By Alex Tarrant
Steven Joyce hasn’t been Finance Minister all that long. But he has already managed to announce a series of tax cuts, and promise a second package in a few years’ time if all goes to plan.
He’s also now the man in the hot seat when it comes to questions on the National-led government’s economic track record over the past nine years. Flat-lining productivity during the second half of that term, wages growing slower than the broader economy, house prices rising 67% when the CPI is up only 15%. There’s quite a bit to be critical of.
But Joyce offers up positive responses to everything put to him. Yes, productivity has been flat, but that’s a phenomenon across the Western world, we’re still doing better than most and immigration gains the past few years will feed through soon. Low inflation has meant purchasing power has increased. And asset prices in general have been inflated by central bank money printing – another global occurrence. We’re focussed on getting on with building more houses.
I sat down with Joyce last week to put these issues to him, and ask a few questions that others aren’t likely to. For instance – what are his thoughts on New Zealand’s taxes on savings? He’d like to review those settings next term, he says. Compulsory KiwiSaver? Not a fan. And just why does he view waged income as different from realised capital gains from the sale of a family home?
I begin by asking Joyce about National’s plan to bring in a second “families package” around 2020. Had he got any further with the details and what exactly would it look like? It’ll look much like the first one, he says.
“Yep, you want to look at tax thresholds, and as you know I’m quite concerned about that middle-income threshold – that it doesn’t get too far behind the median income. It’s still going to be behind the median income once we make the adjustment we’re making 1 April next year.”
At the lower and lower-middle income end, successive governments had added in more transfers rather than adjusting tax rates, he says. “I think the trouble with that is, you end up with people getting very confused as to what their entitlements are, and what happens to their entitlements if they make changes in their lives.
“That can get people stuck in the same place. So, if somebody goes out and does another five hours a week work, or somebody gets a second job, or somebody changes their job – if they’re in a lower income area what does that mean in terms of their Accommodation Supplement, their Working for Families, their Independent Earner Tax Credit?”
So, are we talking about abatement rates, or a tax-free threshold at the bottom of the income tax scale?
“I’m not sure about the idea of a tax-free threshold. I just think that we’re going to be looking at potentially just driving more of the positive changes through the tax system and less of it through the transfer system,” he says.
It hasn’t been designed yet, and Joyce says he’s not yet in a position to do so. “But you saw this time, we took out the Independent Earner Tax Credit from 1 April next year, and we said, ‘let’s put that through the tax system instead, so that everybody gets it’. That’s a ridiculous situation where a whole bunch of people don’t even get it because they don’t even know they’re entitled to it,” he says.
The system would be designed to show people more the value of their work. “Potentially, lowering the effective marginal tax rate of peoples’ wages at the lower end, rather than doing more in the transfer space.”
I put to Joyce that there’d been a lot of discussion recently about tax thresholds. Is this the time where we might see legislation to alter them every year…or three…?
He hasn’t really thought that through. “I think that it’s an interesting idea, but it’s no more than that. I think the difficulty is, that assumes the economy is constantly moving in the right direction.” The alternative argument is that governments regularly update those thresholds, he says. If they weren’t shifted then sooner or later everyone would end up paying tax of 30 cents in the dollar.
Joyce is talking a lot about low-to-middle income earners. So, I ask, if this is going to be the focus of his second package, then will there be measures so that higher earners miss out? I put to him Bill Rosenberg’s figures that 36% of the value of Budget 2017’s families package went the highest earning 20%.
Expectedly, he disputes the figures. Top earners would of course get something from the lower threshold changes, but there wouldn’t be a focus on the top tax threshold, he says. “And I think we need to keep doing that to ensure there’s that opportunity for low and middle-income earners.”
Is cutting taxes and shifting thresholds really the best way to get more money in people’s pockets?
“I think, ideally, yes, Joyce replies. “Because actually you want to link their income more directly to their work.”
“If people can see the benefit of an extra hour’s work, or changing jobs to a higher income, more easily than they can in lower and middle-income jobs at the moment – where you’ve got to get your tax table out, and your Working for Families table, and your Accommodation Supplement table and think about what it all means, and then decide, ‘should I actually do something or should I just stay where I am because I’m worried about losing all this stuff?’”
It would be better for New Zealand economically for people to see the “true fruits of their work rather than having it all completely de-linked,” he says.
