Posts Tagged ‘Bill English’
International Rating Agency Standard & Poor’s (“S&P”) has lowered the outlook on NZ’s AA+ sovereign credit rating to “negative” from “stable”. This is not great news for New Zealand borrowers as if New Zealand’s sovereign rating were actually downgraded to only AA our interest costs would rise. This would have an impact on business owners and struggling home owners and property investors, as we continue to navigate our way out of this cyclical downturn slowly but surely.
S&P Sovereign ratings credit analyst Kyran Curry stated:
The outlook revision on the foreign currency ratings reflect our recognition of the risks stemming from New Zealand’s projected widening external imbalances in the context of the country’s weakened fiscal flexibility…
New Zealand’s vulnerability to external shocks, arising from its open and relatively undiversified economy, also raises risks to the country’s economic recovery and credit quality.”
Standard & Poor’s stresses, however, that these weaknesses are mitigated by New Zealand’s fiscal and monetary policy flexibility, strong institutions, economic resilience, and its actively traded currency.
The main risk to the ratings would be a significant weakening in the credit quality of New Zealand’s banking sector, which is largely owned by the Australian banks. That said, however, a range of factors ameliorates some of these risks, including a high degree of foreign-currency-debt hedging and an actively traded currency. New Zealand has independent and effective monetary policy settings with a highly traded and free-floating currency that allows external imbalances to adjust. A large portion of the nation’s external debt is denominated in New Zealand dollars, while much of the remainder finances companies with revenues in foreign exchange or is hedged. In sum, we view New Zealand’s financial and capital markets as supportive of the rating.”
The negative outlook on the New Zealand foreign currency ratings reflects the possibility of a ratings downgrade if New Zealand’s external position does not improve. Rising public savings will be an important component of such an improvement.
The rating could fall, too, if New Zealand’s current account weakens because of any higher real cross-border funding costs within its banks. On the other hand, the ratings could stabilize at the current levels upon a sharper-than-expected improvement in the external accounts, led by stronger export performance and higher public savings.
New Zealand needs to tackle its growing government deficit in the light of softening international prospects. We are still borrowing over $200 million a week, which is over $10 billion per year. This has a significant interest servicing cost and the potential to place a noose on future generations of taxpayers.
A major issue is that together New Zealanders always want to borrow a lot more than other New Zealanders are willing to lend. As a result the difference has to be imported, which means that the net international liabilities of New Zealand (note that this is private and not Government debt) at 30 June 2010 was NZ$164 billion.
The private debt our economy has is akin to that of Portugal, Ireland, Greece and Spain (the “PIGS” countries that are stressing global financial markets) and has long been pointed to by the credit rating agencies as a significant problem.
John Key’s thoughts on this
Our Prime Minister John Key thinks that Prime Minister the downgrade in outlook by S&P is because of NZ’s high private indebtedness and S&P’s reassessment of risks following the Irish banking crisis, where a bailout up to $100 billion Euros may be required (similar to the bailout Greece had). Concerns are mounting on Portugal’s debt and to a lesser extent Spain too. As a result S&P felt they had to put us on a negative outlook. John Key said:
In fact the Finance Minister (Bill English) met with Standard and Poor’s two weeks ago, (and) there were no specific issues raised at that point.
With the position in Ireland, that has had an impact on their (S&P’s) assessment of countries that have an over-reliance on debt.
What I will say though is the way it’s been positioned by S&P and other rating agencies to us is, if your [public] gross debt to GDP or net debt to GDP is less than 30%, then you are in a small group of countries for which the rating agencies have no concerns in that regard.
That was absolutely where New Zealand was positioned, with a very small group of other countries – Korea, Australia and one or two others”.
Bill English – Minister of Finance’s View
Bill English issued the following press release to explain the situation and he points out it is private debt and not Government debt which is the issue (as John Key did), and he re-iterated the Government’s commitment to balance the books and return to surpluses by 2016.
Standard and Poor’s decision to put New Zealand’s foreign currency rating on negative outlook highlights the need to reduce our heavy reliance on foreign debt. This is a long-standing problem for New Zealand and has left us vulnerable as a country. The Government is taking steps to reduce this external vulnerability and to move the economy towards savings and exports.
They include the tax changes in the Budget this year and work currently underway with the Savings Working Group. From here, it’s important that our economic programme continues.
Standard and Poor’s praised the New Zealand Government’s commitment to get back to budget surplus by 2016, and it noted that New Zealand had outperformed most other advanced economies in the past two years.
However, it said the negative outlook on New Zealand’s AA+ foreign currency rating reflected risks stemming from its widening external imbalances and relatively low levels of national savings.
As Standard and Poor’s notes, New Zealand’s household liabilities – at about 156 per cent of disposable income – are 50 per cent higher than 10 years ago.
