Released today – Version two of Swan Dive or Belly Flop?
Today we have released round two of Swan Dive or Belly Flop? This version is very different, and, we believe much improved on, the previous version.
In terms of policy it has new ideas (e.g., lower corporate tax rate and the elimination of imputation, practical suggestions to improve public-private sector cohesion), significant refinements on previous ideas (e.g. refined proposals on provisional tax and depreciation), new analysis (e.g. on NZSF directing funds into the NZ economy in larger chunks, SOE performance, KiwiCo). Some of these were entirely “externally” generated via feedback, especially on this blog. All benefited from such feedback.
In terms of “what next”, Swanbelly outlines plainly the need for a broader economic strategy, of which SwanBelly, with its focus on the productive sector, could form a part. Most importantly, it lays out criteria by which the next government’s economic strategy can be evaluated, and concludes with a call to action for the new government to deliver a bold, clear economic growth strategy as a matter of urgency.
Over this process it has become clear to us, with Lloyd issuing his “goal for NZ”, the Unions and Bus NZ both putting out economic strategies, individuals working on detailed manifestos, as well as via the feedback from bloggers and well known civic leaders, that there is a deep need for urgent, cohesive, inclusive New Zealand response, and that this crisis may provide just the opportunity for us to create that.
Whoever the next government is, they should take on board, and ignore at their peril, that the public is thirsty to contribute, and has had enough of being ignored in policy formation, and the overall “direction of travel” of New Zealand. The opportunity, and the risks, are clear to whoever the next government leader is……
Long term, we encourage you to continue to keeping visiting this blog and participating in ongoing national conversations about the economic issues and opportunities facing New Zealand.
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Posted by Mark Weldon on November 4th, 2008 :: Filed under NZ Institute, NZX, New Zealand, Policy, Swanbelly
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November 4th, 2008
Congratulations once again to Mark and David for driving the economic discussion for our country. Version 2 of SwanDive or Belly Flop is an impressively detailed document full of great strategies and giving whatever government we next have an action plan to debate / develop and execute ASAP.
One point I must disagree with though – your statement that it is irrational dinosaurs and humans ever walked the earth together. Have you checked out Winston Peters lately
November 4th, 2008
Sustainable, effective visions do not come readily out of emergency packages. They mature and become grounded, in one way or another, in a political, economic, business and community framework. There is an important distinction between a short-term, even medium-term, package of measures designed to head off a crisis, and a sustainable vision for a country. Perhaps this distinction could be borne in mind as this discussion develops.
If you look at modern, sustainable visions, they tend to be established in one of 4 ways:
• Compulsion: for example, South Korea’s growth model was driven by government control of finance and political networks, direction of the business community on the basis of clientalism, strong-arm action to keep the broader community calm, and a limited commitment to democratic ideals. Contemporary China is little different. Chinese Taipei was similar for much of its post-war history;
• Authoritarian corporatism: perhaps a variant of the previous model, Singapore grew on the back of strong central direction, a restricted democratic order and substantial incorporation of social institutions into a unifying growth model; Malaysia is a similar case under Mathatir;
• Crisis: Ireland was rapidly becoming a basket case. Impending doom drove the creation in the early 1070s of a multi-sector collaborative arrangement (embodied in the National Economic and Social Council) which in turn drove the model of the Celtic tiger;
• Social democratic corporatism: the Swedish model par excellence, grounded in accommodations in the 1930s, and reprised in Norway, Denmark and Finland. The ‘modern’ version of this is New Zealand post 1999, contemporary Chile under the Concertación, Blair’s ‘Third Way’.
There is a fifth ,somewhat particular and not enviable way:
• Rejoining the civilised world(with apologies to ‘Yes Minister’): both Germany and Japan adopted a market-based, corporatist approach to growth in the 1950s, in which multi-sector involvement around a strong , central political process was crucial.
One might argue that no sustainable model has been built in the modern period on the basis of market fundamentalism . Where this has been tried – for example, Thatcher’s UK, Pinochet’s Chile, Fujimori’s Peru etc – a sustainable framework for growth has been difficult to create. Indeed, some of these models have been amongst the most directive and repressive, of modern political regimes. Even during the Industrial Revolution, the political limitations to market fundamentalism rapidly produced regulatory and participative mechanisms, which qualified the ‘market model’. The reason for this can be put in two quite different ways – the market fundamentalist might argue that it is because politics intrudes into what would otherwise be a quite sensible arrangement; a more democratic perspective might argue that the exclusionary and narrow conditions demanded by market fundamentalism cannot be sustained politically – people won’t stand for it.
