OPINION
Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up for my weekly newsletter, click here (for step-by-step instructions, click here). If you have a burning question about the quirks or intricacies of economics, send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
Last week I mentioned a poll that found 65% of Kiwis support a Capital Gains Tax in some form. It was an interesting survey by international research company Ipsos looking at a range of issues and how New Zealanders feel about them. It found inflation and the cost of living still topped the list of concerns but healthcare and hospitals were running a close second.
The full story was covered by Herald political reporter Thomas Coughlan (now on the ground in the United States).
But despite the story including a range of topics, the Capital Gains Tax (CGT) result was picked up by other media and got all the headlines. That was almost certainly because it is such a contentious topic and the figure of 65% support was surprisingly high.
Some readers have expressed scepticism about the 65% figure and have even suggested the reporting of the survey was inaccurate and misleading.
That would be a concern if true.
So, I went back to Ipsos to double-check the figures and get them to explain the methodology. They responded:
“A couple of points for you. Designing this question was difficult because it is very situational, so it doesn’t make sense to ask a broad question of support for this topic. The reason is the answer is likely to be “it depends (on the situation)”.
Your reporting was correct, 65% did say they would support a CGT in one (or more) of those situations.
To give you a bit more detail: 7% said yes to all 4 situations, 11% to 3 situations, 27% to 2 situations and 20% to just 1 of the four. That means nearly half (45%) said yes to 2 or more.
On the flipside, 23% said no to all of those situations and 85% said no to one (or more) of those situations.”
That’s interesting. Not only is the 65% figure accurate but only 23% of people said they were opposed to all forms of CGT.
Based on this survey (and it is just a poll of 1005 or so people — with a margin of error of about 3.5%) it does seem fair to say support for some form of CGT is fairly strong in this country.
I suspect what people objected to was the framing of the headlines, which simplified the results and focused on that one aggregate number — 65%. But, for better or for worse, is the nature of almost all media headlines.
If I had to say what the most representative figure was with regard to the kind of capital gains tax we might expect from a Labour Government then I’d say it was probably the 45% who supported a CGT in at least two of the categories.
That falls more along party political lines and is intuitively where you might expect support to be.
But that’s not what was being polled and would have required some big subjective assumptions to run as a headline.
It’s also not especially interesting or unusual.
Headline writers make choices but usually emphasise the thing in a story that is most unexpected. There’s no question the media has a bias towards the unusual and interesting. That’s what makes something ‘news’. There was an old adage I learned in journalism school: dog bites man isn’t much of a story. Man bites dog, on the other hand...
If that annoys you about the way the media works then fair enough... all I can do is tell you that it has been that way since the first pamphlet rolled off Johannes Guttenberg’s printing press.
Martin Luther reformed the Christian Church and sparked hundreds of years of religious war with an article headlined: “Disputation on the Power and Efficacy of Indulgences” Needless to say, there was a lot more going on if you read the full article.
Being short doesn’t make the headlines wrong.
What’s important then is that the full details are covered in the story. Which they were, in the Herald story at least.
They showed that 57% of people supported a Capital Gains Tax on investment property, 43% supported a CGT on the sale of a business, and 22% supported it on the sale of other assets such as boats, cars and paintings. And, of course, unsurprisingly just 13% supported it on the sale of the family home.
The breakdown of different levels of support for different capital gains tax scenarios is important and interesting.
But if we’re looking broadly at support for a CGT in any form then each of these situations is a subset of the two outer extremes. How many support a CGT in some form and how many don’t support one in any form at all?
My view (and why it doesn’t really matter)
Clearly, there are opinion writers who support a CGT and opinion writers who don’t. Stephen Joyce made a strong case against it in a recent Herald article.
For the record — as I said last week —I am currently agnostic on a CGT. I am opposed to it if it is not offset by lower income taxes.
But I’m concerned the demographic direction we’re headed means we’ll need to reform our tax system at some point. And some form (there are those words again) of CGT will need to be in the mix.
Our population is ageing. In the coming years, we are going to have considerably more retired people to support and relatively fewer workers paying income tax to pay the superannuation and healthcare bills.
Over the next 30 years, according to Stats NZ, New Zealand’s population of seniors is expected to grow from about 850,000 (17% of the population) to 1.5 million (24% of the population).
