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How the coming inflation surge will cost savers NZ$9 bln and why they need a tax break
The dangers of inflation for savers
There's been a lot of discussion about the inflationary effects of the GST increase since the budget, but everyone is looking in the wrong direction.
Everyone is talking about consumers and interest rates, but are ignoring savers who are taking the biggest hit. Labour is pointing to the combined effect of the GST hike, increased power and petrol prices from the Emissions Trading Scheme, and increased ACC levies as a sign the government is increasing taxes and making consumers poorer.
Even the Treasury is forecasting annual inflation will hit 5.9% in 2011. That is almost triple the middle of the Reserve Bank's target range of 1-3%.
The government responds that it has structured the income tax cuts and various top-ups to ensure both middle and lower income earners are not disadvantaged by the GST increase. The government even argues that real after tax incomes will rise between 0.5% to 1% once tax increases on property investors and foreign-controlled companies are spread around. The government also rightly points out that its moves to reform taxation will eventually improve growth rates and incomes. This is less certain, but a fair enough argument on the income side of the debate.
Interest rates are also unlikely to be affected directly by this surge in inflation. Reserve Bank Governor Alan Bollard has already pointed to the clauses in the Policy Targets Agreement which allow him to 'look through' the jump as a 'one-off' increase, as long as it doesn't lead to any longer term increase in inflationary expectations. There is some uncertainty around this idea that the jump through 2010 and 2011 will be ignored.
The Reserve Bank's own survey last week of businesses' expectations of inflation show a spike up to 2.9% in the June quarter from 2.1% in the previous quarter.
But everyone is focusing on these two pieces of fallout from the inflation spike: consumer purchasing power and interest rates. They are ignoring what is potentially the most damaging impact that will not be compensated for. New Zealanders had NZ$153 billion worth of savings in term deposits, debentures, bonds and savings accounts at the end of December, Reserve Bank figures show. Inflation erodes the purchasing power of all of these assets.
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Over the next year the expected inflation surge will reduce the real purchasing power of those savings by around NZ$9 billion. This dwarfs the potential compensation the government will provide for consumers, taxpayers and beneficiaries. So why is it being ignored? Savers will not be compensated for this one off erosion of this purchasing power. The irony is they will actually be taxed extra for the 'privilege' of earning interest on their savings.
One of the great injustices of our tax system is that the government takes tax on the inflation component of interest earnings on savings.
For example, anyone earning 5% of their savings is being taxed on the inflation component of these returns, even though it is eroding the real value of these savings. Term deposit rates are unlikely to rise much to compensate for the boost in inflation, thanks to Alan Bollard's move to 'look through' the spike. In the coming year savers will receive interest returns that are far less than inflation and will have to pay tax on the interest they do receive.
Many economists have argued that the government should exempt tax on this inflation component of interest payments. Australia has just announced a 50% tax break on the first A$1,000 of interest earnings from savings in term deposits. New Zealand should do the same, at least.
That would go some way to encourage savings and compensate savers for this one-off permanent reduction in their wealth.
The final irony is that one of the aims of the budget was to encourage savings and reduce the incentives to invest in other assets where tax is not paid on capital gains, such as property. This inflation hit does just the opposite.
58 Comments
A question Bernard: Is it
A question Bernard: Is it true that forced sale prices on property are deliberately not included in determining average and medium property values?
.. .. Why is inflation being
..
.. Why is inflation being ignored you ask ! On this , Iain Parker has some traction . Governments happily inflate their problems away , as the Americans and Europeans are currently doing under their QE programmes , munny printing . A cursory look at history shows that gov'ts have no qualms about enacting policies which wipe out the holders of the gov't's own bonds .
.. Savers : Holder of cash or cash instruments always lose the battle with inflation . ... . Back into property guys , that's safe !
Must away to beach today to
Must away to beach today to harvest the southerly bonanza..lovely hardwood high on the beach and oh man does that stuff burn well..best of all..no carbon tax to pay to a thieving govt.