If the debate about a sustainable vision is to be taken forward from other debates about short and medium-term responses to this crisis, it will, I believe, have to consider how to build that coalition of support which makes a vision sustainable. That coalition must, I think, be broad, inclusive and, if the Irish case is to be believed, founded in robust debate.
November 4th, 2008
Overall, this document improves significantly as it matures…
Three comments, all based on the observation that the suggestions in the paper are largely economical in nature:
Regulatory:
What I find missing in the suggested approaches are regulatory simplifications that will assist investment growth and assist in reducing the property investment bias. For example the RMA and building regulations are relevant in that respect (but many others can be found). Easing RMA compliance costs and delays would substantially bring down property prices as it would strongly increase available supply and do so at lower costs. Reducing building compliance costs would reduce construction values, eventually producing higher volumes and thus bringing prices down. If that was coupled with the suggested removal of property investment bias, house prices could be brought much closer to actual costs by removing non-productive components (compliance costs, capital delay costs, investment bias-bonus). An additional consequence of increased property supply is also the related infrastructure requirement, which would bring investments in that area forward.
Culture:
The paper does not address the cultural changes that are required to shift the economic focus as desired. It’s sad that neither of the political candidates (see yesterday’s debate and the fist three questions, that all related to the NZX NZI report) apparently has the leadership charisma that is required to quickly bring about the necessary culture shift. All is not lost however, because NZ has ready-made “heroes” and other existing cultural traits that can be tapped into to achieve the required national focus on a different economic attitude on both a macro- and micro-scale. I suggest that a separate part of the plan looks at this ‘cultural’ aspect, i.e. which specific culture changes are necessary to support far-reaching changes in the economic productivity model, and how do we bring such changes about?
Legal:
NZ has over the years substantially deviated from the traditional “laissez faire” common law model, to a structure of courts, tribunals and legislative and statutory environment, that is utterly crippling for fast-paced initiatives such as the ones proposed. I argue that this aspect requires at least discussion, possibly some suggestions. Countries with effective and efficient systems of (commercial) dispute resolution always do better economically.
November 4th, 2008
Berry – interested to hear more about how we bring about the required cultural changes. Do we just kill off or exile 30% of the population, or perhaps fit everyone with permanent bluetooth headsets so the authorities can just whisper public service announcements into our ears 24 hours a day. I also like your idea to loosen up building standards. There is an obvious problem with the excessively high quality buildings being contructed in this country. We must act to free up the flow of shoddy, boxy, aluminium windowed eyesores as fast as possible.
November 4th, 2008
Hi …
Also congratulations on the debate … it is needed in spades … I have been reading carefully and I now post this message which I sent to Mark some months ago now ….
This is perhaps a time where I can say this and not be lambasted as being sour grapes/reactionary wrt our share performance … ABA has out performed all indices … so the NZX should be a good place for us … it is … but we could be doing much much better and its the long term that I am looking at.
I believe economically NZ needs to merge with Aussie as soon as possible … I sat and listened to the debate that ran when the NZX listed a few years ago just before you came home to run it. I also worked overseas and have seen other economies especially Australia. When we first debated this I didn’t buy the arguments about doing it alone as they were full of blue sky … knowledge economy … look at Ireland etc etc … and layered with short term self interest on the part of the NZX brokers who became shareholders … the reality of the go it alone strategy I believe is being seen now.
The depth of investors and equity funds here is very very thin … and when combined with the stupid NZ Super mandate to export and invest most of the super funds into other economies … I think we/the NZX need to take a lead in this area and drag the NZ economy and politicians into a deep and meaningful dialogue with Aussie. Mark I know you made many submissions on NZ Funds and you had and have my support. You have also transformed the NZX and it is a far far better place than it used to be. The problem is YOU are good and the your organisation the exchange is good … but you can’t change the political and investing landscape on your own. The amount of $ going into the ASX just from Aussie super means it underpins the entire exchange performance and its performance becomes self fulfilling. People ask me if Australians invest here or look to the NZ economy and I tell them Australians look at us as often as we look at Fiji!
I have no issue with paying higher fees Mark if we get access to a capital market that rates our equity and that has a depth of companies and indices that are meaningful to what we do and therefore that generates investor interest and shareholder wealth. I will happily pay three times the NZX fees if the capital market I am on values us at a comparable level to Aussie companies in the same space same size and with the same track record and growth. Will we dual list … yes eventually when we have at least 60% of our business there … but there again is the issue … dual list! … why not one integrated exchange … why not drive it all from here? … because as you know the Aussies do not rate us or the NZX as a long term serious investment space .. it is a short term in out punt.
