The Kākā by Bernard Hickey

TLDR: Britain is about to appoint another right-wing populist as its Prime Minister in the form of Liz Truss. She is promising even more extreme policies than Boris Johnson.

Her election by Conservative Party members is due on Monday and is another symptom of an increasingly volatile set of geo-political forces driven by a rapid corrosion of stable and competent western democracies such as Britain and the Unite States.

I think the inflection point was just over ten years ago and driven by two events;

* the failures of technocratic Governments and independent central bankers in the Global Financial Crises of 2008-10 in Europe and the United States; and,

* the launch of the iPhone 4 in June 2010.

Paying subscribers can see more analysis and detail below the paywall fold and hear more in the podcast above.

Destabilised democracies are shocking the global economy

Liz Truss is expected to be announced as the new British Prime Minister on Monday, which some might see from a distance as a welcome relief from all the drama and stupidity of Boris Johnson, Britain’s Covid response and the awful mistake of Brexit.

But Truss could actually create more volatility and drama in the global economy, along with all the other destabilising events and trends being pumped out of the political scenes of established western democracies in the wake of the Global Financial Crisis, the launch of the iPhone 4 in June 2010 (more on that below) and a massive widening of inequality driven by repeated central bank bailouts of banks and asset owners — without democratic permission.

She is preparing to:

* declare China a ‘severe threat’ on a par with Russia;

* cut income and VAT taxes, but increase subsidies for household energy users in a way that may wreck global financial market confidence in Britain;

* remove speed restrictions on motorways;

* cancel a green energy levy;

* review the Bank of England’s independence; and,

* rip up completely the Brexit deal with the European Union, which is expected to start a full trade war.

So how is someone so extreme about to become the Prime Minister? The Tory party changed its rules to ensure its leader was chosen by party members at larger, rather than Tory MPs in Parliament. It meant party leaders had to appeal to the most extreme voters with the most extreme policies.

The same thing is happening in the United States, where Republican gerrymandering of state and federal electorates means Republican candidates also don’t need to appeal to centrist voters because whoever wins the Republican nomination will win. That drives policies to the extremes in those places with gerrymandering, but creates division when those Congressional and state leaders have to deal with a President who is elected by a majority of all voters, which is much harder to gerrymander.

But why is there so much polarisation? And why now?

My view is the political landscape in both western democratic nations and autocracies such as Russia and China has fundamentally changed since the GFC and the near immediate rollout in just a few following years of billions of smartphones. Their speed, power and endemic nature have weaponised social media platforms such as Facebook, Instagram, Twitter, TikTok and YouTube to appeal to our worst instincts. We like, share and rant along with the views of those that reinforce our biases, creating ‘tribes’ of people who increasingly don’t listen, talk or deal with each other. These base instincts can then be mobilised to further destabilise the institutions and public discourse that had kept most western democracies stable for over a century.

The key moment was the launch of the iPhone 4 in June 2010, which in turn further accelerated Google’s response to the iPhone, which was to create an open source and free software for other phone-makers to compete with Apple.

That launch moment in the mobile phone arms race grew the number of smart phones in hands for hours each day from less than 5% of the global population to just over 4b or 50% of the world’s population inside 10 years. It took over a century for the steam engine to transform the global economy through industrialisation and globalisation in the 1800s. This transformation took a tenth of that time

But why the iPhone 4?

Its combination of a front-facing camera, an amazing user experience with much cheaper and faster 4G data unleashed a smartphone revolution that transformed our political conversations, along with filling many hours of the day of billions with pointless doom-scrolling. Instagram took off with the launch of the iPhone 4. Facebook then pivoted to mobile and bought Instagram. Youtube’s impact exploded from being just on laptops to also on phones.

I think that launch of the iPhone 4 was an inflection point for the global political economy that now means we have a much more polarised, divided and unstable world. Donald Trump would not have been President without Twitter or the ability to circumvent traditional media through social networks, that also allowed his supporters to organise independently of the established party structures. We have since discovered the world’s longest-running and most-powerful democracy barely escaped a coup at the beginning of last year.

Geo-political earthquakes causing inflation

Brexit would not have happened without the social-media-driven campaigning, backed by Russian-funded forces, of Boris Johnson and an extreme right wing group of supporters who now dominate the Tory party, but didn’t then. Just a few days ago, Facebook settled a lawsuit over the way it allowed Cambridge Analytica to harvest data that the pro-Brexit campaign used to target misinformation at British voters.

That Brexit vote has amplified divisions within Europe and the economic shock of Covid. Britain’s trade deficit has ballooned, its inflation is far worse and its economy is now growing slower than the rest of the developed world. Goldman Sachs last night forecast British inflation would reach almost 22% early next year.

In my view, Russia would not have invaded Ukraine if it thought Europe, the United States and Britain were united and collectively competent. It’s hard to imagine it would have happened if Trump and Johnson had not been in power for much of the previous five years.

So what? This geo-political volatility is now hitting our real world and the global economy in obvious ways with higher inflation, lower growth, more war, a deepening split between China and the United States, and in longer-term and more fundamental ways. The failure of western democracies and China to more aggressively cooperate to reduce climate emissions is a factor in the planet’s faster heating and more extreme weather events of recent years.

In particular, the warming planet is expected to generate more zoonotic plagues of the sort we have just seen with Covid.

Is that it? I don’t have a solution to reverse the polarisation of our political landscapes or the weaponisation of social media through our smart phones to drive us apart and prevent sensible deals and cooperation that solve these global problems. But there are some things that can be done to soften these trends and create oases of relative calmness and sense.

Firstly, I think we have to push back individually and collectively to reclaim our time and debating spaces from algorithmically-driven platforms that are designed to amplify and sharpen our differences for the sake of engagement-driven advertising revenues.

Secondly, we have to protect our democratic institutions from polarisation by avoiding the mistakes of gerrymandering and avoiding the potential for first-past-the-post politics to deliver complete power to minorities. At least with MMP, it is the minority in the centre that need to be won over, rather than at the extremes.

And thirdly, I think we have to be much less complacent here in Aotearoa-NZ about the dangers of the forces above establishing themselves here to screw the scrum of our political economy. That’s why I was glad to see both major parties have (finally) ruled out working with Brian Tamaki’s rabble. See more on that below.

I welcome your thoughts and suggestions in the comments below.

Quotes of the day

Finally, Luxon rules out a coalition with Tamaki

“What I've tried to say consistently is that I've got nothing in common with Tamaki. I think they're crazy, I don't think they're serious, I don't think they're going to make it and you saw that coalition fall apart if you read between the lines. If it helps Mike, I'm very happy to give you a Mike Hosking exclusive that I'll certainly rule out Tamaki and never work with him.” National Leader Christopher Luxon talking to Mike Hosking yesterday via NZ Herald, having refused to rule out working with Tamaki for nearly two weeks.

Tamaki tees off

“By calling all of the above "crazy" and writing us ALL off saying he will never work with us, he is writing off votes from the above, emboldening the vote towards Freedoms NZ and signing National's political death warrant. So get ready…here comes the Kingmaker, whether you like it or not Luxon and Robertson! Fortunately…you don't get to decide…the people do!. " Brian Tamaki responding in an opinion piece sent to media (Newshub) with the above photo (which is in fact a Getty Images pic taken by Lynn Grieveson while being physically pushed around by Tamaki’s ‘security’). Lynn, amongst many other things, also edits and illustrates this newsletter.

Robertson just plain ticked off in Parliament

“Did he not take the clue of the so-called people's court that took place outside Parliament where Mr Luxon, among other people, was convicted of crimes against humanity?

"Apparently, no. Now, this question was so easy David Seymour got it right - that's how easy the question was - but no, Christopher Luxon ploughed on, he doubled down, he said he wouldn't rule it out.” Deputy PM Grant Robertson in the general debate in Parliament on Wednesday via Hansard.

Number of the day

The cost of consenting delays

20% - The cost escalation for house building estimated by the Registered Master Builders Association because of consenting delays. The Association called yesterday for a dramatic reduction and consolidation of the current 67 council consenting authorities in its submission to MBIE’s ongoing review of the building consent system. Submissions close at 5pm on Monday. It said a survey of over 3,000 builder members found 80% were affected by consenting delays and 45% had experienced delays of five weeks or more.

Chart of the day

China’s working age pop’n is falling. That may stall growth & lift wages

Longer read of the day

How globalisation’s failure to reach gas is hurting, but flipping now

“The whole cause of the current crisis has been due to globalisation not quite reaching the last major fossil fuel, natural gas. Even after decades of investment in infrastructure — the world has three times as many kilometres of gas pipeline as it does for oil — the supply of natural gas was still largely regional. Last month the price of gas in Europe was over 800% higher than in the United States. Gas is the inverse of coal, in that it is especially costly and difficult to transport by sea. Natural gas first needs to be cooled into a liquid before it can be loaded onto a specialised ship, and then needs to be converted upon arrival back into gas. Liquefied natural gas (LNG) thus requires a whole expensive processing and storage infrastructure of its own in order to even be imported — an infrastructure that many countries had not installed when Russia suddenly restricted its gas pipeline exports to Europe.