Hey Wally, doesn't that salty
Hey Wally,
doesn't that salty wood rot out your woodburner?
.. .. Here's a thought for
..
.. Here's a thought for you Bernard : National to bring in a capital gains tax immediately AFTER the 2011 election . Then all holders of equity - property and shares - will be stung too . Wiped out the savers gains through inflation . Pinged the others through a CGT . Game-set-and-Match ! Governement 1 : Populance 0 .
If National campaign on A
If National campaign on A CGT, they won't be getting my vote or the vote anyone I know.
I guess I'll miss out on Gerry's chocolates next election, since he won't be putting his or John's billboard on any of our fences.
CGT will have Fendalton and Remuera seeing RED!
"Australia’s housing market
"Australia’s housing market has started to display the first signs of a long-anticipated cooling in conditions".
It's not a CGT that you have to worry about. This is a headline from the latest scribblings form possibly Austrlia;s most committed property bull, Christopher Joye. If we do not lead Australia down, which we most probably will, then they surely will drag us down.
There will never be a CGT in
There will never be a CGT in NZ while pollies still lead the charge for property ponzi schemes, as they do now.
Once these toxic schemes collapse under their own putrid weight, pollies will rush to align themselves with those who have been critical of property scams all along.
So more taxes will come into effect, but on all the wrong things and people, as always. The only ones not to suffer will be the pollies and their closest mates.
And you don't think that the
And you don't think that the lead time that has been given to anyone that may have seen the writing on the wall to exit property has been used to advantage by the dreaded pollies, already?! Hey; if I was making upo the rules I'd give a hint or two; madly scramble to quit my holdings and voila! I'm out! And "I told you so as well!" It's not my fault if you didn't choose to take notice"
Sorry, I don't buy it.
Sorry, I don't buy it. National rode into power largely on a wave of support from the property ponzi scheme's biggest group of supporters. That's a lot of people, comprising just about everybody in NZ on a decent income (by NZ standards of course). Those people are still enamoured of property and unwilling to cling to anything else. And there are just too many of them to suddenly ditch property all at once: you said the pollies are trying to avoid a property rout and the resulting economic damage, but that's exactly what will happen in any case.
It takes courage, vision, determination and integrity to make hard decisions and tough changes that no one at the time wants, and there's nobody in govt who is ANY of those things, let-alone ALL of them.
Dirty little double dipton and junkbond Johnny - like all pollies - are working away behind the scenes to get their personal financial ducks in a row, and ONLY their personal financial ducks. Why on earth would you think they'd give a stuff about the NZ economy beyond their own personal welath? They're only politicians after all.
Your second paragraph
Your second paragraph partially sums up all my views and beliefs in what will happen. I guess I have a faith in our politicians that many do not. But at some stage, hopefully this stage!, we will get all of those characteristics that you outline as being crucial to our future; to our sovereign survival. As I have said before, if we don't have a rich politician at the helm, now, who will make the necessary changes , then the global economy will force those changes on us anyway. I believe that Key & Co. have the insight and courage to see that. ( NB: I'm neither a JK fan, nor a Nat. voter in the last election)
Good luck with that because
Good luck with that because it would make a lovely 100% change after decades of the opposite.
We have far too much taxation
We have far too much taxation full stop (because we have far too much government, and this government is still growing the State - so logic would indicate that of course the 'have' to grow the overall tax take). But yes, a good place to start would be not to tax savings, and yes, I agree with you, inflation (caused by governments pumping the money supply) is theft of savings and is the blight of the West since control of money supply was handed over to politicians/central banks.
But one correction of you, Labour, and every mainstream news outlet: the increase of GST on 1 October is not 'inflation'.
Inflation is defined as the is a rise in the general level of prices of goods and services in an economy over a period of time.
The single day increase in GST is not inflation, it's just old fashioned in your face and straight from your pocket government theft.