As you know we sit in the health sector here and we constantly get the patronising political mantra from Government that … We should bench mark ourselves with Portugal … and Australia is not comparable! … ie lower the bar to somewhere that fits. You know all the gdp immigration and economic stats and data that I do … the reality is we have to get NZ working and investing and ever since CER we have simply gone backwards while the entire OECD is accelerating away .. and our Asian and Australian trading partners are now multiples ahead of us. I hate the fact that my kids and probably yours Mark will almost certainly move away from NZ because there is more opportunity elsewhere … especially two hours away.
So … I think the NZX has a role to play … especially with a new Government that may listen to you and open up this debate and genuinely see if we can crank a deal with the ASX that creates an opening for a wider economic conversation before we really slip off into the Pacific and join our coussie economies. We will still beat them at rugby we will still be Kiwi we can even talk differently … but we need a mature conversation to take place now … they are down as we are and that is a good reason and a great incentive to talk to each other …
You have made a difference Mark and the exchange is run very well and the services we get are excellent … but mate the little bit of land we sit on is just too dam small and don’t lecture me with a knowledge economy or Ireland we both know that is all just too bloody hard and under MMP it will never happen … No this gloom is not indicative of ABA … we are in a good space and have many good opportunities here and in Aussie Asia ahead of us … this is for the next twenty years of investors and our kids.
November 4th, 2008
Really good to see that feedback was listened to and incorporated – particularly on Provisional Tax. Politicians tend to talk, and make an act of listening, and we get a policy mess as a result. The comments about cohesion are spot on. What is coming down the line (did you see our “one trick pony” of dairy looks like it has run out of puff – prices coming back faster than the exchange rate), will require much more skill and knowledge than lies internal to the public sector. They are increasingly ill equipped to make the right decisions, or even to recognise a strategy if one was given to them. Very important that the new government quickly change the culture, and move from being secretive and insular to open and trusting.
Other thing that is good is the CCMAU. Performance of SOEs is shocking, and the appointment of political hacks to Boards is the worst of pork belly politics. This should be one of the first things the new govt, of whatever flavour, does upon getting in.
November 4th, 2008
Mark
I’m happy with the changes made though I’m horrified that I have seen very little debate about it in the media for such a significant piece of work. These ideas deserve some strong debate from our political leaders but they seem more interested in parading there pathetic tax cuts and increased benefits all to get votes. Our parties sit so centre that they are afraid to try something different, something that our political history was full of.
I also think that these concepts need to be put across in a simpler format. It requires visual stimulates and practical examples. For example use a shop keeper’s work place e.g. economics 101 style. If we do this we bring more people into the debate and really get people to think beyond today but to look at tomorrow as well.
Alan Clarke – I agree with your comments but disagree with belief that we should join with the ASX. Firstly the ASX though bigger is still a blip in the ocean take away BHP and Rio then you really get a small operation. So why wouldn’t we look further afield because if predictions are correct there will be a consolidation in capital markets globally. The big guys swallowing the little guys so to speak meaning both NZX and ASX would disappear.
I don’t agree that this would help NZ or NZ businesses.
Your main driver appears to be greater capital for investment and growth. You view Australia as the easiest and simplest option for achieving this.
If a number of these suggestions in this document were implemented would you consider staying if greater capital was made available to your business.
I personally as a kiwi working in Australia do not think they do business any better or worse that us and if capital is an issue I think we as nation need to address this. If we encourage innovative businesses to leave through lack of capital our government is failing us.
Keep up the good work guys I just hope this document can mean something to everyday New Zealanders and that politicians will give it due respect.
November 4th, 2008
I believe the latest document to be an excellent summary of what it describes (in PART V: ACTIONS) as “one of the most serious events to confront the New Zealand economy over the past few decades.” It also suggests many worthwhile initiatives that should be implemented to minimise its effect on our economy.
However, it appears to leave the implementation of these initiatives to “whoever forms the next government.”
Leaving economic policy decisions to our governments over the past 50 years, however, has caused us to plunge from 4th to 22nd in the OECDs GDP per capita stakes. Successful New Zealanders, and our expats who care about our children and grandchildren, must ensure that some “vehicle” is found to ensure they are involved with key government and ministry representatives in planning, implementing and constantly updating an agreed and widely publicized “New Zealand Strategic Plan.”
My suggested “vehicle” would be the following:
• Identify New Zealand’s internationally competitive sectors. (Perhaps 7 or so, plus an “Other Sectors”
category. [I believe these should be – Tourism, Dairying, Education, ICT, Food & Beverage, Bio-
Technology, Mineral Resources (Oil etc) and Other Sectors.]
