TVHE

Good summaries here and here.  Speech is found here.

There was nothing in the speech (when it comes to tax – which is the sole focus of this post).  An increase in GST was already very likely – but the government wouldn’t even commit to it.  Given that it isn’t going to be finalised in size or scope until the May budget, and given that the they want to compensate by changing tax rates it is likely they won’t introduce this until March/April 2011.

Note:  I’ve heard rumours they would change GST in October.  Increasing GST just before Christmas, with no compensation, and coming out of a recession with elevated unemployment is what I would term moronic.  As a result, it can’t be ruled out

No land tax, no capital gains tax, probably some fiddling around depreciation rules (although that wasn’t even pointed at in the speech), all implies that the government isn’t really that serious about ensuring property is treated the same as other capital investment.

I heard today that we were going to hear about “significant changes to the tax system”, something about a “step change”.  Other than the possibility of a slight shift from income to consumption taxes there was nothing in this speech.  To be honest, it makes me laugh a little

Update:  The more I think about it, the more this speech implied a STEP BACK from the MINOR adjustments that everyone already expected.

No mention of LAQC’s, no mention of changes to the treatment of depreciation on property, no commitment to a GST rate change, no aims to flatten the income tax scale per see (as the higher GST would be fully compensated).

A lot of (waffly) talk about investment and minor fiddles with benefits – which aren’t the purpose of this post, but which indicates how tax reform DOESN’T HAVE A PRIORITY in terms of the governments thinking.

In reality this speech has shown that this government is less willing to change issues that have been illustrated with the tax system then we believed before the speech.  That was a surprise, given how little was expected in the first place

Update 2:  So it wasn’t a “major economic reform” in the tax sense.  But yesterday he did say:

Mr Key said the details of any changes would not be revealed before the Budget in May, but his speech would spell out the Government’s overall economic programme for the year.

That isn’t as bad.  The speech didn’t have any details, that is true.  However, it didn’t really spell out much in terms of tax changes either.

When it is put in this context it feels like there wasn’t supposed to be much too it – so I don’t feel as bad about it as I did.  However, there are two major negatives still:

1. it means we will have to wait until May until we have any sort of “certainty” around tax policy – that is not a good thing for the economy.
2. The things I said above still hold – expectations of tax change are now lower than they were, and the things that weren’t mentioned will be analysed as much as the things that were!  As a result, this increases uncertainty MORE, as well as indicating that any changes may be smaller than the policy changes suggested by specialists.

Update 3:  For those who are interested in the wider social policy discussions, opinions, and other tax stuff look:

Offsetting Behaviour, Brad Taylor, Public Address (1 and 2), The Standard, Homepaddock, Education Directions, Colin Espiner, Dim Post.

Also everyone else is grading it so I better.  C+ for catching an increase in GST and not putting in a tax free threshold.  However, it loses marks for creating uncertainty and not balancing expectations – both serious issues with such a speech (and really polices in general).

In a chart on the Rates Blog today they point out that the money stock (note not really the money supply, depending on how you define it) in the Euro Zone is declining.  The indication then is that “Europe looks bad”.

However, the money stock is also dropping in Australia and New Zealand.  If there were figures for the US, I suspect we would see some contraction there as well.

Does this mean economic activity is taking a sharp turn downwards?  Not necessarily – we may be seeing a sharp uptick in the velocity of money or a movement in reserves as global interest rates tick up.  Furthermore, remember that growth in the money stock in many countries ACCELERATED in the middle of the great financial crisis – so to be honest, it is hard to tell exactly what is going on with these figures.

Overall, falling money stock (in conjunction with an easing in borrowing statistics) suggests we should be cautious – it looks like deleveraging is happening.  However, it is not a clear indicator of where the economy is directly going – if relative prices in the economy are adjusting then activity could still be rolling along nicely.

There has been a lot of negative talk about the maths in economics – like a huge amount.  Just look at these links, some of them are poor and reactionary, but some of them are excellent and the last two are my favourite (*, *, *,*,*,*).

Now although I believe much of this attack is excessive, and I believe the role of maths in economics is very very important, like all protestations there is a grain of truth to be found.

Read more…

Dr Bollard is spot on in saying that it isn’t likely that we will catch up to Australia in incomes (ht Kiwiblog and Rates Blog).

Simply put, I think the majority of economists believe that the ability of government to influence per capita incomes (especially given the relative size and scope of governance in Aussie and NZ) is relatively negligible.  Australians are 30% more wealthy then we are, and the belief is that a lot of this comes down to locational, scale, and endowment type advantages – not “magic policy”.

Furthermore, Australia is running down its natural capital stock here – any production numbers should take the temporary nature of some of this income into account.

And finally, just because production is 30% higher in Australia, what is the actual gap in happiness?

I’ve never liked the aim of catching Australia, it seems pointless (see here).  We should instead “aim” to have a society where citizens are as free from coercion as possible, so that they have the ability to find satisfaction.  I am glad that the RBNZ governor agrees.

Agnitio sent me a couple of links to an interview I did on unemployment last night (here and here).

It is consistent with what I wrote yesterday, even if it doesn’t seem that way.  Furthermore, I don’t believe the government was too “inactive” in this case – we aren’t a centrally planned economy, blaming the government appears pretty arbitrary.

Relative to my expectations (which albeit were low) the government actually performed quite well in terms of the recession – by not really doing anything excessive, but still trying to make sure that any painful transitions are smoothed over (by not removing, and augmenting, automatic stabilisers).