We shift onto productivity. Wouldn’t improving productivity also provide for a base for paying workers more if employers were able to increase their margins through productivity gains and feed this through to wages? A lot has been written about labour productivity under National’s nine years. What are Joyce’s thoughts on how that has tracked?
“It’s actually tracked better than most other developed countries,” he says. “If you look at GDP per hour worked, it’s got better. Nobody’s arguing it’s stellar. New Zealand has had a long-term productivity problem, and since the GFC the world has had a productivity growth problem.”
Out of a bunch of countries having problems, New Zealand is still one of the better ones, he argues. The seeds of productivity growth were obvious – it’s mainly driven by companies, not governments and Ministers.
“So, let’s deal with it at a company level. How do I improve my productivity?” he says. Investment in capital equipment, accessing new markets and improving company organisation – such as through use of ultra-fast broadband and internet connectivity to cut down on travel – are all important. For National, it has been investing in broadband and other infrastructure, and sought to grow market access.
I put to him that Gross Capital Formation and Business Investment measures, as a percentage of GDP, haven’t shifted since 2008. The second half of National’s term has coincided with productivity not doing as well as in the first half.
“Well I think that’s true, but that’s also true for most countries, actually,” Joyce says. “Productivity has been a struggle everywhere. If you look across the eight years – and let’s be clear, these people that talk about productivity measures over a year, they’re really…”
I cut in: former Reserve Bank economist, and Croaking Cassandra blogger Michael Reddell’s talking about the last five years, when productivity growth has been negative by most measures.
“Five years is getting more like it,” he accepts. “The thing about measuring productivity is it’s generally measured more effectively a couple of years after the fact, which is very frustrating for those us who are focussed on it,” he said.
He raised the OECD’s latest report on New Zealand. Its chief economist, Catharine Mann, said we were in a situation where the capacity of the labour market was growing quickly, we were bringing in more people, which over time would build extra capacity. “It’s hard to build your capacity and your productivity at exactly the same time – once you’ve built your capacity, you’ll go through a stage of improving the productivity as businesses invest in more capital.
“She was not remotely worried from an OECD point of view, that, say the last two or three years, because of the significant labour market growth, [that] was not necessarily leading to fast productivity growth. Her sense was, that would come,” Joyce says.
How about cutting off some of that Labour market inflow? Joyce says that wouldn’t work. Capital and skills were portable, meaning they would just shift offshore, he argues. “I just don’t think that that’s possible to do…you do need to lift the capacity of your economy as well.”
Productivity has been a 30 to 40-year issue for New Zealand, and it is just starting to improve, he says. Consistency of economic policy would encourage investment…
On to wage growth. I put to Joyce that in the last two terms of the National government, wages had not grown as fast as GDP – indicating waged workers were not receiving the relative benefit for working harder to achieve greater economic output.
He replies that the key measure is how people’s purchasing power is growing. “On that measure, we’ve been growing at roughly twice the rate of inflation.” Over the longer term, wages had kept pace with growth, he argues.
“It’s not like some parts of the world where you’ve seen an income redistribution to a particular part of society – that’s definitely not occurred here – and Perry has made that clear,” he says. (I put to him that Perry did however say things were a bit rough when it comes to factoring in housing costs: “Well, again it depends on the measure you use.”)
House values and building
Which brought us nicely to housing. The Consumers Price Index – a measure of the general level of prices across the economy (but not existing housing) since 2008 has gone up by about 14.5%. House values, however, were up about 67%. What are his thoughts when presented with those two numbers?
“Well it’s asset prices right around, actually,” he says. “The problem we’ve all got, which we’re all grappling with, is that we had the GFC, then we had Reserve Banks/central banks around the world effectively getting themselves into a deep hole and then they’ve ended up printing a lot of money – quantitative easing – zero real interest rates.”
And, New Zealand’s part of the world.
“That’s led to big asset price inflation. Low returns, high asset price inflation. That’s been reflected everywhere, and New Zealand’s been caught up in that. So, right around the world, we’ve got high asset prices and low interest rates,” Joyce says.
“That’s fine for people that have already got to the stage of life where they own their assets; it’s fine for those people, in some ways, that have perhaps borrowed against assets because – including houses – because they got low interest rates. But then the hard part is for people starting out, because their deposit – particularly to purchase a house – is higher compared to incomes. I think that’s where the real pressure comes.”
