Good short-term news hides structural imbalance

Improved Balance of Payments figures released today are not a result of a structurally more sound economy said Green Party Finance Spokesperson Russel Norman today.

“Today’s slight improvement in our investment income deficit has more to do with reduced profits earned by foreign-owned companies due to the recession as well as a one-off company tax transaction,” said Dr Norman.

“What remains unchanged is our relatively high level of indebtedness — we rank fifth in the OECD — and our over-reliance on borrowing to invest in the housing market at the expense of the productive sector. As soon as growth returns to the New Zealand economy, all these structural imbalances will again become obvious.”

“We need new tools to revitalise the productive sector so we can earn our living by what we produce rather than by what we borrow,” added Dr Norman.

“Our current tax system encourages a disproportionate amount of our wealth to be invested in non-productive assets like property. A capital gains tax on investment properties is one of a suite of measures to help restore some balance.”

Dr Norman proposed further demand-side measures including putting limits to the tax write-offs property investors are able to claim through loss-attributing companies (LAQCs). Losses on LAQCs, used to offset tax, have increased from $750 million in 2003 to $2.3 billion in 2008. On the supply side, higher state and community sector housing starts along with smart growth initiatives would help ease the demand for housing.

“We may even need to consider more specific measures targeting the bank lending behaviour at the root of this all. For example, by increasing the amount banks need to hold in reserve for lending in bubble-prone sectors like housing, you effectively limit the amount of borrowing.”