Fallow on Immigration

June 29th, 2015 at 2:00 pm by David Farrar

Brian Fallow writes in the NZ Herald:

The net inflow of migrants hit a new high in the year ended May, eliciting ritual denunciation from Winston Peters.

“The Government is condemning more Kiwis to the dole queue and to a life in rental houses,” he said. “Soon there will be anger as so many miss out on the Kiwi dream of home ownership, especially in Auckland, where over half the record net 57,800 migrants are settling.”

The first point to make in response to this is that the statisticians’ definition of permanent and long-term migrants includes Kiwis.

Indeed. In the last 12 months 29,510 New Zealanders “migrated” home.

In the latest year there was a net loss of 5800 New Zealand citizens, compared with an average net loss of 26,600 a year over the previous 10 years, and 13,200 in the year to May 2014. Harder times across the Tasman explain a lot of that.

In 2012, the net outflow of New Zealanders was 38,910, so it is now one sixth of that.

So who are the immigrants Peters is keen to scapegoat?

A breakdown of visa types gives us a clue. Of the 80,000 visas issued in the past year, 35,100 – 44 per cent – were work visas. That is 13,800, or 65 per cent, more than four years ago, before the need to rebuild our second-largest city boosted demand for people in the building trades. By all accounts Auckland could do with some of them too.

There are definite areas where not enough Kiwis are available for work.

Student visas are the second-largest category, representing 32 per cent of all visas issued in the past year. The total of 25,600 issued in the past year is up from 17,600 in the previous year and 9500 10 years ago.

“Indian student arrivals of 12,100 are double the previous year and Chinese student arrivals were up 22 per cent to over 7000 in the past year,” Peters said.

Whatever his source for these numbers was, it was not Statistics NZ, which put the number of student visas issued to Indians at 10,100 and to Chinese at 4800.

“Young Kiwi workers are also missing out on low-skilled jobs as foreign students, most of whom want permanent residence, take over in supermarkets, service stations and hotels,” Peters said. “Why should foreign students be allowed to work at all? Our supposed export education industry is supposed to be bringing in foreign exchange.”

Well, it is. A report by Infometrics on the economic impact of the international education industry estimates that gross spending, including tuition fees, rose 10.4 per cent last year to $2.75 billion, the majority of it in Auckland.

“About 14,500 full-time-equivalent jobs are directly attributable to international education delivered within New Zealand, with another 15,700 jobs being indirectly supported through the industry’s upstream and downstream multiplier effects,” it said.

We make a substantial profit from offering international education. A great income earner.

Fallow on tax

February 28th, 2014 at 1:00 pm by David Farrar

Brian Fallow writes in NZ Herald:

Large chunks of the tax base resemble icebergs, drifting north into the warm waters of the global and digital economy.

Policymakers have a term for this: “base erosion and profit shifting” – BEPS for short.

They are grappling with the changing nature of international commerce, where the eternal desire to minimise the tax you pay is assisted by the rapid growth of e-commerce, and by the opportunities presented by countries’ different tax laws and the ability of multinational firms to locate debt funding and intellectual property wherever will maximise the bottom line.

As part of that effort, finance ministers from 20 major economies, meeting in Sydney last Sunday, agreed to adopt a regime for automatic information sharing among tax authorities.

The Organisation for Economic Co-operation and Development (OECD) calls it the Common Reporting and Due Diligence Standard. You can translate that as: “We are going to make your banks tell on you.”

The erosion of the tax base globally is a problem, but so is erosion at home.

Let me give you an example of how you can erode the tax base locally, and legally.

  1. Set up an incorporated society. It can be any sort of incorporated society.
  2. The society doesn’t have to pay income tax but it does have to deduct tax from its employees and pay GST.
  3. Now if you don’t pay that tax, then the IRD can come and liquidate you, which means the society gets wound up.
  4. So set up a limited liability company, and have some of your transactions go through that company instead of the society. You can have the lease assigned to it, and charge management fees. You can also charge your salary through it also, as that then allows you to deduct stuff off tax.
  5. Have the limited liability company spend all its money on behalf of the society, and not pay any tax to the IRD. This means you have more money to spend.
  6. IRD liquidates the company, leaving the society untouched and the IRD ends up out of pocket by say $150,000 – while the society carries on unscathed.

This is all totally legal, using a crafty mixture of corporate tax structures and non payments.

I look forward to political parties putting forward policies on how to stop the erosion of the tax base in this way.

Fallow on inflation

February 3rd, 2014 at 3:00 pm by David Farrar

Brian Fallow, NZ Herald Economics Editor, writes:

So we have David Cunliffe in his state of the nation speech on Monday deploring that people are struggling with a rising cost of living while their wages stay still and then talking about “reforming” the Reserve Bank Act to assist exporters.

By reform, they mean to have more inflation – which of course makes the cost of living increase!

It is one of the ironies of our political discourse that the parties of the left are the most casual about inflation when it is the poor and economically powerless who suffer most when inflation gets out of hand and as it is brought under control again. Perhaps they are too young to remember. 

If more inflation is the answer, the question is wrong.

Fallow says rising inequality largely a myth

July 19th, 2013 at 9:00 am by David Farrar

Herald Economics Editor Brian Fallow writes:

The idea that New Zealand has become one of the most unequal societies in the developed world is just not supported by the data. It is a belief that is in some danger of hardening into received wisdom.

The data being:

The Ministry of Social Development has just updated its comprehensive (200 pages) and careful report, Household Incomes in New Zealand: Trends in Indicators of Inequality and Hardship, to include the results of Statistics New Zealand’s 2011/12 household economic survey (HES).

While the report debunks the notion that New Zealand is conspicuous among developed countries for inequality, it is far from providing a defence of the status quo or grounds for complacency.

In terms of the top vs the bottom 10%:

Another way of measuring income inequality is to look at the income of the top decile or 10 per cent of households (when ranked by income) and compare it with the bottom decile’s.

The average over the past four household economic surveys is that the top decile have received 8.5 times the income of the bottom one, after tax and transfers.

That puts us in the middle of the OECD rankings, and lower than Australia and Canada (8.9 times), Britain (10 times) and the United States (16 times).



Between the 2008/09 HES and the 2011/12 survey market income for New Zealand households fell 2.6 per cent in real terms, similar to the declines seen in the US, Britain and Australia.

But the net change in median disposable income (after tax and transfers) was a rise of 0.5 per cent over that three-year period as tax cuts and increased New Zealand superannuation compensated for the decline in market income.

Called taking the edges off the recession.

“For many OECD countries, lower income households tended to lose more, or gain less, than high income families,” the report says.

For New Zealand, however, there was a small gain for bottom-decile households of 1 to 3 per cent and a net fall, of around 8 per cent, for the top decile.