This was why the government had boosted KiwiSaver HomeStart and introduced other measures that, “you wouldn’t normally do…”
I jump in: Is it disappointing that government was needing to turn to subsidies to help people get a deposit together for a first home? (This was recorded before Sunday’s announcement of doubling HomeStart grants.)
“Yes, it is,” Joyce says. “Of course, that’s the case. But the reason for that is…this whole international phenomenon that we’re dealing with. We’re part of the world – we don’t get a choice.”
Global cash is flowing in and pushing up our asset prices?
“Well, not just so much that, as…right around the world, you’ve got very low interest rates. And New Zealand’s interest rates are driven as much by international inflation, or lack of it, [just] as they are by domestic inflation. Our tradables inflation has been flat to negative for a long time,” he says.
“So, we have that transmitted into us, and if people are getting – depositors and so on – are getting low interest rates, people go looking for yield, and asset prices get pushed up.”
He continues that the other problem re rising housing values has been house construction. The two issues had worked together in a way that hadn’t been good for first home buyers. “We just haven’t built enough houses, historically,” Joyce says, pointing to Auckland numbers between 2003 and 2009 dropping to 2,500 a year.
Although we’re back at 10,000 for Auckland, it looks like we’re heading back down, I say. He argues it’s at least back up to a level which looks like it’s going to continue for some time, according to the latest BRANZ construction report.
Except the last one of those saw builds come in below expectations, I put to him. The response: “Well, it did a little bit.” He continues: “But, assuming that they’ve got it broadly right, and we can debate a little bit where the margin is, but then actually we’re going to see that [housing shortage] fixed over time.”
I had spent the morning reading through the last ten years’ worth of Monetary Policy Statements. In 2009, the Reserve Bank had started to warn about the impact of growing immigration on the housing market. Then in 2013 after a couple of quiet years, there were warnings on supply and demand imbalances coming through. Did the National-led government move fast enough on the warnings?
“I think what everybody would say is that, it’s been harder to push some of the regulatory levers in terms of getting the impact, than we would like,” Joyce says, pointing to the Auckland Unitary Plan. “I think that’s been frustrating for everybody…”
But: “If you look at the growth that’s occurred, over that period, actually we have the fastest compound growth in the New Zealand construction sector for some years.”
Was it fast enough? I ask. We still had house values rise 67% over the past nine years. “Well you can debate that, but…you are growing faster than we’ve ever grown before off a low base.”
Waged income vs realised capital gains
While we’re on the subject of house prices, I put to Joyce that since the 2014 election, house values are up about 27%. That means an average someone who owned a house valued at $600,000 then and is selling now, will be receiving a gain of over $150,000, tax free. How was this fair when a waged worker earning $50,000 each year over that same time frame was paying an effective tax rate of 16%?
“They’ll have to go and buy another one…in that current market,” he says. “So, yes, it sounds good, but actually, they’re going to have to move back into that market. Unless they’re completely cashing out, that’s what they’re going to have to do. So, there’s a limit to that comparison.”
“Most people, who move out of a house, buy another one. And they’re dealing in the market that you have there today. I’m not arguing for that sort of ongoing price increases; I’m arguing that, actually, if we have enough growth in the housing market around the country in terms of supply, as we’ve seen in Christchurch, then actually house price growth stops.”
In Auckland now, house price growth is falling, he says. I reply that this may be welcomed, but we’d still need 20-30 years of flat house prices there before we get back to proper affordability levels.
“I’m not sure that that’s right” – the typical response. “And the other affordability measure that’s the elephant in the room, is interest rates. Which is why I always say to people, be careful. Because interest rates at some point will go up again.”
“One of the biggest drivers of, say, the house price to income ratio is interest rates. And when people talk about, ‘I’d love to get the house price to income ratio back to four’, well, the last time it was at four, interest rates were at 18%. So, there’s no free lunch in all of this,” he says.
“I actually want us to just keep building more houses, and allowing more onto the market, which will ensure in places like Auckland, that house prices stay at a fairly steady level for an extended period of time. And then we can get that balance. And the idea is that happens at a time when interest rates remain low, otherwise people will get caught with higher mortgages.”
Savings taxes & KiwiSaver
I ask about the ‘Andrew Coleman idea’ – that, instead of apply a CGT or imputed rents to try and level the playing field, how about changing the way we tax to just once during their life-time. This is one that I’m putting to all the financial guys before the election. Is it something that appeals to Joyce?
