Bernard Hickey has a column in the herald this morning calling for changes to New Zealand’s financial system. (http://blogs.nzherald.co.nz/blog/show-me-money/2009/11/1/steps-ease-squeeze/?c_id=3) This is not the first time he has called for changes, (I think it is the third), but is anyone actually listening?

The changes suggested are:

1 Introduce a capital gains tax to ensure the property-owning classes think twice before making losses to reduce their tax bills, comfortable they can make it back with tax-free capital gains.

John Key saying he would resign if this happened was probably a very dumb political move in the long run. All it is doing is allowing the rich to get richer through a giant hole in our tax system. We need to fix that hole now.

2 Introduce a land tax to broaden the tax system to include those who made $300 billion of tax-free capital gains from 2002 to 2007. Those without property face the biggest tax burden in the years to come. Without some change to tax the rich, the perceived unfairness will drive away our youngest and most productive generations.

Same as point 1 really, we need tax on land and property.

3 Introduce a single, flat tax rate at 25 per cent for the income, corporate and trust rate. Set a high tax-free income threshold to ensure the poorest taxpayers retain plenty.

The current progressive tax system is simply unfair and does nothing to encourage people to get ahead in life. A single tax system would be fair and balanced to all.

4 Shut down Working for Families and the Student Loan scheme to remove the ruinous marginal tax rates and debts that are building up.

Getting rid of WFF makes sense. The student loan scheme on the other hand is a whole lot harder. You either have to make the courses free (like they used to be pre 1990) or have someone else lend the money at interest. The current system works because anyone can qualify and it allows anyone the chance to get ahead.

5 Increase GST to 16.6 per cent to help rebalance the economy away from consumption and towards saving. Ensure the poorest who spend most of their income are compensated using extra revenue from the capital gains and land taxes.

As painful as this sounds it makes sense and we need to do it in time.

6 Reduce government spending growth over the next decade to return core government spending from the current 36 per cent of GDP to the 29 per cent that it was in 2004.

Yes. But what do you cut?

7 Intervene in local district and city councils to consolidate duplication, reduce their combined size, reduce their rates growth and focus them on freeing land for home building.

Home building can lead to problems in the long run. We can’t just turn all our land to houses we need the land for production and other industries.

8 Increase the Reserve Bank’s prudential liquidity target for banks so they are forced to raise more funds locally and rely less on cheap foreign funds. This will continue to reduce their profit margins, increase deposit rates, encourage local savings and reduce New Zealand’s vulnerability to market freezes.

Yup. Focus on New Zealand first.

9 Increase the amount of capital that banks must put aside when lending against land and property to discourage the heavy lending to property investors that powered the 2002-2007 property boom.

Again a great idea, but why would the banks do this when they make money from people doing this too?

10 Raise the retirement age progressively to account for longer life spans and reduce the pension progressively to 62 per cent of the average wage from the current 66 per cent.

I read yesteday that the pension age was introduced at 65 around 1900 when life expectancy was only 62, now we live 20 years longer, and the age needs to go up, otherwise we cannot afford it.

http://www.interest.co.nz/ratesblog/index.php/2009/07/17/economic-weather-report-dependency-ratio-worsens-in-new-zealand/

This is an interesting video becuase the stats for beneficiaries include pensioners and Working for Families. Now I have no issue with the pension it is nice to be guaranteed some of your hard earned tax back when you retire. But Working for Families is crippling the rest of New Zealand. It as John Key put middle class welfare and the sooner a more fairer system that treats everyone as equals is introduced the better.

Around a week ago I blogged about the good article in the herald by Bernard Hickey on why Generation X and Y should leave NZ. (http://www.brad.net.nz/blog/2009/06/bernard-hickey-tells-young-people-to-get-out-of-nz/)

Hickey followed this up earlier this week with a second blog on how to turn the tide and get people to stay: http://blogs.nzherald.co.nz/blog/show-me-money/2009/6/30/ten-ways-baby-boomers-redeem-themselves/?c_id=3

A summary of the key points:

I got quite a few comments from baby boomers (and younger readers) throwing their hands in the air and wondering what could possibly be done to solve the problem. They also pointed out it was no different anywhere else so what was the point of leaving. House prices have collapsed 20-30 per cent in America and Britain, effectively reducing the scale of the problem, while prices here have only fallen around 9 per cent here. Australian prices are more affordable in many cities because incomes are higher, although inner Sydney and Melbourne are pretty unaffordable.

