Posts Tagged ‘government overspending’
Source: One News - TVNZ / Colmar Brunton Poll, 29 May 2011
Labour are struggling in the polls and are staring down the barrel at a good old fashioned whipping on 26 November this year, similar to what they dished out to a Bill English led National Party in the 2002 General Election. So they need to be a bit more radical to appear relevant. The truth is National has moved further left to become a centre to centre-right party and Act to the right of the political spectrum to National have weakened with a bit of in fighting and are only rebuilding now. National can govern alone on current polling – a first in this MMP era.
This blog talks about Labour’s new policies and gives me take on them. I have been interviewed by the NZ Herald and also Radio Live on this today, and suspect with NZ Property Investors’ Federation President Andrew King away that I will get more media attention to cover off the all important property investors’ perspective.
Own Your Future – Labour’s New Financial Policies
So this is the backdrop to the Labour Party’s Own Your Future electioneering. They need to do something radical to appear relevant and to get noticed by the media. So this afternoon David Cunliffe stated the Labour Party’s financial policies in this video below:
Labour Leader Phil Goff said that the NZ Government is borrowing $16.7 billion this year on Campbell Live (TV3) this evening, and criticised National of simply borrowing and hoping. He then talked about Labour’s tax plans to raise Government income. Lets have a look at what they are:
- Increase tax on higher income earners – introducing a ‘special’ tax rate of 39% for those on incomes over $150,000
- Ensure the first $5,000 of earnings taxed at 0% (ie. tax free, and this includes increasing benefits by $10 a week)
- Introduce a Capital Gain Tax (“CGT”) of 15%
- Boats will be exempt from the CGT
- A farm house will be exempt CGT, but not the farm itself
- Jewellery will be exempt from CGT
- If you are over 55 years of age and have owned a small business for at least 15 years then the first $250,000 of capital gain is tax free
- Fresh fruit and vegetables will be exempt GST
My take
Read my lips – “no more new taxes”. We do not need capital gains tax. It is not aspirational, not necessary and surely the wrong question is being asked. I believe that the quality of one’s life is determined by the quality of the questions we ask. If we are asking how we (the Government) can afford to keep over-spending and borrowing $16,700,000,000 this year? Then the answer would be increase taxes and keep all state owned enterprises, if you were in the Labour party. Might as well bring in some refugees with no English language skills and poor health while we are there too!
Phil Goff confirmed to John Campbell that the own home is sacred and will not be taxed. This will lead to “castle building” since own homes will be sheltered from this tax, you may as well add tremendous value to it and get a larger capital gain.
Exemptions
Exemptions are not a smart feature of a tax system. If I invest in a start up company WXYZ Manufacturing Ltd with no capital initially, employ lots of unskilled people that would otherwise be dependent on the Government as beneficiaries and then sell it say 15 years later for $200,000, I would have to pay $30,000 CGT on this under Labour’s proposal. Yet if I buy my wife jewellery like an expensive diamond ring for $400,000 which I sell for $600,000 giving me a $200,000 profit, then I would not have an CGT to pay.
Does this exemption make sense or sound fair to you?
Defining the farm house as opposed to the farm itself is going to fun, particularly for tax accountants and lawyers. Boats being exempt CGT is interesting too – perhaps this is because too many boats depreciate in value, meaning refunding CGT. With beach houses and secondary homes subject to CGT, could we see a positive for the luxury boat industry if CGT comes in!
No GST on fresh fruit and veges is a strange exemption too. Australia does silly things like tampering with exemptions and as a result have a massively larger GST Act than we do. Are dried apricots fresh fruit? Are exported coconuts fresh? Is coconut ice fresh? Are bounty bars covered? How do frozen peas and veges fit into this exemption? Will retailers have to spend a lot of money complying with the act, changing their accounting and IT systems to cope with this awkward change? I think Labour should stop thinking about tampering with a good piece of legislation and instead focus on raising the quality of life and incomes for all New Zealanders.
Envy Tax – a smile back to tax accountants and lawyers faces
So that leaves the 39% tax rate on those who have personally succeeded and earn incomes over $150,000. This is an increase of 6%, and hardly rewards our nations most valuable taxpayers. I think that it is unnecessary and very disappointing when many of these earners have the ability to go 3 hours west to Australia and earn more. The lower tax rate here helps keep some of our country’s largest taxpaying citizens who we need to maintain the tax base and welfare state we have developed. Why punish high income earners? I think those that pay tens of thousands in tax per year, as opposed to consuming tens of thousands per year should be rewarded. With all the healthcare, medical, pharmaceutical, diet advances and lifestyle changes we are living a lot longer, which places a great burden on the taxpayers. With the pension age of eligibility only at 65 years of age, we just cannot afford to lose high income earners. Also this tax will mean a lot of people become companies, partnerships and trusts and be contractors not employees, and perhaps billing their would be employer’s subsidiary companies to get around the inevitable restrictions that would be imposed. Again tax accountants and lawyers will win.
