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I wrote a piece for my Herald on Sunday column that is also available at NZHerald.co.nz here. I received a bunch of emails in response so I thought it would be useful to publish those here and see what people think.

I get nervous whenever I hear ministers of the Crown talk about “ginormous” financial problems that are “elephants in the room” that they want to use taxpayer money to fix. I worry we are about to be presented with a fait accompli where many taxpayers pay huge amounts to a few other taxpayers for a long time.

I’m talking of course about the leaky building crisis and the moves afoot by the National-led Government to help fund some sort of bailout in tandem with local governments in Auckland in particular.

The scale of the problem is only just dawning on policymakers and the shock of the likely cost has yet to really register with the public. Yet decisions are being taken behind closed doors without public discussion.

Last weekend Building and Construction Minister Maurice Williamson lifted the veil somewhat on a monster of a problem that deserves wider debate. He was reported as saying he was sitting there with his head in his hands wondering how to deal with the “ginormous” problem at a time when the Government is already forecasting deficits for years to come.

He described the problem as the “elephant in the room” in budget discussions. An expert panel has estimated 89,000 homes could fail at a cost of up to $23 billion. This panel estimated 90 per cent of all apartments, townhouses and units built between 1992 and 2005 could leak badly in the next 15 years.

Astonishingly, Prime Minister John Key has already talked about the Government “guaranteeing access to funds” for leaky homeowners to borrow to pay to repair their homes and not have to pay interest or repay those funds until they die.

Even more astonishingly, Key believed the effects of inflation on property values would help solve the eventual problem of having to pay back this debt. He effectively suggested this would be a painless solution for the taxpayers at large.

Nothing could be further from the truth. The Government is already borrowing $240 million a week to fund its current budget deficits. New Zealand’s net foreign debt is likely to top 110 per cent of GDP by 2014.

This puts us in the same basket as Greece, Spain and Portugal, all of whom have lost the confidence of international investors and face massive spending cutbacks and depressions.

New Zealand’s foreign debt situation is being ignored because most of it is being held by Australian banks, who are effectively underwritten by the Chinese-backed Australian economy.

We are seen as a suburb of Australia, which is seen as a province of China. That’s fine, until international investors look behind our veil to find our leaky buildings, slow growth and hollowed-out workforce.

Meanwhile, the last thing we should be doing is adding more mountains of debt for future generations to pay off while paying the health care and pension costs of the baby boomers.

Yet that is what John Key and Maurice Williamson are talking about with their guaranteed funding plan for leaky building owners.

Are New Zealand’s taxpayers in Invercargill, Westport and Kaitaia prepared to pay for the owners of mock Mediterranean mansions in Herne Bay, St Heliers and Takapuna to reclad and rebuild their townhouses?

Is it fair those who bought these leaky buildings after 2002 when the issues became known should be bailed out too? Why shouldn’t those who made capital gains from 2002 to 2007 use those gains to pay for the recladding?

Is New Zealand prepared to saddle its younger generations with unsustainable debt so home owners and investors in Auckland can retire with a safe nest egg, free health care and a bullet-proof pension over the next decade?

Your view? I welcome your comments below

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David Chaston presents a Special Report on the half year Crown accounts and why we need some serious innovation in the forthcoming Budget announcement, brought to you in association with BNZ

On May 20, Finance Minister Bill English will present his second Budget to Parliament.

It will be one of the more eagerly awaited policy statements from this government.

This year we have had the
- 2025 Commission,
- the Tax Working Group,
- and the Capital Markets Taskforce.
all appointed by this government to look at some tricky issues, ones that require special leadership to solve.

They have now all reported back but the reaction from the Prime Minister, and his cabinet colleagues has hardly been enthusiastic.

The Finance Minister clearly noted the challenge the country faced at last year’s Budget review, pointing out that unless something significant was changed, we all face a “demoralizing trudge” out of the debt binge we had over the past ten years or so.