• Identify the most respected leaders in each of the above sectors. (Perhaps 5 or so from each sector.)
• Form Sector Growth Committees comprising the above leaders and appropriate Government Ministers
and ministry representatives, and have them prepare agreed Sector Growth Strategy Plans, which
would maximise the sustainable growth of each sector.
• Provide the Sector Growth Committees with the resources to implement these plans.
• Widely publicise these plans – both within New Zealand, and to New Zealanders living overseas
• Ensure the Sector Growth Committees meet, review and update their Sector Growth Plans at least
three times each year.
The above Sector Growth Committees would be ideally positioned to develop strategies to ensure our internationally competitive sectors maximise the fantastic opportunity the China Free Trade agreement offers. If is left to individual businesses (as currently appears to be the case), progress will be painfully slow, and that wonderful opportunity will be lost. These committees would also be ideally placed to implement strategies to encourage our expert and experienced expats in their sectors to return to New Zealand, and use their talents and overseas contacts to assist in growing the targeted sectors.
Our Governments have failed us miserably in the past. They have constantly received high quality advice from competent New Zealanders who want our country to succeed – at Knowledge Wave Conferences, and through various advisory groups etc. But Governments have never “owned” that advice because they have not been involved in its preparation – and hence they only implement what is politically beneficial to them.
New Zealanders must now demand that the government must commit to implementing the above tried and proven policy, and thereby minimise the effect of the current recession, and in the future make New Zealand the next international economic success story.
November 5th, 2008
I submitted my comment on the “Draft Strategy For Coming Out Of The Crisis Stronger (Version 2) late last night at 11-10pm. However, on waking at 4-45am this morning, I realised that in concentrating on future economic growth, I had omitted to include reference to the all important “Fiscal Strategy Committee” which must be appointed immediately by the new government, in order to minimize the effect on New Zealand of the current fiscal crisis. The “Fiscal Strategy Committee’s” members would consist of the Minister and Associate Minister of Finance, a key Treasury representative, the Governor of the Reserve Bank, and New Zealand’s most competent fiscal policy experts – people with proven fiscal expertise and experience, like Mark Weldon, David Skilling and Lloyd Morrison.
Many may question the inclusion of the Governor of the Reserve Bank as a member of the “Fiscal Strategy Committee.” But I agree with the statement in the Draft Strategy (Version 2), that as the UK Chancellor has recommended for that country, New Zealand too “should now be on a war-time footing.” At such a critical time, the “nice to have” independence of the Reserve Bank, must be temporarily suspended.
November 5th, 2008
It might be unrealistic to expect that all the worthy recommendations of the Weldon/Skilling paper will be taken up by our next govt. immediately.
Many recommendations are not easily understood and therefore debatable, with a substantial time span before results are to be expected (especially those suggesting mainly administrational instead of direct policy changes) – and therefore PERHAPS hampering rather than being helpful towards the emergence of a popularly backed and understood visionary goal in measurable terms.
In view of this, the greatest LEAP FORWARD in the latest paper is naming the Ownership Society concept, easily understood as the “third way” between the socialistic left and plutocratic right on the political spectrum, and the natural successor to the original “third way” Social Democratic welfarism (improving the latter through reducing welfare dependency, and thus enabling superior welfare to the needy through misfortune).
But why compulsory KiwiSaving (and the unneeded opposition of liberals), when we already have compulsory saving introduced through the NZSF?
1) The latter, when allocated to PAs, is superior to CKS (Compulsory KiwiSaving), because through GST ABSOLUTELY EVERYONE PARTICIPATES, without “incentive” help, wheras not everyone can participate in subsidised CKS!
2) KS delivers according to input, and what the investments earn. The NZSF delivers EQUALLY TO ALL regardless of input or what it earns, with the primary benefit in the reduced redistributive taxation cost to the taxpayer. Therefore it would be a superior source of low interest infrastructure construction capital, with the PA owner losing practically nothing – apart from a marginally smaller estate in the case of death before the PA has been consumed by its owner’s NZ Super.
3) NZSF PAs would totally eliminate the argument for means testing NZ Super (the safety net is means tested in Australia), because obviously, the bigger PA, the smaller the taxpayer burden to finance NZ Super. (And remember, unlike PAYGO NZ Super, the PA financed NZ Super has been a long term economically constructive development investment.)
4) PERHAPS THE MOST IMPORTANT FACTOR IN FAVOR OF NZSF PA ALLOCATION IS IN ITS IMMEDIATELY TANGIBLE BENEFIT FROM ITS 1ST YEAR OF INTRODUCTION – when PAs start financing their owners’ NZ Super, and releasing that amount of taxation revenue for spending in other areas.