Please remember this data when people go on about how the rich have done best under National. Simply not true.

Fallow on monetary policy

January 31st, 2013 at 4:00 pm by David Farrar

Brian Fallow writes in the NZ Herald:

Listening to a procession of manufacturers say their piece to the parliamentary inquiry into manufacturing this week, two things were clear.

One is that the high dollar is causing real and lasting damage to their sector.

The other is that the idea that an overvalued exchange rate is the fault of the monetary policy framework has hardened into dogma.

Cast off outdated neoliberal doctrine. Change the Reserve Bank’s mandate. Then New Zealand manufacturers will have a fighting chance. That was the message.

It echoes statements like this from Labour leader David Shearer last Sunday: “We’ll make changes to monetary policy so that our job-creating businesses aren’t undermined by our exchange rate.”

It is glib. It glosses over difficult questions about what changes they have in mind, and what the costs, risks, trade-offs and spillover effects would be

All correct.

And it misdiagnoses the problem, which is that the rather enfeebled state of much of the other 99.8 per cent of the world economy has led to policies abroad which are unhelpful from New Zealand’s point of view and which we can only hope succeed.

This is in fact the major point.  The US and Europe are poked (for now) and their dollars are weaker. Politicians preaching how we can rectify this are dreaming. If we want proof that this is about the weakness of the US$ and the Euro, not a strong NZ$ – look at this graph from ANZ:


As you can see we are in fact historically quite low against the Australian dollar.

If the object of the exercise is to ensure that in the future the Reserve Bank runs monetary policy looser than it otherwise would, consider this: higher inflation would lower real wages, and real incomes more broadly, in the hope of protecting jobs in the favoured sector. Should the union movement support that?

Lower interest rates would increase the risk of a housing bubble that, this time, bursts messily all over us. Ask the Irish tradesmen flocking to Christchurch how much fun that is.

If it succeeds in making New Zealand exports cheaper to foreign buyers – a pretty big if – it will also make New Zealand assets cheaper to foreign buyers. That should give economic nationalists in New Zealand First and the Greens pause.

So nice to have someone print this out.


Fallow on paying for the quake

March 4th, 2011 at 10:00 am by David Farrar

Brian Fallow writes:

Key is right to be dismissive of the idea of an ad hoc tax akin to the Australian flood levy.

If levied on the same basis – half a cent in the dollar of income for those earning between $50,000 and $100,000 or 1c for those earning above $100,000 – a back-of-the-envelope calculation indicates it would bring in a bit less than $500 million. About half would come from those earning between $50,000 and $100,000.

There is an opportunity cost to such an impost. It is money they cannot spend on consumption or investment elsewhere in the economy.

The economy started this year without a whole lot of momentum.

Export prices are at all-time highs, true, but many farmers are using the money to pay down debt and the flipside of the commodity boom is more and more of people’s incomes is soaked up by such necessities as food and fuel.

For firms chasing the consumer’s discretionary dollar an ad hoc levy is the last thing they need.

I totally agree. Putting taxes up when you are on the verge of a recession is daft.

As for calls for cuts to programmes like Working for Families or student loans, the case for such policy changes is no better or worse than it was before the earthquake.

They should be considered on their long-term merits. They should not be trundled through under cover of an all-purpose excuse, the cost of Canterbury’s misfortune.

I also agree. An inctreased abatement rate for WFF should occur because National doesn’t believe in welfare to relatively wealthy families, not because of the earthquake. The earthquake may prove to be a catalyst for considering the issue, but any change should be subject to an electoral mandate in November.

The response of both the previous Government and the present one to the global financial crisis and accompanying recession was to loosen fiscal policy.

They cut taxes and they let the automatic stabilisers work. As revenue took a hit and more people landed in the social safety net, operating surpluses turned to deficits and public debt rose (from a very low base).

They let the Crown’s balance sheet take the strain. It was the appropriate policy then and it is again.

This is a one off shock. The balance sheet is the appropriate place to take the strain, so long as the level of debt is not so great that the interest on the debt leads to structural deficits – it there is still a credible path back into surplus.

Fallow on Tax

April 5th, 2010 at 8:58 am by David Farrar

Brian Fallow writes:

“We need to stop the tax system creating the wrong incentives,” said Treasury Secretary John Whitehead in a speech last week.

Citing Inland Revenue data, Whitehead said 1996 was the last year that more people made profits than losses from rental properties, yet the number of such properties had increased significantly since then.

I wonder what the total amount of tax losses claimed in those 15 years has been.

“Now why would increasing numbers of people – rational New Zealanders – invest billions of dollars collectively in an area that is unprofitable?” he said.

“It’s hard to believe it’s not because of the tax advantages. People can claim depreciation against their investment properties – even when most real estate was significantly increasing in value. They can deduct tax losses on property against their other income.

“And if they sell a rental property the capital gain they make is usually untaxed.”

The depreciation is reversed at sale, but you may have had interest free use of that money for a decade or more.

A widely quoted passage of the Tax Working Group’s report in January said that in 2008 the $200 billion invested in rental housing yielded net rental losses totalling $500 million.

That meant that collectively landlords not only paid no tax on their rental income, they were able to escape paying around $150 millon of tax on other sources of income they had.

However, Michael Littlewood, of Auckland University’s Retirement Policy and Research Centre, has cast a lot of doubt on the robustness of the $200 billion figure. …

But if he is right to conclude that the true combined value of residential investment properties could well be less than half the $200 billion stated, how much ice is that likely to cut with policymakers?

I doubt it will change decisions, but it will change estimates of how much revenue the Crown may gain from any changes.

It depends what they are most worried about. If their concern is that New Zealanders are over-invested in property and that that is for tax reasons rather than, say, a shortage of other investment opportunities, then Littlewood’s results are highly relevant.

But if the concern is purely fiscal – how to fund the gap between the $2 billion and change that a GST increase would yield and the cost of comprehensive income tax cuts and compensating adjustments to superannuation, benefits and family tax credits – then the focus would be not on how much is invested in rental properties but on the aggregate $500 million of net tax losses.

A bit of both I’d say, with priority on the latter.

The IRD data charted by the tax working group shows a clear downward trend in net rental income for the past decade, and it was 10 years ago that the Labour Government raised the top marginal tax rate from 33 to 39 per cent, increasing the incentive to shelter income through highly geared property investment.

I sometimes wonder if anyone actually pays the (now) 38% tax rate? Much better to reverse Cullen’s envy tax, and clamp down on loopholes.

Tax pros and cons

January 23rd, 2010 at 11:00 am by David Farrar

Brian Fallow has a nice summary of the pros and cons of various tax options. They are:


Pro: GST is a robust and efficient tax, and shifting tax from incomes to spending might improve saving.

