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8
July 2007
Struggle
Street
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 While
we were away in Europe for two weeks, we did see New Zealand
featuring in the news – but no, it wasn’t about the
America’s Cup. It was about the Reserve Bank’s
unprecedented foray into the currency markets! But more on
that later…
The
most sobering aspect of our trip was the realisation that New
Zealand’s standard of living is more like Poland, than
Holland, Denmark, Sweden, Germany, Singapore, and many other
countries. And that’s despite Poland being shackled by the
vestiges of socialism and organised crime.
The
troubling question is how can this be, when we have so much
going for us? What has forced so many families to live in
Struggle Street when our economy continues to deliver to the
government record tax surpluses?
The
answer is that our economy is like one very poorly tuned
automobile (a fiat 500 comes to mind) - no matter how hard you
put your foot on the accelerator, the car will never do more
than cough and splutter its way along the autobahn. So it is
with our economy – all of our combined effort will never
flow into standard of living increases, until the economy is
managed for growth rather than spending.
At
the top of the faults list has to be our tax rates. Most New
Zealanders now understand that they would be better off if the
government didn’t have so much of their money in its pocket.
That’s why the promise of tax cuts in the 2005 budget –
through raising tax thresholds - was so important:
“We
have decided to raise the thresholds by a uniform 2% each
year. Compounded over three years this produces an increase of
6.12%. In April 2008, the income threshold for 15% tax will
rise from income up to $9,500, to income of $10,081. The
21% threshold will rise from income up to $38,000, to $40,324.
The 33% threshold will rise from income up to $60,000 to
$63,672. And the 39% rate will cut in at $63,673 instead of at
$60,001 now. (Michael Cullen in the 2005 budget speech, click
to view>>>)
However,
in a shocking revelation, Cabinet papers posted on
Treasury’s website last week now reveal that on April 15th
– over a month before the 2007 Budget – the tax cuts were
secretly rescinded:
“Our
increased spending in Budget 2007 has not been costless. I may
need to make some adjustments to future Budgets. These are
likely to be: that
we do not adjust tax thresholds in the medium term thereby
retaining fiscal drag and potentially allowing tax to GDP
ratios to rise slightly. Accordingly, this paper seeks
Cabinet’s agreement to rescind our previous decision to
adjust income tax thresholds on a three-yearly basis.”
(To view Cabinet Paper on Budget 2007, click
here>>>)
The
deception over this is a blow to every hard-working New
Zealander.
In
Europe flat taxes are common and consumption taxes reach 25%.
The question is whether there would be public support for
increasing GST and lowering income tax? In my mind New
Zealand’s goal should be to introduce a simple flat tax
covering personal, company and consumption tax, set at 19%.
This was the rate proposed by Hoover Institute Senior Fellows
back in 1981 for the USA and is the rate that is driving
economic growth in Slovakia. (To view the Hoover Institute
“Where the flat tax goes from here” click
>>>)
Slovakia’s
flat tax, introduced in 2004, has generated a growth rate of
over 8% p.a. and with it a dramatic improvement in living
standards. A fascinating Harvard Business School discussion
“All Eyes on Slovakia’s Flat Tax”, published in April
and featured as this week’s NZCPR guest commentary,
explains:
“Economists
and business leaders alike are talking about flat taxes in
many countries. As Western European countries lose ground vis-à-vis
countries in Eastern Europe endowed with low tax rates, low
salaries, and skilled labor, governments will increasingly
look for ways to reform their tax and labor systems in order
to attract business—or simply stop businesses from
delocalizing. The direct effect of the Slovak flat tax can be
seen in Europe, where neighboring Austria has lowered its
corporate tax rate from 34 percent to 25 percent. This has
been perceived by many as a clear sign that the Slovak reforms
have been attractive to foreign investors. In response to
broader initiatives, Germany has recently decided to reduce
its corporate tax rate from 39 percent to below 30 percent in
an effort to make the country attractive for investors.