“Because of Europe’s sudden and extraordinary regional gas shortage, formerly Russia-dependent countries like Germany are now scrambling to build LNG import terminals of their own, and gas-exporting countries are exploring how to take advantage of Europe’s sudden spike in demand. Egypt is even rationing its own people’s electricity right now, so that it can ship more LNG to Europe. The demand for LNG in Europe is so high, that even countries on the other side of the world are having to outbid them for any gas supplies they had not already contracted for — LNG-dependent countries like South Korea, Pakistan, and Japan are being especially hit hard by rising energy costs. We are thus seeing the market for natural gas globalise in a matter of months rather than decades, with the usual winners and losers from price convergence experiencing their wins and losses especially sharply.” Anton Howe in his excellent Substack Age of Invention.

Reports of the day

Just in case you were in any doubt

Greenhouse gas concentrations, global sea levels and ocean heat content reached record highs in 2021, according to the 32nd annual State of the Climate report released yesterday by the US National Oceanic and Atmospheric Administration’s National Centers for Environmental Information and published by the Bulletin of the American Meteorological Society (AMS). It is based on contributions from more than 530 scientists in over 60 countries.

UN finds China committed “serious human rights violations”

The UN Office of the High Commissioner for Human Rights yesterday finally issued its formal assessment of human rights concerns in China’s Xinjiang Uyghur Autonomous Region. It was the current commissioner, Michelle Bachelet’s, last day in the job. It’s a landmark report that Foreign Minister Nanaia Mahuta formally responding to here, saying the Government was deeply concerned.

“We are particularly concerned about the report’s conclusions regarding arbitrary detention, torture, sexual and gender-based violence, forced medical treatment, widespread surveillance, violations of reproductive rights, restrictions on freedom of religion or belief, and forced labour.

“The High Commissioner’s report notes that the extent of arbitrary and discriminatory detention in Xinjiang may constitute crimes against humanity.” Nanaia Mahuta in a Government statement overnight.

Comment of the day on The Kākā

“I feel for David Parker. He is a very smart man but he has the most boring of portfolios and he is as charismatic as a cold fish. And this man has to "sell" detailed & sometimes complicated tax policies to people that can't be bothered reading beyond the NZ Herald headline on Twitter.

“Many a times I had to explain CGT to people that only read headlines at the last round when the idea floated. The lack of understanding and of interest to understand is mind boggling.

“This one was simply a PR disaster but also Labour stubbornly refusing to give anything back. So many punishing policies National inflicted on us could have been reversed to sweeten this deal. But no, they chose to shoot themselves in the foot just so they can claim to continue being fiscally responsible.” Merav Benaia in yesterday’s Dawn Chorus on Labour’s GST backflip.

Today’s fun thing

Ka kite ano

Bernard

PS. I’m looking forward to seeing you all in the Ask Me Anything comments from midday to 1pm. I’ll send out the invite shortly beforehand. I’m also up for the weekly hoon at 5pm, which I’ll send the invite to paid subscribers just beforehand. This is the link to jump on as well.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: The Labour Government back-flipped on its plan to apply GST to KiwiSaver fees in spectacular fashion yesterday. A closer look at how and why it happened shows how completely the original sin of Labour’s failure in 1989 to introduce a Capital Gains Tax has polluted our political economy, and ultimately, our society.

A one-day epic tax fail and the 33-year-long epic tax fail behind it (and everything else)

This sixth Labour Government’s embarrassing and politically damaging backflip yesterday on Tuesday’s plan to extend GST to all fund managers’ fees was an epic fail from all angles, but it was only a short-term one.

The real tax failure highlighted by yesterday’s dramas was a much longer-term and much more damaging one for our economy and society: the failure of the fourth Labour Government in 1989 to complete its ‘pure’ redesign of a comprehensive ‘broad-based and low-rate’ tax net to include capital gains or land wealth in any form.

Revenue Minister David Parker’s awkward mea culpa news conference at 1.45 pm yesterday with multiple caveats of blame tossed around (full quotes in all their squirming detail below) served only to emphasise the mess our political economy is now in because of that failure by the last dry Labour policy-wonk-David. It was then-Finance Minister David Caygill inability in the dying days of that Government to complete the pure trifecta of a simple exception-free income tax, a comprehensive value added tax and a capital gains tax, that led to this contortion, which is just the latest of many to try to rectify that failure in a politically acceptable way.

Failing to complete the capital gains leg of that trifecta has changed Aotearoa-NZ in a fundamental and negative way. And now that failure is piling up the political pressure to further pollute the purity and effectiveness of the other two legs.

It is the biggest ‘if only’ in our political history. If only Caygill’s proposal from December 19, 1989 at been implemented, we would be living in a different place now. It created the conditions for our brutally expensive housing market, which now dominates our political landscape, is a major factor in our child poverty, health and education crises, and is holding back our attempts to get to carbon zero.

It was the missing link that would have made our income tax and GST systems sustainable, and removed the tax advantages in leveraged residential land investment that has screwed the scrum of our banking system, dramatically widened inequality and has embedded over $1t in wealth into the minds of voting-home-owners that centrist politicians must now win over to win or retain power.

But first things first.

The short-term epic fail

David Parker denied yesterday that the Labour Government tried to ‘sneak through’ a $225m tax increase by extending GST to fall funds management fees, but the optics did look plenty sneaky.

The initial announcement from Parker early on Tuesday afternoon didn’t even mention the GST change, even though the extra tax raised was five times that of the other main measure and the FMA had warned it would reduce KiwiSaver and other savings by over $163b by 2070. His explanation yesterday was that IRD had checked with a few fund managers, who didn’t seem that concerned, with some opposed and some in favour. The unspoken implication is that the Government hoped it would go through to the keeper, or bizarrely, that big and small fund managers would come out in support of it and the Opposition or media wouldn’t notice or care that much. Whatever the case, it blew up in the Government’s face spectacularly.

The detail about the extra taxes were on page 95 of the bill’s 225-page commentary and the detail about the potential loss of $163b in lost savings was on page 10 of the IRD’s 19-page Regulatory Impact Statement. Here’s the full suite of documents via IRD’s very useful and not-well-trafficked Tax Policy website.

The NZ Herald’s Thomas Coughlan and Stuff’s Rob Stock both reported those key details later on Tuesday afternoon. I found them around 4.30pm. The NZ Herald-$$$’s ‘Government quietly introduces $103b tax on KiwiSaver’ headline caused all sorts of ructions in the afternoon, including attempts to get it taken down or changed. The Herald doubled down with a banner ‘Tax Grab’ headline in the physical paper yesterday morning.

Parker defended the plan on RNZ’s Morning Report yesterday morning shortly after National Leader Christopher Luxon attacked it on Morning Report as a ‘retirement tax’ and a ‘wealth tax’ that he would repeal immediately.

Within an hour or two, Parker and Finance Minister Grant Robertson started talking about how to do a ‘reverse ferret’. In the end, it was a rapid and complete capitulation, as this announcement sent at 1.16pm makes clear.

I’m reproducing it here in full, if only because the explanation is the clearest about the problem the Government wanted to solve, and its justification for first going ahead with it, and then abandoning it within 24 hours.

Inland Revenue and Treasury advised this change be made to remove a loophole used by large financial companies, so they would have to align with how others in New Zealand pay GST.

The move would also have brought New Zealand fund managers more into line with the approach in Australia.

“Smaller fund management providers who were doing the right thing were at a competitive disadvantage compared to others, mostly larger providers, who were using the loophole,” David Parker said.

“Generally it’s bad to have these sorts of distortions in the tax system as bigger players can exploit them, but if the sector as a whole is happy to operate with the status quo then we will leave them in place.

“During extensive consultation views were mixed on the merits of the technical change. The large companies profiting from the current set-up were opposed to the change, while smaller providers were more supportive of the change. This was because these providers who did charge the full GST on their service fees faced unfair competition from the bigger players.

“However since the announcement it has become clear that smaller providers now oppose it too.

“It’s important to clear up some inaccurate representation of the proposal. New Zealanders’ KiwiSaver contributions and balances were not going to be taxed under this legislation. However it is clear from the reaction to this proposal that it has caused concern for Kiwis,” David Parker said.

“I am proud of Labour’s role in introducing KiwiSaver and its role in securing the future of New Zealanders. We will never do anything to undermine it.

“By contrast, National will not commit to keeping KiwiSaver in its current form, and cannot be trusted to support this important scheme. When last in Government National ditched the Kick-Start payment and introduced a tax on employer contributions,” David Parker said.

“Because of the importance of public confidence in KiwiSaver and the need to ensure nothing unduly affects New Zealanders’ willingness to save, the Government will not to go ahead with the proposal contained in the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Bill.”

If only this explanation was made a day earlier? Yeah…nah.

The absence of this rationale from the original release is all the more glaring by its inclusion in the about-face statement.

In theory, it all made perfect sense and is totally in line with the 30-plus year long quest of IRD and Treasury to design the perfect tax system, which is broad-based, low rate and free of awkward, time-consuming and unfair exceptions. That’s the basis for our current income and GST systems, which is among the world’s least-exception-ridden tax codes in the world.

Except for the biggest exceptions of them all:

* capital gains were excluded from the income tax net, except for gains on financial market trading;

* financial services such as mortgages, bank fees, credit card fees and life insurance are excluded from the GST net because GST on these were judged a tax on savings, rather than consumption; and,

* residential rents are excluded from the net because that also would penalise renters vs owners, who were also in the position of effectively receiving a return on an asset, rather than consuming a service.

We built a perfect tax system, except for the exceptions that turned us into a housing market with bits tacked on, and which mean we have the least affordable housing the world, an endemic child poverty problem and we’re struggling to reduce our climate emissions.

