Government holds line on capital gains tax, retirement age, despite OECD joining IMF in recommending budget policy shake-up

By Alex Tarrant

The government has again been told to introduce a more comprehensive capital gains tax and raise the retirement age, and has again dismissed the recommendations.

An OECD report released this morning said a comprehensive capital gains tax would help remove a bias toward property investment relative to other asset classes. It also said raising the age of eligibility for superannuation payments, which is currently 65, could boost household savings rates while providing large fiscal savings.

"Introducing a comprehensive realisation-based tax on capital gains would further reduce the bias towards housing investment relative to other assets. Excluding primary residences from taxation would diminish the effectiveness of such a tax but partial exemption or rollover relief could act as a second best solution so as to facilitate public acceptance," the OECD said in its Economic Survey of New Zealand 2011 report.

"Improving the fiscal sustainability of NZ superannuation through raising the retirement age, while slowing the rate of growth in benefit payments by, for example a switch from full wage to partial price indexation could simultaneously provide large fiscal savings, increase potential output and boost household savings rates," it said.

A spokesman for Finance Minister Bill English told interest.co.nz the two recommendations were not up for consideration.

These comments from the OECD follow similar ones made by the International Monetary Fund earlier this year. In March the IMF said the government should widen its tax base for capital gains and introduce a liand tax. See the IMF's comments here.

'Surplus as soon as possible'

English said the government agreed with the OECD that New Zealand should return to budget surplus as soon as possible and that the government's Budget next month would take steps in that direction.

“In its economic survey of New Zealand out today, the OECD points out that achieving faster economic growth requires progress across a broad policy front,” English said in a media release.

“In particular, it recommends a faster improvement in our fiscal position, which would take the pressure off monetary policy. The OECD points out this would allow interest rates to remain low for longer and create room for the exchange rate to ease," English said.

“All of this would support the economic adjustment - which is already underway - to build faster growth from savings, exports and productive investment, rather than excessive borrowing and increases in government spending,” he said.

“Budget 2011 will take further steps to get the Government’s finances in order, setting a path back to surplus so we can start repaying debt on behalf of taxpayers and help increase national savings. We will do that while continuing to support the most vulnerable and maintaining public services," English said.

Here is the OECD's summary of its report:

The recovery stalled in 2010, despite record terms of trade and support from policy stimulus. Households, businesses and farmers are attempting to repair over extended balance sheets in the aftermath of a property boom. The effects of two damaging earthquakes will further retard the recovery and make the outlook highly uncertain.

The recession has highlighted the need for structural reforms. With the property boom of the past decade financed by private sector borrowing from abroad through the banking system, net foreign liabilities have accumulated to levels that make the economy vulnerable to sharp changes in investor sentiment. The economy now faces the challenge of a combination of high external deficits and international debt, an overvalued exchange rate, a heavy cost of capital and unbalanced growth.

Achieving faster growth will require progress across a broad policy front. This includes bolder fiscal consolidation in the form of spending restraint, coupled with tax and pension reforms to boost national saving. These measures would allow interest rates to stay low for longer and create room for the exchange rate to ease, thereby facilitating the needed rebalancing of the economy, boosting output of tradable goods and services.

Favourable tax treatment of housing and inefficient regulatory constraints on supply should be removed. These distortions exaggerated the surge in house prices, giving rise to wider wealth inequalities and a heavy dependence of households’ long term financial positions on volatile property values. Policy priorities should include further tax reforms to level the playing field for saving and investment decisions, while improving the efficiency of land use policies and the overall urban planning system.

Regaining regulatory best practice and improving management of the government’s considerable asset holdings could help boost productivity growth. New Zealand’s long standing front runner status in product market regulation has been eroded away over the past decade.  Regulatory governance should be further fortified to improve the overall investment environment, while moving towards full or even partial privatisation of state controlled commercial assets would strengthen market discipline and transparency.

Green growth would help to consolidate New Zealand’s long run growth potential. As an exporter of resource based goods and services, its “brand” relies on the environmental integrity of its output and policies. The emissions trading scheme is a major development, but market based instruments to give natural assets a value should be used more broadly, notably to allocate water efficiently.