While not commenting on that proposal particularly, Joyce says he is interested in looking at the taxation on savings at some point. Next term? “Yes, I’d like to have a chance to have a look at it in the next term. I think that’s an area of work that New Zealand needs to do if we want to encourage more savings.”
“Are we putting anything in the way of encouraging people to save, by, for example, the effective tax rates and so on?” he says.
How about compulsory KiwiSaver, then? Joyce isn’t a fan. “I’m keen to encourage everybody into it, or into a similar scheme. But what I’m not interested in is making it compulsory. Because there’s plenty of people at different stages of their lives. It’s not necessarily the best thing for them to do.
“If they’ve just started a business, and it’s going to be a successful business, then they could make a strong argument their money should go into their business at that time – why should it go into a KiwiSaver scheme?” he says.
“Similarly, you can make the argument that for some people it would be more preferable to pay off their mortgage – or some of their mortgage – and allowing sufficient flexibility for people to do that I think is actually just treating everybody like grown-ups.”
Exports and imports
I ended by putting a couple of numbers to Joyce – one was on the goal to increase exports as a proportion of GDP from 30% to 40% by 2025. It hasn’t shifted from 29% since 2008. Is he disappointed?
“I’d like to see more growth in that.” He couldn’t really have said much else. “But you have to go and look at what’s been happening under the hood. And under the hood, world trade intensity has dropped.
“So, if you look at New Zealand relative to say, your Singapores, your Denmarks or so on, which are the big traders, they’ve gone back a bit, because we’ve had an extended period of a decline in world trade,” he says.
“We’ve held our own. Again, it’s nothing to write home about necessarily, except that we haven’t slipped back the way other countries have.”
Another thing New Zealand had been dealing with was our biggest export had been “down a bit of a hole over the last two or three years,” Joyce said (about dairy).
“What I think’s exciting is that, we had all these doomsayers coming out and saying, ‘oh my goodness, the dairy price has dropped, that’ll be the end of New Zealand for three years’. And what we’ve shown is that we’ve diversified sufficiently into other industries at this point – more to do…but – tourism, education, ICT, the other food sectors – [and] that actually we were able to maintain and grow our value of exports compared to when dairy was 23-34% at one stage, of the export pie.
“I think that’s been good to see that maturity grow, and I think as dairy comes back on stream, we’ll see that proportion lift as well as the overall number lift. But yeah, we’ve got a job on to get to 40%,” he says.
Imports as a percentage of GDP, meanwhile, have risen – from 30% in 2008 to 33%. Are we buying too much from the rest of the world while our means for paying for it isn’t budging in relative terms?
“I’m not too worried about that,” Joyce says. “The key thing in the New Zealand context – in fact any country – is how much debt you’re creating – what’s your liabilities to the rest of the world? And New Zealand has come down from 80-something – 84% of GDP I think to about 58.5% - I’d like to see that keep going.”
Will he set a target for our net international liabilities, then?
“Well no, I’m not going to put a target on it – it’s worked better without one.” He’s still got a sense of humour as the polls turn. Apparently, he’s got a regular side bet with Treasury that our net international liabilities will keep falling, verses their predictions of them rising again. The current account deficit too.
“They’ve given up now - I’ve won a couple of bottles of nice orange juice or the equivalent on that. And I actually think New Zealand’s external sector is growing pretty good resilience,” he says.
“What we’ve proven to Treasury is, it’s not necessarily the case that we always revert to type, provided you run the economy well and you encourage these export-facing businesses to get out there and trade.”
The next three years
Finally, what can we expect over the next three years if National gets back in?
“Firstly, we’re very, very keen on encouraging the opening up of markets, and this whole facing the world, making sure New Zealand [has] its best foot forward on the world stage. We’d love to get TPP 11 over the line – that’s not just totally dependent on us – but I just see this massive opportunity for New Zealand, which I’m excited about for New Zealand companies,” Joyce says.
“We can get out there and give them a platform which makes them hugely competitive on the world stage. That’s what we’re doing and I think we can double-down on all of that – the innovation side, the trade side, and so on. And that will actually ensure that New Zealand really gets the benefits out of growing Asia-Pacific region and particularly the Asian economies.
“That’s our vision. The alternative is, I have to say, one that doesn’t understand businesses. Because it’s proposing to put on a whole lot more taxes and reduce the competitiveness of New Zealand in the world economy. And I think that would be very negative for this country over the next three years.”