And there is Aotearoa’s political economy and predicament in one sentence.

Sadly, perfect was much more than the enemy of the good in this case. Almost perfect just plain wrecked the good. For good.

The long-term epic fail

Roger Douglas, David Caygill, Geoffrey Palmer and Ruth Richardson were the driving political and legislative forces behind the tax reforms, resource management, public finance and labour law reforms that are now the bedrock of our economy and society. In many ways, their logic and intent was pure and good.

They reformed everything to get away from the all-encompassing morass of tax and industrial law that appeared to bog down the economy in a tangled mess of:

* wage and price freezes to fight endemic inflation;

* a fixed exchange rate that was bankrupting the nation;

* import and export tariffs, controls and subsidies designed to reward farmers and punish consumers to attain trade surpluses;

* nationally arbitrated and set wages and conditions to bolster the power of workers at the expense of industrial firms’ profits; and,

* a tax code designed to enhance the wealth of the connected and their accountants and advisers, rather than improve the health of the Crown’s finances.

They decided to rewrite the tax code in a ‘broad-based, low rate and neutral way’ to:

* lower and simplify personal income taxes by cutting the top tax rate from 66% to first 48% in 1988 and then 33% in 1989 (with just two rates of 33% above $30,000 and 24% below that);

* create a value added tax of 10% in 1986 (subsequently lifted to 12.5% in 1989 and 15% in 2010);

* removing tax subsidies for savings into pension funds between 1987 and 1990; and,

* lowering the corporate income tax rate from 48% to 28% in 1988 (subsequently lifted back to 33% in 1989, cut to 30% in 2008 and then 28% in 2011);

But these were all ultimately reliant on introducing a capital gains tax to fill out the landscape completely, as Caygill pointed out in December, 1989:

“As the Consultative document points out, investments which are not attractive in their own right can be attractive merely because the income they produce is untaxed.

“The tax exemption therefore encourages investment in areas offering low pre-tax returns.

“On that basis, and on the basis that the advantage of existing concessions is greatest for those with most wealth, it is both efficient and fair to include currently untaxed income in taxable income.” Then-Labour Finance Minister David Caygill in his December 19, 1989 speech.

The third leg was just left hanging (with a few nudges)

The rest is history. Labour lost the 1990 election and never got the chance to introduce it. National didn’t introduce one and both National and Labour have been trying to directly or tangentially fill the hole ever since. Meanwhile, home-owning voters, savers, investors, businesses and the whole economy more broadly has been sniffing out the hole and piling into it with a passion. Renters can only stare into the edges of the abyss as it recedes into the distance with their dreams of bringing up families in their own secure and healthy homes.

National won the 2011 and 2014 elections, at least partly, by campaigning against Labour’s plans for a CGT beyond the family home, but even it introduced the ‘bright line’ test for taxable capital gains on property trading by landlords in 2015 to try to squeeze the hole a bit. Labour extended National’s two-year test to five years in 2018 and then ten years in 2021 in what was a politically adept move to squeeze the hole down a bit more.

Also in an attempt to fill the hole from a distance and at an angle, the current Labour Government has tried to throw sand and mud into the gears of home owners using their untaxed and leveraged home equity to buy ever more rental properties. It has done that by ring-fencing rental property losses from other income (2019) and removing interest as a deductible expense for tax purposes for residential landlords.

All of these ‘fixes’ are a long way from the pure and simple model laid out in the 1980s. They create confusion, break basic principles of taxation and create ‘grey areas’ and boundary issues all over the place.

No wonder the tax geeks in IRD and Treasury jumped at the chance to do something ‘pure’ by removing some of the confusion about whether funds management fees were eligible for GST or not. Some used to be. Most weren’t. Now all aren’t. That’ll learn them.

And then there’s the awfulness of WFF and AS

Meanwhile, the politics of imposing capital gains taxes got ever tougher as the leveraged and tax-free gains got ever larger and harder to give up. That led to increasingly expensive, difficult to build and unhealthy housing. That creation of housing as the preferred investment class (along with other factors driven by the low-tax and low-investment structure of Government created in these reforms meaning housing supply was restrained by infrastructure investment droughts) have made it politically impossible to achieve a capital gains tax.

So other ways to help those struggling with housing costs were dreamed up and delivered via the income tax and welfare systems. Working For Families (WFF) was created as a rebate scheme to help low-to-middle income earners with children cope with high housing costs and low wages, both of which were driven by low public and private investment in infrastructure and business technology (because any surpluses were being ploughed into land values).

Now WFF has created an income tax system pocked with the most awful ulcers of marginal tax rates nearing 100% at points. The Accommodation Supplement (AS) along with emergency housing costs and emergency benefit costs, are now approaching $4b a year. That would be more than enough to service $100b of debt to build half a million homes.

All because we couldn’t get a capital gains tax across the line 32 years ago. Now that was an epic and long-term tax fail.

A post script on David Parker’s train-wreck standup

I like David Parker. He’s a policy wonk with a long-term vision to fill the hole I’ve written about above. He is playing the ultimate long game, which you have to admire in this world of 24 minute news cycles around games of political optics, ‘rule-in, rule-out question lines and rule-by-focus-group in the interests of median voters.

But yesterday’s ‘stand-up’ on the tiles was one for the ages. A good politician walking in front of a bus, three tractors and an industrial hedge trimmer. I felt for him as I and others accelerated, reversed, and accelerated again just to feel the bumps.

Here’s the audio just to make your teeth grate.

And here’s the quotes I’ve transcribed for those who don’t like to grind their teeth.

'We didn't think it would be an issue'

Parker said the Government had expected funds would absorb much of the increase through lower profits, although IRD had advised otherwise.

Asked if all the $225m in extra taxes would be passed on to KiwiSavers, he said: "It depends what would be the competitive response to New Zealand fees. New Zealand fees are already higher than they are in Australia. Even though in Australia, they already have the GST treatment that we were proposing."

Asked why he had defended it this morning, but backtracked by midday, he said: "We weren't expecting the backlash that we've experienced against this."

He argued that was the reason it had not been included in the news release announcing the tax changes.

"It's one of the reasons why we're doing we were highlighting other issues like the reduction in fringe benefit tax, the changes to GST on Airbnb, and Uber. So this backlash has been a surprise to us based on the information that we had from Inland Revenue, which was that there was some providers that were in favour of the change."

Parker would not name which funds had supported it.

He denied the Government had tried to 'sneak it through.'

He was then asked about his blaming the media for the reaction.

"Well, one of the headlines, and one of the major newspapers said that this was a tax on KiwiSaver. So it gave people the impression that their KiwiSaver savings were going to be subject to GST, which was never the case. Now we are the parents of KiwiSaver. It's the other side that have undermined it by withdrawing tax credits and subsidies for fees etc. And we just weren't willing to put at risk the reputation of KiwiSaver," Parker said.

"I can blame the media and in respect of misrepresentative headlines which suggested that GST was going to be charged on KiwiSaver contributions and the funds that people have in KiwiSaver," he said.

Seriously. Dude. What were you thinking?

Asked if he had 'read the room wrong,' he said: "Maybe I shouldn't have been surprised at how well banks defend their profits. They're the owners of the big KiwiSaver firms."

He rejected the advice of both the IRD and FMA, who estimated it would reduce funds under management over time. The FMA estimated a reduction of over $160b in total by 2070.

"They've made no allowance for what would be the competitive response in an increasingly competitive KiwiSaver market," he said.

Parker also blamed the Opposition for putting KiwiSaver's reputation at risk.

"The reaction to the proposal has been overblown, and it's included assertions that it was a wealth tax...that was one of the assertions from one of the providers. Someone else said that it was going to be a tax on KiwiSaver, implying that it was a tax on KiwiSaver contributions. And that has been one of the reasons why people who have KiwiSaver accounts have been so alarmed.

"The effect on fees would have been far lower than the changes made to the KiwiSaver scheme by the prior government when they took away the tax contributions," he said.

Asked if it was the banks' fault for the reaction, he said: "They're the big winners today."

'We did it to save KiwiSaver's reputation'

Asked again why the Government had made the u-turn, he said:

"Because we thought that the reputation of KiwiSaver in the meantime was being besmirched in the way that undermine public confidence in it."

Asked if the u-turn was embarrassing, he said:

"We would obviously have preferred that the people that we thought were going to come out in support of this had.The fact that they haven't causes us to reverse our position. We think that's the right thing to do. Because we think that the furore around this was denting public confidence in KiwiSaver."

"There has been engagement with the the funds management sector before this proposal came out. And the feedback that I had from the Inland Revenue Department was that there were some in favour and some against."

So in summary:

* the Government thought few in the public would notice or care;

* and when the public did it was, it claims, because of fund manager, media and Opposition misrepresentations;

* it thought the IRD and FMA were wrong in their advice about the likely taxes raised and the eventual reduction in funds saved;

* it thought some small fund managers would support the plan (!); and,

* then the Government had no choice but to reverse the policy to contain the damage from the misrepresentation.

An epic short term fail from a Labour policy wonk minister called David because of an even more epic long-term fail by a Labour policy wonk minister called David.

Both of whom I admire and respect, but sometimes disagree with.