What the hell does my title mean.

Well, let me be straight up – the headline number is a lot worse than expected … especially by me personally.

However, the more general “underutilisation” measure (the number unemployed + the number of people who want more hours all as a proportion of the labour market) was in-line with what I felt were my overly optimistic expectations!

What does this suggest – well it sort of suggests that the people that were laid off during the December quarter were the people who wanted more hours in September, sort of (as we are excluding normal seasonal factors as well).

My opinion here?  The fall in hours worked points to a weak December, especially in conjunction with other partial indicators (QSBO, money supply, inflation expectations).

But so what, the past sucked.  Forward looking expectations are strong, our trading partners are genuinely recovering, and we have an intelligent Reserve Bank that understands how to balance inflation expectations and prevent arbitrary pain in the economy.  When we see hours worked pick up it is game on – that is the one to watch.

Economic activity will remain below trend for some time, unemployment will stay higher than we would like for some time.  But surprising even the shock of a much higher UR number is enough to suggest that the outlook is significantly worse than it was.  Why is this surprising?  If you had told me that UR=7.3% yesterday without telling me about underutilisation I would have been in a mild state of shock.  However, putting these numbers in context has eased my mind.

Update:  Other commentary at Rates Blog, Kiwiblog, Gonzo, the Standard, and No-Right Turn.

The unemployment issue is a lot more complicated then it is being made out to be methinks – it looks like NZ is undergoing a structural shift as well as a standard “recession”, blaming the government doesn’t make sense in this type of case.  For an example, look at manufacturing employment …

Over at Worthwhile Canadian Initiative, Nick Rowe suggests that central banks should find something else to discuss instead of interest rates.  The analogy provided is that of oligopoly competition: namely how the Cournot-Nash and Bertrand games have exceedingly different outcomes, even though the only superficial difference is that one game involves choosing output and the other game involves choosing price.

However, in the same way I don’t believe the difference in these games is just the product of “framing”, I am not sure if the call to arms against using interest rates as a focal point is necessarily that compelling.

Read more…

Yesterday gave us the Labour cost index.  This index provides my favourite (albeit partial) measure of inflation expectations, the adjusted private sector labour cost index.  Anyway, what is it doing?

In conjunction with the negative annual growth in the money stock during the close of 2009 (note our caution) it looks like inflation isn’t a clear and immediate concern …

Ok ok ok, so trimmed mean consumer price inflation is running at 3.2% (ht Institutional Economist), house prices rose by 12% on a year earlier (around 18% annualized), my favourite measure of inflation expectations – the labour cost index – rose by 3.5% on a year earlier.  So given the RBA expects trend real growth (3%), the premium on credit has fallen to about 50bps, and the cash rate is only 3.75% a rate increase is in the bag right!!

No – they left rates unchanged.  The statement seems to indicate that an increase is coming next time, why they didn’t now I have no idea

As far as I can tell this is why:

Concerns regarding some sovereigns have increased

If you are worried about the world RBA just say so, we’re friends and transparency is a great thing in a friendship.

Furthermore, you have an inflation problem.  As a concerned party I would love to intervene on your behalf but I can’t.  You are going to have to get rates up and get this inflation down.

In New Zealand inflation is contained and the Bank does have some time to think.  In Australia they need to keep moving.

Update:  My impression is that a decline in the money stock could also engender caution – broad money declined by 0.8% (sa) in the December quarter, the fastest rate of decline since July 2002.  They may feel that this is an indicator of weakness in Dec quarterly activity rather than a run down in reserves on the back of rising interest rates.

I don’t like the idea of a “zero tax” threshold at the bottom of the tax system.  I see it was suggested today by Mark Keating, so I thought I should explain why I feel this way (ht Kiwiblog).  I’ll put down three reasons, in reality the third reason is by far the most important:

1. I don’t believe the cost of “churn” is very substantial – implying that any benefit from setting a zero tax will be negligible compared to taking the tax and sending it back.
2. The effort required to set a zero tax and enforce payment of tax when moving out of the bracket requires effort as well – as a result I don’t think it is self-evident that setting a new bracket would reduce administration costs (it might even increase them).
3. If we set a zero tax bracket this also acts as a tax cut for EVERYONE earning more than that amount.  This has to be paid for by INCREASING other tax rates (substantially as well, since the loss of the bottom bracket will cost more than an equivalent cut anywhere else).  As a result, effective marginal tax rates will be higher than if we taxed and paid benefits (for the same average tax rate in other words).  This reduces labour supply incentives for higher income earners.  As these earners tend to be more responsive to tax there would be a SIGNIFICANT efficiency cost.

Yes, the zero tax rate at the bottom will increase labour supply incentives for those on very low incomes.  But this will only lead to efficiency gains if we believe it will get the more elastic secondary earners into the labour market.  If we are doing it to promote equity it doesn’t make sense – as those that are actually poor are likely to provide very inelastic labour supply.  Overall, it is likely that the negative impact of higher EMTR’s on middle and high income earners will outweigh any positive impact through a increase in, our already enormous, part time labour force.

The purpose of the zero tax bracket is to make sure that people get a minimum living standard.  The better way to do this is to ensure that society pays everyone a living wage at whatever level it believes is fair.  Leave redistribution to the welfare system (where our social value judgments are transparent), tax needs to be applied on the basis of efficiency in order to be effective.