Hiking income tax on an ever-smaller proportion of Kiwis isn’t realistic or fair. It will disincentivise work and send young people offshore, exacerbating the problem.
So unless we want to cut spending massively, we need to look at the structure of our tax system.
But that’s just my personal view, which I share in my opinion columns. It might help people frame their own opinion but it isn’t relevant in the news coverage.
When it comes to headlines on news stories we just want people to read the story.
It’s great that people read this one. It’s great it stirred up some debate and discussion about tax policy which — with all due respect to my accountant friends — is generally a bit dry and dull. I hope people consider all the ramifications of the current tax system and the ramifications of any potential reform. Then I hope they make up their own minds.
But let’s keep it all in perspective, this was just a poll on an issue that isn’t on the agenda for the Government right now and is unlikely to be anytime in the near future.
I’ve already hedged my bets and written a column that gives the edge to Donald Trump in the US Presidential race. And yes, I am hoping I’ll be wrong. In that sense, it’s a bit like putting a bet on the All Blacks to lose the World Cup final. But my gut feeling is that Trump’s support has held up extremely well and he seems to be on a bit of a roll in key states such as Pennsylvania and and Arizona. We’ll see.
Financial market traders seem to have taken the same stance. We know they favour Trump because we have seen the US dollar strengthening and bond yields rising in recent weeks.
Business Herald senior markets writer Jamie Gray took a deep dive into the so-called “Trump Trade” at the weekend (which you can read here).
He notes that “markets anticipate fiscal expansion and more bonds coming on stream under a Trump administration, which has served to drive yields up across the curve.”
In other words, Trump’s proposed tax cuts would require more US borrowing to deal with the inevitable deficit blowout. More borrowing means more US bonds being issued and puts upward pressure on interest rates... which pushes a stronger US dollar.
The Trump trade means we can see markets have been pricing him in as odds on to win. But on Tuesday the US dollar actually slipped back a bit, something analysts pinned on a poll which showed Kamala Harris taking the lead in Iowa a state Trump is expected to win.
So those masochists following every poll and every bit of commentary about this US electoral circus can add the currency markets to their list of barometers to check.
A stronger US dollar means traders are more confident of a Trump win, a weaker US means they are less confident. And thanks to the joy of live trading you can watch those odds change by the minute.
We should be wary of other factors that might move the markets. But at this point, the US election is casting a long and dark shadow.
There’s also no way to know if the market will pick it correctly. It’s just another (admittedly larger) bunch of people watching worrying and making a call.
The nice thing — especially for those who worry about media bias — is that financial markets don’t care about anything except making money.
So while they can get it wrong it won’t be because of blind support for one candidate or the other.
In the scheme of things, the Kiwi dollar is pretty irrelevant. But the Herald’s Jamie Gray quotes ASB economist Mark Smith pointing out that a Trump win won’t be great news for us.
“If Trump goes through with the protectionist sentiment, it will mean a big headwind for the New Zealand economy, which depends on trade.
“That can hurt the New Zealand economy, so I would expect the New Zealand dollar to weaken further.
“A Trump victory would certainly be a negative for the New Zealand dollar.”
Gray’s story also notes that markets are pricing in a 25 basis point cut in the US Federal Reserve’s funds rate on Friday, expectations of another 50 basis point cut have faded, as the economy looks to be heading towards a soft landing.
Meanwhile, in its preview of the Fed’s call, the Financial Times notes that the election is casting a shadow over the US central bank’s pathway from here.
I wrote about this last week but the FT offers another good summary:
“Former president Donald Trump has touted a return to more protectionist trade policy with the imposition of a sweeping set of tariffs, in addition to lower corporate taxes and a crackdown on immigration. He has also signalled his preference to have a greater say in the Fed’s monetary policy decisions — a worrisome incursion on the institution’s long-held independence if realised,” writes the FT
“Vice-President Kamala Harris, meanwhile, has focused on expanding the country’s social safety net, paid for by higher taxes on the wealthy, while upholding the Fed’s independence. Initial analysis from most economists suggests Trump’s plan would be more inflationary than Harris’s and could also dent growth. But what policies are actually enacted — and in turn their economic impact — will depend chiefly on how power is divided among both chambers of Congress.”