Con: It is very hard to prevent a rise in GST hitting those on lower incomes harder.


Pro: Potentially very lucrative, allowing more tax relief elsewhere.

Con: Lots of practical difficulties and the IRD, which would have to administer it, hates the idea.


Pro: Broad base, low rate and could bring in billions.

Con: Liable to be undermined by exemptions as in the past. Hard on the retired, Maori trusts and farmers.


Pro: Targeted at a sector that seems undertaxed now.

Con: Because it is based on equity, it could perversely encourage more gearing in the rental property sector. Could flow through to tenants.


Pro: Could be done quickly.

Con: It is not easy to distinguish buildings which do depreciate from those which don’t.

I hope the Government will act on at least a couple of these, using the revenue to reduce income taxes. What we tax does matter – not just how much we tax. The best system is broad based and low rate.

John Roughan looks at the current tax system:

Read a few lines further into the Tax Working Group’s report and the picture gets worse. Once you distribute family tax credits, welfare benefits and national superannuation those top 10 per cent of taxpayers have provided 76 per cent of what is left for general public services. Seventy six per cent.

Yep 10% of taxpayers provide 76%. And what happens if more and ore of that 10% go offshore?

The Working for Families refund alone results in 40 per cent of households effectively paying no income tax. It would be cheaper not to tax their wages at all.

It would be. The best system would be that no one pays any tax until they are earning what one regards as the minimum amount needed for a family of their size. Churning money from tax to welfare to inefficient.

Labour should read Fallow

December 16th, 2009 at 1:05 pm by David Farrar

The moment there is a small upturn in the economy, Labour is already pushing for a splurge o Government spending. This is reckless, and fiscal restraint is needed for not just a year or two, but probably a decade. Brian Fallow explains:

The net effect of a reduced tax take and much higher public spending will have given a boost roughly equivalent to 6 per cent of gross domestic product over the two years to June next year.

That was entirely appropriate.

But the recession’s legacy of a shrunken tax base, a string of deficits and mounting debt servicing costs will cast a dark and cold shadow over next year’s Budget. …

It will be 2016, if we are lucky, before surpluses return, and every year in the red adds to the public debt burden.

It is a recipe for interest costs to eat up more and more of the future tax dollar, well before the echo of the baby boom sends health and superannuation costs through the roof. It is not sustainable.

Spending needs to be restrained, and to shrink as a proportion of the economy.

Fran O’Sullivan writes:

It doesn’t want to “rip the guts” out of the Government’s expenditure line. But if the Government holds new Budget spending to a constant $1.1 billion increase each year, over time this will have the effect of pulling Government spending back down towards 30 per cent of GDP and, in Key’s words, “force change through the system”.

This is around half the new spending that Labour had, and keeping spending increases to this level for more than a couple of years will be pretty bloody difficult. But we do need to get Government spending down to under 30% of GDP.

And Colin Espiner reports:

The Government remained committed to a new spending limit of $1.1b and was investigating a total spending cap, English said.

Total Crown spending is expected to reach $65b this year and rise by about $3b each year.

“Demand-driven” expenditure such as health and education, benefits, superannuation and KiwiSaver payments are not currently included in the Government’s sinking lid on public spending.

Under a total cap, any increases in expenditure would have to be offset by cuts in other areas or approved by the Cabinet. English said he was looking at “better and more coherent methods of knowing where spending is occurring and what the alternatives are”.

The Netherlands and Sweden had spending caps, he said. “We’ll be talking more about that in Budget 2010.”

I think the Fiscal Responsibility Act should be amended so that the Government has to set a target (like it does for CPI for the Reserve Bank) for spending as a percentage of GDP and for what level of surplus is desired. This would require political parties to be more transparent about what they propose. If Labour wants to spend an extra $6 billion a year, then they’ll have to be open about it, and let people see the consequences.

Fallow on Tax

December 3rd, 2009 at 6:56 am by David Farrar

Brian Fallow writes:

There was a whiff of incrementalism, even complacency, about Finance Minister Bill English’s comments to the tax working group’s conference on Tuesday. …

Had he been able to stay for the rest of the conference and listen to the presentation by some of the working group’s members he would have got a clear message that the tax system has deteriorated beyond the point where tinkering and tweaking are enough.

I hope the Govt does more than tinker.

From the standpoint of maximising economic growth and living standards, the worst things to tax are those which can up stakes and leave, like capital and labour.

Labour sees lowering the top tax rate as opportunity for the politics of envy. But it is about getting the incentives right.

Taxing consumption is better, but tends to be regressive.

Actually over someone’s lifetime, GST is not as regressive as people think.

The best, least-distortionary thing to tax is something which is immobile and the supply of which is not sensitive to taxation, like land.

If it allows income tax to be lowered, I support a land tax. Not only does it provide an incentive to get better economic use out of land, it also brings foreign land owners into the tax base.

One feature of the status quo English singled out as unacceptable is that, within little more than a decade, fiscal drag will have pulled someone on the average wage into the top tax bracket.

Our top marginal tax rate cuts in at a massively low level compared to other countries.

GST on Housing

August 27th, 2009 at 9:23 am by David Farrar

Brian Fallow writes:

Here’s a suggestion for the tax working group set up to figure out how to put the tax system on a more durable and efficient footing to consider: scrap the provision exempting mortgage payments and rents from GST.

A brave suggestion.

But remember, any recommendations the working group comes up with are expected to be revenue-neutral, taken as a whole. And the broader the tax base the lower rates can be.

The question I then have is how much extra GST revenue would ending the housing exemption bring in, which would indicate howmuch tax rates in other areas could decrease.

More than 40 per cent of the income tax – much the biggest single source of Government revenue – comes from the top 10 per cent of taxpayers ranked by income, which is dangerous when labour is as mobile as it is and the income gap with Australia and most other developed countries is as large as it is.

It sure is. The top 9% pay 42% of income tax and the top 14% pay 53%.

What is so special about expenditure on housing that warrants exemption from a consumption tax? Other necessities like food, clothing and electricity attract GST.

A fair point.

According to Statistics New Zealand’s household economic survey the average household expends just over $10,000 a year on rents or mortgage payments (including principal).

With nearly 1.6 million households, at the current GST rate and ignoring any second round effects, that would yield about $2 billion a year. That is also about what an increase in the GST rate to 15 per cent would yield and is reportedly enough to fund, for example, a cut in the top income tax rate to 30c in the dollar – an avowed goal of the Government.

Oh I love it when a journalist actually does research and provides the info you need.

It would cost around $800 million to drop the 38c rate to 30c and around $280 million to drop the 33c rate to 30c so GST on housing would easily allow that it seems.