It is important to debate the pros and cons of the specific proposal as above, because if they are as good as argued, they would set the ball rolling for at least a serious public examination of all the other worthy – but slower in delivering noticeable results – innovations proposed.
November 5th, 2008
We have just posted the following comment on The Hive
This is now a very significant document. It is an head on attack on some current elements of Government policy (eg the current R&D policy is described as “deeply flawed in design”) and an endorsement of some of the ideas coming from John Key.
We agree fully on the need for an economic strategy. We have so called strategies right now but they are largely spin. It is great to see Weldon and Skilling try and and define essential components of that strategy.
Urgent Actions:
We think that we should be cautious on fiscal stimulus. we think that tax cuts are a great way to get money flowing in the economy. We are less happy with expanded Government expenditure unless this can be linked to likely productivity growth – eg key infrastructure. We really need to focus on improving the quality of Government expenditure.
We agree that RBNZ needs to keep cutting and like the goal of having our rates down to 2.5% to 3% above the Fed’s rates.
We agree with the recommendations on provisional tax- this is just common sense.
Accelerated tax depreciation on capital investment is essential if we are to grow productivity.
Still thinking about the proposed review of the imputation regime and suggestions re Deposit insurance.
Drive to increase local investment and performance
We support debt financing of key infrastructure projects and agree with the note of caution. We like the idea of SOE bonds being offered to NZ investors and the idea of a 30-year NZ Government Treasury bond and long term infrastructure bonds.
Reforms of the CCMAU process are fully in line with our own thinking.
The idea of an ownership vehicle for the SOEs is also of some interest. We know the Singapore model well. It has made some mistakes though….
We, like you, support the idea of having more coordination of the various NZ Government investment funds. We are comfortable with National’s 40% vision in the short to medium term.
Improve growth environment for New Zealand business
We support a compulsory savings scheme and agree that 2% is a good place to start.
We are happy to see housing removed from the LAQC regime but would oppose a capital gains tax.
Agree that we should try and develop an R&D scheme that works rather than one that creates more accountants jobs.
Agree fully on the need to reduce corporate tax.
Win in the global economy
We must get those well qualified and experienced Kiwis home.
Very open to use tax incentives to attract firms to NZ. Also keen to go out and buy some with our investment funds – should they fit.
Expanded investment offshore is critical. Integration with our FTA strategy is essential.
Public Private Sector Cohesion
In full agreement.
Summary
Thanks for doing this work. Lets hope that a new Government, whether it be Labour or National led picks up your ideas and runs with them.
November 5th, 2008
I could not help but notice there is little reference, in your report proposals, to the glaring national mortgage that subtracts substantially from any endeavours to impliment new productive capacity.
Our current net foreign liabilties are NZD 159.2 billion at last count. The annual current A/C deficit to finance that deficit was NZD 14.97 bn. To me it’s like a pyramid scheme where a cut back in consumption will not suffice unless our creditors forego their dues.
We perpetually have to borrow capital (print NZD liabilities with acceptable ratings ie Uridashi notes (AAA rated, supranational issuers) to fund the annual current A/C deficit which in turn adds to net foreign liabilities. And so on.
Thus we have to be constantly at the mercy of vendor financiers peddling their goods ie cars plasma TV’s so they will in turn buy our liabilities. Recently we have used the rising value of housing (secured via massive mortgage debt and indirectly pledged to foreigners) to defer judgement day. What’s next?. Infrastructure Bonds is my guess.
A post-election Clark or Key led coalition will have little choice but to fast track infrastructure projects and fund them with namesake bonds. Unfortunately your prognosis that such bonds will benefit taxpayers charged with the liability of servicing and redeeming them are sadly misplaced. Just as ~70% of government stock resides in foreigners hands so will these liabilities.
It then becomes a matter of how much debt servicing can 1.8 million working Kiwis support and generate savings to fund new productive investment. Not much in my view. It certainly behoves the integrity of your report to provide a definitive numerical outline.
November 5th, 2008
Just finished reading this. Very pleased to see how some things have changed after feedback.
