Treasury at odds with Reserve Bank over CGT

Treasury and the Reserve Bank are at odds over whether a property tax is the answer to Auckland's over-heated property market.

Earlier this week, Reserve Bank deputy governor Grant Spencer re-ignited the capital gains tax debate as he told a conference in Rotorua, “While there are difficult issues and trade-offs to consider in this area, the Reserve Bank would like to see fresh consideration of possible policy measures to address the tax-preferred status of housing, especially investor-related housing.

“Housing is the most tax-preferred form of investment, particularly when it is highly leveraged. Investors are often setting the marginal market prices that are then applied to the full housing stock within a regional market. Indicators point to an increasing presence of investors in the Auckland market and this trend is no doubt being reinforced by the expectation of high rates of return based on untaxed capital gains."

Questioned about Mr Spencer's comments on TV3's The Nation this weekend, Treasury Secretary Gabriel Makhlouf said he’s “quite skeptical that a capital gains tax will help curb house price rises because it hasn’t in other countries.
 
“Looking really carefully at our planning regulations is the single biggest thing that will make a difference to how we build — how many houses we build in Auckland,” he said.

His comments put Mr Makhlouf on the same page as Housing Minister Nick Smith, who this week emphasised the Housing Accord with Auckland Council and other measures to cut red tape and increase supply.

The government has already rejected opposition housing policies aimed at offshore investors, such as a band on foreign house buyers, a register for foreign buyers, or only approving foreign buyers who build rather than purchase existing house. Mr Smith says such policies are impractical and undesirable.
 
Elsewhere, Mr Makhlouf said he thought immigration was “more or less in the right place.”
 
He described the international economic recovery as “patchy”. Slowing growth in NZ’s number one export market, China, didn't keep him “awake at night” but Australia is a “bit of a concern for us,” the Treasury boss said.

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RAW DATA: The Nation transcript: Lisa Owen interviews Treasury Secretary Gabriel Makhlouf

