A brickbat and a bouquet for Treasury this morning, following from the pro-active release yesterday (albeit with many deletions) of papers related to this year’s Budget. Pro-active release is a welcome practice that should be more widely adopted. Indeed, in some form it is a practice that should generally be made mandatory.
First the brickbat. Very late in the Budget process, as the government continued to flail around with an apparent sense that “something must be done” about the housing market, but a reluctance to expend political capital to actually address the underlying issues (land use restrictions and the active policy-driven programme of inward non-citizen immigration), Treasury was asked for some advice on several tax options. None involved serious or thoroughgoing reform of the overall tax system (eg land tax, taxing imputed rents, shifting the basis of local authority rates back to land values, inflation-indexing the tax system (which reduces the value of interest deductibility), or even less desirable measures such as a comprehensive capital gains tax, or ring-fencing the ability to offset losses on rental properties). Instead, they were patches, or worse. Treasury compounded the problem by throwing in its own proposal – an Auckland Investor Levy.
By this point, Treasury was probably under quite unreasonable pressure. As they bluntly note in their 24 April Treasury Report, “because of the very short timeframe, this is a longer and less considered report than we would normally provide”. That is not a good basis for making policy. But public servants must respond to the demands of their Ministers.
The Auckland Investor Levy – a 1 per cent annual levy on the value of residential rental property – appears not to have been the Minister’s idea, but a proposal of officials. Perhaps they saw it as something less bad than other possibilities canvassed in the paper (such as an interest levy). But this is not just an idea that Treasury is reluctantly providing pros and cons on. They recommend to the Minister to “consider progressing” such a tax. Much of the discussion of the proposed Auckland Investor Levy has been withheld in the document that is released, but the summary table at the back of the paper makes it clear that Treasury is pretty sympathetic to this option.
- There is no analysis in the paper to explain why Treasury believes that investors, as opposed to (say) owner-occupiers are a particular “problem” in the housing market.
- There is no discussion of how the “tax advantages” of housing are distributed among owner-occupiers and investors. Previous analysis has suggested that unleveraged owner occupiers are at the greatest advantage.
- There is no apparent attempt to reconcile this proposal with the more general point that there appear to be too few houses (or at least too little effective land supply) not too many.
- There is no analysis in the paper to justify why such a wealth tax should be so partial. Why impose a levy on investor residential properties, and not on owner-occupier ones? Why houses and not commercial buildings? Why rental houses and not farms or equities?
- Treasury proposes hypothecating the revenue from this (supposedly temporary) levy to the Auckland Council, and yet there is no discussion (released) of the difficulty of lifting the levy in future (and thus depriving the Council of a major revenue line).
- There is no discussion of the efficiency costs (or the equity) of having one tax system for Auckland, and one for the rest of the country.
In a rushed paper, I’m not suggesting that Treasury could have fully adequately dealt with each of these issues, but it is pretty inexcusable that these issues are not even mentioned.
And the bouquet. Media reports indicate that Treasury proposed ending public funding of Kiiwrail and either markedly reducing the size of the operation, or closing the company altogether. Given the amount of money that has already been sunk into Kiwirail, in one sense it would be a shame if it were to come to that. But sunk costs are sunk costs, and unfortunately it does not appear that the analysis underpinning the earlier injections was particularly robust. I don’t suppose Treasury expected that Ministers would agree to their proposal, but it is good that it was made.
It is particularly encouraging that the recommendation was presumably endorsed by the Secretary to the Treasury. I spent a couple of years on secondment to the Treasury, which overlapped with the early days in Treasury of Gabs Makhlouf, fresh from the UK. A major discussion was held one day to try to gravitate towards an agreed “narrative” on the reasons for New Zealand’s disappointing long-term economic performance. Gabs’s contribution was to observe that New Zealand’s problem was that it had underinvested in rail. Britain developed railways and exported the technology around the world, and New Zealand never really took advantage of it. Fortunately, it did not seem to be a widely held view. I guess Gabs has learned. A while ago I asked for a copy of an “economic narrative” document Treasury did in 2013. If and when it arrives, it will be interesting to see how the Makhlouf Treasury now accounts for New Zealand’s disappointing longer-term performance.