I think it is just so important that the incoming government read this, and take it to heart. The main things I think will make a real difference are these:
- First 100 days announced and implemented:
a. Depreciation accelerated for investment that drives productivity
c. CCMAU given the boot, and analysts appointed to scrutize, and make public their performance
c. Black hole expenditure. I had not realised that capital raising costs could not be deducted. This does not even need discusing – just fix it
d. Clear strategy announced and made public (and agree with SwanBelly that it has to be written in English, not jargonese)
- First year implemented
a. NZSF investing much more into NZ economy.
b. SOEs put together in some form. May not be perfect, but what we have now, with politics and nonsense is untenable and needs to change. Important the govt recognize this – the SOE model is broken
c. Major changes to corporate tax so more money goes into firms, not housing. Do not think any politician will put capital gains on housing, but dropping corporate tax rate a lot, and eliminating imputation (and investment bias to yield), will mean that putting your money in growth companies becomes the thing to do. This would be really, truly transformative
d. Economic councils implemented, and public sector CE jobs rescoped to include private sector experience. Current people could clearly apply, but…
Last point is that the government should be “of the people”, not a fortress.
Am really hopeful
-
November 6th, 2008
This second draft looks like further good work – The sections on R&D tax and housing tax treatment make sense and abolishing the imputation credit system also looks like an eminently sensible suggestion that should have been acted upon years ago.
However, I remain deeply unhappy with the view that the energy SOEs are government assets that should be “aggressively managed” to maximize shareholder returns via a KiwiCo entity. This action will further incentivise price-gouging in an inherently inelastic market with insufficient competition. The net result will be further proliferation of “just too late” generation underinvestment and further rapid electricity price inflation. This will be severely detrimental to NZ’s global competitiveness particularly in export manufacturing.
I am much more enthused by the suggestion of a single consolidated renewable generator SOE that is no longer a vertically integrated gen-tailer. In this case, a complete rethink of the current electricity market model would be required. It was flawed to start with and is now broken beyond repair. We shouldn’t try to fix it, we should build a new system that recognizes the strategic importance of the electricity sector and incentivises the generator to provide security of supply accompanied by the lowest cost per kWhr. We need to achieve this whilst simultaneously investing heavily in new generation and transmission capacity. This will probably require some government borrowing and/or infrastructure bond issuance. The net result will be a reduction in the “electricity tax” which will help NZ businesses to compete on the global stage as well as attract new energy intensive export businesses.
November 8th, 2008
What about small business? (I own 50% of a small business (approx $3m turnover per year with $1m in exports, designing and manufacturing advanced high end food dsiplay cabinets for cafes, bakeries etc)).
Some simple initiatives could easily target and benefit small businesses, primarily through assisting the crucial aspect of cash flow, such as:
Firstly, many small businesses will loose the 3% extra tax paid (when the corporate rate was 33%) over and above the new rate of 30%. This is because, unlike larger corporates (local and foreign owned) that commonly raise funds via shares and debt instruments etc, small businesses commonly grow through reinvestment of profits and are unable to fully distribute the benefit of tax paid as imputation credits. Why not allow business (within certain bounds) the ability to offset this tax paid which would otherwise be lost (our small business will loose $30,000 in imputation credits) against provisional/year end tax?
Secondly, it is all the more important during this difficult economic period that small business owners reduce the cash drain on their businesses by limiting as much as possible their drawings and/or dividends. This is made difficult by the fact that ‘Working for Families’ is in fact ‘Working for Families Without a Small Business’. Small business owners do not qualify for ‘Working for Families’ due to the fact that they have business ownership/income (even though it may be no income or even a loss). Whilst this aspect was put in place obviously to stop potential income manipulation, it has in fact resulted in a situation where thousands of small business owners with negative, low and moderate income cannot receive the benefit of ‘Working for Families’. A change could assist in owners reducing their drawings from their struggling businesses and help reduce business failures and job losses.
Finally, a lower threshold of systems and record keeping etc should be put in place for any R & D tax credit (if it continues) for small business. To access the credit and help our small business grow we must divert significant attention away from achieving our operational and strategic goals in order to comply with the IRD’s requirements. In fact, I’ve estimated that it will cost as much as the benefit we will receive.
November 9th, 2008
Stephen Hulme – regarding “how much debt servicing can 1.8 million Kiwis support…?, consider this:
We need infrastructure. If (up to a point) the NZSF invests say 1 million in infrastructure with say a half million labour cost component, at say only a 5% rate of interest, this would return more than twice the taxable income to the country, than the same million returning say, a risky 20% return from overseas, and also be the least inflationary way possible for infrastructure construction, compared to imported or bank overdraft capital.
Furthermore, when user-, rates-, and taxpayers repay this debt, the same transaction would also deliver the cash flow for our NZ Super.
Is this “smoke & mirrors”, or sound, depression defeating and growth generating economics?
November 12th, 2008
Jens Meder.
Thank you for replying – November 9th , 2008 at 9.44pm
In the case where the NZSF is authorised to divert NZD 1.0 million from foreign investment to a local infrastruce project a number of factors have to be taken into account.
