New Zealand needs to raise taxes to cover the costs of the post-pandemic world and investors need to build wealth without relying property price inflation, Dan Brunskill says

When I started my first real journalism job in January 2020, one of my first stories was about “the outbreak of a new respiratory disease in China”.

It quoted New Zealand’s Director of Public Health, Caroline McElnay, saying human transmission of this novel coronavirus seemed limited but it was being monitored carefully anyway. 

Travel and tourism stocks were down a couple of percentage points on the NZ and Australian share markets, with analysts wondering if it might dampen demand in the Lunar New Year travel season.

A few months later, most major economies had closed borders to all foreign travellers and imposed lockdowns or strict social distancing. Covid-19 changed everything.

Almost every story I have written since has stemmed, directly or indirectly, from that one thing. It has underpinned almost all political, social, and economic events.

It seems passé to say this, most people are eager to put the pandemic in our collective memory hole and move on. But it's helpful to recognise that we are still living through the aftershocks, and that it has caused lasting structural change.

This was clear even in 2020. That April, I sent a voice note to a friend: “What happens with this lockdown over the next four weeks, and with future alert levels, will shape the next four years economically, and the next decade socially.”

I was only looking back to the 2007 Global Financial Crisis, which still hung over New Zealand when I left school in the mid-2010s. My friend went further, calling back to 1918 to 1939, when there was also a pandemic, a depression, de-globalisation, fascism, and then war.

History doesn’t repeat exactly but I have often recalled that conversation.

I remembered it when rioters stormed the US Capitol in 2021 and when Russia invaded Ukraine a year later. When Kiwi protestors hurled paving stones at police outside Parliament, and as first home buyers went bust in the housing bubble. Or when social intolerance crept back into the global mainstream through toxic algorithms, and those 2021 rioters helped elect a US president that shocked the world with hateful nationalism, disruptive tariffs and threats of possible military action.

None of this is over, and neither is the economic fallout in NZ. The fiscal and monetary response to the pandemic was oversized. It swung the economic pendulum too far and we are still waiting for it to settle.

From next year, the cycle ought to normalise. That is, the pandemic will no longer be the main driver of economic and social outcomes, though it will still be an underlying factor for decades to come.

There are probably countless examples of the structural change left behind, but I want to focus on just two economic elements that I’m convinced will feature in the new era.

Betting against the house

NZ’s decades of building wealth by buying houses has likely ended. Property price growth from the 1990s to 2021 was driven by three factors: strong population growth, restrictive zoning laws, and steadily falling interest rates. 

Population growth has slowed and longer-term interest rates trend up. But even if that reverses, big and medium cities have been forced to zone an unbelievable quantity of housing development opportunities.  

Low interest rates and high population growth should now manifest in the economy as construction activity and more homes, rather than as house price inflation.

Other reforms to building materials and consenting regulations will hopefully keep a lid on construction costs increases, plus the Reserve Bank’s stricter loan-to-value and debt-to-income ratios are likely to prevent future ‘FOMO’ bubbles. 

The 2022 interest rate shock and house price crash will also have scared some would-be home buyers in much the same way the 1987 stock market crash did.

Baby Boomers and their eldest children saw property as the safest and most profitable investment. Gen Z and younger Millennials will be much more aware of property’s risks and accustomed to seeing enormous returns in equities and even crypto.

If you add the prospect of Labour’s capital gains tax on investment properties, a continuation of the foreign buyers ban, and maybe the removal of interest deductibility, public policy starts to look like open war on house prices.

Betting on a high return from property now means betting against ‘the house’. 

Tax truthers 

In economic terms, debt takes an expense—a pandemic, for example—and spreads it over a longer period of time. It doesn’t make an expense magically disappear. 

The recently departed Jim Bolger understood this in July 2020. He told RNZ that all political parties were “dreamwalking” unless they admitted the need for higher taxes.

“Over the decades, we tend to elect mayors who promise they'll never increase rates…then we see the infrastructure of cities falling apart. We elect political parties who say they’re going to reduce taxes, not increase them, and then we see the deficits,” he said.

Bolger said higher taxes would be a “stark reality” of the post-pandemic economy and political leaders needed to front-up and be honest about it.

Instead, Labour continued to run big budgets without enough revenue to support them and National won in 2023 pledging to cut taxes despite enormous deficits.

New Zealand does not have abnormally high debt but it is expensive. Taxpayers will spend $8.5 billion servicing public debt this year, largely pandemic-related borrowing.

Add to this the need for more defence spending, as superpowers flirt with the idea of rounding out the 1930s parallels with a third world war, and the constant costs of climate change — whether we try to prevent it or not.

That’s a lot of money that now cannot be spent on public services and investments that often looked underfunded even before the pandemic. As voters seem unwilling to scrap big ticket items, e.g. universal healthcare and pensions, higher taxes are needed.

Current efforts to refocus spending and improve value for money are an excellent first step, governments have an obligation to maximize efficiency before raising taxes, but it won’t be enough.

Taxes can take different forms. The National Party wants to rely on ‘user pays’ public services as much as possible, therefore avoiding the need for broad tax hikes, while Labour has proposed at-least one increase with its capital gains tax policy.

Treasury and IRD have floated the possibility of lifting the GST to 18% with some sort of rebate for low income earners. The Greens want a big wealth tax and ACT would rather privatize everything (swapping higher taxes for extra household costs).

You can take your pick, but pull your head out of the goddamn sand.