Green Party co-leader James Shaw says having a capital gains tax makes even more sense now than it did before COVID-19.
He told interest.co.nz he worried the money being printed by the Reserve Bank (RBNZ) to buy New Zealand Government Bonds as a part of its quantitative easing (QE) programme was flowing through into asset prices, rather than the “real economy”.
He noted how QE done in other countries in response to the 2008 Global Financial Crisis created asset bubbles and had “huge secondary impacts” on house price affordability.
In this crisis, Shaw said we’re already seeing cash flow into stock markets, with markets in the US performing relatively well for example, all the while unemployment is high and rising.
Shaw, who is also an associate finance minister, said it was “worth investigating” whether the RBNZ’s mandate should be changed to enable it to do QE in a different way to avoid creating this disconnect between financial markets and the economic reality experienced by most people.
The RBNZ is currently buying New Zealand Government Bonds from bondholders in view of lowering interest rates to boost inflation and employment in line with its monetary policy objectives.
Shaw said he didn’t have the expertise to say whether or not the Government should direct the RBNZ to buy bonds direct from Treasury with the purpose of funding specific government policies, and in doing so, putting the cash directly in the hands of households/businesses that need it.
However, he was cautious: “With an idea like that, which is largely untested, at a time like this, which is a moment of enormous crisis - it’s not necessarily the best time to go experimenting at scale.
“Maybe if you were to do it, you might want to bite off a very small chunk and see what effect it has, but treat it very cautiously.”
Both Finance Minister Grant Robertson and RBNZ Governor Adrian Orr have said this move, perceived to be taboo, is unnecessary, as the market is functioning smoothly. However, Orr hasn’t completely ruled it out, saying it would be “achievable” if done transparently and with the appropriate checks.
Greens looking at all tax options
Shaw believed that with QE keeping interest rates low, largely to the benefit of asset owners, a capital gains tax made even more sense.
“It was our policy when we entered parliament in 1999; it remains our policy today. The extent to which we’ll lead with that or with something else [at the election] is yet to be revealed,” he said.
Shaw wouldn’t say whether the Green Party would advocate for a different type of tax, like a wealth tax for example, going into the election, in light of the Prime Minister sticking to the position she formed after the Tax Working Group recommended a capital gains tax, that such a tax wouldn’t be introduced under her leadership.
Shaw said the Green Party was “actively looking at all of the options”.
Neither Labour, New Zealand First nor National have unveiled the tax policies they’ll take to the election either. All the political focus is on spending, not repaying.
‘Significant’ progress could be made on welfare reform without NZ First
In the more immediate term, Shaw saw welfare reform as a way of providing a demand-side boost to the economy.
He made the argument that lower income earners are more likely to spend any additional funds they receive, than higher income earners.
“Focussing on income support for people worst off is a really good way to get money moving through the economy… They’re spending it at dairies and supermarkets and electricity companies and using it to pay rent.”
Shaw maintained without New Zealand First, a Labour/Greens government could make “significant” progress in this area off the back of the government-commissioned Welfare Advisory Group’s recommendations.
How a crisis can be a catalyst for change
Shaw believed it was possible to make structural changes to the economy during a time of crisis, without crashing the entire system.
He explained: “You can understand that when there’s a downturn people want to cut cost… but often… they will simply cut too close to the bone. And it means that as the economy recovers, they don’t have enough of an operation to rise along with the rising tide.
“Whereas those companies that go, ‘Ok, prices are lower now than they were a few months ago, let’s cut some deals - borrow, invest and actually build the operation…’ - those companies historically have done very well on the other side as things have recovered.
“Obviously a national economy doesn’t work the same way as a company, but often if you try to do major reforms when things are really humming along and prices are actually inflated, that’s a really tough time to change things because people’s vested interests are in the status quo - ‘I’m making money, don’t mess with it’…
“But if you do see a significant market correction and prices, including house prices and other asset prices, are down anyway, in some ways that’s the ideal time to do structural reform because you’re messing with a system that’s already messed with. And then you retool and as the economy recovers, it actually just grows into the new shape.”
Shaw used his recently-announced Emissions Trading Scheme reforms as an example, saying it was harder and more expensive three months ago to add 3 cents to the price of petrol, than it is now as prices are lower.
We can’t do this all again in 10 years’ time
Looking at the big picture, Shaw said the Government had a “responsibility” to borrow and invest well for future generations, who will have to help repay this debt.
“Every dollar that we borrow and spend today to get us through another crisis, is a dollar that they cannot spend on getting them through another crisis that they will also be faced with.”
Shaw said these were “big ticket” crisis around housing, climate and biodiversity.
“It’s an economic duty, but also a moral duty, to use the stimulus money that we’re currently spending on those things, so that they don’t then have the double whammy of paying for our crisis on top of their crisis.”