But that is not all. Applying GST to mortgage payments deals with one of the biggest distortions in the current tax system, the problem of “imputed rentals”. Avoiding the need to pay rent is a large part of the return on investing in the roof over your head. An untaxed capital gain is the rest.

My incentive was to stop paying rent. Any capital gain is a bonus.

Compared with a land tax or the McLeod review’s wealth tax, attacking housing through the GST system has the advantage of not relying on what someone from Quotable Value – however professional and incorruptible – estimates a property is worth. How much you pay a bank or landlord is cut-and-dried, not a matter of opinion.

I wonder why Fallow advocates GST on a mortgage only, and why not GST on the sale of a house? Maybe because most sellers are individuals and not GST registered?

The brutal reality is that if politicians set their face against a shift in the tax mix from direct to indirect taxation because they think the short-term distributional effects are too hard to deal with, then they are bequeathing to their successors a tax system that resembles an iceberg drifting slowly northwards. It will just not deliver the revenue required to provide the services people have come to expect from the state.

This is the killer paragraph and one the Government should remember.

Fallow on 2020 target

August 1st, 2009 at 7:18 am by David Farrar

Brian Fallow writes:

The sort of number the Government has been directing our attention towards, in a non-committal way, is a 15 per cent cut from 1990 levels. That would also be 15 per cent below the current commitment under the Kyoto Protocol.

But as New Zealand’s gross emissions are 24 per cent above 1990 levels, such a target would be a cut of nearly a third from where we are now.

Yes. This is talking gross emissions and a cut of a third in ten years is not some wimpy cop out but bloody ambitious. Some say it is not so hard as what counts is net emissions. Not quite that simple though. Apart from the fact by 2020 gross and net emissions may be similiar, as I understand it our target is always in gross emissions, but the amount we will have to pay will be based on net emissions. In other words the rest of the world expects us to actually cut emissions, not just plant trees.

It would be the equivalent of eliminating, within 10 years, all emissions from transport and electricity generation, and then some. Transport accounts for 20 per cent of national emissions, the electricity sector 9 per cent.

That is for a target of 15% below 1990. Remember that when the Greens claim anything less than 40% is a cop out.

“The nightmare for the Government is that even what looks like a very modest target is incredibly challenging, because we are starting 24 per cent behind the eight ball,” says Climate Change Minister Nick Smith.

Thanks Helen. Despite her carbon neutral rhetoric, emissions grew faster in NZ under Clark than in the US under Bush, compared to 1990 levels.

There are three ways New Zealand can meet its target: physically reducing emissions within the country, expanding the forest area or buying carbon credits on the international market – which represent emissions reductions which have occurred somewhere else in the world.

All three methods cost money. How much is educated guesswork: all the economic modelling tells us is that the more ambitious the target and the higher the international carbon price, the greater the cost will be.

Yep. The greater all the targets are for reduction, the higher the price per unit and hence the price consumers and businesses will pay in NZ.

Satellite and aerial mapping has confirmed an increase of 566,000ha in the area of plantation forest, which the Government expects will just about cover the increase in gross emissions over the same period.

But most of those trees were already in the ground when the Kyoto Protocol was negotiated in 1997.

Net afforestation has collapsed since then, and the trees planted in the 1990s will be ready for harvest in the 2020s, turning the forestry sector from a net sink for carbon into a net source.

This is why reliance on our net emissions being at 1990 levels is little comfort for the 2020 target.

Unless, that is, the rules for counting forest emissions are changed. At the moment the carbon sequestered in trees is deemed to be all released to the atmosphere when the tree is felled, which is nonsense if it is used for building timber.

New Zealand is seeking a number of changes to the rules relating to LULUCF (land use, land use change and forestry). Groser said that within the range of environmentally credible or defensible rules the difference between the best and worst case outcomes on the rules from a New Zealand perspective could swing the country’s emissions by as much as 70 per cent. The rules will not be finally decided at Copenhagen.

Those potential rule changes are of huge significance.

Labour’s climate change spokesman Charles Chauvel says it is better to be bold than timid.

“We will be a target-taker, let’s face it, when we get to the negotiations. The benefit about being bold in setting a target now is that it will obviously be provisional given that we are going into negotiations and we will effectively be given a target by bigger players.

With all respects to Charles this is a pretty stupid strategy. As he points out there will be international negotiations and in those negotiations big players will try and push up what our target should be. Now knowing this is likely to happen, why would you go in with a target already at the top end of what is possible, as this then removes any flexibility from the negotiations. Sure our initial negotiating target has to be credible, but this talk of boldness (and note Labour refuse to say what target they support) is silly fluff. Ask any negotiator if your starting bid should ever be your final position.

Fallow on Government Spending

July 23rd, 2009 at 8:23 am by David Farrar

A good piece by Brian Fallow:

The government is a large part of the non-tradeables sector, which over the past five years has grown by 15 per cent. The tradeables sector, said Whitehead, where the country earns its living as a trading nation, contracted by 10 per cent.

Even without the global recession, this was going to catch up with us.

“In other words the public sector has to raise its productivity – provide more for every dollar spent – and grow more slowly than the private and export sectors, to rebalance the economy.”

This is key. The Government sector should not grow faster than the private sector. The private sector funds the Government sector.

Easier said than done, one suspects, but they will need to all the same. The budget allowance for new spending has been slashed and as debt mounts a growing share of revenue will be pre-empted by higher interest costs.

And this is worth remembering. Every daft proposal by Labour to borrow and spend means greater financing costs for the next decade or two. That means either less spending in other areas or tax increases.

The bottom-line arithmetic is that, even with serious fiscal restraint, chronic deficits and mounting debt will be part of the legacy of this recession. All else being equal, this represents upside risk to interest rates.

It will also make it much harder to accomplish the kind of tax reform that the economy needs.

Significant structural changes to the tax system are a lot easier to accomplish in the context of fiscal surpluses, to lessen the extent to which it is an exercise in robbing Peter to pay Paul.

I regard the Cullen years as a horrific wasted opportunity to reform the tax system. The massive surpluses allowed options that just do not exist anymore.

But there are some good signs. Not a lot of money, but it is about the culture. The Dom Post reports:

Wellington Hospital chiefs will axe percolated coffee for staff from next month to save $190,000 a year.


Some ACC facts

March 12th, 2009 at 2:00 pm by David Farrar

Brian Fallow writes on ACC. He bashes Nick Smith up a bit for calling the scheme insolvent (and I agree that was not the most useful contribution to the debate). But Fallow also concedes there are problems:

The briefing to the incoming minister highlights three troubling trends.

One is in the number of claims. In the 2007-08 year claims rose 4 per cent when the population grew only 1 per cent.

In the case of workplace accidents alone the number of claims per million hours worked has increased by 15.6 per cent over the past four years, and is now at the same rate as Australia (where the trend has been declining).