The two add up to the same, but I prefer the blatant theft over inflation, as it has an honesty about it. People can see from that day the damage the government is doing to them. They are doing the same thing through inflation, but people don't make the link so easily, hence why governments have been getting away with growing Western States to such a huge size, and such an intrusion in an individual's life. We have all been led down this inflationary Road to Serfdom (Hayek) for a very long time.
Inflation is an increase in
Inflation is an increase in the money supply. Price inflation is a symptom of that.
.. .. As ever Mark , you ask
..
.. As ever Mark , you ask the question that really matters most , yet is consistently overlooked : " Why does Government spend so much ? "
.. Maybe it's an addiction ..... Maybe it's fun ..... Maybe it buys re-election ... .... " Whoop whoop , boing , ding ding ding " ... ... Hmmmmmmm , I think we have an answer !
... When're we gonna get an edit function Bnerard ?
Inflation is an increase in
Inflation is an increase in the money supply. Price inflation is a symptom of that.
They needed time for the
They needed time for the Party rump to exit the property RT..that way post the cgt after the election the rumpers and goodness knows how many govt mps will be able to pick up all that lovely property at knockdown prices. Oh it's great to be making the rules for all the fools.
Income is income. As long as
Income is income. As long as we have direct taxation we need to lower and simplify it. Tax income from savings, but ALL savings. Introduce a tax on the implied savings in property ( the equity component) and reduce the direct taxtion level to one rate of 20%.
Actually NA I suspect BE and
Actually NA I suspect BE and JK are trying to convince the peasants that more saving is good. So I doubt they would set a tax on income earned from savings higher than the rate of paye. Indeed it is bad enough now that inflation is engineered to steal near 3% of savings every year. If you 'earn' 4% you are standing still at best. So why bloody save at all?
For the majority, who are on low real incomes and can save bugger all..it is wiser to spend the cash on bulk food and stuff needed which can be stored at home. Dunny paper for a start.
The real damage is being done by property being seriously unaffordable thanks to those fatheads in the govts that Queen Helen lorded it over.
Store dunny paper - no way -
Store dunny paper - no way - I am waiting untill it is cheaper to use paper money.
To add to Mark Hubbard's
To add to Mark Hubbard's comment, inflation doesn't even necessarily mean rising prices. The term "inflation" refers to the actual increase in the money supply, so it is possible for prices to go down (due to productivity gains) quicker than the money supply increases, meaning you still have inflation even though prices are falling or stable.
Here's the thing, Wally. Yes;
Here's the thing, Wally. Yes; I understand your points; but those who are likley to be pinged by the flat 'savings' tax don't have them to tax, so won't notice the difference! As I see it if I save $1000 p.a. and stick it in the bank I get taxed at the marginal rate. ( Right or wrong on that tax, but that's what we have). If I pay it off the principal of my property, I don't get taxed on the 'savings' that have reduced my mortgage, or that I have put into a loan free property. How much do we have locked up in property? Billions of equity; savings. Tax the implied equity, at whatever you like - and make Bank deposits the same - and there goes our fiscal problem! If we are indeed an economy of 'property with bits tacked on', then lets' tax 'the economy' properly?
Spend it NA...blow it on bulk
Spend it NA...blow it on bulk food and stuff you can store. The savings earned on that are real and the thieving govt cannot get its grubby fingers on it.
It would be interesting to read about what can be saved by the average family if they go the bulk food way and throw in the garden and the return to the granny option of bottling the summer excess.
I reckon it would have to be more than $1000pa minimum.
At least, and it's even more
At least, and it's even more effective if neighbours team up. Not having the readies to buy in bulk is one of those traps where being poor makes life more expensive. My neighbour has a grapefruit tree and chips in a couple of bucks for bulk sugar, I make giant vats of marmalade for about 10c a jar, everybody wins, except for the gougers at the supermarket.