Ka kite ano

BernardElsewhere in the news overnight and this morning:

Russia turned off its main gas pipeline to Europe gas completely for at least three days, adding impetus to European Union moves to break the connections between gas and electricity markets Reuters;

Europe’s inflation rate hit 9.1% in August and Britain’s inflation rate was forecast to rise as high as 22% early next year as the continent braces for a ‘Putin Recession’ in the northern winter months Reuters;

America’s jobs market showed some signs of cooling in a new measure of employment in August suggesting a mild recession in the world’s largest economy is possible late in 2022 CNBC; and,

China’s Covid lockdowns widened in both the southern factory areas of Shenzen and Guangzhou and north, adding to the risks of a recession in our largest trading partner Reuters.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: Just quietly, the Government just chose to reduce Budget deficits by $225m per year in the next few years in order to keep public debt and interest rates just that little bit lower, in order to keep house prices that little bit higher for today’s owners.

Even more quietly, that decision shifts $186b in wealth from future generations’ nest eggs of investments in non-housing assets to today’s home owners leveraged and mostly untaxed equity in homes. It is an extension of an inter-generational wealth transfer that made those buying and owning homes in the last 30 years more than $1t wealthier at the expense of future generations. It is those generations working from 2040 to 2070 who will have to pay for those current home owners’ pensions and health costs through income taxes on their work and GST on their spending. These future generations will also have to pay for the emissions liabilities being accumulated and unaccounted for.

Yesterday’s decision to extend GST to KiwiSaver and other funds management fees was another one of the stealthy decisions by both Labour and National Governments over the last 30 years to prioritise the interests of today’s older median-voting home owners at the expense of younger renters, their children and the unborn.

These decisions are the most damaging to the 50% of children who now live in private rentals with their parents. They and their parents are both now locked out of healthy and secure futures in Aotearoa-NZ, but are sentenced to keep paying income tax and GST for decades to come to ensure those wealthy home owners are paid unconditional basic income after the age of 65 and get free health care from the state.

Paid subscribers can see and hear more detail and analysis below the paywall fold and in the podcast above. They can also vote below to open this up for public sharing early. (I have now opened this up for the public to be shared and read by all.)

How another $186b was just nicked from the future

Yesterday, the Labour Government quietly introduced an extension to the GST net to include funds management fees, Airbnb rooms and Uber fares. Combined, the change is expected to drag in an extra $272m a year in tax revenues from 2026. That, in turn, will reduce future Budget deficits and therefore Crown debt by same amount per year, all other things being equal.

But it is also expected to reduce the amount of KiwiSaver funds under management by $103b by 2070 to $2.1969t and cut non-KiwiSaver managed funds by $83b to $1.75705t by 2070.

It was done in a body of an omnibus of tax changes and without mention by a minister. Tax advisors and fund managers were given a heads up. The kids growing up in private rentals today who will be that much poorer in future were not.

So what actually just happened?

You gotta love the smell of a fresh Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Bill introduced into Parliament on a quiet Tuesday afternoon. Almost as good as freshly cut grass…or napalm, depending on your point of view.

Just in case you couldn’t find the detail in the ministerial press release (because it’s not there) and you didn’t have time to read the 223 page official announcement and commentary, or the 133 pages over eight Regulatory Impact Statements (RIS), here’s what you need to know before lunchtime:

* the bill extends GST to funds management fees, which is expected to increase tax revenues by $225m from April 1, 2026 onwards;

* the extension is estimated by the Financial Markets Authority (FMA) to reduce KiwiSaver funds under management by $103b by 2070 to $2.1969t and cut non-KiwiSaver managed funds by $83b to $1.75705t by 2070;

* the extension of GST to online accommodation and transportation services such as Uber and Airbnb, which is expected to raise $47m a year in extra tax revenue; and,

* the exemption of public transport from fringe benefit tax, although the exemption for car parks provided by an employer also remains.

The news release focused on the Airbnb and Uber changes, along with the public transport exemption, which has been called for by the Greens for years.

So why KiwiSaver fees and why now? (And why not bank fees too?)

The GST extension to KiwiSaver and other managed funds has snuck up on a few people because the 2018/19 Tax Working Group recommended not extending GST to financial services, in part because it risks opening up a very nasty can of worms that would lead to questions about why mortgage services and bank fees are not charged GST.

This Labour Government’s Tax Working Group recommended no change to GST on financial services in this 2019 paper on the grounds it would be too difficult to disentangle the tax on the service provided by the bank or the fund manager, from the return on the investment.

Here’s the argument from the Tax Working Group:

“Financial services are exempt from GST because of the practical difficulty in trying to isolate the service provided by financial institutions. In principle, GST should apply to the service that financial institutions supply in intermediating borrowing and lending between borrowers and savers.

“However, GST is not intended to apply to savings as they represent deferred consumption, which GST will apply to when eventually spent and consumed.

“However, in reality this sort of matching exercise is not possible as there is no tracing between the source of funds and whom they are lent to. This makes it very difficult to isolate the value of the service provided by financial institutions. In the absence of financial institutions charging explicit fees instead of profiting from interest rate margins, it is generally considered not possible to apply GST to these services under a credit-invoice mechanism.

“Alternative approaches for applying GST to financial services have been considered previously. These include applying GST to the difference between all cash inflows and outflows, charging GST on interest above a certain defined margin, or charging GST on consumer loans on the sum of profits and wages for financial institutions.” The Tax Working Group recommending no change to GST on financial services in this 2019 paper

It’s not about filling in a gaping hole

So what’s going on here?

Parker and the IRD argue in the commentary on the bill that an anomaly has developed where some boutique fund managers taking a cautious approach on the ‘service provided’ aspect of their fees are charging GST, while others taking the ‘financial services are exempt’ approach are not.

This removes any doubt, but it’s not filling a hole in the GST net that is significant. New Zealand has the second most comprehensive GST net in the world. Only Luxembourg’s is wider, and that’s specifically because it does charge GST (Value Added Tax) on financial services provided to non-residents. This Tax Working Group chart from OECD data tells the story.

It appears an opportunistic move to simply raise some extra revenue to ensure the Budget gets back into surplus faster, and therefore keeps a little more downward pressure on interest rates. That in turn keeps upward pressure on house prices.

This is all consistent with the ‘30/30’ bi-partisan agreement to keep tax and public debt below 30% of GDP in the long run and not to tax unearned and leveraged wealth from gains in residential land prices. The quintupling of section values in the last 20 years is due largely to that 30/30 rule, which has starved cities of the infrastructure spending they need to enable much more brown fields and green fields land for housing.

Careful. You might open up a can of worms.

This move also begs the question: why isn’t GST charged on bank fees, charges and interest on mortgages?

The answer? Because it would massively disrupt bank business models that bury their services and profits in net interest margins. It has effectively become a GST-free subsidy for home owners able to borrow that little more cheaply and therefore push up house prices that little bit more.

The addition of leverage and New Zealand’s exception as the only country in the developed world without a capital gains tax makes the exception an even more profitable lark.

But only for those who own homes.

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: Winter is coming for Europe and it will be one of the main driving forces in the global economy in the year ahead.

The European Union is preparing massive emergency interventions in electricity markets to ease the burden for consumers and some businesses of a doubling and quadrupling of electricity costs across the continent. This is all because Russia is cutting off gas supplies used to generate electricity.

Windfall taxes to subsidise power bills

Brace for it - The European Union is preparing emergency interventions in Europe’s electricity markets and tax systems to blunt the impact this coming Northern Hemisphere winter of a doubling and quadrupling of electricity costs. The could include windfall taxes on ‘super’ profits being reported by energy firms and the forced disconnection of electricity prices from gas prices.

“Currently, gas dominates the price of the electricity market . . . with these exorbitant prices, we’ll have to decouple. We’ll have to ensure renewable energies are generated at lower costs, that those costs are transferred to consumers and windfall profits used to help vulnerable households. We need an emergency instrument which would be triggered very quickly, in weeks perhaps.” EU President Ursula von der Leyen quoted in FT-$$$

The moves come as Shell CEO Ben van Beurden said overnight Europe could face several winters of gas shortages as a result of the cuts to Russian supplies. Reuters.

The pressure is intense. Even Tesla founder Elon Musk says a quick transition to renewable is impossible.

“Realistically I think we need to use oil and gas in the short term, because otherwise civilization will crumble. I think some additional exploration is warranted at this time.”

“One of the biggest challenges the world has ever faced is the transition to sustainable energy and to a sustainable economy. That will take some decades to complete.” Elon Musk talking to reporters at an energy conference in Norway, via Reuters.

So what? - Geo-politics is driving the global economy towards higher energy costs and shortages in the most intense way in the months to come. The political reaction in countries across Europe that are under pressure will be crucial, in particular whether they keep supporting Ukraine through the dark months.

Elsewhere overseas in the news overnight, Ukraine launched an offensive in the south to retake Kherson back off Russia, UN officials visited the Zaporizhzhia nuclear plant endangered by shelling and global stocks kept falling, albeit more slowly, after the Fed’s hawkish speech at Jackson Hole.

Here, the Government is set to review the orange setting of Covid in a couple of weeks time, which may see isolation periods drop from seven days to five days.

Chart of the day

A housing market with bits tacked on

NZ business credit demand Index, Year-on-Year Changes

11.9% - Business credit demand in Aotearoa-NZ fell by 11.9% in the June quarter from the same quarter a year ago, with construction sector loan demand down 18.5%. Equifax NZ reported yesterday.