Similarly, voters in Finland decided to oust the ruling Social
Democrats in favor of parties promoting tax cuts in response
to the attraction of neighboring Estonia's flat tax. Most
recently, the United Kingdom reduced its corporate tax rate
from 30 percent to 28 percent and its income tax rate from 22
percent to 20 percent in an attempt to simplify the tax
system”. (To read the full article click the sidebar link
>>>)
The
Czech Republic, which has lowered personal tax rates but
unlike many of its Eastern European neighbours, has not
adopted a flat tax, remains paralysed by its government. As
the Economist points out:
“The
June 2006 election to the lower house resulted in a hung
parliament, with centre-left and centre-right parties each
winning 100 seats. On January 19th 2007 the Czech Republic
finally confirmed a government, about seven months after
holding the general election. However, the three-party
coalition, comprising the Civic Democratic Party, the
Christian Democratic Union-Czechoslovak People's Party and the
Green Party, still lacks an absolute majority in parliament,
and will struggle to push deep structural reforms through
parliament”. (To read more click
here >>>)
This
sounds uncannily like New Zealand, where the sort of
courageous reforms needed to introduce say, a flat tax,
appears to be almost out of the question under MMP as parties
seem to be increasingly losing their identities and morphing
into each other. (If you still haven’t voted in the MMP poll
at the top of the www.nzcpr.com
homepage, please do so!!!)
So
while a flat tax and a prosperous economy might be a distant
dream at this stage, we presently face extremely serious
problems on the home-front as the collateral damage from
having the highest rates of interest in the Western World and
a dollar at record levels, bite deep, killing off business and
crucifying exporters.
The
reason, of course, is that New Zealand Government Stock offers
a high rate of risk-free return to overseas investors who can
borrow money far more cheaply at home. There is no better
example of this than Japan where investors can borrow at a
rate of less than 2% and invest here to achieve 7-8%. With
that sort of easy-money incentive it is not hard to see why
there has been a strong inflow of Japanese currency buying
Kiwi dollars and in the process creating unprecedented demand
for our currency.
While
our interest rates remain high, it is logical to predict that
the Kiwi will remain in strong demand, and the dabbling by the
Reserve Bank in the currency markets is not likely to change
that. Instead, surely the focus should be on what is driving
such excessively high interest rates.
We
have been repeatedly told by socialist politicians that
“speculators” driving the booming housing sector are the
culprits. The fact that these so-called ‘evil’ speculators
are mum and dad homeowners who have sought to trade up to a
better house or invest in a rental property for retirement
purposes, is by-the-by. And the fact that demand for housing
was driven by the sudden influx of tens of thousands of
immigrants a few years ago when the government got their
immigration numbers wrong, is conveniently forgotten. Also
conveniently glossed over is the inflationary effect of
year-on-year record levels of government spending.
In
an article published in the Dominion Post on Monday,
“Reserve Bank needs sharper focus”, Infometrics economist
Brent Oliver reveals that changes to the Reserve Bank’s
policy targets, made by Labour when they first came to office,
are responsible for exacerbating the situation resulting in
“interest rates and the currency being higher now than they
would otherwise have been”. (Click here to read the article
>>>)
But
there is another issue. In contrast to the rest of the world,
New Zealand’s Consumer Price Index, which is used by the
Reserve Bank as the trigger for raising interest rates,
includes a heavy weighting of housing costs. Some countries do
not include housing costs at all, while many other countries
use an imputed rental approach. The conclusion to an
international analysis of Housing Costs in the CPI by the
Reserve Bank is that “there is a strong case for moving over
to an implicit rental approach to bring New Zealand’s
principal inflation measure into line with internationally
accepted standards” (click here to view
>>>). Maybe if we did that, mum and dad
homeowners would no longer cop the blame for CPI increases.
The poll
this week asks: Do you
support
the introduction of a 19% flat tax in New Zealand? Take part in poll
>>>
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