English says more reform of property taxation needed to transform economy

Finance Minister Bill English has signaled the government will look at further property taxation reform in next year's budget as it moves to switch the economy from too much consumption to more exporting.

English told interest.co.nz in a Double Shot interview (from 2 minutes on) the government would go back to the area of property taxation and other areas where it hadn't moved enough.

"The challenges for the economy are long running, particularly in dealing with the private sector's appetite for debt, households in particular, and businesses not so much. That's going to be a long job," English said.

"We'll need more change on a reasonable scale," he said.

Asked what more the government could do on property taxation, he said: "That's an open question. The changes we've made were pretty balanced and moderate, didn't go as much far as people like yourself would have liked us to go. It was probably to the edge of the tolerance of a lot of the smaller and highly leveraged investors in the property community. We're open minded about propositions that are going to further try and re-balance the economy."

"It's important for people to understand we don't regard the job as done," he said.

I asked English about further moves towards a 'bright line' test for property traders, where properties bought and sold within a certain period are deemed to be traded and subject to income tax, and also moves to tighten any ringfence around losses for rental properties.

"Those are areas we had a pretty hard look  at through the budget process and came to the conclusion it was difficult to make them work without creating another avoidance industry. In a political sense, if people think they're unfair they just get undone and that's happened in Australia and NZ in the past," English replied.

"We're also a bit uneasy about discriminating too much on particular asset classes. We have a general issue about effective tax rates on savings and on debt. There's no doubt the effective tax rates on leveraged investments have been pretty low, and the effective tax rate on money in the bank has been very high, particularly in a low inflation environment. So that's an area where we'll be doing a bit of thinking."

House prices

Asked about house prices at around 9 minutes 10 seconds, English said:

"I'm a fundamentalist (on house prices) The ratios of prices to income are historically significantly out of line in New Zealand and Australia, more so than most other countries. Spain and Ireland had those ratios, but now they've changed. I'm open minded enough to be waiting for the theory that explains why a housing market would stay out of line with where it's been for 30-40 years."

"It's (housing affordability) a very real concern for young New Zealanders the prospect of home ownership with these kinds of ratios is very hard for them to imagine, particularly when the returns to savings are so low with low interest rates."

"I know that your readers say you're wrong with the 30% reduction. I've yet to see the theory that will justify why in the long run you will be wrong."

Monetary Policy tools

Speaking about the Reserve Bank's use of monetary policy tools and Labour's call for a debate about alternatives to the current Policy Targets Agreement (PTA), English said there was too much focus on the details in the Policy Targets Agreement. The global de-leveraging process and the Reserve Bank's macro-prudential tools, including the Core Funding Ratio, was making that debate about the agreement's focus on 1-3% inflation redundant, he said.

The Reserve Bank is using the Core Funding Ratio (CFR) to force the banks to raise more funds from local and long term sources, discouraging the use of 'hot' short term wholesale markets overseas that froze after the Lehman Brothers and AIG collapses in September 2008. The Reserve Bank has specified a 65% CFR, which is expected to rise to 75% over the next two years.

"Three or four years ago it (the PTA) was a big deal at the height of  the consumption and government spending driven cycle. We pushed the framework to the limits, but now the macro-prudential activities of the Reserve Bank are of a great deal more interest and making more difference than making some semantic change in the Policy Targets Agreement," English said.

"And both of those things are somewhat peripheral to the ongoing de-leveraging process."

Speaking about global de-leveraging, English said New Zealanders were starting to work out how this recovery would be different.

"They are developing a reasonable view of their own situation and the need to reduce their debt, and as they see interest rates picking up that's starting to be driven home," he said.

"We're all a bit unclear about the channels by which that (global deleveraging) will feed back into New Zealand. Those economies are going to have pretty grumpy consumers and difficult politics for the next decade./"