Then again they always do under Labour. Remember the 25% superannuitant surcharge, and differential tax rates under Labour from 1999 – 2008. National is shortly going to strip lawyers and accountants gravy train of annual gifting $250 – $550 fees for signing a template document and IRD form to forgive $27,000 of debt off your own home (and other assets) each year in favour of your Trust.
Labour’s Policy Rating
I will be generous and give them a solid 1/10 for making an effort.”
Earlier this week I got back from holiday at the idyllic Otama Beach in the Coromandels. I had a very relaxing time, but something disturbed me in the papers. It wasn’t the article about the dangers of swimming in the ocean for fear of a shark attack.
Life was particularly stressless on Otama Beach in the Coromandels with limited cellphone coverage
Seriously there are millions of sharks in New Zealand territorial waters and there have been millions of swims and swim hours without a shark attack. I know a bit more than this than most having my second degree at a Bachelor of Science majoring in biology, where I did a number of zoology papers, including marine biology. I was lucky enough to have tuition from two amazing individuals Professors John Montgomery and Scott Baker, and being able to spend some quality of time at the University of Auckland’s Leigh Marine Laboratory (the ‘marine campus’) about 100km north of Auckland. I loved my time there and thoroughly enjoyed studying for my BSc (usually more than my law degree in fact).
More New Zealanders get hurt by getting out of their parked cars, than by shark attacks – maybe we need an article on that! Getting to the subject matter of this article and what annoyed me, was the series of articles run in the NZ Herald where tax lecturers in the University of Auckland’s commercial law department, Craig Elliffe and Chye-Ching Huang, proposed the introduction of a Capital Gains Tax. They built upon the ideas set out by columnist Fran O’Sullivan in the NZ Herald article Ten ways to beat our snowballing debt, published on 9 December 2010. Whilst I agree with most of Fran’s ideas, I didn’t like item 5 – introducing a capital gains tax or a land tax.
Elliffe and Huang wrote about how this is a great idea to help reduce Government debt and that it is fair and equitable to have a new tax, and this would not distort investment choices adversely. They were disappointingly emotive in stating that having a capital gains tax would help save New Zealand from ‘fiscal suicide’. Despite being respected academics, particularly Elliffe who has worked as a tax partner in a leading commercial law firm (Chapman Tripp), they have conveniently forgotten that New Zealand’s mountain of debt is mainly not government (or sovereign) debt. In fact New Zealand is an outstanding performer globally when compared to most other countries around the world. Below I have included a graph from visualeconomics.com so you can see where the real debt issues lie. Like Australia and China, we have low levels of public debt. The countries in the red zone (just look at Italy, Japan and Zimbabwe) of the following graphic are the ones with a debt problem. As a country we are in the safe dark grey zone with Government debt at (considerably) less than 30% of GDP.
Cut Government Spending
I don’t think for a minute that it is smart for our Government to borrow $300 million each and every week. This figure has gone up over the past year as the tax take reduces, and we have more pressures for Government spending. Whilst there have been arguments made about the ballooning of credit that we used for investment properties, farms, credit cards over the past decade, we clearly have a spending problem at the Government level. So instead of increasing Government income by raising taxes, which makes things tougher for people choosing to work and striving to get ahead, we should consider something even simpler. We should just cut Government spending. After all how prudent is it to run a household that spends a large percentage more than what it earns, and plans to do so for over 6 years? In our electoral system we voters have the chance to elect Governments and we are supposed to tell them what we want, and they as our servants (hence the term public or civil servants) carry out these tasks for us. Do we want to borrow several billions of dollars every year until 2016 and create a noose for the taxpayers now, our childrens’ and grandchildrens’ generations in terms of servicing the interest on this debt?
That is not a New Zealand I want to life in. So why we persevere with a universal pension at 65 years of age, when the statistics show that we are living much longer healthier lives in general, and that we can’t afford to keep funding it is beyond me, but for one thing – fear of being turfed out of Government in this MMP consensus style of politics with a very short 3 year electoral life cycle.