Watch the interview here

Lisa Owen: He’s the Government’s top economic and financial adviser, so as John Key moves into Budget mode, what does the Treasury boss think are the main challenges we face as a country? Amid all that hype about whether or not we’re going to reach that all-important surplus, is our economy moving from rock star to rock solid, or are we actually hitting the rocks? Treasury Secretary Gabriel Makhlouf has boldly ventured out of Number 1, The Terrace to join me in the studio. I’m delighted to welcome him here. Good morning.
Gabriel Makhlouf: Good morning.
Let’s start with the big picture. How do you think that the international recovery is going?
Well, it’s going, which is the most important thing. The IMF’s report from this week talks about the global recovery, but it’s patchy. And I think the world’s still coming out of the global financial crisis. We’re seeing growth in the US, we’re seeing growth in the UK, we’re seeing growth in China, even though it’s slowing down, but in the Eurozone and in Japan, things are less good, so it’s a patchy recovery, but at least it is a recovery.
So what does that mean for us, then? What are our risks and opportunities in that landscape?
I think there are immediate risks and opportunities and then there’s longer-term challenges and particularly opportunities. I mean, I think in the short term, clearly as a country that relies on exports, what happens in the rest of the world matters to us. Fortunately, I think even though China’s growth is slowing, it’s still growing with pretty remarkable numbers, and as we’re in the essentials business, I think China will continue to be a really important driver of our economy. The Australian economy is doing less well and we rely on it quite a bit, so that’s a bit of a concern for us. But I think over the medium to longer term, it’s opportunity. The fact is that the centre of economic gravity is moving east. It’s moving to our region. For the first time— actually, this is probably an interesting thing. For the first time in New Zealand’s history, we find ourselves part of that region in the world that’s growing the fastest, so, really, the challenge for us is how do we seize the opportunities that are increasingly coming in front of us?
And how do you think we do that?
Well, I think we do that in all sorts of ways. I think at a very sort of high level, we need to deepen our international connections, so we’ve been doing a terrific job entering into free trade agreements with a number of countries, but we need to take that to the next level and actually increase, for example, two-way investment. We need to increase the people-to-people links. We need to equip our people to understand how to trade in Asia, for example, how to contract in Asia, how to build relationships in Asia. Some of that is about language. It’s all about different things, different opportunities and making sure that we seize them.
I want to come back to some of that later, but you mentioned there that China is slowing. How much is there a real risk of a hard landing for China?
Look, if you compare China from what it was growing at five-plus years ago when it was doing 10%-plus rates of growth and now we’re talking about it at seven or maybe just below seven, that’s an amazing difference. But 7% is still pretty good rates of growth, and I think for New Zealand – for New Zealand – where a lot of our exports are meeting the needs of their middle classes, we’re in a better position than, for example, Australia, where a lot of their exports are in iron ore.
But couldn’t we end up like Australia? Because if you look at that example and you swapped mining for dairy, couldn’t we go the same way?
Well, I think in Asia, the middle classes are forecast to grow from about sort of 500,000 that they were six years ago or so to 3.2 billion in about 10 years, 10 years plus. So that growth is going to continue, and the demand for the sort of protein that we produce is going to continue, so I think the longer-term trend is pretty set.
So China doesn’t keep you awake at night?
No, no. Well, it doesn’t keep me awake at night. I mean, I do pay close attention to what’s happening, because it’s such an important player in the world and such an important player to us. But the fact that growth in China is slightly shading downwards does not keep me awake at night.
Okay, well, you've described flows of people, trade and money in New Zealand as part of a mega trend. You know some people are scared about that already. So how do you think they're going to react to the fact that this is just kind of the beginning?
Well, you could say it's the beginning, but you could say it's just a continuation of what has been happening in the world now for some time.
But they would even find that continuation a little scary, so what do you say to those people?
Well, there is a million Kiwis who live outside of New Zealand. They don't look scared of overseas. We've actually benefitted hugely from two-way trade — both of, well, trade, of people, of ideas already, and what I would say is think of the opportunities that we have to create the, sort of, prosperous nation we want to be for the future, and I think the— For me the big challenge is how do we actually explain those opportunities to people in a really good way, and that's more— that's a role for the whole community actually, not just for government. It's also for the business community, massively, to be telling this story.
But the thing is people see immigration at high levels, they see house prices going up, they see the need for more schools — those are the things that they see.
Sure, and we need immigration because we need the sort of— our businesses need particular types of skills that we haven't got right now, so I think that plays a big part. We need immigration for just the generation of ideas. Don't forget that currently some of the net immigration numbers are as much about New Zealanders not leaving the country and some of them returning from Australia.
So do we need to keep growing, then, do you think?
I think we absolutely need to keep growing as a country.
But more immigration?
Well, I think we need to— We've got currently— The OECD, when it last looked at our immigration settings said they were broadly right. We have to keep looking to make sure they're actually meeting our needs, and I think it's something you keep under constant review, because we also want to develop— we want our education system to be developing  the skills that we feel we need for our people, so I think immigration meets a gap, but I mean we can, sort of, fill that gap ourselves by making sure the education system delivers.