Secondly the proportion of claimants who return to work has been trending down, from 93 per cent in 2001 to 87 per cent six years later.

And the combined effect of more claims and high rates of inflation in the health industry have pushed ACC’s overall cost of medical treatment up an arresting 55 per cent in the three years to June 2008.

So more people are claiming, workplace accident rate is increasing, rehabilitation rates are declining and costs are massively blowing out.

And since then:

The Department of Labour’s most recent quarterly report card on ACC says: “The three-month rehabilitation rate, return-to-work rate and long-term claims pool are continuing to show negative results, indicating clients are staying on the scheme longer, thus increasing outstanding liabilities, particularly weekly compensation.”

And who is driving the cost increases:

Another $200 million was the result of court rulings (about asbestos) and legislative changes to increase the scheme’s coverage, on top of $600 million in Cabinet-approved policy decisions.

The Labour Government did.

“The previous Government wanted to increase ACC benefits take-up and coverage. Now the new Government wants greater cost control.”

The shift in focus is fair enough.

But ACC is a civilised and cost-effective approach to dealing with the injured. Why undermine confidence in the scheme, unless you plan to undermine the scheme itself?

I don’t think the scheme is being undermined. It is the previous management of the scheme that is being highlighted as lacking.

Fallow on Broadband

February 26th, 2009 at 9:13 am by David Farrar

Brian Fallow makes some good points on broadband:

Going further than the current programme of laying fibre to the cabinet, taking fibre to the home is estimated to cost a further $6.2 billion, of which the Government is contemplating stumping up about a quarter.

Brian is quoting the Castalia report, which I covered on Saturday. That estimate is based on using telcos only to do fibre to the home. It has been estimated the cost drops by around $2 billion if you bring utility lines companies into the equation.

But we have something of a tradition of being penny-wise, pound foolish when it comes to infrastructure investment.

We are paying a stiff price for neglecting investment in the national grid.

Auckland would be a better-functioning city right now if it had gone for light rail when Sir Dove-Meyer Robinson advocated it and/or had completed its highway network.


Sceptics of the Government’s plans are on firmer ground perhaps when they question whether they would pay off in lifting the country’s unimpressive productivity levels. Surely fibre to the workplace is what counts there.

However the boundary between home and workplace is becoming fuzzier.

If the aim of this exercise is to deliver infrastructure that will be as important for the coming century as roads and power lines were for the last one, then part of that future-proofing should take account of carbon costs and the gains to be had if telecommunications can be substituted for transport.

When your home Internet connection means you can access the office LAN as quickly as if you were in the office, and when it means you can be video-conferenced to one or more colleagues more quickly that it would take to walk down a corridor, then you will have a significant exodus of people going from work to working from home.

Details about how it will be structured and intersect with existing players are on the non-existent side of scant at this stage but Communications Minister Stephen Joyce is promising more information within a matter of weeks.

“It is a plan to proceed over 10 years, to achieve a step change and do it faster than the market would otherwise do it,” he said.

“The argument is it provides a competitive advantage to New Zealand as a whole to get this infrastructure in ahead of some other countries.”

It is not too much of a simplification to say that, historically, the things which have really propelled the New Zealand economy forward have been technologies which overcome or mitigate the tyranny of distance, like refrigerated shipping in the 1880s or jet travel in the 1960s.

It is hard enough to achieve productivity gains through economies of scale or scope given our small size and remoteness.

We are the only OECD country that is both very remote and very small. To stay competitive we do need to be ahead of the pack when it comes to technologies that, as Steve Joyce said, mitigate the tyranny of distance.

Fallow on Tax

February 19th, 2009 at 11:11 am by David Farrar

Brian Fallow writes how scrapping tax cuts would be bad:

Just for a moment there it sounded as if the Government might be preparing to renege on its promise of income tax cuts over the next three years.

Now that would seriously piss me off if that ever happened.

At a conference on tax policy at Victoria University last week, Finance Minister Bill English was laying out some home truths about how utterly the fiscal backdrop for such discussions has changed – Budget deficits and relentlessly mounting Government debt as far ahead as the eye can see.

The inherited decade of deficits and debt.

“The opportunities to reduce tax rates further will be fairly minimal,” he said.

But when asked if in saying that he was signalling something about the string of income tax cuts National had campaigned on, the answer was a curt “No”.

While I suspect if Labour had got back in, all the tax cuts would have been cancelled by now – and in fact we may have had tax increases.

There are structural problems as well, and the tax system is one of them.

It is, as PricewaterhouseCoopers chairman John Shewan told the conference, not sustainable. “We rely too much on too few taxpayers.”

The left see this as a good thing, If 40% of the country funds 60% of the country, then that 60% will vote for parties that support higher taxes on the 40% to fund the majority.

Nearly half of the tax take is personal income tax and nearly half of that, in turn, is from people in the top tax bracket ($70,000 plus since October).

Meanwhile, for the bottom half of households, ranked by income, net taxes (taxes less transfers received) are negligible or negative, according to the Treasury’s briefing to its incoming minister. And many of those on middling incomes have very high effective marginal tax rates as Working for Families tax credits abate. The IRD reckons over 500,000 taxpayers face marginal rates of more the 40 per cent.

Combine that with the income gap which has opened up between New Zealand and Australia (or indeed most of the rest of the OECD) and “probably the most internationally mobile labour force in the OECD” and you have a situation where a large part of the tax base is globally contestable. It is vulnerable. It is at risk.

In other words if you tax people too much, they leave.

It is not just that the tax base resembles an iceberg heading towards the equator. It looks as if the taxes we rely on most are the ones which are more damaging to economic growth.

An OECD study last year, entitled Tax and Economic Growth, looked at the relative impact of four kinds of taxes on GDP per capita.

Worst in terms of impact on GDP per capita, it found, are corporate taxes, followed by personal income tax. The least distortionary thing to tax is immovable property.

I find that fascinating. I must try and get a copy of the report.

“Particularly recurrent taxes on residential property,” Christopher Heady, one of the report’s authors, told the conference. “But that frightens politicians.”

In the more demure language of the report, such taxes are “very unpopular in many countries” and tend to be the preserve of local rather than central government. But property taxes do not affect decisions to work, or to acquire skills and education, or to produce, invest and innovate, to the same extent as other taxes.

There is a degree of fairness to consider in taxing an asset, as people who are asset rich and income poor may have to sell them. But having said that, it is important to get the incentives right for working, education, investment etc.

I hope the Government looks seriously at how to improve the structure of our tax system.

Mood of the Boardroom

October 31st, 2008 at 11:30 am by David Farrar

I attended the Mood of the Boardroom Breakfast in Auckland organised by APN. The results of a survey of CEOs was presented, and then we had speeches from and questions to Dr Cullen and Bill English.