Against that backdrop, nobody expects too much detail from Fed chairman Jerome Powell on Friday about the path forward from here.
There has been plenty written about Trump’s proposed tariffs and what they might mean for New Zealand (none of it good).
The prospect of a trade war and more tariff barriers around the world isn’t great for a small exporting nation. We’ve also seen commentary that suggests there are likely to be trade headwinds even if Harris wins.
Chris Nixon, a principal economist at the NZIER, has taken a look at the implications of the election for New Zealand and warns that we may be facing a lose/lose scenario on trade.
“The current situation is a bad place to start — whoever gets in,” he begins. “The world trade landscape is dominated by Trump even though he has been out of office for four years. The US$300 billion [$501b] of Chinese tariffs remain, and for good measure, Biden has added a further US$18 billion.”
Unfortunately, while Trump is the one talking big about new tariffs, they’ve become one of the few areas of bipartisan agreement in US politics.
“We know that tariffs are the answer to everything for Trump/Republicans,” Nixon says. “But the real worry is that Harris/Democrats will also be seduced by their allure. We are very unlikely to see the United States do a backflip of tariff policy.”
All of that just makes New Zealand’s multi-lateral and bipartisan trade deals more important. The Coalition Government has made good progress in its first year shoring up two deals in the Middle East. It did a bipartisan deal with the United Arab Emirates (UAE) followed, last week, by a broader free trade agreement with the Gulf Cooperation Council (GCC), which comprises the following countries: Saudi Arabia, United Arab Emirates (UAE), Qatar, Kuwait, Bahrain, and Oman.
ANZ economic Susan Kilsby took a look at New Zealand’s trade relationship with the region in a research note this week.
These countries combined currently account for 2.7% of New Zealand‘s exports, making them collectively our seventh-largest trade partner, she wrote.
“Saudi Arabia and UAE are currently our main export markets within the GCC, with dairy being the main export to both of these countries. Saudi Arabia is also a significant market for mutton.”
The current tariffs are relatively low, but the elimination of these and improved access will strengthen New Zealand’s trade in this region, she said.
“The agreement will also make it easier to do business in these countries and New Zealand businesses will have guaranteed access to central Government contracting opportunities. It will also be easier for New Zealanders to work in this region as our companies will have access to a range of visas.”
I agree. The value of these deals isn’t just in the elimination of tariffs — big or small.
In my view — as we’ve seen with China — these deals open new trade pathways as a closer economic relationship develops. That value is not as tangible and easy to measure as tariff removal but because it relates to business we’re not doing yet.
But when new markets present opportunity business people will often take advantage.
That’s why there is so much value in the Government progressing free trade talks with India, even though there is almost no chance of major export products such as dairy being included in any deal — initially at least.
For the record, Kilsby notes that the trade balance with the Middle East is lopsided. New Zealand exports far outweigh our imports from GCC countries, which are primarily oil.
Speaking of the Middle East (it’s always nice to find a segue between items) oil prices have had a bit of a bump this week with Brent Crude up almost 6% to US$75.
So expect to feel a bit of a squeeze on your wallet filling up this weekend,
It’s nothing to do with the US elections at this point. Although a lower Kiwi dollar adds some pain at the pump.
The eight members of the Opec+ group of oil-producing nations said on Sunday they were extending supply cuts until the end of December, AFP reports.
The countries “have agreed to extend the November 2023 voluntary production adjustments of 2.2 million barrels a day for one month until the end of December 2024″, the organisation said in a statement.
The eight Opec+ nations are Saudi Arabia, Russia, Iraq, United Arab Emirates, Kuwait, Kazakhstan, Algeria and Oman.
They have been delaying production increases amid concerns over slowing demand in China and the United States, which has weighed on oil prices in recent months.
Finally... yes it is US election day, but don’t forget we get Labour Market Data for the third quarter this morning at 10.45am. That will include the latest unemployment number as well as data about wage inflation.
It’s the last big piece of data the RBNZ will see ahead of its next OCR call. Economists see unemployment landing at 5% — the highest level in four years. But most think that it would need to be significantly worse than that to prompt a 75 basis point rate cut on November 27. The consensus is that we’ll see the RBNZ opt for 50 basis points.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
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