Keith Rankin's Thursday Column
20 September 2000
A report by investment bank ABN Amro suggests that New Zealand is in for a long spell of net emigration and that house prices will fall by about 15%. This report was the subject of a Question to Parliament yesterday from Opposition leader Jenny Shipley.
While those predictions may prove to be correct, this is a mischievous document that is promoting a self-interested political agenda.
New Zealand has always had net emigration at times when the domestic economy has been creating fewer jobs than other countries' economies. That is particularly true of Trans-Tasman migration. New Zealand and Australia represent a common labour market.
To a large extent, New Zealand emigration is no more than a larger scale version of the emigration from regions such as Southland or Hawkes Bay. People have always migrated to the towns and cities where the jobs are. It's principally a regional development problem that can be addressed by payments - benefits, subsidies, royalties or remittances - from the centre (eg Canberra) to the peripheral regions.
The ABN Amro report however is more interested in creating an opportunity to grizzle about the new 39% marginal tax rate, applied to personal annual income in excess of the first $60,000. Nobody seriously believes that a rise in the marginal tax rate is driving emigration, given that the countries New Zealanders are going to have higher marginal income tax rates.
This claim however hides an important truth. The high average income tax rate faced by tertiary-educated persons aged from say 22 to 35 is a cause of emigration. Whereas our marginal tax rates are not high, our average tax rates are. Further, student loan repayments are a major contributor to the excessive average tax rates our young adults are subjected to.
If we get the diagnosis wrong, an attempt to remedy the problem will have no effect, other than to pander an interest group, such as the interest group that ABN Amro represents.
Others argue that it is student loans rather than high taxes that are driving emigration. This is half-true.
Student loans have enabled almost all New Zealanders to get as much tertiary education as they wish. That was never true in the "golden" days of the 1960s. In those days it was three months hard labour in places like Longburn, Southdown and Waingawa that got us through. There certainly was not a generous student allowance.
The problem is not student loans, but the repayment regime imposed on ex-students, combined with the fact that young income earners pay higher average tax rates in New Zealand than in the countries they migrate to.
To fix the part of the problem that we can fix, we neither focus on marginal tax rates nor student loans nor student fees. Rather, we reduce the tax burden on low income (which often means young) New Zealanders. And we introduce a much more flexible student loan repayment option.
In the 1960s, young New Zealanders wishing to purchase a home and start a family could capitalise their universal family benefit. Now the cash flow goes the other way. Instead of receiving a family benefit, they pay a surcharge (called a 'loan repayment') on top of an already high average tax rate. And they have the option of capitalising that 'loan repayment'.
Where young couples could claim a significant capital injection at that vital moment of family formation, today they are invited to make a large capital payment in order to save interest costs on their student loan. It is no wonder they move to countries where tax rates are more family friendly. The irony is that they go to places like Australia, Canada and Ireland because of (not despite) the higher marginal tax rates in those countries. Those countries can only have low average taxes for young adults if they have highish marginal rates for those who can afford them.
Tax reform that facilitates family formation (and family retention) is only a part of the solution. The other part, as I've suggested, is that those richer nations that utilise human capital created in poorer countries should, to some extent, pay for that resource.
The ABN Amro report argued that one effect of the chronic emigration they are predicting will be a 15 percent decline in New Zealand house prices. Once again, the basic prediction may be correct, yet their analysis is flawed. If our property values fall, it will be because they were grossly inflated in the mid-1990s. An ongoing fall in property values will represent, in the main, part of an ongoing correction. There is no sensible reason why Auckland property values in 1996 were massively higher than in Brisbane, Melbourne and Adelaide.
What happened in the mid-1990s? We are usually told that the Reserve Bank raised interest rates in 1994 in order to suppress a property boom. The truth is that the Reserve Bank - acting according to the requirements of the 1989 Reserve Bank Act - created the Auckland property boom. High interest rates directed foreigners' savings into the New Zealand property market. Once Auckland property prices started to rise, the prospect of high capital gains outweighed any concerns about the higher mortgage costs. (The process was exacerbated by the absence of a capital gains tax.) Further, with flexible mortgage interest rates, there is simply no point in postponing house purchases while interest rates are high.
Yes, New Zealand is facing challenging times. But no more so than in the past. As in the past, outcomes will be worse if we misdiagnose the problems, and act on those misdiagnoses.
We need family-friendly tax scales, and we need cheaper real estate so that landlords can make a profit without charging excessive rents. We do not need more of the corporate welfare that finance sector companies like ABN Amro are lobbying for.
© 2000 Keith Rankin
Thursday Column Archive (2000): http://pl.net/~keithr/thursday2000.html