Now some may say why survey CEOs only? Well a CEO can and does have a massive impact on the sucess of a business. Just like a great principal can turn a school around, so can a great CEO. CEOs are where the buck stops. And the CEOs of our top businesses probably have more impact on our country’s economic prosperity than most Ministers.

The Herald reports from the survey (all scores are on a 1 – 5 scale so 3 is average):

  • Key 3.5 vs Clark 3.0 on overall campaign performance (Clark did better than Brash last election in the same survey  so CEOs tend to be quite fair while reflecting their backgrounds)
  • Clark leadership is 3.9 to 3.6 for Key
  • Vision and strategy has Key 4.0 to 2.5 for Clark
  • On trustworthiness Clark is 2.6 and Key 4.0
  • Put’s NZ interests over party has Key 3.8 to Clark 2.3
  • On experience Clark 4.4 vs Key 2.9
  • Economic management Clark 2.5 to 4.2 for Key
  • Overall 90% prefer Key to Clark (last time it was 72% Brash to 28% Clark)

Cullen spoke first and got a great laugh when he said “Welcome to both of my supporters in the audience, even if I had to pay your airfares to be here.”

He then spoke about the three Is and three Ss that he says are crucial:

1. Innovation
2. Infrastructure
3. International Connections
4. Skills
5. Savings
6. Sustainability

On the deposit guarantee scheme he said he doesn’t like doing it, in fact that it was the second worst option. But the worst option was to do nothing. He is worried about the moral hazard it creates.

Mentioned (ever so casually) that US Secretary of State Condi Rice would be calling him later that day to brief him on what is planned for the G20 meeting. The US incidentally is playing a real leadership role – even the US Federal Reserve is doing a $15 billion cash-swap facility with the NZ Reserve Bank – something not covered in much detail in the media considering how extraordinary it is. Uncle Dubya is helping Helen out 🙂

Cullen did have a little snipe at some of the business leaders telling them that it was no time for the “top end of town” to be lecturing Government, when the Gordon Browns are bailing out the Gordon Geckos. Went on to say they need to work together, and wants to sit down with business groups after the election re the planned December mini-budget.

English started off with a scathing attack on Labour saying look at the front page of Herald as to whether Government is qualified to lead. That instead of focusing of helping economy they are working on smearing the Leader of Opposition by innuendo and influence. Said it was a disgrace and why Labour are not qualified, despite Dr Cullen’s best efforts.

Bill also asked what sort of strategy is it to say trust us and after the election we will tell you what we will do.

He said that National trusts business to innovate and to get through recession as they have previous ones.

He gave Cullen credit for include the Opposition in briefings on financial stabilisation and shares Cullen’s misgivings. He said the Australian guarantee is unravelling a bit and they should learn from that.

He said a National Government is not going to whip out rug from under people as we go into recession – people need security. Also that it was important not to over-react to fiscal outlook. The key is to get through the recession and lift long term prospects for economy.

He said the combined tax cuts would be the largest fiscal stimulus in 15 years.

Highlighted how Clark has said National’s borrowing for infrastructure was reckless, dangerous and gambling with future and then two weeks ago announced similar policy to National’s.

English said changes in attitude as important as policy and that having Key as PM will be important. Said he is the most relentlessly optimistic person Bill has ever met and that is why hundreds turned up in Invercargill to meet him (Winston got 50).

Bill concluded “That is why I’m voting National.” Cullen offered response and quipped “Well I’m not voting National.”. Was very funny.

Bill also called Cullen only economically literate member of the Labour Party.

Someone asked for a grand coalition and Dr Cullen said a recession is no reason not have give people a choice, and it is one of a moderate centre-left or a moderate centre-right Government. Nice to have him confirm National as moderate centre-right.

Herald Economic Editor Brian Fallow asked a great question to English on why this recession is different from previous recessions that one needs to intervene for people who have ignored all the warnings about inflated house prices, and don’t take on a mortgage you can’t afford. His column yesterday makes the same point.

He also asked what is the point of ghettoizing the Cullen Fund? I thought Bill was rather unconvincing in his reply to both points – probably because he somewhat agrees with Fallow privately – but in politics you never get the luxury of agreeing with 100% of your party’s policies – not even the Leader. Holyoake once said he only agreed with 80% of what his Government did. Mind you with Muldoon it might have been 100% 🙂

Cullen said that once you break that line of non involvement in the Super Fund, you have no defence to further involvements. Highlighted how the Greens support National’s policy on the Super Fund and they would like to invest it in many pet projects – none of which probably have much of a rate of return.

English did well though on Fast Forward and he had even Cullen nodding as he said the private sector is yet to commit a dollar for fast forward. English said the fast forward fund is borrowing money to then reinvest it in bonds. The structure is stupid. He supports actual research and National will put more money into fast forward projects, but not through the structure of a dedicated fund.

Overall both did very well I though. Both knew their stuff, agreed with each other on a bit but also exposed the weaknesses on both sides.

Reaction to Tax Cuts package

October 9th, 2008 at 6:59 am by David Farrar

In no particular order.

The Herald Editorial compares the parties:

There has been a striking contrast in the response of the two main parties to the disturbing news that after 14 years of budget surpluses the Treasury now calculates the public accounts are set for a decade of deficits. …

Finance Minister Michael Cullen merely congratulated himself again on having saved previous surpluses for a “rainy day” and looked forward to the problems it would cause for National’s intended tax cuts.

There was evidently nothing he thought necessary to change, either in his own programme of reluctant tax cuts that started this month or in the Government’s spending programmes that might have seemed affordable in better times. If Labour’s “rainy day” could last 10 years, as the Treasury forecasts, Dr Cullen and his colleagues seemed strangely relaxed about it.

In other words Labour has no plan at all.

The fiscal crisis is indeed the first real test of the mettle of leader John Key and his team and it is rare that voters get such a measure before an election.

National could have taken the easy option of confirming its previously indicated tax cuts, offering no specific savings in public expenditure and pretending that tax cuts would actually cure the deficit in quick time. Conservative parties are prone to that belief.

Instead, National has faced the need to balance its tax cuts with specified savings, notably the removal of business tax breaks on research and development and employer contributions to KiwiSaver. The wisdom of reducing the incentives to save is questionable but the courage is not.

And National is willing to take the hard decisions, and not pretend that the decade of deficits is acceptable.

Paula Oliver in NZ Herald:

National has risked alienating people who have embraced KiwiSaver, as the party goes into the election with a tax-cut package that would leave more money in the pockets of most earners – but takes away two business tax breaks to pay for it.