“With business confidence remaining at lows only seen for short periods of time, in the initial phases of the pandemic and around the GFC, the softness of business credit demand is to be expected. The uncertainty created by rising interest rates, above target inflation and supply-chain constraints will be impacting business credit demand, but it is the labour supply shortfalls that likely have the greatest impact on investment plans. If businesses struggle to get access to the labour to implement their growth plans, they will limit the capital they allocate and borrow.” Equifax Managing Director Angus Luffman

Number of the day

Still, employment is growing, even at ‘full employment’

2.31m - There were 2.31m people employed in July, up 0.5% or 10,863 from June, Statistics NZ reported yesterday from administrative data provided by IRD. Also, gross wages measured on an accrual basis rose to $13.8b in July, up 7.8% from the $12.8b reported in July a year ago.

Comment of the day

Captured Government

“Thank you for sharing the (as usual) excellent writing of Danyl Mclauchlan. Coincidentally, I'm in the middle of reading David Graeber's 'Utopia of Rules'. These are a series of long-form essays, and a fascinating explainer for why bureaucracy exists and - as per Danyl's focus - the incentives that cause its corruption. 

“Bureaucracy is such an easy target for the opposition. Especially as I agree with Danyl that there 'appears' to be a lot of waste this government term. Even if we generously grant than Labour are pointing our country in the right direction with all this spending, they have done a shockingly bad job of communicating *where the money is actually going*. And I expect they'll lose the election on that alone. National and Act will repeal a bunch of stuff and all we will have from billions spent is a bunch of richer lawyers and consultants, plus some thick reports hidden away at the bottom of filing cabinets.” Tim in Monday’s Dawn Chorus.

A fun thing

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: The battle to control inflation will define the era we live in economically. The central banker that matters most globally gave a very tough speech on Saturday morning we should all take notice of. Either he’s right, and will walk the walk from this talk, which will make all our interest rates higher globally for the next year or two. Or he’s wrong and won’t, which would mean our mortgage rates fall next year.

Most investors and traders still think he’s wrong, but they’re getting a bit nervous. That’s why stocks and bitcoin fell sharply over the weekend.

Paid subscribers can see more of my analysis and pointers below the paywall fold and in the podcast above.

Will he pivot?

US Federal Reserve Chair Jerome Powell gave an eight minute speech in the early hours of Sunday morning that underlined the determination of the world’s most important interest rate setter to get inflation lower come hell or high water. Traders and investors had been hoping for some confirmation of their bias that a pivot would come next year to lower short-term interest rates as inflation comes off the boil ‘naturally’. They didn’t get it. Powell gave his most hawkish speech yet.

So what? - US stocks fell 3.4% because expectations of higher interest rates make stocks relatively less attractive, but interestingly (to me), the US 10 year Treasury yield was unmoved at 3.03%. We need to care about this stuff because the Fed sets the base for interest rates globally and this constant battle between what the Fed thinks and what global inflation watchers think determines the base for our interest rates. It also reflects what’s happening in the global economy, which eventually dribbles or floods down to us in some form or another. Think of it as an economic ‘Atmospheric Flood.’

The bottom line? - The Fed is talking tough and may well push up the mortgage rates we pay here through sheer force of will. But ultimately, how far the Fed squeezes will be decided by what happens to inflation on the ground in the Northern Hemisphere. I’m still in ‘Team Transitory’, which was the team Powell joined at Jackson Hole this time last year. He abandoned it by November last year because the facts changed on the ground by then. We’ll see if inflation is turning by November this year. My bet is it will, but it’s worth knowing what the Fed is saying and doing. Fighting the Fed can be a dangerous game for anyone to play.

Dive deeper - US- based British economist Adam Tooze does a great weekly podcast called Onze and Tooze for Foreign Policy. This week he went deep into the history of these Jackson Hole shindigs (which our Reserve Bank Governor Adrian Orr attended this year) before the event. I highly recommend it. Here it is in freely-available blog form too via Adam’s Substack, which I subscribe to.

Quote of the day

Powell puts his ‘put’ on hold

“The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.

“These lessons are guiding us as we use our tools to bring inflation down. We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.” US Federal Reserve Chair Jerome Powell in a speech at Jackson Hole on Saturday morning NZ Time. The bolding is mine.

Chart of the day

Going backwards - FT data journalist John Burns Murdoch has done a brilliant analysis of global mortality stats that shows America’s opioid, gun crime and obesity epidemics have lowered life expectancy there in recent years, especially for men. It’s today’s deeper data dive.

Number of the day

1,008 - The Dow fell 1,008 points or 3.03% to 32,283 on Saturday morning NZ Time after Powell’s speech, which was interpreted as the Fed refusing to pivot to softer monetary policy soonish, as many investors and traders had expected or hoped for.

Comment of the day

A big idea in the AMA

“I do so love this hour! It's like a debate of great ideas. I've been mulling one potential solution to climate adaptation. Rather than individually negotiating with the 1000s of people with homes built in unsuitable locations, how about the government identify large blocks of land in safe zones in our inner cities (I'm thinking the Adelaide Rd block up from the Basin in Welly). Acquire the land, build big but beautiful mixed use high rise apartments that can be for climate refugees (both from here and overseas) to relocate to. Highly insulated, no cars (only bus, bike etc). Close to town for jobs. Surely a better use of taxpayer money than rebuilding communities that will only get smashed again. Obviously not a compulsory option but wouldn't it be comforting to give communities another option?” Sonya in Friday’s AMA.

Today’s must read

The Administrative State - Danyl Mclauchlan is one of my favourite writers on politics and big ideas here in Aotearoa-NZ. He has written a Sunday Essay for The Spinoff challenging the amounts being spent on consultants dreaming up massive structural reforms. This Government, like many before it, appears captured.

Here’s the gist (bolding mine):

“Aren’t we seeing an erosion in state capacity alongside all this centralisation and expansion? Aren’t outcomes in health, education and welfare trending down rather than up? What’s going on? You can’t have effective public services without bureaucracies, but it’s not clear that the torrents of money flowing into them are delivering more value to the public or to the marginalised communities some of them are named after. It’s almost as if the primary role of the administrative state is shifting from serving the people to the redistribution of wealth to the staffers, lawyers, PR companies, managers and consultancy firms that work in them, or for them. A billion dollars a year in public sector consultancy is an awful lot of money when you’re running out of teachers and nurses because you don’t pay them enough, and the fire trucks are breaking down.” Danyl Mclauchlan in The Spinoff

Today’s must listen

How to finance a revolution - Irish economist David McWilliams produces a weekly podcast I enjoy listening to regularly. He and his mate John Davis meander around a particular topic and sometimes have guests. This week they took a closer look at how Michael Collins financed Ireland’s revolution by creating a ghost bank and doing a bond issue. Collins worked for JP Morgan in London in his 20s.

Some fun things

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: The five signals I picked out from the noise this week were:

The Fed scared markets a bit

US Federal Reserve Chair Jerome Powell said in his hotly-anticipated speech at Jackson Hole at 2am this morning that the Fed must keep hiking interest rates “until the job is done,” which would probably lower economic growth for “a sustained period.” This was seen as tougher than traders and investors had expected so the S&P 500 fell 3% by 10 am. The 2-year Treasury bond yield, which is the one fixed mortgage borrowers here in Aotearoa-NZ should watch, rose only 3 basis points to 2.07%. The 10-year yield rose just 1 basis point to 3.03%.

So what? - Clearly Powell’s hawkishness has unnerved share investors a bit, but bond investors, who are the ones who forecast inflation and interest rates for a living, were more relaxed. The bond market moves were not enough on their own to force big moves up in our fixed mortgage rates, but our stocks are likely to fall a bit on Monday morning. Meh.

Europe’s gas shock deepened

European gas prices jumped another 10% overnight to a fresh record-high over €343 per megawatt hour because of fear Russia will turn off its gas completely. This is more than ten times pre-war prices. Heating bills in Europe in the coming winter will be brutal and the political pain of Europe’s support for Ukraine is deepening. Putin is applying the screws hard.

This chart from Capital Economics this week shows just how serious the shock is for Europe.

The 20% fall in house prices won’t wipe out many at all

Some people are worried a lot of recent first home buyers will be wiped out by the 20% fall in house prices that is now rippling out from Auckland and Wellington. I wrote in Wednesday’s email about why very few people are likely to lose their houses and deposits. As in less than 10. I was then invited on to 1News’ Breakfast show to talk about it and on RNZ’s The Panel on Friday.

Climate Change is hitting the economy from all directions

Climate change feedback loops hammered the global economy this week, adding to the inflationary and recessionary pain of Covid and the war in Ukraine. Europe’s drought was declared the worst in 500 years as German and French factories hit by higher electricity costs reported output in recessionary territory.

Meanwhile, China closed shopping centres, turned off light displays and ordered factory closures because of hydro-electric power shortages from the worst drought it has experienced in 50 years.

That water seemed to head straight for us in an extension of the ‘Atmospheric River’ that caused extensive damage in Nelson and Marlborough this week. I wrote in Tuesday’s email about how these climate changes are affecting our economy.

Migration settings are being loosened

I wrote in Monday’s email about how the Labour Government was loosening migration settings and in Tuesday’s email I wrote about how this loosening reinforced that all roads towards a real improvement in investment and productivity would lead to an annual levy or tax on residential land values.

I hosted our weekly live ‘hoon’ webinar for over 100 paying subscribers on Friday night to talk about these events of the week. The audio from the webinar is in the podcast above for all subscribers immediately as part of this weekly summary and sampler of the week’s news and my work this week on The Kaka.

