Thus the roller coaster continues. There are many words you can use to describe this Reserve Bank Governor, but slow and steady is not two of them. Still, better to come down faster when the economy is clearly on its way back.
We are now likely through the peak of the recession but there remains plenty of mopping up to do. Many balance sheets in both the public and private sectors have been wrecked, with high levels of debt and low levels of equity. Unemployment, which always lags a recovery, has probably a way to rise yet, as companies and Government entities continue the necessary restructuring.
Further evidence came last week of just how badly the Government books have deteriorated over the Covid period and its aftermath. The accounts for the year to June show total Government spending has lifted from just under $100 billion a year in 2017 to $180b this year, an 80% increase. The Government’s core debt has more than doubled from 21% to 42.5% of GDP, and the Government sector has grown to a massive 44% of our total economy.
And yet there are still people who think the solution to our woes is more public spending. If it were, then surely the public sector would be running perfectly after the largesse of the past six or seven years and it clearly isn’t.
Driven partly by the left spying an opportunity, and partly by the apparent hopelessness of the Government’s fiscal situation, the idea of a capital gains tax has reared its head again. A chorus of diverse voices are touting it as “the answer”.
For an alternative view: A good capital gains tax should mean lower income tax
If I was in the current Government, I’d be more than happy for this debate to go around one more time. Labour has promoted or flirted with a capital gains tax in several recent elections, in all of which it went on to lose the popular vote convincingly.
The first practical problem with a capital gains tax is what it would apply to. Pretty much everyone except maybe the Greens immediately rules out the family home, because that is political kryptonite. Try to tell New Zealanders the Government will take a cut on the sale of their family home, which they’ve paid for via their (already heavily taxed) wages and salaries, and they’ll show you the door.
The next asset to get excluded is the family bach. Having a holiday home at the beach is almost considered a birthright by a large group of New Zealanders. Touch that at your peril, too.
Then we move on to the primary sector. Taxing the sale of the family farm is tantamount to declaring a political war on rural New Zealand. For most farmers, the equity in their farms is their retirement savings scheme. For many livestock farmers, the appreciating capital value of their land over the decades is the only significant upside they get for years of hard toil. So that, too, is effectively a non-starter.
At this point in the argument nearly all who are left in the net is the late Sir Michael Cullen’s “rich pricks”, a few of whom are actually wealthy but most of whom are small and medium-sized business owners. We are a nation of small businesses, and included among them are groups such as West Auckland tradies, battling shopkeepers and hospitality businesses up and down the country. Once those people realise you are after their prospective nest egg, you are in trouble once again.
All of which leaves you back taxing the capital gains of share traders or on bank deposits, both of which is already done, and the capital gain on rental properties. That, too, is already taxed if you fall on the wrong side of a politically moveable bright line test. It’s at this point the whole idea collapses.
As convincing as the political argument against a new (or more correctly a broader) capital gains tax is, the real argument against it is the economic one. And that can be summed up simply as you can’t tax your way to prosperity. The more you tax, the more you stifle economic activity. A state that keeps getting bigger simply drains away economic activity in the productive parts of the economy.
You also don’t increase taxes on economic activity you are trying to encourage. If you want more people starting businesses, taking risks, having a go, hiring people, and aspiring to succeed, don’t tax that activity more.
This applies double when you are trying to rebuild an economy. How would it make sense to increase taxation on the very people you want to help us grow out of trouble?
It is very hard to make a dollar running a business in this country. We are small in number, well spread out, not especially wealthy, and isolated in world terms. It is much easier to set up and run a business almost anywhere else, including Australia. The lack of a capital gains tax is one of the few points in our favour.
And this is where organisations such as the IMF, perennial recommenders of a capital gains tax, go wrong. They fail to recognise how small and remote New Zealand is. The big difference between us and countries such as Ireland, Singapore, or Denmark, is that they all live right next door to very large populations.
In any event, the New Zealand Government, already nearly half the economy, surely does not need to be a larger part of it again. All the evidence says the chunks of society it already runs are performing relatively poorly.
No, the solution is not more tax, but diligent hard work in getting costs under control, doing more with less (aka improving productivity), and swapping poor spending for investment in infrastructure and the like. In short, getting our national balance sheet back in order.
We did it last time, after the twin shocks of the GFC and the Christchurch earthquakes, and we can do it again. It’s a hard grind but it is worth it — not least so we have the capacity to absorb the inevitable next shock.
Let’s not get distracted by talk of new taxes, which will either fail to get up, or if they do get up, just reduce our competitiveness. New taxes of any type can only slow the recovery down.
