as a percentage) to change manual contributions?

    I am paid on drawings so contribute via dd. Will labour force the bank to change my dd? What aboit kids and non earners who do not currently contribute?

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  39. ROJ (100 comments) says:

    Strikes me the only way to drive down the dollar is to make the economy tank. Pretty much what every other country is experiencing the last few years, except China, NZ and Aus.

    Maybe Labour with the Green influence is going to do that anyway with most of their other policies?

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  40. slijmbal (1,223 comments) says:

    Copied from what I wrote on GD about this

    If, like me, you believe that the major driver for house price inflation is the massive increase in available credit then it will have minimal effect as the underlying driver will outweigh anything other than a major decrease in available funds, which would require a huge increase in KiwiSaver contributions.

    If it then meant interest rates stayed lower then it is quite likely to exacerbate the situation further and actually cause further price house inflation.

    Our $ is high because currency movements tend to overreact, most of the countries who traditionally have stronger currencies are printing money like there’s no tomorrow and as a ‘commodities based’ currency we’re seen as a safer bet. We’ve had very high interest rates in the past with a weak currency. The link between currency value and interest rates is much less strong for NZ than this policy presumes. Short of copying the ludicrous monetary policies of the like of the US we’re going to have a stronger currency.

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  41. Paulus (2,558 comments) says:

    Winston Peters has just said that he entirely supports Parker’s new policy.

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  42. unaha-closp (1,137 comments) says:

    The VSR will decrease what banks pay out on savings, decrease the cost of borrowing for banks and force NZers to put more money in banks. How much did the banking lobby donate to Labour this year?

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  43. Weihana (4,496 comments) says:

    stephen2d (51 comments) says:
    April 29th, 2014 at 2:33 pm

    I’d like to know how will the employees and (especially) employers work out their budgets for their business if the contribtuion rate by both of them can go up or down willy-nilly, every month potentially?

    And I would like to know how a business can budget if customers can just willy nilly choose to take their business elsewhere. It’s almost like the future isn’t a foregone conclusion! :)

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  44. OneTrack (2,798 comments) says:

    Alan – “The money isn’t destroyed, it’s simply locked away till a later date when it’s released back into the economy to be spent.”

    What about when one of Cunliffes coalition partners (not sure which one ….) confiscates (cant think of a better word) KiwiSaver funds to invest in “assets” (that he chooses) and those assets crash (Solid Energy is still listed by the left as an asset that cannot be sold).

    In that case, the money would be destroyed and you would have zero comeback.

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  45. mara (752 comments) says:

    Somehow I cannot see this policy bringing the peasants out on the streets chanting “WE LOVE LABOUR.” If anything, it gives the Nats every opportunity to highlight its disadvantages to the non-mortgaged, lower income voter.

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  46. Sir Cullen's Sidekick (833 comments) says:

    May be Parker was referring to his own big tool…..just sayin…

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  47. jp_1983 (200 comments) says:

    Does Labour remember this?

    A referendum that happened on the 5 September 1997 Compulsory Retirement Savings Scheme 91.8% against

    Now for all those who say that Asset Sales etc…
    The referendum happened after the fact and had a far less voter turnout…..

    That turnout for that referendum was 80.3%

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  48. duggledog (1,431 comments) says:

    I don’t know why anyone would be in Kiwisaver until they have paid off at least the vast majority of their mortgage.

    You’ll never get a better return from a Kiwisaver investment than whatever the interest rate on a mortgage is, ever.

    The f***ing thieving government take too much of my money anyway without compulsorily taking any more for them to f*** up.

    I reckon if Labour Greens get in I may as well just hand over everything I earn. Or stop earning and go on whatever benefit I can get because it’ll be up for all & sundry. Or leave! (I won’t leave).

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  49. Fentex (909 comments) says:

    This doesn’t mean the policy is a bad one, just that it creates both winners and losers – and the losers are low to middle income earners without a mortgage.

    At least it’s an interesting idea, an actual policy to consider even if on balance it doesn’t seem a good idea.

    The ambition, to improve the monetary policy that is currently a blunt instrument applied to inflation that has it’s own problems is a good one, and the variable saving rate an innovative concept.

    If it worked then the loss in spendable income committed to savings would be preferable to loss of spending power to inflation, but as some observed if it doesn’t work it adds to the trials of those with low incomes – though it need be remembered the loss is still contributing to savings.