We talked about:

* why a 20% fall in house prices isn’t too big a problem for NZ Inc;

* how consumers are feeling about spending (a bit better), even those with mortgages;

* why all roads lead to a tax or levy on residential land values;

* how accelerating climate change is shunting the global economy around;

* why Labour’s loosening of migration settings shows how hard it is to kick our economy’s basic business model; and,

* what might happen next with inflation, interest rates, asset prices and jobs markets.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: News about economic growth and inflation around the world is mixed this morning, with the balance still tipping towards recessions in Europe and China. But there was some good news out of the United States of stronger than expected GDP.

Everyone is watching the central bankers’ shindig at Jackson Hole in Wyoming this weekend like a hawk (for hawks), including our own Reserve Bank Governor Adrian Orr. Some are nervous the Fed will be much aggressive about taming inflation than most investors and traders expect, which could unleash mayhem on stock and bond markets.

Here, our retail sales figures yesterday were weaker than expected, showing the wealth effect of a 15-20% fall in house prices in Auckland City and Wellington City. Some are wondering if Orr will need to hike quite so much if this softer demand pressure from consumers takes the steam out of inflation.

Paid subscribers can see more detail, charts and analysis below the paywall fold and in the podcast above. They’ll also get invites to my weekly Ask Me Anything session on Substack from 12-1pm and our weekly ‘hoon’ webinar from 5pm-6pm. The invite link is below the fun things.

The wealth effect kicks in

Aotearoa-NZ’s retail sales volume figures for the June quarter out yesterday showed weaker than expected consumer spending as homeowners and small businesses felt the effects of the 15-20% fall in house prices in the ‘bleeding edge’ markets of Auckland City and Wellington city over the last six months. Statistics NZ reported volumes fell 2.3% in the June quarter from the March quarter, having also fallen 0.9% in the March quarter.

Economists had expected a rise of 1.7% and the result clearly shook a few. A couple started talking about potential risks of a technical recession if the weak consumer spending extended to the rest of economic activity. Doubts about the extent of the Reserve Bank’s expected tightening of the OCR from 3.0% to 4.0% started to nudge into the commentary.

So what? - It’s another bit of evidence to suggest the demand-driven local inflationary pressures driving short term interest rate hikes may be coming off the boil. That reinforces my view that interest rates don’t go as high as most expect and that the underlying drivers for low inflation remain intact. If confirmed, it would mean fixed mortgage rates have peaked and could start falling next year. We’ll find out more with GDP data due on September 15, along with the regular barrage of inflation data from overseas and here. It’s good news for ‘Team Transitory,’ which I’m still in with not many others.

US GDP beat expectations

The second estimate of June quarter GDP in the world’s largest economy was stronger than expected overnight. The Bureau of Economic Analysis reported GDP fell just 0.6%, which was less than the first estimate of a 0.9% fall and better than the 0.8% expected by economists. Also, jobless claims were slightly less than expected.

All eyes on Jerome Powell at Jackson Hole

US Federal Reserve Chair Jerome Powell is due to talk at 2am NZT tomorrow morning about the outlook for monetary policy at the annual Jackson Hole get-together of the world’s top 100 central bankers. Reserve Bank Governor Adrian Orr is going this year, which is the first one in-person since the pandemic.

Currently, traders and investors mostly think the inflation genie is getting itself back in the bottle and Powell won’t have to drive the US economy into recession by hiking short term interest rates much more than 4%, and that he’ll be able to start cutting them again later next year.

The trouble is all the mood music coming from Powell’s fellow decision makers at the Fed has been about the need to hike until the pips squeak. Someone is going to be wrong and if it’s the markets then expect another bout of heavy selling in stock and bond markets. That’s why Powell’s speech is seen as so important.

European gas shock worse than oil shocks of the 1970s

European gas and electricity prices jumped to record highs overnight on fears a three-day shutdown of Nordstream 1 for maintenance late next week may actually be the trigger for Russia to turn off its gas to Europe completely ahead of the winter.

This is a big deal for European economies as electricity price spikes are shocking consumers into cutting back elsewhere and heavy industrial plants that use a lot of power, such as smelters, start shutting down. Gas prices have risen ten-fold and the surge in electricity prices will at least double household heating bills over the winter.

This chart via Capital Economics shows how the expected hit to European GDP from the gas and electricity shocks rolling across Europe as the war in Ukraine drags on are likely to be bigger than the oil price shocks of the 1970s.

So what? - European economies are most likely to fall into recession later this year, if they aren’t already. Stagflation is a serious problem for Europe now, but the responses from central bankers will decide how big a problem it becomes and how much it spreads to the rest of the world. The European Central Bank could rapidly hike rates to contain inflation, or resume money printing to stave off recession.

The bottom line - My thesis is the deflationary forces of the recession will eventually overpower the inflationary forces of the energy price shock, which in turn will add to the disinflationary forces now gaining the upper hand in the Northern Hemisphere. But it all depends on how the Ukraine War progresses and what the ECB does.

China unveils a new US$150b stimulus plan

China released the details overnight of a new one trillion yuan (US$150b) stimulus plan to bolster infrastructure spending and ease some of the debt loads of local governments hammered by the collapse of apartment developers. But most observers saw the intervention as marginal and unlikely to turn around dire consumer sentiment and stalling industrial output in the wake of Covid lockdowns and the apartment sector collapse.

So what? - We depend on Chinese consumers buying our meat, dairy, fish and wine for the biggest chunk of our export receipts. We also need China’s construction sector to buy our logs to box up concrete. We also depend on Australian consumers as our second-largest export market. In turn, Australia is dependent on China’s iron ore and coal buyers, who need it as the raw ingredients for the steel and concrete used in the infrastructure.

The bottom line - It’s still unclear whether China is going into a very heavy recession. Beijing has managed to pull the levers to avoid big slowdowns in the past, but this time might be different because its local governments and apartment developers are mired in debt and consumers are very cautious because of the Covid lockdowns. There is also a big demographic headwind building because of its falling working-age population. There’s a big leadership meeting in November, which might be President Xi Jinping’s opportunity to ease his Covid elimination focus. That will be a key moment.

Some fun things

Ka kite ano

Bernard

PS: Here’s the link for today’s ‘hoon’ webinar for an hour at 5pm.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: Unexpected situations are naturally unnerving, but it’s worth taking a closer look to see if they’re really as dangerous as they seem at first glance. A whole generation of home buyers are seeing commentary about negative equity for the first time and some are spooked.

They needn’t be, unless they’re a couple who have just bought and are just getting divorced, or one of them has just died. In those cases, negative equity won’t be their biggest problem, or much of a problem at all. Everyone should just chill a bit on negative equity. It is renters with children who are in the worst financial stress right now.

Paid subscribers can see more detail and analysis below the paywall fold and in the podcast above, while everyone can see the clip on 1News from Breakfast this morning of me talking about this issue. Update. I have now opened this up for all in the public interest.

Chillax and embrace the 20% fall in house prices

The Reserve Bank’s updated forecast last week of a peak-to-trough fall in house prices of as much as 20% seems to have unnerved a new generation of home buyers who never thought such a fall possible, and certainly haven’t seen one in their lifetimes. Nominal house prices fell as much as 10% in 2008/09 in the Global Financial Crisis so the likely double-digit fall — albeit after a 45% rise in the previous 18 months — has a few people shaken and stirred. They shouldn’t be.

Ged Cann has written a piece about people being in negative equity after a 20% fall in house prices for Stuff this morning, which is leading Stuff’s home page. It’s useful and not sensational at all, but the headlines from the last few days seemed to have caused a few to flick nervously to the real-time house valuation sites such as homes.co.nz. I was even called on to talk about it this morning on Breakfast on 1News. The assumption was the news would not be good. You can hear the tone of surprise in Jenny-May Clarkson’s questions in the clip.

The short version of my view is that barely anyone will ever have to sell and realise a complete loss in their equity, let alone force the bank to realise a loss. And when I say barely anyone, I mean the actual number of first-home-buying couples who will lose their entire life savings in the deposits they put into their homes will be lucky to get into double digits, let alone triple digits. And the main reason for that loss will have nothing to do with the housing market itself. Let me explain.

Really? Aren’t they mortgaged to the hilt & aren’t banks nervous? No.

Only first-home buyers being forced to sell because of a divorce or death might get into trouble, and even then, there will be a relatively short window of time for them to get into that trouble and for the bank to force a mortgagee sale. That’s because prices in the ‘bleeding-edge’ markets such as Auckland City and Wellington City will be well into rebound mode within the next year, in my view.

Banks here also have no need or desire to do what American or Irish or Spanish banks were forced to do during the Global Financial Crisis. Fearing being stuck with debt that could not be serviced because of unemployment and fearing even bigger house price falls that could destroy what was left of their almost non-existent equity reserves, those banks in the Northern Hemisphere 14 years ago forced mortgagee sales on those in negative equity with mortgages they could not service.

Here in Aotearoa-NZ, our banks now have twice as much equity in reserve as they did in 2008/09, and around four times more than those US, Irish and Spanish banks had in 2008/09. Also, unemployment here is 3.3%, not the levels near or over 10% seen in those other markets back in the GFC.

Hang on a minute. Doesn’t a 20% fall in prices mean carnage?

