By Terry McFadgen*
Our political class has a problem, which is that it never wants to talk about new taxes. Those that do tend to have careers that end badly. And to the chagrin of the Productivity Commission, no one wants to talk about productivity either.
But we need to address the tax and productivity issues because New Zealand faces three unattractive options.
It can continue down the present road of never-ending fiscal deficits and high private sector borrowing, much for housing, worsening what is already an unsustainable current account balance.
New Zealand is running an annual deficit with the rest of the world in excess of $25 billion, and total debt now stands at close to $700b (220% of GDP) with housing debt representing close to 45% of that total. This is frighteningly high in terms of our ability to fund the growth we need in the business sector. Buying and selling houses to each other at ever increasing prices simply cannot sustain a thriving economy.
What looms down this track is a credit rating downgrade and probably a large devaluation. We are already on notice from the credit agencies. (Our podcast episode with S&P Global Ratings' Martin Foo on NZ's current account deficit is here).
Or we can cut government services to balance the books, but then fail to meet the needs and aspirations of our citizens in areas like health, education, law enforcement, infrastructure and building climate resilience into our assets. Then, even more of our citizens will likely elect to decamp elsewhere.
Or we can find a better way.
That requires moving capital out of bigger and better housing, and into the productive sectors of our economy.
It is in this context that I would like to introduce you to Victoria’s new vacant land tax, not as a fiscal silver bullet, but a facilitator for rebalancing our nation’s allocation of capital.
The tax is simple-all vacant residential land, anywhere in the State, attracts an annual tax of 1% of its value. But note that “vacant” is defined as land that has not been occupied or tenanted for at least six months in the relevant year. There are two important exemptions-first it does not apply to holiday homes provided the owner lives in the property for at least a month a year and has a permanent home elsewhere, and second, properties under development have a two-year window where the tax does not apply.
The tax was first imposed in Melbourne city areas in 2018, and will apply to all regions as from 2025. In principle, there is much to like about a vacant land tax:
• It discourages long term land banking and encourages the early development of residential land. This should take some pressure off house prices and, in New Zealand, put an end to what has been a tax-free ride for land bankers.
• By encouraging renting, it should ease pressures in the rental market. This would have a deflationary impact on rents and help the RBNZ to reduce interest rates.
• It has no adverse effects on the productive side of the economy as it does not apply to industrial or rural land. On the contrary, it should nudge capital into the productive side.
• It is highly progressive as only the very well off will hold vacant residential land as an asset, or more than one holiday home.
• It does not require a new data base of values. All that data is already there in Councils’ rating data bases.
• Unlike a capital gains tax (or at least a soft CGT that only catches assets acquired after the date the tax is introduced) it produces revenue immediately, not revenue in 5-10 years hence.
• It can easily be flexed and adjusted both in terms of the annual rate, and the time of its introduction. It can also be capped-either permanently or for an introductory period.
Electorally, the tax has been quite well received in Victoria. In New Zealand it would presumably be very well received by renters, who now represent half the population, and by aspiring house buyers.
It should also be welcomed by RBNZ and anyone else wanting to see New Zealand’s capital resources put to more productive use than ever more expensive housing.
By itself it would not close New Zealand’s fiscal gap-that will require action on other fronts probably including a CGT. But think of the vacant land tax not as a quick fiscal fix, but as a facilitator of lower rents, lower land (and therefore house) costs, and a much better use of our country’s capital.
I hope our new government takes a close look at the Victorian experience.
*Terry McFadgen was a founding partner of Simpson Grierson, and a former CEO of Fletcher Building and External Monetary Policy Adviser to the RBNZ. He now resides in Melbourne.
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