How else can we cut Government spending? Let me give you just a few of my ideas to explore further as this is already a long blog:
- Cut the number of MPs down to around 80 people
- Cut MPs perks and benefits
- Cut the entourage MPs have
- Change the Electoral Act to have a longer term of Government (4 or 5 years) to encourage longer term thinking
- Dispose of MMP and its costly consensus based politics (foreshore and seabed anyone?)
- Reduce central government bureaucracy
- Reduce local government bureaucracy (including the sheer number of civil servants and focus on customers needs, not council’s needs)
- Sell non-core Government assets that have a poor return (on asset value – eg. Power Companies, Accident Compensation Corporation)
- Make the benefit system a hand up not a hand-out (remove the ability to choose whether you work or not)
- Question the doctors who certify people (including a past tenant) as medically unable to work, except they can lift kegs of beer with their “severe back injuries” and go fishing, and put an end to those vast numbers of people rorting the costly invalid’s benefit (note the sickness benefit is the temporary and short term one)
- Raise the tax on cigarettes so they cost at least $25 per packet (that will stop a great number of smokers and therefore save a lot of money on our pressured healthcare system)
- Ditch Working For Families
- Cut the silly subsidies (did billionaire Sir Michael Fay’s daughter need a $50,000 NZ on Air grant?, revisit the SuperGold card free trips to Waiheke Island subsidy, having TVNZ + TV3 + Maori TV bid all subsidised is rather ridiculous and put the bid prices up for the International Rugby Board without any additional benefits to NZ taxpayers – we could watch private broadcasters TV3 for free or even pay for the Sky Sport service for 2 months)
- Cut spending on tertiary education (but maintain the student loan scheme)
- Charge interest on student loans
- Don’t let people leave NZ until they have paid off their student loan (as chances are you will not get it all back)
No More New Taxes
We need another tax, like Rafael Nadal (world number 1 and holder of 9 grand slams at just 24 years of age) needs to be told how to play tennis. The idea of a new tax really offends me. It smacks of arrogance and a neanderthal like ‘big Government is good’ mentality without really thinking about it. Do we really want to live in a country that seeks to strongly impact on an individuals liberties and intrude further on their personal freedoms? Do we want to run the risk of more good Kiwis going overseas?
Lets encourage and praise those that want to make a better life for themselves and not be dependent on the Government for hand outs. Lets salute those patriots of New Zealand who own assets and contribute from paying for returns on those assets (eg term deposit holders in taxes on interest income; rental property owners in taxes on rental income and land rates; home and secondary property owners who pay land rates; share owners/managed funds/Kiwisaver funds who pay taxes on dividends etc).
I want to live in a New Zealand that rewards those who receive income, pay tax on this income and don’t spend all of their net income, so they have this money left over to built their asset base. That is after all how I like thousands of others of New Zealanders have built our property investment portfolio and retirement nest egg. It is a simple fact of life that many older New Zealanders don’t want to or can’t manage or don’t want the additional hassle of having ownership of their rental properties as the move into their 70s, 80s and 90s, so they sell them. Sometimes proceeds are used to pay down or pay off debt, at other times term deposits are created. Some even invest in high yielding shares. Again these asset owners are making income which is taxable, to help Governments of the day, and they are far more self-sufficient than most Kiwis that own no assets. So why is punishing these people with a capital gains tax a good idea?
Impact on Housing New Zealand?
Also if there was a capital gains tax in New Zealand, I wonder how many people would invest in Australia (that has a Capital Gains Tax with some exemptions). Australian cities and towns have a higher capital growth rate than that of New Zealand over the years and they have a higher population growth forecasts than other New Zealand cities (apart from our financial hub Auckland).
With New Zealanders investing in Australia, how much pressure would this put on Housing New Zealand to borrow more money to buy houses for our nations poorest individuals? This social aspect of property investment is an invaluable one and is often overlooked. It has not been taken into account by Elliffe and Huang again either.
Raising Government income by its own means?
If it was not politically achievable to cut Government spending that is disappointing. However we could always have fun like other Governments are doing with interfering with money supply, eg. quantitative easing (money printing) or do what we have already done and get our Reserve Bank back into trading the New Zealand Dollar to suppress it to help our exporters for an export led recovery, and to make billions of dollars in FX gains. Baring disaster there will be pressure in 2011 for the Pound (GBP) to hit 0.5000 vs the NZD, and for the US Dollar (USD) to hit 0.8000. The Reserve Bank can buy some of these currencies when our dollar is high against them, and sell them as it gets low. Other countries do this too – why can’t we? New Zealand needs a capital gains tax as much as we need the plague to strike us.
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?