Banks and the Government, which are borrowing in volatile international financial markets, face higher interest costs on their increasing debt. In the past 10 years alone, New Zealand’s net foreign liabilities have jumped from about $90 billion to more than $160 billion.
Bill English also pointed out that, despite the negative outlook on its AA+ rating with Standard and Poor’s, New Zealand still enjoys the highest possible Aaa (stable) rating with Moody’s (another International Rating Agency).
I think we have to watch this space and the international events we are faced with that create an environment of uncertainty. Also consider negotiating some good interest rates on 2 and 3 year fixed rate periods with your lender, as I just don’t see these rates getting materially cheaper (the odd cut up to 0.1% for competition reasons aside may happen) and I don’t see the floating rate being decreased in the short or medium term.
Finance Minister Bill English (National Party) has just revealed the Government’s 2010 Budget. It proposes a number of changes, including the biggest tax reforms since GST was first introduced and other tax rates slashed 25 years ago (under the Labour Party). These were designed to make the tax system fairer, lift income levels and address long standing economic weaknesses. Bill English stated:
It continues the Government’s focus on getting long-term, sustainable growth and shifting the economy away from borrowing, consumption and government spending and back towards saving, investing in productive areas and exporting.”
Key Changes from Budget 2010:
- Personal income tax cuts across the spectrum, as below:
| up to $14,000 | at a rate of | 10.5% |
| between $14,001 and $48,000 | at a rate of | 17.5% |
| between $48,001 and $70,000 | at a rate of | 30% |
| over $70,000 | at a rate of | 33% |
- Increasing the GST rate to 15% from 12.5% from 1 October 2010, as expected, and unlike when the Labour Government raised GST by 2.5% 21 years ago, with compensation to beneficiaries and super annuitants as pointed out by Prime Minister when he reminded Phil Goff of what he did as a Cabinet in that Labour Government 21 years ago.
- Reducing the company tax rate to 28 cents from 30 cents from 1 April 2011 (start of 2012 income year).
- Reducing the PIE tax rate to 28 cents, increasing incentives to save money for retirement to reduce dependence on the Government
- Property investment losses can no longer be claimed by those looking to reduce their taxable income to claim Working for Families.
- No depreciation on buildings with a useful life of more 50 years or more (which is the vast majority of rental properties) – ie. 0% depreciation rate on building structure.
- Businesses and Property Investors (building or replacing assets) will no longer be able to claim the 20% new asset loading (accelerated depreciation) on new plant and equipment. This change will apply to assets purchased after budget day. Note that the old rules will continue to apply for assets purchased before this date, so you can continue to claim loading.
- Changing the rules for Loss Attributing Qualifying Companies and Qualifying Companies as they apply to property investors, so they are taxed like Limited Liability Partnerships (ie. limiting the amount of a loss that one can deduct through a LAQC in any given financial year to the amount that the shareholder has invested in the LAQC. The balance of the loss would then be carried forward to future financial years.)
- Commercial fit-out depreciation rule changes (details yet to come)
- Changing the thin capitalisation rules for foreign entities who have loaded up their local subsidiaries with a lot of debt, meaning they will have to reduce their interest bearing debts and pay a whole lot more tax in New Zealand.
See http://www.taxpolicy.ird.govt.nz/sites/default/files/2010-sr-budget2010-special-report.pdf for a Guide to the Tax Changes Announced in Today’s Budget.
Tackling Government debt
The Finance Minister reminded us that we are currently borrowing $240 million each and every week to fund Government over-spending, and the interest servicing bill is going up as a result. Unfortunately we are going to need to borrow more. This means our net debt as a % of Gross Domestic Product will be nearly 30% in 2014.
This is then projected to go down to an extremely manageable 14% of GDP by 2024, assuming at least a decade of disciplined spending – which will be a challenge as history shows us exceptionally few Governments last over 9 years, and the Labour Party has a strong history of overspending, or as John Key said today ‘spending and hoping’ for things to get better.
Look at the graph below to see the forecast and projected Core Crown expenses as a % of GDP.
Source: NZ Treasury 20 May 2010
My thoughts
On the whole I think that this budget is fine. Investors lose the ability to claim on building structure (I don’t like this as I do believe commercial and residential properties in fact depreciate – just with high variance amongst properties). However we are still able to depreciate separately identifiable items (chattels) like curtains, carpets, heat pump, letterbox, which is fair. In addition any repairs and maintenance expenditure and items under $500 in value are tax deductible. So if you have to repaint your window sills and fascia, like I do on 1 of my houses before the full force of winter sets in, this will be tax deductible as repairs & maintenance. In fact it may be smart to spend money on things that need to happen before 1 October 2010 when GST goes up 2.5%. With tax losses not completely ring fenced I consider that there will be no major fall in property prices as a result of this budget.
As an update to my blog on the evening of Anzac Day, the poll on www.billenglish.co.nz has got a lot busier. The news for the Government is not good with 79% of respondents (at 11:45am on 27 April 2010) voting NO – I do not support tax changes to property.