So do you think we're in a sweet spot with immigration levels, or can we and should we be bringing more people in?
No, no, I think we're probably in more or less the right place with immigration levels. As I said, I mean,  the current numbers are as much about people not leaving New Zealand or returning from Australia, and we need to take account of the impact of those numbers, so we do need to build new schools; we do need to critically build new houses.
A lot of those migrants come to Auckland, and you have said that you believe that Auckland should be the focus of growth, and you're happy to see it get bigger, then?
Am I happy to see Auckland grow?
Yeah, see Auckland grow even more.
In general, I'm happy to see Auckland grow. I think what we've learnt from history, and certainly what we're learning at the moment from around the world, is agglomeration — the bringing together of activities in a large urban area, like Auckland — makes a massive difference to the overall— ultimately the overall living standards of a country as a whole. It needs to be managed growth. It absolutely needs to be managed growth, but the trend — you know, over the last hundred years; New Zealand's rural population has basically stayed stable. It's the urban areas that have been growing, and that trend is going to continue.
Well, just this week the Deputy Reserve Bank Governor, Grant Spencer, is calling for a capital gains tax, or some kind of tax on investment. What do you make of that?
Well, I think what Grant Spencer was talking about was the need for us to address the housing issues in Auckland, and at the heart of the housing issue in Auckland is that we're not building enough houses, and the Productivity Commission said a few years ago when it looked at this issue that building more houses is the answer. Looking really carefully at our planning regulations is the single biggest thing that will make a difference to how we build— how many houses we build in Auckland.
So you don’t think a capital gains tax or a tax like that is part of the solution?
I’m quite sceptical. If the issue that people are talking about is house prices, London and Sydney have got capital gains taxes and they’ve got similar issues as us. This is a phenomenon that’s actually playing out in large urban areas which are successful, right? And New Zealand is successful, Auckland is successful, so one of the consequences of that, as in Sydney and London and in Vancouver, is the current phenomenon, house prices. But we need to build more houses to actually meet the needs that we’ve got.
So in your view, it’s a supply side problem, then?
That’s the principal issue, is the supply side problem. And it’s not just my view; it’s the Productivity Commission’s view as well.
Okay well, education is also an important issue, key issue for you. I’m just wondering, after the billions of dollars that we’ve put into education, we do still have this big tail of underachievement, don’t we? Why?
Well, the Treasury’s view on that is it’s a very complex issue. I’ve talked about it publicly in the past. There’s no single answer to it. I think a really important answer to it is to look at the quality of teaching. The Government’s investing in that. The results from over the last few years is showing an improvement in NCEA 2 levels, including in that long tail, but it’s a challenge we’ve got to keep on top of because it’s really important for the future prosperity of the country.
Because, you see, a lot of people would probably argue that the schools are doing quite a good job; that we’ve put a lot of money into them and they’re doing pretty much the best job they can. And so, actually, this is about poverty in the home. Is that what we need to tackle?
Well, I think, as I said, I think the issue’s complex, but I would disagree that there’s nothing that we can do in the education system. I think I would absolutely disagree with that. And so a lot of the evidence is improving the quality of teaching will make a difference. But looking in the round at all the issues that affect the development of our children, I think, is important. But at the end of the day, the Treasury’s view of the whole – I don’t use the word poverty; I like to talk about social inclusion.
Yes.
For adults, it’s about making sure that they’ve got jobs to go to. For children, it’s about making sure that their education is the best that it could be.
But when you talk about inclusion, people like Jonathan Boston and the Children’s Commissioner Russell Wills have said to be included, we need to raise spending in targeted areas of need, and that’s going to include, in their view, raising benefit levels. Do you buy into that?
Well, I certainly accept their arguments have some force, but I would take issue with them if people concluded it was the only thing we could do to make a difference. The issues are very complex. I absolutely agree—
They’re not suggesting it’s the only thing. So is that an important part, like raising benefit levels?
I think that could certainly play a role in addressing the issues, but we would be making a mistake if we concluded that we didn’t need to look really hard at making our education system work well, all those sorts of factors. In the Treasury, we’re spending quite a lot of time talking to people on the front line to understand the issues they face, and I completely respect the many organisations that work in that area, and it is complex.
So in saying that it’s an area that could do with some consideration, have you suggested that to Bill English, to look at benefit levels?
We talk to the ministers about a whole bunch of things, including that issue. We’ve talked about that issue.
Specifically raising or whether it’s a good thing?
We’re talking about that issue. If you’re going to try and get me to tell you what’s in the Budget, I’m going to tell you to wait for another month.
On that note then, surplus – are we going to get there or not, do you think?
You’ve got to wait until Budget Day.
Your lips are sealed? What about your level of confidence? Are you confident that we might get there?
You’ve got to wait until Budget Day.
All right. Thank you very much for joining me this morning. Do appreciate it.
You’re welcome.