I think that times are probably going to be tough fairly long-term, and part of my diversified investment strategy has been to buy things like durable good-quality walking shoes and equipment for making and doing things for myself. Granny skills are where it's at. Frankly, I'd rather spend 10 minutes at home darning socks than spend half an hour fighting my way through all the slow-moving mouth-breathers at The Warehouse to buy new ones.
The old inflation vs
The old inflation vs deflation arguement, sir. I'm not buying anything; just selling whatever I can take a picture of and get on TradeMe... now where is Puss... Cheers!
This Government claims it
This Government claims it wants us to save but does nothing to encourage this. It stokes inflation via lunatic policies that spend like drunken sailors (ETS to name but one. It acts like a dog chasing its tail having to compensate people for an increase in GST.
I have money saved, and have worked out that if the RWT rate goes to 17.5% on 1 October unless the amount of savings held in the period to 31 March is equal to or less than that held from the earlier 6 months there will be tax to pay, because the "composite tax rate " for 2010/2011 will be 19.25%.
Also why I ask can not these tax changes be retrospective to the start of the tax year rather than bring them in half way through creating chaos and confusion? Perhaps it is because PAYE works on a week by week basis rather than on a cumulative running total as it does in the UK, and where tax reductions/increases can take immediate effect. Or perhaps the concept is just too hard to contemplate.
Very good article Bernard.
Very good article Bernard.
Savers are losers and nobody
Savers are losers and nobody likes them, not even the banks. We are supposed to subsist on debt, didn't you know? Mortgages, credit cards, overdrafts, hire-purchase agreements, IOUs, etc. That way we're PRODUCTIVE. Or something. Savers are selfish and nasty wee buggers who think only of themselves instead of the grand socialist collective.
Good one Bernard. How on
Good one Bernard.
How on earth can we expect to pay out our oversized debts if we don't encourage saving.
Accumulation of capital used to be a good thing. Now everyone thinks debt is a good thing. I have debt in order to protect against inflation. Something is messed up here.
Remind me, why does the Reserve Bank set short term interest rates?
Roger, Saving is not
Roger,
Saving is not investment . . . or paying off debt. By that I mean those politicians mainly, (and you by the looks of it) who berate the "bad" savings habits of the public "out there" as the cause of the "debt" problem. We wouldn't have to borrow so much if you saved a bit more! Shifting the blame so we are going to think of ways to improve your bad habits (eg. tax you more so that we can save for you!).
Well it actually doesn't work like that.
Debt is repaid by the return on the asset that the debt created. Debt raised on a failed asset or consumption (or government deficits funding consumption) can never be repaid. It's a white elephant, a bridge to nowhere, or consumed and gone forever, and loss to lender and borrower. What does the "saver" have to do with this?
Savings is an accumulated right to consume or invest (eg. China's surplus) but it's nothing until the spending decision is made. Unearned savings ie. savings accumulated from "rent seeking" is not savings at all because it hasn't been derived from value/added capacity created in the economy that the savings can be spent on (including savings accumulated by public servants).
The RB shouldn't set interest rates, it should be set in the marketplace by willing buyers and sellers.
Thanks Bernard! About time to
Thanks Bernard! About time to make this point more often and clearly however, I wouldn't be surprised if a large part of that money sitting in bank deposits, bonds etc. is actually working capital & cash held by commercial enterprise. Is there any way to get some breakdown on private vs commercial money from that RB figure?
Right now I have almost
Right now I have almost NZ$1.5m in "savings". That's years of hard work and going without. To me debt is an evil thing.
But now what? Maybe I should be struggling to cover the interest on a huge mortgage on a Look At Me mansion somewhere.
How long have people who save their money instead of spending it all been regarded as financial lepers?
'Why savers will never get a
'Why savers will never get a tax break.'
Because corporate-backed governments prefer consumers.
Good article. We had some
Good article. We had some friends around at the week-end and got talking about the economy. I mentioned this particular issue about savings to them and the reply was "Savings, what's that? Who's got savings these days anyway?". Sums up what a lot of people think I guess (we moved on to another subject...).
