Saving New Zealand from the crisis

Mark Welden and David Skilling went to Davos, got back to NZ, clearly talked a lot over beers and came up with what I can only term a business first over-reaction to the current global gyrations.

Good on them for the doing this though, and for the intention which they are following through of starting a conversation.

However their list of ideas to help deal with the incipient crisis are right wing oriented – placing business and wealthy individuals first.

I’ve sat on this post for a few days, as events are moving fast. The Australian solution is to give money to those that need it – the people on lower incomes. We all need to tighten our belts, and the higher income folk have more ability to absorb loss of income. As Obama famously said, if the lower income folk are able to earn more, then they will spread it around.

Here’s the original list of ideas, and my 2 cents worth of response:

Defer all provisional tax payments for next 24 months

That means slow paying money from business to the government. This reduces Government income, increases business income and puts an increased loan burden on the Government, meaning they need to go offshore to borrow more money, at current high interest rates exacerbated by a lower credit rating resulting from the increased debt. As a product of the Muldoon era I have a very real aversion to high levels on New Zealand Government debt with a declining currency.

Allow 100% depreciation of capital investment.

Companies pay a lot less taxes as they can expense all capital purchases (like cars, machines). The bulk of that capital would come in from overseas, so that would be really bad for the terms of trade, and again increasing our debt burden. This again reduces Government income, increases national debt and so forth.

Create a two-year tax rebate to cap income tax at 20% for returning Kiwis who have been away for over three years.

This means the Government gets less money, while highly paid ex McKinsey consultants from overseas get more money. I’d love this, but then I’d just leave each 2 years (which I seem to do anyway).

Besides, the tax rate is not really a concern with respect to living in NZ – it’s everything else. If we cared only about tax rates then we’d be in Hong Kong or Ireland. I’m not, and besides raw tax rates are higher in the USA or Australia than in NZ at the moment.

Firms that are not here do not pay tax. If firms move here, with more than ten people, give them two years of no company tax. {Financial, IT and environmental/science-based firms can move easily as they are essentially just people + broadband. }

This will reduce income to government, and encourage firms to screw with their location so they can clam tax benefits.

Actually I’d like to see the idea behind this and the previous one implemented, but the proposal is just a bit too naked and open to abuse, and would lead to a multitude of unintended consequences. The way to approach this one is to lower corporate tax rates for everyone, creating a level playing field that is better than those elsewhere. Sadly lowering corporate tax isn’t going to help balance the books.

Retain the R&D tax credit, to ensure that R&D investment is made in New Zealand.

I’m not a fan of targeted government money for business as it tends to focus businesses on Government aims rather than their market’s aims. This creates economic loss where that Government money is wasted on R&D that is not required and where business divert resources (time and money) to non essential work in order to obtain and keep a Government grant. The National proposal to remove the new 15% R&D credit is therefore good in a meta sense. Indeed I’m all for a very simple tax code – with low rates and no exemptions.

I’m beginning to believe that some Government seed money is useful, but I have yet to see it effectively applied in NZ.

I do have an investment in a company that has obtained decent amounts of Government grants over the years, but I would prefer that this tax credit just went away.

Retaining it means reduced Government income and reduced business expense. I’m beginning to detect a pattern.

Create KiwiCo. Commercial SOEs would be put into a new company similar to Infratil in New Zealand or Temasek in Singapore

We taxpayers already have Kiwibank, a good chunk of AirNZ, NZRail and the Kiwi share in Telecom. Meanwhile Infratil already exists, and while I’m sure they’d love Government money, they seem to be doing pretty well without the money nor the interference.

The SOE’s are doing just fine under the current arrangement, and another layer would just serve to add costs of the real and agency kind. Agency costs are where managers do things that the real owners (taxpayers) wouldn’t want – like NZRail under investing in infrastructure.

Create an at-scale taxpayer savings vehicle, using financial assets currently managed by the NZSF, EQC, and ACC.  There are a number of organizational options for this that would ensure that certain defined liabilities are recognized, but a material portion of these funds would take a long-term, Warren Buffet style investment approach, with a real expertise and focus on New Zealand – where it should have a real advantage, and really help New Zealand.

This is really scary. Government money would be used to boost the tiny NZ stock market rather than gaining the much higher and lower beta returns derived from a portfolio  of safe and diversified securities across geographies, industries and investment types. Warren Buffet’s Berkshire Hathaway isn’t invested in NZ, and this approach would see our taxpayers portfolio not invested in Berkshire Hathaway, which, for example, has dropped only a few percent in USD terms and soared in NZD terms over the last 3 months.

Convert KiwiSaver into a compulsory savings scheme. We must reduce our reliance on foreign capital and grow our savings pool.

Kiwisaver is doing just fine as it is, and making is compulsory will just increase compliance costs and the timing will really annoy people that don’t want to invest cash into something that is currently showing negative returns. This will increase investment into the NZX, and decrease income in the hand for average New Zealanders.

Eliminate the biases in the tax code that promote housing speculation.

This will slow home owners from buying homes and thereby move investment money into the stock market and banks.

It will also accelerate the decline of Real Estate values, making the crisis, well, more of a crisis.

Meanwhile along with Real Estate folks have also lost confidence in the markets and the banks are looking dodgy. This is shutting the gate far too late, and won’t let the horse back in.

Here are top of head three things that we can do:

1: Don’t panic. The daily market gyrations will eventually settle, and considered opinions can once again rule roost. The price versus earnings numbers have been showing crazily high values for some time now, so let the dust settle and valuations return to historical norms. Let the election play out, and don’t spend billions beyond a quiet guarantee of bank deposits.

At some stage it may pay to diversify our investment assets around the world, and take advantage of any major price/earnings discrepancies we see. This is fundamentals driven investment into global assets that show a good safe return.

2: Help those that need help, when they need it – right now people are still employed, but when problems mount then we need a plan to help get unemployed people eating, working and adding benefit to New Zealand. That does not mean borrowing to build dams, but having enough in the bank to start a few projects if we start to see large scale unemployment. There’s a recent Nobel laureate who thinks this is a good idea.

3: Open the books of the banks and finance companies. The really scary bit about this crisis is the massive value of securities that has been discounted to almost zero. That is, things that the market though were worth billions and billions are worth – well a lot less.

Forcing all operating financial institutions to open up their books and show exactly what they have will allow the market to fairly value them. I would guess that the banks operating in New Zealand have pretty conservative balance sheets, and opening the books will ease fears of investors, counterparties and individuals with deposits and loans. The “Aussie” banks are actually seperate NZ companies, owned but seperated from their Australian parents, and are subject to pretty good NZ rules on asset ratios.There aren’t really any finance companies left, but those that are woul need to do the same. I’d like to see exactly what the securities are, not just a S&P risk rating – which we now know is useless. In this computerised age there is no reason why we can ask for full, annonymised, disclosure, and let the analysts rip on to the actuals.

The NZX could push this level of disclosure out to all of the companies on the NZX, (along with increased frequency) and help restore investor confidence in the capacity of companies to absorb the hit and propser in the future.

While we wait the new Government could work on simplifying the tax code – even more. Get rid of the reasons for family trusts to exist, make company and personal tax rates the same, lose the naive capital gains tax, zero tax under say $25,000 income and so forth.

About Lance Wiggs

@lancewiggs
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5 Responses to Saving New Zealand from the crisis

  1. Alex Fala says:

    Hey Lance,

    Interesting post. Even more interesting that you characterise the proposals as ‘right wing’, then go on to criticise some of them for the intrusive role that they advocate for the state. I’d describe the Skilling/Weldon initiatives –and your criticisms– more as pragmatic (incoherent?) albeit roughly formed.

    I also think the Skilling/Weldon paper reflects an underlying belief that the NZ economy is slowly slipping away to whatever state is below mediocrity and the current crisis is exactly the impetus (“burning platform” in McKinsey-ese) needed for some bold moves. What’s your view on that position (irrespective of your views on their solutions)?

    Cheers,
    Alex

    PS What’s your beef with ex-McKinsey consultants ;-)

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  2. Lance Wiggs says:

    Alex
    Great comments.
    I shiver when I see a burning platform, as they are most often used to make rash decisions that are not we thought out, syndicated or managed well when they happen. I see this in business and politics, and most often the best course is simply to stay the course.

    A classic example of this is the post 9/11 reaction by the US President and Congress. The Patriot Act was essentially unread by congress and shoved througgh with startling speed – and the result was almost tailor made for meeting Bin Laden’s objectives of spreading fear. The invasion of Iraq was able to go ahead because there was insufficient oversight after 9/11.

    So by right wing I mean disturbing elements of the far right wing from the USA, the right wing that puts business and personal wealth ahead of everything else, even society. True right wing is less callous and puts society first, and NZ would tolerate nothing less.

    Yes the proposals are all incoherent and imperfectly formed, but the good thing is that the conversatiojn is started. We just need to have the voice of the people in there (the Labour Party is preocccupied with losing the election) and a serious amount of restraint and not panicking.

    The NZ economy has always been somewhat second rate, unless the food commodity prices are high. It’s a long journey out of the wilderness, and it was initially led by Lange and Douglas, and is now increasingly led by the likes of Rod Drury, Sam Morgan and Stephen Tindall. The government and market regulators have a role, but is is mainly to ensure an educated, healthy and housed population with solid infrastructure, to help those that stumble and to continue to make Doing Business (google that) easier.

    McKinsey is an excellent institution – attracting and developing amazing people. The increasing number of Kiwi “graduates” is an excellent thing for NZ.

    However it was really difficult to get and keep Mark Welden (e.g. his compensation package was pushed back on recently), David Skilling will be missed as he leaves the NZ Institute and as for me – well I’m writing this from Perth. Alex you are in a great role at Trade Me post McKinsey, and it will be interesting to see where you go over the next years. The opportunities offshore have traditionally been far bigger than in NZ though, and it is a real internal struggle to balance career and income versus being at home.

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  3. Alex Fala says:

    Lance,

    I hear where you’re coming from re voice of the people.

    The challenge for NZ–and particularly our politicians–is that the weakness of our economy and our failure to create wealth is one of the major threats to our society.

    Like it or not (and in spite of the impediments of our slow broadband :-)) Kiwis want everything that’s available in the rest of the world, but we’re just not rich enough anymore.

    For what it’s worth, I think bold moves are necessary. They’re also unlikely given the incrementalist nature of our parliament (a reality of MMP). I also think that a lot of the Weldon/Skilling proposals are relevant at any point in the economic cycle. Some of them have been talked about for a while (and publicly) but only make the front page when we have the twin tempests of a financial crisis and an election. They’re not as reactionary as you suggest.

    In any case, I think we both agree that it would be good to see some more debate around this stuff. But I’m not holding my breath…

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  4. Lance,
    Interesting thoughts. Depressingly, you’re the only one to challenge Mark and David along these lines in any sort of public way that I’ve seen.
    Fair criticisms.
    One of the reasons I welcome the intervention from Mark and David is that it might spark the debate we need.
    It’s scary to say this, but our politicians are not talking about productivity and the sort of infrastructure and educational investments needed to make this happen.
    Everyone is too scared in an MMP environment of saying anything they might hurt anyone at any stage.
    Mark and David seem to have gone over the top because, like many, they are desperate to avoid New Zealand slipping by a thousand cuts into a hollowed out congealed state where all the productive people have left and the only ones still in the country voting are those who don’t like/can’t handle change.
    I’m with their sentiment, if not all their ideas.

    The really depressing thing is the David Skilling, one of our brightest and most thoughtful leaders, is leaving the country to work in Singapore later this year/early next year.

    cheers and hope you are well
    Bernard

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