It has to be understood the NZSF in conjunction with the NZDMO (both Crown entities) are engaging in quite sophisticated financial engineering schemes to obtain the foreign currency investment funds whilst leaving the accrued NZD taxpayers contributed funds lodged with our New Zealand banks.
May I refer you to an article posted recently by Roger Kerr here: http://www.interest.co.nz/ratesblog/index.php/2008/10/24/opinion-home-or-away-investing-the-cullen-fund/
to better understand the mechanics involved.
Please read my responses below the article and the linked comments on my website.
I think it will become clear that which you propose will serve no purpose other than to temporarily divert the banks’ deposits securing NZD 1.0 million in mortgages to the NZSF infra structure project.
The banks will still have to leave their foreign borrowing in place and secure another source of NZD funding via, say, Uridashi bond issuance. This process will inevitably require the banks to monetise the bond issuance to replace the deposits lost to the infrastructure project.
The net result is a devaluation/dilution of the outstanding credit currency in circulation by NZD 1.0 million.
November 12th, 2008
Dear Stephen – Roger Kerr is a passionate promoter of the status quo from a plutocratic point if view (”there is no shortage of capital for profitable investments….so reduce taxes…etc). He himself is too cautious to debate economic basics, but commissions people to write books & studies to “prove” that the NZ savings rate is adequate (which it is for any state of any economy, because NOTHING is created without someone’s savings – a physical fact, not theory), and that savings are the result of wealth, and not its creator. (Of course, my grandmother knew already, that if you are wealthy, it is no effort to save more, you don’t need any studies with complicated equations to prove that).
According to plutocratic laissez faire, his way of raising our economic growth rate is to reduce taxes, so the wealthy cannot help becoming more wealthy – and resort to the trickery of “hedging” – about which he himself admits no one knows where the money ends up. According to R.Kerr, NZSF investment abroad, commonly understood as “spreading the risk” – is practically “smoke & mirrors” – and the only honest investment without the need of the trickery of “hedging”, would be domestic investment!
Stephen – why would the banks have to leave their foreign borrowings in place, when the NZSF – our savings – would cancel the foreign debt by converting uridashi bonds into domestic debt, which in the case of home mortgages are pretty low risk?
The way I understand it, there would be no foreign debt nor interest to be paid to Japan. Please explain.
November 13th, 2008
Dear Jens
I am not a supporter of Roger Kerr or the policies he espouses. But in this instance he has exposed the method by which our banks, RBNZ and other Crown entities, in my view, finance hedged foreign reserves and hence NZD deposits (liabilities) for our local banks to invest in what they choose. Mortgages seem a favourite choice.
I believe it would benefit your understanding if you came to grips with the mechanics of the financial derivative employed in these schemes. It is called a cross currency basis swap. A brief flowchart description can be viewed here: http://www.omo.co.nz/Uridashi%20Flow%20Chart.gif
I hope the question you ask of me will be answered when you understand the convoluted aspects of this instrument. And please feel free to follow the links I indicated were of value in my previous comment.
November 13th, 2008
Stephen – I must admit I do not understand the “convoluted aspects” of the hedging flow chart, which seems to be an ideal instrument of deception, and – I understand – will come under serious investigation as causing, or having allowed to cause the recent meltdown, through concealing the deficit in savings to sustain the excessive speculation on credit.
Isn’t hedging basically a dubious instrument for share market speculation on credit? Yes or no?
Has the NZSF really sunk to that level of economic gambling? I understand, when it lost $100 million through the Italian dairy company bankruptcy, it was a loss not softened by hedging? Is the NZSF a share market gambler, or a long term investor? If the latter is true, then all this hedging smoke and mirrors is irrelevant to our discussion on a measurable goal to lift New Zealand’s economic performance rate.
By the way, it is share market speculation which creates booms and busts, and not long term investments, an increasing proportion of which would have a stabilising effect on trading cycles.
I believe our search for a better economic future should include severely restricting, or even banning, share market speculation on credit, just as I understand, casinos do on gambling. Your views on this would be important for economic commonsense to prevail.
November 13th, 2008
So I can’t comment on the various economic arguments that are being put forward here.
But what I do know is that the most important impact of this work has to been able to articulate a goal and start charting a path towards that. From what I can see most agree with the goal. And the conversation is heading towards an assessment of the path.
What I am interested in is this.
1. Who is really interested in being part of this debate with the aim of taking it to the point where we know what we want to do?
2. How do we have this conversation? I don’t like the idea of forming lots of committees – we have the knowledge now so it’s about creating a forum for active debate – and committees are easily captured.