    The policies quality really revolves on whether it can succeed at it’s ambition to suppress and compensate for increased inflation with monetary policy that considers avoiding unemployment an objective. Can it do that, is the question?

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  50. Adolf Fiinkensein (2,830 comments) says:

    Dear God, please let parliament be sitting tomorrow.

    First Dorothy Dixer

    To the Finance Minister:-

    “Has he seen any reports of the Labour Party’s big tool?”

    “Mr Speaker, I can advise the Labour’s Party big tool he has been widely reported. In one report I saw the day before yesterday he was reported telling fiscal porkies no less than seven times…………….”

    This is all just too much. The ribs are aching.

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  51. beautox (434 comments) says:

    “Compared to the other policies Labour has announced, I’d say this is pretty good”

    In the same way that dog shit is better to eat than cyanide.

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  52. Sir Cullen's Sidekick (833 comments) says:

    I like the very idea that those who don’t own a house will also be paying more into their KiwiSaver scheme…well done Labour…

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  53. Couchpotatoe (28 comments) says:

    It is a great option. Increased savings, financial discipline and lower interest rates. Fuck yeah.

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  54. CharlieBrown (921 comments) says:

    Labour are guilty of ignoring the age old principal of Occam’s razor. They have came up with an even more complex system to solve a simple problem – some would even sensibly argue that there is no problem. Labour being the party that believes in a “fairer” tax system will no doubt try to add exceptions and rules to make the burden on lower income people less, which will no doubt invoke the rule of unintended consequences, like the last time they were in power and increased the incentive to borrow more by increasing income tax rates and make student loans free.

    Why don’t either of the major parties just realize that a simpler tax system will ultimately make it easier and fairer on nearly everyone and will result in a much more efficient and productive economy.

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  55. Southern Raider (1,733 comments) says:

    Parker mentioned a figure of 9% as a future target savings rate.

    I don’t think this would impact low income earners at all. Labour just needs to convince their Polynesian voting base in South Auckland to stop giving 10% to the church each week and everything nets out

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  56. CharlieBrown (921 comments) says:

    Southern – you will never see Polynesians do that, most people see their church tithes and donations being spent better on causes they believe in than going to the tax man’s pot.

    And hell – 9% would be a lot to me, let alone someone on a low income. And if Labour and the greens got in and were fiscally irresponsible who is to say that 9% figure won’t go up to 19%? It will definitely hurt low income people more.

    Interest rates are at the lowest rate in living memory, never has it been easier for people with equity to borrow cheap money, and never has the returns on bank term deposits been so low. Just because the rest of the world have printed money doesn’t mean we have to. We are doing something better than them which is evidenced by the growth of the economy whilst the rest of the world is stagnant.

    What labour are proposing is to decrease the value of the dollar by screwing the NZ economy up to make the NZD less desirable. I would almost guarantee you that on the day a labour\green government got to power the exchange rate would go down because investors will be scared.

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  57. thedavincimode (6,589 comments) says:

    I know a lot of people who moved from Auckland to the Waikato. The lower wages in many cases are more than made up by the lower cost of housing. There is not much unemployment here.

    People would move for their own self interest.

    Goodness me Chuck. Market forces? Well I never. How does that work?

    Anyway, back to the point. liebore’s policy – are you buying it then?

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  58. jcuk (637 comments) says:

    If KS contributions were suddenly lifted to 8% or 9 % it would be serious … BUT if as when over the years I contributed to Nat Prov the rate went up by 1% at a time, usually when there was a Cost of Living increase it is hardly noticed. But of course these days there are not nation-wide COL increases …..f***** we are.

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  59. Kimble (4,406 comments) says:

    Scene from Labour’s policy meeting:

    “Dammit, what can we do to help reduce interest rates?”

    “Well, we could help reduce inflationary pressures by reducing government expenditure.”

    “…”

    “Psych!”

    “BAHAHAAAAA!”

    “But seriously, I have no idea about that. Lets just keep doing what we’re doing, pre-empt Russell’s economic policies, and if anything goes wrong, blame it all on the rich.”

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  60. Chuck Bird (4,756 comments) says:

    “Anyway, back to the point. liebore’s policy – are you buying it then?”

    In regard a variable LVR for the regions I do.

    The rest is mad. Labour has talked in the past of super being decided on cross party support. They are now making it a election issue.

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  61. DJP6-25 (1,308 comments) says:

    NoCash 4.26 pm. Eighty years of socialisim and relativisim is how.

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