If you doubt that less than 10 people might be forced out of their homes having lost their deposit, it’s worth showing the figures on the numbers of borrowers in trouble now, how many could find themselves in negative equity, and how many could be in the sad and unusual position of getting divorced or dying in the next year.

There were six (yes, as in single digit six) mortgagee sales in the three months to the end of January. That is an average of one every two weeks for the entire country.

CoreLogic estimates that as many as 500 first home borrowers who bought near the peak of the market in October or November could now be in that negative equity situation if their house prices have fallen 20%, as has been seen in some parts of Auckland City and Wellington City.

“Of course, with unemployment low, provided that they don’t need to sell, negative equity on paper needn’t be a disaster,” CoreLogic’s Chief Economist Kelvin Davidson wrote last week.

So if 500 might be at risk, you’d have to work out what the chances are of divorce or relationship breakdown, death, dual unemployment or sickness that might force a bank’s hand. Statistics NZ estimates about one in five marriages end within a decade so the chances are about 10 of those 500 buyers might experience divorce in the next year. The mortality rate per 100,000 people for those aged 30-50 is around 80 per 100,000. So that works out at about half a person being likely to die out of the 500.

So it’s not outrageous to say that less than 10 first home buyers in the whole country might be in a position to be forced to sell their home within the next year and have to take a complete loss. Even then, the prospects of a bank forcing a young recently divorced couple or just-bereaved widow or widower to sell at a loss that might also force the bank to take a loss is low. That’s why I’m confident in saying the number would be less than 10, and most likely under five. That is the scale of the issue.

Here’s more detail from CoreLogic about the proportion of people who sell their house for less than they bought them, and the size of their losses. In the June quarter, just 1.5% of the houses sold were let go for less than what the buyer paid for it. The median loss for those home buyers was $25,000, which would be significantly less than the equity still in those homes. Also, it’s worth remembering that the median hold period for a loss-making seller was just over a year.

But what about the massive mortgages and rising interest rates?

We’ve been conditioned to think that first home buyers are mortgaged to the eyeballs and can barely afford a flat white because of all the interest they’re paying when they take out their first mortgage and that the rise from 2% to 5.5% for mortgage rates must have tipped them all over the edge. But the truth is banks don’t let first home buyers have a mortgage unless they can afford more like 6.5% or 7%, as this Reserve Bank chart on the serviceability test rates shows.

Some of those first home buyers might have to economise on holidays and blocks of tasty cheese, but they will be a long way from defaulting on their mortgages. And it’s not just because the banks made sure they had some fat in case of higher interest rates. Incomes for couples on higher incomes in their 30s and 40s are rising at double digit rates at the moment, partly due to higher hourly wage inflation, and partly because more people per household are working more hours per week. That’s what happens when unemployment is at 3.3%.

You can see the lack of stress in in the non-performing loan rates reported by banks through the Reserve Bank.

So in summary, NZ Inc does not have a negative equity problem because so few borrowers are at risk, so few banks are ready to pull the trigger, and unemployment is so low. The only risk would be some sort of mass divorce or extinction event for first home buyers, and I suspect that would be a bigger issue than the housing market.

The rebound isn’t that far away. Seriously.

All that everyone has to do is wait for the inevitable rebound in house price inflation, which is not that far away. In my view, house prices have already stopped falling in the ‘bleeding edge’ markets of Auckland City and Wellington City. They are already up to the 20% quota the Reserve Bank has set. Other areas outside of Auckland still have some catching up to do, but not as much as you might think.

That’s because:

* Labour started loosening the migration taps last weekend and National is itching to open the taps even wider if it wins late next year;

* fixed mortgage rates stopped rising about a month ago because inflation is now coming off the boil globally and wholesale interest rates have peaked;

* banks are emerging from their shells and need to keep growing lending to meet their profit growth quotas set in Australia; and,

* new housing supply growth is slowing rapidly.

There are already early indications that the market is starting to bounce. Tony Alexander’s survey of mortgage brokers found a net increase in first home buyer inquiries in August for the first time in a year. The survey also found brokers saying banks were more willing to lend than at any time since November 2020.

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: Climate change feedback loops are hammering the global economy, adding to the inflationary and recessionary pain of Covid and the war in Ukraine. Europe’s drought was declared the worst in 500 years overnight as German and French factories hit by higher electricity costs reported output in recessionary territory.

Meanwhile, China closed shopping centres, turned off light displays and ordered factory closures because of hydro-electric power shortages from the worst drought it has experienced in 50 years.

The climate feedback loops hammering the global economy

Climate change is on our minds here in Aotearoa-NZ because we’re experiencing one of the wettest winters on record, powered by an ‘atmospheric river’ reaching down from the tropics. CoreLogic and MunichRe forecast overnight weather-related insurance claims would rise as much as 30% per year by 2050.

Meanwhile, Europe and China are suffering their worst droughts in 500 years (BBC) and 50 years respectively, which is creating all sorts of feedback loops for their economies and the climate.

China was forced overnight to shut shopping malls and factories throughout its southwestern region because drought was starving its hydro-electric power plants of water. That is adding to the economic pain of its Covid lockdowns and a crash in its property development sector.

Across the northern hemisphere, the European Union declared the continent was in the midst of its worst drought in 500 years and it would go on for months to come. Rivers used for transporting coal and other products throughout Europe have drained so much that barges can’t go down them, compounding the logistics pain from Covid and the war in Ukraine. Portugal and Spain are experiencing their worst wild fires in history, which is throwing yet more carbon into the atmosphere.

France and Germany both reported slumps in factory production overnight, due largely to higher electricity costs linked to Europe’s reliance on gas and coal. To make matters worse, France has had to cut back on nuclear power production, which it relies on and in theory should be renewable, because of insufficient water for cooling due to the drought.

If there’s any doubt that climate change won’t disrupt the global economy and ours, this year’s droughts, fires, floods and storms have already compounded the damage wrought by Covid and the war in Ukraine.

Elsewhere in the news here and overseas this morning:

In geo-politics, the global economy, business and markets

Cooling US and European economies - S&P Global reported overnight that European factory production fell in August. In the United States, reported new home sales fell to their lowest level in four and a half years in July and S&P’s ‘flash’ factory activity measures for August showed a second month of contraction. US interest rates fell, which prompted a rise in the Nasdaq this morning. Reuters

Also, Julian Robertson died, Macy’s downgraded its profit outlook and the Australian-$$$ reported Fonterra was considering a A$1.5b float of its Australian assets.

In our political economy and business

Green shoots - Tony Alexander’s survey of mortgage brokers found a net increase in first home buyer inquiries in August for the first time in a year. The survey also found brokers saying banks were more willing to lend than at any time since November 2020.

Supermarket action - Later today the Government is expected to announce the details of its regulatory backstop that would force the two supermarket operators to open up their wholesaling operations to rivals.

Today’s must read

Speaking of feedback loops, I’d recommend this piece in the FT because it goes in depth into a tipping point feedback loop for methane, which is the most potent climate warming emission, even if it is the shortest lasting.

Chart of the day

Quote of the day

“If you think of fossil fuel emissions as putting the world on a slow boil, methane is a blow torch that is cooking us today. The fear is that this is a self-reinforcing feedback loop . . . If we let the earth warm enough to start warming itself, we are going to lose this battle.” Durwood Zaelke, president of the Institute for Governance & Sustainable Development, and an advocate of stricter policies to reduce methane emissions via today’s Must Read in the FT

Some fun things

They’re back!

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: We’re discovering all over again how hard it is to go cold turkey on our economy’s addictions to imported low-wage labour and leveraged-and-tax-free gains on residential land price appreciation.

This week’s backsliding by the Government on its hopes to wean NZ Inc off cheap migrant labour shows that, along with the continued ruling-out of wealth or capital gains taxes by Prime Minister Jacinda Ardern and PM-in-waiting Christopher Luxon ‘in their political lifetimes’.

The older home-owning median voters in the suburbs of our big cities and provincial towns and cities cannot imagine a different way of doing things. More importantly, they cannot see how going turkey would be anything other than disastrous for their own plans for retirement and their hopes of helping their own children into stable homes ie the ladder to financial security.

Ironically, but perhaps not surprisingly, the more extreme the addiction has become and the more obvious it is it needs kicking, the harder it is to kick. Median voters and the politicians that court them cannot see an alternative.

There is no alternative (to a residential land tax)

Without too much fanfare, the Labour Government has just reversed its course on one of its main economic strategies. It had hoped to use Covid as a chance to re-set NZ Inc’s addiction to low-wage temporary migration, which has been a key ingredient keeping our economy growing faster overall than our peers for most of the last two decades.

The record-high migration has also disguised the highest rate of ‘leaching’ of home-grown talent in the developed world and even-more-slugglish productivity growth than the rest of the world. It also fueled an explosion in house values to the highest in the world, relative to incomes and rents, that made it palatable for those with homes to still be on low incomes. Low wage migration goes hand-in-hand with leveraged and tax-free capital gains on residential property to keep NZ Inc feeling wealthier than it actually is – for asset owners.

