The government's operating balance before gains and losses reported a deficit of $6.3-billion from $3.9-billion in 2009. The government's tax-take fell to $50.1-billion from $51.1-billion in 2009, with a $2.1-billion decline in corporate taxation to $7.2-billion, while personal tax receipts fell $1.5-billion to $24.4-billion. The take from GST rose $350-million to $11.9-billion, and it remains to be seen whether it would gain with the government hiking GST to 15 per cent from October 1 this year.
Without trying to take credit for changes due to circumstances outside his control, English said: "There are early signs New Zealanders are rebalancing their own behaviour quite markedly and faster than we expected". He enlarged on that on Radio New Zealand on Friday morning by saying that many were “deleveraging” by paying off the big plasma TVs and second cars that they had “put on the house” when bank credit ran wild.
The Tax Working Group, a chorus of commentators, and the Key-led government vilified property investors, and this year’s Budget helped fund tax cuts to wage and salary earners by ending depreciation on property.
English commented that the financial sector had sustained a near-death experience. Otherwise, there has been no official finger pointing at that sector, but that is where the failure has been. This week’s financial statements say that the government faces a hefty bill from that failure, the biggest of which was South Canterbury Finance that immediately cost the Crown $1.7-billion to take on all liability from creditors. The Clark-Cullen government’s hastily put together deposit guarantee scheme is coming to an end and further such schemes will place responsibility on banks and finance companies for funding.
Anyone who has dealt with a lender over a period of time cannot help but become cynical of their changing criteria – awash with credit in a boom and nothing happening during a bust. This roller-coaster ride could chart the greed and fear of bank directors and CEOs as they alternately chase market share and try to extricate themselves from the consequences of their own woeful decisions. If a 20 percent deposit is required for a property purchase during a bust, why not require it during a boom?
During the boom, numerous bank economists bemoaned house price inflation and diminishing affordability, but few seem to reflect that the relaxed lending criteria of the banks they represent was part of the problem.
Perhaps the Key government has a blind spot towards the finance sector since numerous Nats, most notably the prime minister, come from that background. Vilification of property investors shows little evidence of understanding of the property sector as part of the economy.
English said, in his October Focus on Finance newsletter that “as well as improving the incentives to work, the tax package tilts the economy towards savings, investment and exports and away from the unsustainable borrowing, consumption and over-investment in housing of the past decade”. (2) What effect have the government’s negative utterances had on the property sector?
An exact cause-effect link is probably not possible, but only 16,000 dwelling consents were issued in 2009, according to Statistics New Zealand, while the 10-year norm for New Zealand is 26,000 new dwellings built per year. The NZ Property Investors Federation says we are building only 7000 dwellings a year.
Analyst Owen McShane quoted a 1960s report, on the relationship between house construction and employment, that concluded that every 1000 houses would generate a total of 40,000 contracts and jobs over 15 to 20 years. (3) He showed that reducing the residential construction rate from 26,000 a year to a no more than 16,000 a year, and probably much fewer, is cutting 400,000 contracts and jobs over 15 to 20 years. Is this the legacy that the Key-led government wants to leave?
Where does immigration fit into the Key government’s grand scheme? Net migration went from minus 6760 in 2001 to plus 34,580 in 2002, and up to plus 42,090 in 2003, the beginning of the boom. Since more people require more dwellings, the residential property sector keeps a close eye on net migration. Whether the Clark-Cullen government deliberately allowed the influx to pump up the economy or whether it was an administrative cock-up has never been discussed. There are quality migrants around the world who would give anything to be able to live in New Zealand. By world standards, New Zealand is thinly populated. Would it not be worthwhile to investigate a managed increase in immigration?
A shrinking deficit is a move in the right direction, but English is happy to continue to borrow in the belief that he is helping us all maintain our standard of living. Such borrowings totalled $250-million a week before the latest figures. What sane household would follow such a course? The usual advice to households with financial cancer is to stop the reckless spending and systematically reduce debt.
How long can the policy excesses of the Clark-Cullen government, namely the welfare for workers Working For Families scheme, and interest-free student loans, remain untouched? How long can any government continue to pay non-means-tested superannuation? How about the bottomless-pit health sector that delivers less the more it is funded?
It seems that while the Key government seeks to outflank a perceived Labour opposition with “Labour-lite” policies, economic management will continue to contain more politics than practicality.
Sources
1. Govt deficit shrinks, NZ Herald, October 14, 2010. http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10680529
2. October Tax Changes Good For the Economy, Bill English, Focus on Finance, October 4, 2010
3. Owen McShane, The Disappearance of the next middle class, August 29, 2010. http://breakingviewsnz.blogspot.com/2010/08/owen-mcshane-disappearance-of-next.html
2 comments:
A population growth driven economy that relies on importing people is just a recipe for boom bust failure. All they do is drive up prices and the focus on investment becomes the incoming people everyone borrows to either get in on the internal growth or they borrow just to live.
During this last boom our country became distant from the global economy as we disengaged. we focused on the internal growth that was false and forgot to export which is where our money really comes from.
Tragically this boom didn't even leave us with better infrastructure just houses and debt.
Forget builders and electricians we need engineers and scientists with factories to export not more subdivisions. That is how to earn an income.
Hi The high leverage that has been used in borrowings in the last few years has been predicated on a continued boom. This could not continue with more and more people being deceived by borrow and hope thinking. This is flawed. Yes we have to be earning steadily and learning to live within our means however meager these may be.
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