Trafalgar says (s)he has
Trafalgar says (s)he has savings, so at least one person does. I don't have any because I'm maxed out on property like most people, but one of my brothers has heaps of cash in the bank. I still reckon I'm better off than he is.
I have savings too and I'm
I have savings too and I'm not maxed out on my house (which I own)... Just saying that it was interesting to see their reaction (look of horror and/or incredulity) at the mention of "savings". They're not the only people I know who'd react in the same way.
Bernard, you've got to be
Bernard, you've got to be kidding. Have you lost your mind?
Go and buy some real (income earning) assets if you want inflation protection. (Real estate not gold!).
I think you'll find that hard
I think you'll find that hard to do. Most property of any calibre on the market today is a loss making venture, even with the current legislative framewrok, and that will now continuously be eroded by the Government. Buy an income earning asset, by all means, but that isn't property in New Zealand at the current market rate. You'll have to get 45% off, like Olly Newland did last week, to make the numbers work....not that he admits that 'property is falling', mind you!
"Go and buy some real (income
"Go and buy some real (income earning) assets if you want inflation protection. (Real estate not gold!)."
If property is over-valued and incomes too low and yields insufficient to cover the outlay, how is real estate a wise "investment"?
Maybe if you'd posted that in 2003 you'd be correct. In 2010? Nup. Property is still too expensive and returns too low to justify the cost.
But the gold bubble will burst soon like all bubbles.
2000 was better time to buy
2000 was better time to buy than 2003.
Hell, 1990 was better time to buy than 2000.
1990 "seemed" a "bad" time to buy, 1987 was "a lot worse", but by 1993 both were good times to have bought.
2000 "seemed" a "bad" time to buy, 1997 was "a lot worse", but by 2003 both were good times to have bought.
2010 "seemed" a "bad" time to buy, 2007 was "a lot worse", but....
From memory, on all those
From memory, on all those other occassions, rent covered all if not more than the outgoings. After 2003 it went from touch-and-go to, No! Buying NZ property now makes no sense mathematically, and has reverted to a gamble on legislation and capital gains. Feel like a flutter? Buy property! But don't be surprsied if your red bet turns out black.
Good stuff Bernard.... Next,
Good stuff Bernard.... Next, Can u write an article truely explaining inflation..
Inflation IS NOT the CPI index.
The cause of inflation is An increase in the Money Supply.
It is not possible to have a general increase in prices without an increase in the Money Supply.
In the Global Economy... the inflationary impact of increases in the Money supply have manifested far more in Asset prices than in either the CPI or Salaries and Wages.
It is by believing that the CPI is Inflation ...that we have allowed the Money supply to expand at insane levels. eg 15% in 2007
Milton Freidman was right when he said that Inflation is always a Monetary phenomenon.
The relationship between Money Supply and General prices is not mechanical. It is dynamic and fluid and manifests in different ways ,as the economy evolves and changes over the years. We have just come out of a deflationary climate where deflationary forces ( eg, China, Global Trade, the PC computer etc ) have dampened the impact of Money Supply on the CPI. ( early 1990s' till now )
We are now moving into an Inflationary climate, where there are different forces at work that will accentuate the impact of Money supply growth . ( my opinion)
I might sound a little arrogant in stating this.... but I've read about this stuff since the 1970s' ... its' taken me a long time to get my head around it .. but I've reached a point where I feel reasonably sure about what I say...
We have all been hypnotized by the CPI ... thinking all is well, in a Monetary sense, if the CPI is low.
anyway... just saying all this to shine a light on the subject.
cheers Roelof
.. .. Well explained , Roelof
..
.. Well explained , Roelof : Cheers !
And if money supply growth is
And if money supply growth is not circulated, spent, but saved, by the individual or corporation to repay embedded debt? Money supply would have to triple just to fill the vacuum left from the accummulated debts from the last 3 inflationary periods that WERE circulated. Demographics indiacte to me that 'we do not have enough time' to do it one more time. Those who have it, will keep it; those that don't will save it and those that can will repay debt. I cannot see how price rises from money supply growth will happen in asset prices this time. Consumables, most probably.
"Inflation IS NOT the CPI
"Inflation IS NOT the CPI index"
Too damn right. And the CPI, Asset price inflation and wage inflation are not necessarily linked in anyway. Talking about "inflation" in the case of the proposed ETS and GST tax increases is just plain wrong. Its a tax increase - this is a change in the fiscal settings, not a monetary one.
Price-increases due to tax do not increase profits for suppliers hence cannot be expected to lead to wage inflation and subsequent asset price inflation. Someone might like to point this out to olly newland on the other thread as there's some real cod economics being spouted over there....
Incidentally Roelof, M3 is shrinking globally at the moment not growing....
The government and RBNZ don't
The government and RBNZ don't give are rat ass about 'savers'. They want everyone in debt!, not saving. If the government really gave a toss they would remove RWT from all savings accounts with balances below 1 million Instead they allow those that have savings or earn more than 2 million annually off the hook of paying RWT. Removing the RWT would of been far easier to do than setting up Kiwisaver with so much bureaucracy included and which is a con so THEY control your money instead of you.
The Reserve bank only care about house hold debt and the NZD. If you have not borrowed from the banks who inturn borrow from the RBNZ then they don't give a toss.
Savers are treated like financial lepers
Drop all negative incentives
Drop all negative incentives (taxes) on personal savings, and throw in some positive ones: start matching money saved, dollar-for-dollar.
No? Oh, okay then.
Savers are not affected by
Savers are not affected by GST at all. You only pay GST when you spend your money, at which point you are no longer a saver.
@JWright I can both spend
@JWright
I can both spend some money and save some money it isn't an all or nothing proposition.
If the Government's stated aim is to encourage savings and using your logic lets make GST 75% then.
I think 15% is quite high
I think 15% is quite high enough, thanks.
I mean if you spend your savings. Better to build it up and then invest it. No GST in that.
It's amazing how rapidly
It's amazing how rapidly savings can accrue, even in these economic times. There are some people I've had the whole property v. savings debate with for years and have often teased about not getting into property while they still could, but they saved instead. It's only been a few years really but OMG how much they have stashed! If you are like me you probably didn't take too seriously the idea of saving whatever money you had left post-mortgage payments and just went out and had a good time with it. What a fool. If only I'd saved it.
Im a saver,and I can't wait
Im a saver,and I can't wait for interest rates to go up again. I still dream of the good old days, the eighties and 20% interest.O well at least I can dream.
Hey with property now
Hey with property now starting to look like a blackhole for money a lot of people may begin saving hard again and that could force the banks to have to compete for them and their savings. One thing that would entice me to change banks is if the competition offered much better savings interest rates and just the threat of lots of customers jumping ship may be enough to push banks to increase interest rates to keep their customers.
If I could get 20%, I could
If I could get 20%, I could give up work. However 20% interest, I would imagine that inflation could be quite high?
Roubini: "Savings have to
Roubini: "Savings have to rise faster than consumption over the next years"
http://news.yahoo.com/s/nm/20100531/bs_nm/us_roubini_brazil
I just took 1 million from
I just took 1 million from Kiwibank to rabo for the year 5.6% deal.
Kiwibank didn't even ask if they could match or better the rate.
Beggars belief, doesn't it
Beggars belief, doesn't it WAS ( BNZ did the same to me last week in the 180 day run) ! And with Rabogirl on the loose again, why wouldn't we!
Rabo has been out of favour
Rabo has been out of favour with me for quite some time Nicholas. It is about time they got back into the running.
I have another deposit on call at TSB in a PIE. Hoping that next week some of the other banks will up some of the shorter term rates and attract my funds.