Once this happens – then we can start to correctly shape the resources and funds available to make it happen.
I just posted on my blog http://szikszai.blogspot.com/2008/11/how-to-spend-15-billion.html about how to would treat the investment in broadband – this approach of looking at an overall goal and then deciding what to do would mean we probably don’t spend it on a Fibre to the Home network but predominantly on transport and improving the base level of broadband access across all NZ.
November 14th, 2008
Hi Miki – your blog is full of good ideas so why don’t you get them going? According to the Business Roundtable’s wizard Roger Kerr, there is no shortage of capital (or wouldn’t be , if it had not evaporated in hedging wizardry?)
But is it true or not, that despite our reasonable properity, child poverty is reported to be expanding, arguably, because we have a welfare supported and cultivated “have not” underclass – and how could that problem be tackled?
Do you agree with the all-inclusive increased personal savings-investment-ownership effort as easily introduced through allocating the NZSF to PAs (Personal Accouts), as a basic priority to open up a widened range of investment ideas on this forum, or not, and why, or why not?
Do you want the need for charity & welfare be widening as it seems to be at present, or narrowing, as it inevitably would under a successful effort towards the Ownership Society, with at least a minimally meaningful level of personal wealth ownership by all citizens eventually? (Or if you think this is just wishful thinking, please explain!)
November 15th, 2008
I just hope that John Key, and particularly Bill English – who seems a little/lot Roger Kerr-like at times – read this and realise that we need a strategy that pushes us to compete. The idea of cutting corporate tax is awesome. We do not need to lose the total tax take – as getting rid of stupid and difficult and idiosyncratic and stranded and distortionary imputation does that – but this will mean that, finally, investing in firms makes sense, and that firms don’t sit around doing stupid things like borrow to pay dividends – b/c investors will care about growth – and THAT IS WHAT NZ NEEDS – BADLY!!!
November 17th, 2008
Jane – Agreed! We want growth! So let’s increase our savings and investment rate, because that is the way to achieve it. I have done it myself, and neither Roger Kerr’s nor Michael Littlewood’s cleverness can disprove it through sophisticated “smoke and mirrors” camouflaged “studies”, that savings are not essential for providing growth, security, and widening opportunities for actions and choices. How can that be doubted at all, and do not attempts to deliberately ignore or even refute it without practical, tangible evidence and proof, come close to deception?
November 18th, 2008
Stephen Hulme said…
mechanics of the financial derivative employed in these schemes.
There are many, but the majority fall in 2 main categories.
- Interest rate based derivative
- Equity based derivative
Within those 2 categories, there are many different derivative models under them.
Jens Meder said…
Isn’t hedging basically a dubious instrument for share market speculation on credit?
Hedging is about portfolio insurance against market movement and also an important consideration in modern finance. This again doesn’t guarantee zero loss, but if the portfolio is optimized, then the loss is minimal when the market moves against the portfolio and similarly the portfolio gain is maximal when the market moves in the direction that is favorable to the portfolio in comparison to a non-optimized portfolio with exactly the same asset class compositions. Whether or not to hedge, how much portfolio insurance is adequate, and how often to re-balance a portfolio are important considerations for traders, portfolio managers, and financial institutions alike. If there were no transaction costs, financial professionals would prefer to re-balance portfolios continually, thereby minimizing exposure to market movements. However, in practice, the transaction costs associated with frequent portfolio rebalancing may be expensive. Therefore, traders and portfolio managers must carefully assess the cost needed to achieve a particular portfolio sensitivity. Thus, the hedging problem involves the fundamental trade-off between portfolio insurance and the cost of such insurance coverage.
November 19th, 2008
Following my earlier contribution to the blog, I’d like to thank you Lloyd, Paul and the team at HRL Morrison for raising the measurable goal issue as it turned out to be the right challenge at the right time and the response indicates that you have hit the nail on the head. I read many of the responses and for a while thought that we were straying from the target, however in a free democracy everyone is entitled to their opinion and point of view and this is what make us strong. Personally I do not believe that reducing the wage gap between Australia and ourselves or being satisfied with 20th ranking by 2025 are acceptable benchmarks, we need to do better and cast the net wider, we were number one once so why not aim at being number one again and regardless of the Mitre Ten man saying that big is better, I say quality is better than size, and being small as a Nation means that we are nimble, resourceful and flexible, so let’s use these skills to develop our Goal to be the best and the envy of the rest of the world. Our new government is leading the way to become unified regardless of our political, social, ethnic or religious affiliation, so as individuals we must become passionate about being the best and do our best in what ever small way we can. Go New Zealand!