The big "NO" vote: from 64% to 79% in one and a half days
Perhaps unsurprisingly I am one of these voters. However I am pleasantly surprised at the number of people voting at 1,710. Dr English should take a lot at the plethora of comments in relation to his poll. There is some really interesting feedback there, including from former Deloitte Consulting Partner Paul Kane, and a number of investors in not just property.
Focus on the real issue – the NZ Government Overspending
I am not impressed at the Government losing around NZ$240 million each and every week and the fact that we are forecast to lost over NZ$10 billion per year for nearly 6 more years! We raise this money typically on the Global Debt Market. It is interesting to note that New Zealand is a ‘company’ listed on the New York Stock Exchange (see our SEC financial statements). Looking at how much our debt is on the Reserve Bank’s C3 Aggregates is a bit frightening. It is $205 billion dollars! Someone has to service this debt – guess who that is? Of course it is us, as New Zealand taxpayers. And we will be servicing this debt for decades to come.
It is time to cut Government spending now. Dr English’s knows from Inland Revenue that around 10,000 property investors have tax losses and then use Working For Families tax credits – this must stop. But why not get rid of this middle class welfare and Government dependency that Labour introduced towards the end of its 9 year long reign of overspending?
Friends in MFAT and Government departments in Wellington (including the big ones of health and education) say numbers of staff can be chopped, and there is a perception that it is far “cruisier” to work in a Government department than for a private commercial entity.
Private companies and individuals are making big cuts – shouldn’t our Government be doing the same?
In a fascinating development since my last blog, the Minister of Finance put up a poll on his own website at www.billenglish.co.nz asking:
Do you support tax changes to investment property”
The interesting thing is that out of 863 votes at 7:07pm Sunday 25th April 2010, that 548 people voted no. That’s a massive 64% of the total vote. Whilst this poll has a small sample size and cannot be said to be scientific like most web polls, even with a massive margin of error of 13.9%, it would still have more people not supporting tax changes to investment property.
64% of voters do not support tax changes to property investment
This is a very interesting result indeed as this Government doesn’t want to do something its followers don’t like. National cannot govern alone, and with ACT not guaranteed to win Epsom or get the magic 5% threshold in next year’s election, nor the continued support of the Maori party – I view that the Minister of Finance may have to retract his words he mentioned on NewstalkZB and just keep the tax changes to 1 thing only, depreciation. This vote is an indication that these tax changes are going to be unpopular policy – obviously to the many tens of thousands of property investors New Zealand has.
So why don’t you have your own say at www.billenglish.co.nz before the poll closes. I will continue to monitor developments in the lead up to the all important 20 May 2010 budget with the legislative sword looming over property investors heads.
I was listening to the country’s leading radio station (NewstalkZB streaming live) on my computer now and I heard the Minister of Finance Bill English talk about tax reform with host Larry Williams. English said that the tax regime has a more favourable impact on property investors. As a result he foreshadowed the May 20th budget speech, by stating that he would make property investment less attractive. English stated that there will “be more than one change”, so we investors can expect depreciation alone will not be tinkered with. This is to ensure that there aren’t enormous benefits to having “highly leveraged property speculation”.
English went further to say just now that anyone who owns a property will still be able to deduct the repairs and maintenance expenditure, however my interpretation of the Minister’s statement is that depreciation on building structure will be 0% (and not the 1% I had previously anticipated). This is to ensure that there is a tilt in the playing field towards business owners, job creators, and other productive investments.
If there is to be more than one change – then what else?
It looks like the writing is on the wall and that our depreciation on building structure will be lost. However English said just 5 minutes ago (6:20pm 21/4/2010 Newstalk ZB interview) that there will be more than one change.
Could this be highly geared investors worst nightmare of (1) ring-fencing property losses; where properties that make losses are not able to be offset against personally derived income (ie. they are ring fenced until the property becomes profitable). Otherwise could we see (2) thin capping interest deductibility; where interest on servicing a loan will only be able to be deducted if the investor has a loan to value ratio of say 65% of lower, or will it be something else?
Perhaps there will be a real (3) tightening of the revenue account rules to catch all investors who buy a property and sell it within a period of time (say 5 years) for a profit, so this gain would be brought into the income tax net (‘brightline’ test). Previously this gain would in the vast majority of cases be capital and therefore not taxed.
Quick Thought – Interesting Blog on Interest.co.nz:
We eagerly await these changes. In the meantime, have a look at Gareth Kiernan’s (from Infometrics) latest blog on www.Interest.co.nz as it makes interesting reading. He says property investors have vested interests and makes accusations against internet marketer and self-proclaimed property investment guru Dean Letfus:
The comments are quite interesting, particularly from my friend and passionate property investor Andrew King (NZPIF Vice President).