Here’s what was written in a Cabinet paper late last year as the then-Immigration Minister Kris Faafoi was finalising the Government’s ‘rebalance’ of migration policies

“The Rebalance aims to support a future economy that is less reliant on lower-paid temporary workers, better addresses productivity, skills, and infrastructure challenges, and increases the skill levels of migrants. As part of work on the Rebalance and ‘Reconnecting New Zealanders’ step three border opening, interim settings are being developed that would bridge the gap between current tight border restrictions and future settings, while managing and phasing the skill mix of workers entering the country. These include enabling entry of temporary migrants who earn 1.5 times the median wage without other tests.” MBIE advice in Cabinet paper

A quick reminder of the problem

Here’s how Faafoi’s office expressed the problem in a strategy paper to Cabinet last year (the bolding is mine):

“Immigration is important to New Zealand but the volume and mix prior to COVID-19 was starting to impact on our economic performance and standard of living.

“There is no question that New Zealand is always going to need migrants. Migrants make a valuable and significant contribution to New Zealand, both economic and social. And immigration is an important factor for meeting this Government’s goals of creating jobs, supporting small business growth and enhancing our global position. We need to ensure that migrants who are choosing New Zealand as their home have good opportunities, and are not subject to exploitation or poor quality jobs.

“However, our pre-COVID reliance on temporary overseas workers and rate of population growth have been recognised for placing unsustainable pressure on our infrastructure (such as housing and transport) and placing downward pressure on New Zealand workers’ training, wages, terms and conditions.

“A rebalance would aim to improve outcomes for New Zealanders and enhance our economy. This approach is predicated on the basis that businesses previously reliant on migrant workers to fill low-skilled or low-paid roles would be incentivised to find other ways to address their labour needs, such as improving wages or conditions, recruiting or training New Zealanders, or increasing automation.

“The Rebalance aims to support a future economy that is less reliant on lower-paid temporary workers, better addresses productivity, skills, and infrastructure challenges, and increases the skill levels of migrants.

“As part of work on the Rebalance and Reconnecting New Zealanders step three border opening, interim settings are being developed that would bridge the gap between current tight border restrictions and future settings, while managing and phasing the skill mix of workers entering the country. These include enabling entry of temporary migrants who earn 1.5 times the median wage without other tests.” Kris Faafoi’s office in a strategy briefing paper to Cabinet.

Here’s the charts from an OECD paper from 2019 titled ‘Improving wellbeing through migration’. It shows how our economy had the highest use of temporary migrant labour in the developed world prior to Covid and one of the highest rates of ‘leaching’ of home-grown talent. The temporary labour included students, working holiday-makers and lower skilled temporary work visa holders.

We built a system that sucked in new temporary workers to replace the local ones who left because they couldn’t see a future for themselves here, given brutally high housing and other costs. This system only ‘works’ for those who have already captured the unearned, leveraged and tax-free gains on residential land values.

The idea was that the Government would use Covid as ‘system reset’ opportunity to force businesses to go ‘cold turkey’ on the cheap labour, which is the oil that keeps the badly-designed and tuned economic engine running.

But a system-reset requires investment

The missing link in the theory is investment. Small businesses would need to invest in technology, consolidation, training and new management systems to increase output with the same number of workers. That requires a combination of their own investment and central and local government investment in infrastructure. That investment is desperately needed. For 30 years, Aotearoa-NZ’s households and businesses chose to invest in residential land, rather than in businesses. Governments of both flavours also chose low taxes and no taxes on leveraged gains in residential land values because that makes people on relatively low wages (who have high living costs and own homes) feel wealthy and keeping voting in Governments.

Households and businesses know the choices they have. They could invest in R&D, technology and training or M&A to make their businesses more productive. But they know that investing in leveraged residential land is vastly more profitable and vastly less risky because the Government has pledged (and shown) repeatedly that its main priority is protecting and enhancing those unearned gains in owner-occupied residential land prices. Those assurances and the lack of a tax on these gains has made Aotearoa-NZ the fastest-appreciating and most unaffordable housing market in the world in the last 20 years. Those who say our market is just as bad as others who do have capital gains taxes are just plain wrong. The outsized fall in our market since interest rates started rising also shows that.

Don’t expect a better engine without a rebuild

No party anywhere near Government, including Labour and the Greens, has ever pledged to tax owner-occupied land price appreciation. Attempts to tax capital gains beyond the family home failed to win support of median voters and is now embedded so deeply as a ‘third rail’ in politics that the most popular politician in our recent history, Jacinda Ardern, pledged never to try again in her political lifetime. The best the current Labour Government has been able to do is try to throw some sand in the gears of rental property investors through extending the bright line test for property traders, ringfencing landlords’ losses and removing interest deductibility for tax purposes.

But even those measures do not have a social license. The Opposition Leader, Christopher Luxon, has pledged to reverse all of those tax moves and is ahead in the polls. His own choices as an investor, despite his self-described success as a business operator, has been to buy rental properties. Businesses and households know the lay of the land.

The incentives are all there to invest in residential land, for both small and big businesses. The fastest-growing and newest source of wealth on the NZX in the last decade has been the listing and rise of retirement home operators such as Ryman Healthcare, which are essentially plays on tax-free capital gains on residential land values as they buy land, keep the gains, and sell services to the beneficiaries of those tax-free gains. Most small businesses would not survive long without the backstop of continued rises in land values pumping up the equity that can be used in the down years to bolster retirement nest eggs.

It’s one reason why we have one of the highest small-business-ownership rates and self-employment rates in the world. Our rate is more than twice that of Australia and three times that of the United States. Both have capital gains taxes and effectively incentivise the alternative of business investment, which encourages higher R&D, technology investment and international competitiveness.

After all, why bother to invest in an outward-facing high-wage business when you can build a much bigger and less-risky nest egg for your children (who will need it to get their own homes) by investing in your own residential land. When the land under our homes earns more than our actual jobs or businesses, we shouldn’t be surprised when investors choose to sink their money in dead land, rather than active businesses or infrastructure.

A failure at the first attempt and within 103 days

This week’s decision by the Labour Government to extend exemptions for at least two to three years to the median wage minimum for temporary work visa holders for construction, aged care, seafood processing and adventure tourism was announced just 102 days after the ‘rebalance’ was announced.

The attempt to go cold turkey failed after the economy had its first case of the cold sweats and violent shaking. It was always going to happen when the underlying problem of changing the incentives for Government and private sector investment remain in place.

The current machine only keeps going forward with the oil of cheap migrant workers and the rocket fuel of unearned, untaxed and leveraged gains on residential land values.

So what now?

All roads were always going to lead back to changing those investment incentives through a new tax that gives the Government the resources to invest in productivity-enhancing physical and social infrastructure. That tax would also radically change the incentives for businesses and individual investors.

As I’ve talked about in previous articles, we have to invest a lot more in infrastructure to power a burst of productivity growth that lifts real wages, real savings and the size of the economy without the need for yet more oil and petrol being pumped into a spluttering engine that is bursting a gasket and blowing black smoke.

So what type of engine rebuild might work? In my view, a Capital Gains Tax would be too politically toxic, complicated and slow to break the log jam.

The case for a residential land value tax

A much simpler, faster and more politically possible option is a simple and very-low-rate infrastructure levy or tax on residentially-zoned land values that is calculated annually from land value measures in council-maintained databases.

The Opportunities Party (TOP) has proposed such a tax in its current policy document, although it has not detailed its level or how any funds would be used.

I’d prefer to see any revenues hypothecated into a housing and climate infrastructure fund jointly administered on a region-by-region basis by central Government and councils, with the aim of using those funds to achieve affordable housing and net zero transport and housing emissions by 2050. Those responsible for the investments could target rents of less than 30% of median equivalised household disposable income and owner-occupied homes being available for five times gross disposable household income.

At current land values, a 0.5% tax on residential land values would raise an extra $6b, and effectively increase the Government’s tax rate from 30% of GDP to 32% of GDP. It could service around $120b in extra Government debt over the next 30 years with an interest rate of 5%. That would increase Aotearoa-NZ’s net debt from around 30% of GDP to 40-50% of GDP by 2050, depending on the interest rates and economic growth rates. That would still be significantly lower than net debt levels for other countries with similar economies and credit ratings such as Australia, Britain, Canada and the United States. They are all expected to have debt levels of 50-100% of GDP over the next 30 years.

I would also suggest a higher multiples for the land tax for serviced ready-to-build and unoccupied land, and zoned-but-not-occupied land to ensure land bankers release land much faster and repay some of the unearned capital gains made over the decades. You could use a similar multiple to capture the unearned gains of those owning land that benefits from public investment, including areas around rail lines, motorways and new public infrastructure such as hospitals, schools and universities.

So what would be the deal?

So it’s worth asking: in Aotearoa-NZ’s political context, how could this new settlement be found? Essentially, the two large parties would have to agree or be forced into a new consensus, which would be similar to the ones National and Labour effectively agreed from the early 1990s until today. They include:

* no messing with the age of eligibility for NZ Super of 65;

* no means-testing of NZ Super;

* indexing NZ Super for a couple to 66% of the average weekly wage;

* creating an independent inflation-targeting central bank to keep inflation around 1-3%;

* leaving borders mostly tax and tariff-free; and,

* keeping Government taxation and central Government net debt around 30% of GDP.

Under MMP, being forced into a new consensus would require one or both of the balance-of-power parties to dangle an affordable housing and climate infrastructure levy in front of both parties as the price of power. Te Pāti Māori and TOP would be the most obvious candidates for that, potentially in tandem.

I welcome paid subscribers’ views, suggestions and challenges in the comments below. Also: do you want this one opened up early?

Ka kite ano

Bernard

Thank you for reading The Kākā by Bernard Hickey. This post is public so feel free to share it.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe