Thursday, April 23, 2020

Frank Newman: Straight Talk - The good news and the bad news

The good news and the bad news.

The good news first. The latest round of relief for business was announced on the 14th of April.  There are a number of measures but two points are significant:
  • A "tax loss carry-back scheme" will allow a business (company, sole trader, partnership, trust) to offset the loss against a previous year's tax-paid income - to in effect claim a tax refund for their loss. This will be a significant benefit for some businesses and there is no requirement to prove the loss has arisen as a result of COVID-19. While this is definitely a huge bonus to some businesses, it will only benefit those businesses that have moved from profit to loss. It will not benefit those who have suffered a significant loss in profits but remain profitable. Nor will it benefit those businesses who are yet to make profits.
  • A “same or similar business” test will be applied to losses carried forward to replace the existing 49% shareholder continuity test. That means a purchaser can gain a future tax benefit  from  buying a business with tax losses, providing the company meets the same or similar business test.
Other measures tinker with the default notice period for commercial leases from 10 to 30 days and double the remedy notice period for mortgaged land and goods.

Now the bad news. 

Throwing public money at the economic Armageddon the government has created will not save the economy from serious decline and all of the consequences that go with that: job loss, the destruction of retirement savings, and the human consequences.

It's becoming farcical to see new support measures announcement by the Beehive on a daily basis, seemingly to plug every new leak that appears in the titanic. One day it's Maori saying they need a handout because "their people" have been disproportionately affected. That does not actually show up in the numbers but nevertheless the argument has resulted in additional funding for Maori.

The next day it’s the media asking for a bailout and the removal of the takeover rules to allow a merger of two dominant players sought before COVIT-19. One wonders whether the $50m "rescue" package will dull what would otherwise be sharp reporting of the government actions or minimise what would otherwise be a bold headline. Having a media sector dependant on state funding is a serious transition.

Tomorrow it's likely to be the philatelist society has received state funding as I am sure they too can come up with a plausible reason as to how they have been affected.

Who can blame these interest groups for not putting their hand out and trying to recover some of the damage caused by an event that was not of their making?  It's in their self-interest to do so. It's also in the self-interest of politicians to make the most of the COVID-19 opportunity.

The IMF is predicting that New Zealand will be one of the worst performing economies in the world, outside of Europe.

There is only one thing that will rebuild the economy and that is allowing business to get back to business. The private sector is very good at creating jobs and creating wealth, if left alone to do so.  However it is not in the political self-interest of this government to go down that path. There should be no doubt a Labour lead government will become more interventionist and when regulation does not work their solution will be more regulation - it's what socialists do, because they inherently hate the profit motive and despise as selfish those who have done well for themselves.

The real damage from the COVID-19 crisis will come after the lock-down is over. Any commitments made prior to COVID-19 will be easily dismissed. That means everything is back on the table for discussion:  wealth taxes, death duties, higher marginal tax rates for higher incomes, and higher company tax rates.

Frank Newman, a writer and investment analyst, is a former local body councillor.


Lindsay Mitchell said...

"The private sector is very good at creating jobs and creating wealth, if left alone to do so." That's the money quote. Apparently Australia is ahead of us here too. They are debating removing obstacles. Regulation and red tape. Trite as those terms sound we all know what they mean in practice and they have only been ramped-up in this country under Labour.

Sam Esler said...

There is only one proven way out for NZ Inc. That simply is to do what Germany did in 1948, and that was to throw away the rule book and let the private sector do what it does best if allowed. It might well behoove those making the rules now to research how the German economy went from almost zero to a 8% gdp and stayed there till a left wing gov't got elected in the late 1950s. Socialism can provide you with shelter, fill your belly with bacon and beans, provide you with free dental and look after you when ill, all the things provided to a prisoner and a slave.Ronald Reagan said that many years ago.

Unknown said...

Thank you for the overview.

Frank Newman said...

Thank you for the comment Sam. You raise an interesting point about Germany post-WWII. It went down the free-market route because of their tragic experience of state control. England did not learn that lesson and instead allowed the government to become more dominant. The results are plain to see, and it was not until Margaret Thatcher came along was it able to release itself from the shackles of socialism. It is very disturbing how readily New Zealanders have given up their personal rights and more disturbing, astounding, that a number of business groups are asking for government regulation (of their competitors or suppliers). Business people should be singing a united chorus for the Government to ease up on regulation so they can get back to business and create wealth and jobs.