Surpluses are not expected to return until 2016 at the earliest – until then we will be adding public debt that grows from 5% of GDP to 35%. And this is on top of 120% of GDP incurred by the private sector, basically for houses and farms.

We shouldn’t be trying to solve our debt problem by borrowing more, or shifting debt from the private sector to the public sector.

Today we got the Crown accounts, the status at December 2009.

At first glance, they look better than expected.

But look a little deeper, and what is keeping things this way are a series of one-off positives. Things like …
- backing off some of the deposit guarantee provisions
- better settlements with the banks over their tax cases
- shifting out Treaty of Waitangi settlements
- and lower interest rates and lower immediate borrowing requirements.

But, few of those things will get repeated.

Tax revenues aren’t holding up well
- taxes on individuals are more than $400 million less than originally budgeted,
- and $250 million less than the Treasury’s own half year fiscal update,
and without the bank tax settlements, corporate taxes collected are notably less as well.

It is only GST that shows any chance of achieving last years Budget estimate on a sustainable basis.

The Tax Working Group declared our tax system ‘broken’. It needs a comprehensive fix, for all the reasons that we have explored on this website.

But it seems unlikely we are going to get a proper fix on May 20, based on the Prime Minister’s recent equivocations.

All that seems likely is a stream of sickly government accounts showing revenues less than expenditure and rising debt levels, all to be paid for by the next generation of taxpayers and voters.

Or, until we get real leadership.

John Key has indicated an interest in tweaking tax rules to encourage the development of a financial services hub in New Zealand to provide back office type services for fund managers in the Asia Pacific region. The NZHerald reported on Monday Key as saying such a move had been studied (but not released) by the Capital Markets Development Taskforce and could generate 3,000 to 5,000 jobs with an extra NZ$250 million of tax revenue. (Adds My View below)

Mr Key said Ireland had “done a lot of this work. It was cost effective, but also predictable.”

The Prime Minister became very familiar with the reforms in Ireland when he was London-based head of Merrill Lynch’s global foreign exchange business. He shifted a lot of the bank’s business to Dublin.

Fran O’Sullivan has focused her NZHerald column this morning on the idea of a Asia Pacific Funds hub and the involvement of Craig Stobo. He is the chairman of fund management administration business Appello Services, which is 30 per cent-owned by the NZX. Stobo presented the idea at last year’s Job Summit, Adam Bennett reported in Tuesday’s Herald. Stobo is looking for a tax-free set-up.

(more…)

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Bernard Hickey delivers a special report on how New Zealand’s tax system was unbalanced and then broken by politicians tweaking rules, leaving it full of holes and ripe for avoidance.

The current government’s reluctance to truly reform the system is likely to push the Inland Revenue Department further down the route of trying to fix these holes through the courts and legal precedent. This leaves an unfair, imbalanced and inefficient tax system that will handicap our economy.

Meanwhile, tax lawyers, accountants and lobbyists will employ thousands to continue both hunting for loopholes and trying to close them. We need less activism through the courts and more sensible lawmaking.

The problem is it is politically easier to ignore the problem and hope a beefed up IRD can use the courts to do the work some real reform would do much quicker, much more comprehensively and with much more certainty.

Bernard Hickey interviews Labour Finance Spokesman David Cunliffe about John Key’s speech last week on tax reform. Cunliffe says the tax reforms won’t transform the economy and aren’t likely to be fair. However, he says Labour agrees with the National Government about the need for economic reform and the causes of New Zealand’s imbalances. Labour has offered bi-partisan talks on tax reform, but the offer has not been taken up by the government, Cunliffe says.

Cunliffe, a member of Parliament’s Finance and Expenditure (FEC), also talks about Finance Minister Bill English’s comments to the FEC on a ‘bright line’ test for property traders to replace the current ‘intent’ test, and John Key’s comments on ring-fencing of losses by property investors.

Progressives leader Jim Anderton began his speech to Parliament yesterday by pointing out John Key’s hypocracy on GST.