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

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.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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22 Comments

Our leaders are a bunch of clowns. Dismissing obvious parts of a "solution" because of their "popularity contest" ambitions

I know JK made a promise on retirement age, but it was a dumb promise 

Selectively keeping promises despite changing circumstances making them stupid - it is truly depressing that such a concept now epitomises modern political leadership.

I gave a thumbs up to both on you .....  Absolutely correct .

Im sure I heard him yesterday again ruling out charging interest on student loans..... times are tough and everybody has to share the pain.

the previous clowns were even worse:

"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."

Labour's lack of action on housing has created massive wealth inequality and priced housing beyond the reach of many middle income kiwis

 

Matt I think the problem of favourable tax treatment of housing was dealt with on 1 April.

Regulatory constraints are another issue entirely and need dealing with.........and should have been by now if the Minister for Local Govt was doing his job.

Wild Bill foolishly attacked the depreciation allowance for investment property ....... Blithely ignoring the fact that propery does depreciate , and that maintenance is a legitimate expense .

...... the unforseen consequences of his stupidity were that commercial property trusts and hotel groups have been slugged a one off massive tax liability ( I own shares in Millennium Copthorne ) ..... And that private property  investors are not paying for maintenance work , disadvantaging their tenants , and tradesmen .

Sadly for us all , Bill English demonstrated that he is as incompetent as a Finance Minister , as his predecessor , Michael Cullen , was .

Exactly Rog....and one would also be foolish to think that property owners will not become somewhat more aggressive when it comes down to deciding what is capex and what is maintenance......

Absolutely Matt. About time we switched from calling our form of government democracy and call it what it is, Populism. Or perhaps Populocracy. Or Populackracy. Popuslackracy. Chance of getting a world class CEO making plans and implementing them based on the best outcome rather than the best poll result: under current system; zero.

Maybe we can consider outsourcing the government to Singapore. 20% GDP growth !!!!!

Why would anyone in their right mind want to - voluntarily - get hit by additional tax, regardless whether it's capital gain TAX, land TAX, or any other TAX?

The argument isn't to tax people more, it's to tax them differently. If there was a broader tax base, you could lower income taxes, corporate taxes...whatever other types of tax you wish to reduce.

And then there's this comment from Savings Working Group chair Kerry McDonald:

"If you put your money in [a] savings bank term deposit, something like that, your effective marginal tax rate was 50%. If you invested in a rental house, your effective marginal tax rate was 25%, and the return on your owner-occupied houses, which isn’t a matter of contention, was free of tax - so the real comparison is between investment in a rental house and putting your money in a simple savings product," McDonald said.

"You wouldn’t lie awake at night wondering why people are putting so much into housing investments," he said.

http://www.interest.co.nz/kiwisaver/52104/savings-working-group-recommen...

You won't get a CGT because the entire rural property bubble is dependent on capital gains. Bill English would cop an ear tag in his nose on returning to Dipton.

I am officially renaming the Parliament today. Heretofore it shall be called   The Big Top..in honour of the clowns and other idiots warming the seats inside.

I was cogitating " Johnny in Wonderland " , after the fairy tail about Alice ...... 'Cos there are alot of fairies in our parliament , and more than a few fat cats with big cheesey smiles , some over the top no expenses spared tea-parties and junkets , and the whole she-bang is being run by a mad-hatter . .....

'Cos there are alot of fairies in our parliament 

Be careful the PC Police dont get you GBH...apparently you cant even refer to a cigarette as a fag these days !

Don't worry KTF....they'll have to find GBH first and then he'll deflect their mind numbing bureaucratic powers with mango chocolate magic (got an IPO on that?) while the Mad-Hatter recites nonsensical polictical poetry back in 'No-Zealand' (HT to SL). 

So I guess it's off down the rabbit hole then?

Catch 22 also comes to mind.........

OECD recommendations look like a mix of failed neo-classical policy prescriptions plus some green party policy.  W.T.F.?

This government has one plan, that's to just borrow like mad, they are starting to make Labour look good.

I just hope Brash doesn't get in, he'd be even worse, more religously believed fundamentalist crap, which even though has been proven to not work anywhere else in the world, is apparenlty certain to work in NZ.

"...to give natural assets a value should be used more broadly, notably to allocate water efficiently."

 Should more SOEs  be created to faciltate this? 

Hello? New Zealand already has a capital gains tax on speculative property investments, right???

If IRD isn't doing its job properly by enforcing the already existing rules,  then someone needs to tell its Minister to tell it to get off its arse!

thanks god for that, plan and think before you jump to follow IMF elitests. Government is doing well so far

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