Mary Holm says the changes improve KiwiSaver:

The National Party’s proposed changes to KiwiSaver would considerably reduce two of the biggest gripes about the scheme – that some people can’t afford it and that it ties up savings. …

The contributions of anyone earning less than $52,150 would be tripled by employer and government input. And that means three times bigger retirement savings. …

The reduction of the minimum employee contribution from 4 per cent to 2 per cent of pay means it would be easier to afford KiwiSaver, especially after taking tax cuts into account.

John Armstrong says it is a bit of a fizzer:

The door banged shut in Labour’s face following Monday’s mind-numbingly pessimistic economic forecasts. Labour can thank National’s underwhelming tax package for reopening it at least slightly.

Colin Espiner reports on a snap poll:

A snap poll for The Press yesterday showed National may have pitched the package about right.

The poll of 212 people by Futurescape Global found 43% felt the tax cuts matched their expectations, with 34% feeling it fell short. A slim majority of those polled felt the country could afford National’s package, but people were split over whether they were confident in National’s ability to manage the economic crisis, while 55% said the tax package had not altered their vote. The poll has a margin of error of 6.7%.

Brian Fallow sees a shortage of growth:

National claims its tax package will stimulate the economy in the short term and improve incentives and drive growth in the longer term.

The first claim is plausible, the second not so much.

Reducing the top tax rate faster will be better for growth long term, but quite simply the money was no longer there.

James Weir in the Dom Post surveys business opinion:

Business New Zealand also disagreed “pretty seriously” with the decision to drop R&D tax credits but said the planned tax cuts and target to cut personal tax rates to 33 per cent over time rated a “seven out of 10” score overall.

The Press editorial is positive:

Even if tax cuts were not on the agenda, there is a case to argue that the levels set for KiwiSaver were too ambitious from the start. As it stands, some young people entering the scheme and earning the average wage throughout their working lives could end up earning more in retirement, when their National Super entitlements were added to their KiwiSaver earnings, than they did in their lifetime.

Yep, and that is daft. The 4%/4% KiwiSaver forced people on the average wage to save too much, taking money they need during their working life.

Clark has said this election will be one of trust. If this is so, then the question for voters will be who do you trust in the turbulent world we now face? With these tax cuts, and with some detail of its longer-term economic plans, National has placed its cards on the table. It has produced figures to show that its plans are fiscally responsible. Voters must decide whether Key and his colleagues can be trusted to deliver on them, or whether Labour can be trusted to manage difficult times as well as good ones.

Will Labour produce a plan? Or is Labour saying it will run a decade of deficits and not make any changes to tax rates or spending?

Tracy Watkins blogs:

A year ago, Key might have risked over promising and under delivering on those amounts.

But that was a vastly different world..

The failure to deliver more may peel off some soft support among those who were leaning toward National but, because of Working for Families, will not be a whole lot better off.

But the rest will probably agree with Key that it’s a package that’s right for the times.

So is it enough? You’d have to say yes.

And finally NZPA reports that least surprising news of all – that unions and political rivals don’t like it. Some get their facts wrong:

United Future leader Peter Dunne, who is minister of revenue, said it was complicated and would be difficult to administer.

“Superannuitants and low income earners are the big losers,” he said.

Bzzt. Wrong. By 2011 superannuitant couples will get $15 a fortnight more.

Bailout defeated 207 to 226

September 30th, 2008 at 7:45 am by David Farrar

The US House of Representatives has voted down the US$700 billion bailout plan, and share markets have fallen further. Democrats voted around 3:2 in favour while Republicans voted around 2:1 against. The elections in a few weeks loom large – one of the problems of having such a short two year term.

Ironically Brian Fallow must have written his column in advance, saying:

American lawmakers may have pulled the United States and the rest of us back from the brink of economic calamity, but the path down from the clifftop remains long, tortuous and slippery.

Actually the lawmakers have pushed the world a bit closer to economic calamity.

The costs of ETS

September 9th, 2008 at 8:14 am by David Farrar

Brian Fallow looks at the costs of an ETS. It all depends on the price of carbon. Treasury is budgeting $23 a tonne, but a last minute change to the scheme has pushed this up to a likely $50 per tonne, and by 2020 it is predicted the cost will be $70 a tonne. For now we will go with $50 a tonne.

  • Inflation to increase by around 0.7% per year for the next two years
  • Retail electricity prices to increase by 20%
  • Petrol prices to increase by 12c/litre
  • Reduce payout to dairy farmers by 50c/kilo (once agriculture fully in the scheme) or 6%

As Fallow notes:

It would be a perverse outcome for the global climate if growth of the pastoral farming sector in New Zealand were hobbled by climate change policy here, only for the demand for dairy products and meat it might have satisfied to be met instead by production elsewhere in the world whose carbon hoof-print (emissions per litre of milk or kilogram of meat) is greater.

So the ETS exempts livestock emissions altogether until 2013 and taxpayers will continue to pick up the great majority of the bill (up to 90 per cent) until at least 2019.

Agriculture is not the only sector where the NZ ETS may simply lead to production transferring off shore, which will result in even worst environmental outcomes, and a drop in income for New Zealand.

Australia and NZ ETS

July 10th, 2008 at 7:42 am by David Farrar

Brian Fallow makes some very sensible points on the move by both countries towards an ETS:

Australian professor Ross Garnaut has some good advice for our Government as well as his own.

“The review suggests that prior to the indelible conclusion of [emissions trading] scheme design in either country, the Australian and New Zealand Governments meet at ministerial level to discuss linking and to identify any impediments to linking that may warrant adjustment to one or both scheme designs.”

This is sensible, and it is in fact quite vital that the NZ and Australian schemes are as compatible as possible as Australia is our largest trading partner. This is one reason I think we should be slightly less hasty with pushing our ETS into law. Having trans-Tasman harmony is more important than artifical dates such as the election.

Its draft report was released last Friday and a government green paper is due soon. Climate Change Minister Penny Wong is standing by a timetable that has legislation introduced by the end of this year and an emissions trading scheme up and running in 2010.

Which is compatible with NZ – esp that Clark has delayed all sectors but forestry until 2011.

If Australia’s scheme is along the lines recommended by the Garnaut review there will be a family resemblance with the New Zealand scheme, but there are notable differences.

They need not constitute a barrier to linkage between the schemes – a common carbon market, if you will. The environmental integrity of both schemes should be the determining factor there.

But it would be prudent to be sure the differences do not pre-empt linking before anything is set in concrete.


Fallow on Income Splitting

May 1st, 2008 at 12:29 pm by David Farrar

Income splitting is in the news as Peter Dunne has finally got the Government to publish a discussion document on it. For those who don’t want to read the whole 29 pages, Brian Fallow has a good summary of the issues in the Herald:

Broadly speaking, the left is not keen because it is not well targeted at relieving child poverty, the extent of which the Child Poverty Action Group’s report this week makes clear.

