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Insights 9: 26 March 2021
Submission: Climate Change Commission draft emissions budget
Podcast: Oliver Hartwich, Eric Crampton, Bryce Wilkinson and David Law on the government's new housing package
Policy Point: A risky place to do business by Eric Crampton and Bryce Wilkinson

Muldoonist ad hocery is back
Dr Oliver Hartwich | Executive Director |
It is hard to know where to begin, there is so much wrong with the Government’s housing package presented on Tuesday.

I leave it to my colleague David Law to explain why the measures introduced will hurt housing affordability and supply. Instead, I will focus on the political and broader economic implications.

For a start, it is not conducive to creating trust in politics when the two most senior ministers – the Prime Minister and the Minister of Finance – do not do what they promised.

The Prime Minister’s rejection of a capital gains tax was unequivocal. In a Beehive press statement on 17 April 2019, she said: “I am ruling out a capital gains tax under my leadership in the future.”

As Newshubs’s Tova O’Brien wrote: “Jacinda Ardern effectively introduced a capital gains tax, breaking one of the biggest promises of her political career - one that she staked her job on.”

The Minister of Finance’s broken promise weighs heavier still. Only half a year ago, he categorically ruled out extending the bright-line test. He now says that statement was “too definitive”. The Herald’s Audrey Young wryly commented that the Minister’s explanation sounded “little like he meant he was being “too honest”.”

What is worse, the Government’s measures are a serious assault on the tax system's integrity.

To introduce a capital gains through the backdoor is bad enough. To let it operate at taxpayers’ marginal income tax rates (up to 39 percent from next week) is reckless. Almost no other developed country does that. Capital gains taxes typically operate at a much lower rate.

Also, it is one of the principles of taxation that income ought to be taxed, not revenue. Therefore, the deduction of interest for property investors is not a loophole, as the Government claims. It is precisely how the tax system should operate.

The new tax measures create an uneven playing field for investments in housing on the one hand and everything else on the other. It also aggravates the tax advantages of owner-occupied houses – as if that had not already been a problem without the new policy.

The icing on the cake is that the Government’s new measures border on retrospectivity. Property purchase agreements suddenly have their financial calculations invalidated. Existing investors, who had made long-term plans, now find themselves in radically different territory.

The tax system is a core element of the apparatus of government. Tax changes need to be principled and due processes for changes must be followed for the system to have integrity, legitimacy and engender confidence.

That is why, in its first term, the Government asked the Tax Working Group to assess tax reform options. Everyone affected could have their say, and the public could form a view.

With this week’s announcements, one wonders why the Government even bothered with the Tax Working Group. Why not announce plans on a Tuesday, rush them through Parliament under urgency on Wednesday, and have a new capital gains tax in operation on Saturday?

With no public consultation, a truncated Parliamentary process – and, as it turns out, without much consideration of Treasury and Inland Revenue’s advice. This is not how OECD countries are usually run.

Finally, if the Government can violate such elementary principles of good policymaking and taxation so wilfully yet again, what will it do next? Did it not learn from the fallout from its 2018 ban on offshore oil and gas exploration?

For anyone contemplating doing business in New Zealand, the words ‘political risk’ must now come to mind. This kind of policymaking damages New Zealand’s reputation as a place to do business. Just look at what happened to the Kiwi dollar’s exchange rate this week.

As far as policymaking is concerned, it does not get worse than the Government’s housing package. Its political arrogance is compounded by the economic damage it creates.

In normal circumstances, one would like to send the Government back to the drawing board. The only problem is the Government has just thrown out the drawing board.

Law changes we thought too foolish to be contemplated on Monday will be in force tomorrow.

The worst of Muldoonism is back in New Zealand politics. It is a morass of ad hoc interventions and spiralling public debt. We know how that ended last time.

How to manufacture a rental crisis
Dr David Law | Senior Fellow |
The government is at it again. They blame everyone but themselves for high and increasing house prices resulting in low housing affordability.

Late last year, the Prime Minister claimed that increasing house prices was due to migration. That was despite the border being closed and net migration having been close to zero for many months. On the other hand, the Resource Management Act and highly restrictive overseas investment rules continue to restrict housing supply and accommodative monetary policy is fuelling demand.

Now the government's wrath is aimed squarely at the evil property ‘speculator’. It seems they will never hit the mark.

For those of you who may be confused, as I was, a speculator in this context is anyone who voluntarily invests their capital to provide rental services to a willing buyer in a mutually beneficial trade. In economics, we would usually refer to such an agent by a less politically loaded term, such as a seller or a firm, hence my confusion.  

Renters are not all victims of exploitative landlords either. They include people who do not wish to own their own home for various reasons or who may have insufficient capital or income of their own to service a mortgage. Renters will, however, become victims of the government's latest package of housing policies as they become caught in the crossfire in the ‘war on property speculation’.

Two components of the new housing package are particularly problematic. The bright-line test has been extended from five to 10 years, contrary to Labour’s pre-election messaging. That means many more landlords will be subject to a capital gains tax than previously, and at a rate amongst the highest in the OECD.

Second, a supposed tax ‘loophole’ for landlords will be closed. They will no longer be able to deduct interest on mortgages from rental revenue for tax purposes. This is the single largest expense for most landlords and is not a loophole. All other businesses in New Zealand are subject to tax based on their net rather than gross revenue and can offset their operating costs for tax purposes.

The consequence of these two changes is that the costs of providing rental accommodation will increase significantly. The outcome is easy to predict. There will be less rental accommodation on offer and higher rents. Renters interested in buying their own home in the future may find it even more challenging to save for a deposit.

How will the government react to the new rental crisis that will ensue? I suspect rent controls may be in our future – a similarly dubious policy that would reduce rental supply and quality even further.

No case for reform
Matt Burgess | Senior Economist |
After eight weeks of poring over the 847 pages of analysis from the Climate Change Commission, two findings stand out.

First, the Commission shows current policies, including the Emissions Trading Scheme (“ETS”), will deliver our 2050 emissions targets. With existing policies and an ETS price of $50, emissions will pass net zero in the late 2040s and fall to negative 12 million tonnes by the mid-2050s.

Second, the Commission’s analysis implies that with current policies, New Zealand can comfortably maintain net zero emissions after 2050.

The Commission proposes economic transformation to reduce emissions. These findings make clear this is unnecessary.

To justify its plan, the Commission disparages current policies, saying they lean too heavily on trees, “fail to drive meaningful decarbonisation” and “use up land resources for the purpose of offsetting.”

Except that is not what the Commission’s analysis shows. The Commission finds current policies:
  • Plant fewer trees overall than the Commission’s plan by 2050.
  • Deliver only a slightly higher share of exotic trees (26%) than the Commission’s plan (23%) in 2050, and
  • At least 74% of the reduction in net emissions comes from lower gross emissions, not removals by trees, by 2075.
The Commission’s analysis suggests that with current policies, New Zealand could maintain net zero emissions after 2050 without planting any new forests at all.

The Commission’s models show net emissions stabilising at about (positive) 12 million tonnes per year from 2070. This assumes no exotic afforestation after 2050.

Say we close the gap only with forestry. That would mean planting 12,300 hectares of exotic trees each year, a modest rate given afforestation over the last thirty years have averaged 13,500 hectares per year.

But there are other ways to get to net zero. The Commission’s analysis conservatively assumes an ETS price of $50; a carbon price for agriculture of $2.50; all of the carbon stored in trees goes back into the atmosphere after harvesting; and no use of international offsets.

Relax one or more of these assumptions, and we need to plant fewer trees – or none at all – to maintain net zero emissions after 2050.

So current policies tick every box.

Deliver our emissions targets? Tick.

Entirely domestic? Tick.

Mainly decarbonisation, not trees? Tick.

More affordable than the Commission’s plan? Tick. Many times more affordable.

This all means that New Zealand could do none of the Commission’s recommendations and fully meet its commitments to lower emissions, based on the Commission's analysis. The Commission has made no case for its far-reaching reforms.

We make these points and many more in our submission to the Climate Change Commission, which you can read here. Submissions close on 28 March.

Everything is awesome
Steen Videbeck | Research Fellow |
Did you hear that LEGO released a minifigure of our PM. It’s big news. Little old New Zealand has finally made it! LEGO, the most trusted brand in the world, and the coolest, has given a ringing endorsement of our PM and our COVID response. Take that Scott Morrison. No minifigure for you.

The TVNZ article about it got thousands of reactions. A New Zealand Ambassador even tweeted the exciting news. Of course, the detractors moaned that another big company has jumped on a political bandwagon.

But I don’t care. Everything is awesome. Everything is cool when you’re part of a team (of 5 million).

There is only one problem. Just a small one. LEGO hasn’t released a minifigure of our PM.

LEGO has a strict policy against doing anything related to politics as it doesn’t fit their brand values. And a search of ‘Jacinda Ardern’ on LEGO’s official website returns a Flower Garden and a Stormtrooper.

I’m confused too, I read it on, so it must be true. The headline read “Jacinda Ardern made into figurine for International Women’s Day” and they wrote, “Lego’s Custom Minifigs website says Ardern is a “truly inspirational leader.'' Plus, I also saw a photo of the minifigure. She was holding a COVID sign. What is going on? Can you have minifigure deepfakes?

It turns out a better headline for the articles would be “Small UK company that has no association with the LEGO company releases a Jacinda minifigure.” That’s right. The Minifigs company isn’t part of LEGO. Not even close. It’s just a site for fans to buy custom LEGO before they get dressed up and go to the Comic-con Convention. You can even build yourself. I know, I did. Just so that everyone feels included I also built one for Marama, James, Debbie, Rawiri, Judith and David.

Don’t get me wrong. I think it’s cool idea from Minifigs to highlight inspirational women and they look to have done well for themselves – shipments of the Ardern minifigure are delayed due to unprecedented demand.

The real problem is that unless a news article explicitly states that LEGO didn’t release the minifigures most readers will assume it did. Sadly, few readers took the mere hours it would take to investigate LEGO’s corporate structure and subsidiary companies. Disappointing, but that is life.

Now tens, if not hundreds, of thousands of people think LEGO has done something it hasn’t. And that’s not awesome.

On The Record
Other Initiative activity:
All Things Considered
  • Graph of the week: No need for transformation: According to the CCC, current policy settings deliver net zero emissions with marginally more exotic trees and marginally fewer trees overall
  • Does employment protection reduce productivity? Evidence from US States
  • The Macdonald-Laurier Institute’s COVID Misery Index
  • Taiwan was engulfed in salmon chaos
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