Income splitting is no use at all to single parents, who have the hardest row to hoe.

And it is seen as favouring a 1950s model of the family – with mum at home baking biscuits and looking after the children – that bears little relation to the realities of modern times.

At the same time, the right isn’t keen because of the opportunity cost: like any other targeted tax relief, it reduces how much would be left for across-the-board tax cuts.

Fallow also notes that lowering the top tax rates would reduce much of the demand for income splitting. It is that high 39% marginal tax rate that makes income splitting so attractive.

In terms of who would benefit:

The most populous part of the income distribution among couples consists of families whose main breadwinner earns between $50,000 and $60,000 and his or her partner up to $40,000.

About 70,000 families fall into that group and they would stand to gain between $1000 and $3000 a year.

The largest gains, however, would be among couples with larger incomes.

The biggest gain, nearly $9000 a year, goes to a couple where one partner earns $120,00 a year and the other earns nothing.

His conclusion:

Many families are under pressure, no question. But income splitting only benefits some of them and only because of the structure of the income tax scale. Either flatten it or put more resources in Working for Families. But spare us any more complexity in the tax laws.

Fallow on Housing affordability

March 20th, 2008 at 2:04 pm by David Farrar

Brian Fallow says the following facts are sobering. They are indeed:

It uses data from Statistics New Zealand’s survey of family income and employment (affectionately known as Sofie) to estimate what proportion of couples and single people who rent could afford to buy.

To buy, that is, a house from among the cheapest 25 per cent available in their region while keeping their mortgage payments at no more than 30 per cent of their gross income.

They reckon that in 2000, 59 per cent of renting couples and 11 per cent of single people could have afforded a lowest quartile priced house.

By 2006, however, that had dropped to 29 per cent of couples and only 2 per cent of single renters.

It gets worse if you exclude those who could have afforded (based on their net worth) a 20 per cent deposit but who for whatever reason had decided not to.

Among the rest, the proportion of couples who could afford to buy dropped from 40 to 12 per cent since 2000.

“At current prices and interest rates, the gap between the income of those who cannot afford to buy a lower-quartile-priced house and the income needed to service a mortgage on such a house while keeping the payments at or below 30 per cent is large,” the report says.

“On average to bridge the gap, a couple would need a deposit of $122,000 and non-partnered individuals would need a deposit of around $177,000.”

For many people, the officials drily note, this would pose a considerable hurdle.

I am so glad I got in just in time in 2001, and purchased.

Auckland Airport Roundup

March 5th, 2008 at 9:10 am by David Farrar

Lots written on Auckland Airport today. I’ll divide it up into the legal, political, and economic. First of all look at this story by Audrey Young:

On Monday night, after the Australian sharemarket closed, the Government changed overseas investment rules ensuring that if even the Overseas Investment Commission approved the sale, the two ministers with the final say, Clayton Cosgrove and David Parker, would be able to say “no” and withstand judicial review.

I would not be so confident about it withstanding judicial review. Despite attempts to isolate the two decision making Ministers, it is obvious that the issue has been pre-determined for them. And as Chris Carter found out with the Whangamata marina, the Courts do not like Ministers pre-determining issues.

On the political side, Vernon Small blogs:

Labour is cock-a-hoop today over the Auckland Airport (we-won’t-let-it-be-bought-by-a-Canadian-pension-fund-but-don’t-want-to-say-it-that-blatantly) regulation change.

Just a day after Prime Minister Helen Clark predicted the ‘fun would begin’ once National started debating policy John Key has looked surprisingly leaden-footed in response to the change – a popular move with the electorate, I would imagine, but one which National would instinctively reject.

National’s response hasn’t been particularly well-targeted it seems to me. The issues I would focus on are:

  • One shouldn’t change the rules at the last second – moves like that destroy investment and jobs and push up interest rates
  • The rules should be clear as to what is and is not allowed, and this change means no one will be sure now what the ground rules are

Tracy Watkins has an article in the Dom Post, with the headline being “Nats will not ban airport sale”. Now please bear in mind Tracy does not write the headline even though it is her story. The headline though is a misleading one as it suggests Labour is banning the sale, and they are not. They are changing the rules, but they are not banning it.

On the economic front NZ Herald economic editor Brian Fallow looks at the dangers:

The Government is running risks with New Zealand’s reputation as an investment destination by suddenly turning Overseas Investment Office approval, long a rubber stamp, into a serious hurdle for the Canadian bid for Auckland Airport.

It has changed the rules in the closing minutes of the game.

And it does this reckless thing at the worst possible time.

The country has for 20 years enthusiastically taken advantage of the opportunities globalisation provides to access foreign capital.

Had we not, had we relied on what we ourselves are prepared to save and invest, the economy would be a lot smaller than it is.


Fran O’Sullivan counts the cost:

Helen Clark’s Government has wiped hundreds of millions of dollars off Auckland Airport’s value in a vainglorious move to exert “local control” over an asset that passed into majority private ownership more than a decade ago. …

The upshot is that New Zealand’s hard-won reputation as a “fair dealer” that welcomes foreign investment has now been carelessly hammered by a Government which is bent on milking the Auckland International Airport takeover for political advantage.

What Helen Clark and Finance Minister Michael Cullen forget as they blatantly ramp up the foreign investment bogey during election year is that the 50,000 retail shareholders in Auckland Airport also have votes.

The NZ Herald Editorial labels the move xenophobia:

This is populist politicking, pure and simple. An administration reeling in the polls has stooped to courting xenophobia. Only that explains the timing of the intervention. If the Government genuinely viewed this as the right policy, it could have acted when the airport first attracted overseas interest.

Andrew James in the Dom Post reports:

More than $300 million was wiped off Auckland International Airport’s market value after the Government introduced a late rule change …

$300 million wiped out.

And The Press editorial weighs things up:

… But it is doubtful if it is much more amenable to the national interest — whatever that is — under its present ownership than under Canadian ownership. Both owners would be subject to the same laws and regulations, and liable to the same pressures from governments local and national. Both owners would seek to maximise their profits and returns to shareholders. Materially, the only difference to occur under Canadian ownership would be a larger flow of profits offshore.

New Zealand does not have the capital or human resources to fuel its development, but it does not like the large foreign inflow of people and finance that development needs. The way to solve the conundrum is not to pass regulations but to upskill New Zealanders and make them more wealthy. Then they could own and manage their assets.

The Press gets it somewhat wrong with saying more profits would flow overseas. Because the domestic money freed up from any sale could well result in more money flowing to NZ from overseas.

The Visible Hand  in Economics deals with this and other economic issues. Gives a nice list of benefits and costs of foreign investment.