But there is much our baby boomer leaders and their voter-enablers could do to fix the problem if they wanted. We all need to agree on a variety of things to lift our productivity and therefore our real per capita incomes at the same time as reducing house prices. Here’s 10 ideas:

1. Impose a land tax. It works in Hong Kong and is much cleaner, fairer and more efficient way to take some of the air of the land price bubble than a capital gains tax.

Agreed, but as pointed out last week would it ever be voted through?

2. Introduce a flatter, simpler system for income tax to encourage productive work rather than tax avoiding rental property investing and consumption. Here’s more detail here.

Hickey’s ideas for a flat tax system make a lot of sense, and is one thing I agree with, as far as income tax goes there should be a flat rate, why should someone who earns more be taxed at a greater proportion of their income, their tax take is greater than someone who earns less anyway because tax is based on a percentage of income not a fixed amount, and it is also likely that they will pay more in GST because they probably spend more as well.

3. Remove middle class welfare payments such as Working for Families and non-means tested interest free student loans. They create work for bureaucrats and create ruinously high marginal tax rates.

Working for Families is something that I do not agree with, and then introduce an independent workers allowance to counter it is just as dumb, reduce the bureaucracy, reduce the costs, overall everyone pays less tax and therefore has more in their back pocket.

Interest Free Student Loans is interesting. I believe they should have interest at CPI on them, this way the government does not lose out on any money that it loans out, and in return having a small interest rate would encourage people to pay it back faster as with zero interest there is zero incentive to pay it back. But using this as a means for the government to make money is not a good idea.

4. Extend the retirement age to 70 from 65 by 2020. Reduce the universal superannuation payment to 60 per cent of average wages from 66 per cent. We just can’t afford it and it will give us time to restructure our economy.

Meh, I am at a minimum 45 years away from retirement so by then I don’t think there will be any hand outs for me.

5. Open up monopolistic industries to competition wherever possible and regulate hard to restrain inflation wherever competition is not possible. The electricity and telecommunications industries come to mind. I’d love to see the power generators forced to sell their retailing operations and I’d love to see the Commerce Commission force mobile termination fees much lower to encourage a third mobile competitor.

Yup, and how about selling Kiwibank and Air NZ while we are at it, it makes no sense to be in a competitive market with State Owned Enterprises competing against others. There is a need for SOE in areas where they are the only providers but where they are not what is the need for them?

6. Crack down on handouts for politically neat but economically dumb ideas such as sports stadiums, NZ$40 million wharves and railway operators. Be ruthless on public sector spending.

Yup. The White Elephant on the waterfront comes to mind. We are in the worst recession in 80 years or whatever and spending is being slashed left right and centre but we can suddenly have a whole lot of money to buy a wharf and place a giant rugby ball on it for a two week period in 2011.

7. Open up the immigration taps. Population growth, particularly of young skilled migrants, will do an awful lot to kick-start our economy and skew the population imbalance to something more sustainable. Welcome everyone in, regardless of whether they are from China, India, Brazil or Timbuktu. As long as they have some English and are bright, we should open the door.

The last line of this is vital. They must be able to communicate effectively otherwise this policy does to achieve its aims.

8. Convert the NZ Superannuation Fund into individualised accounts that could be transferred to KiwiSaver accounts with other fund managers. This would effectively make KiwiSaver almost compulsory and encourage many New Zealanders to become more financially literate.

Yes. This is one of the things that has kept me out of Kiwisaver, the fact that I will still get superannuation regardless of if I save or not, and also the fact that once you are in you cannot get out. Make everyone in or everyone the ability to come or leave as they can.

9. Set a target size for the government sector (both local and central) in some sort of taxpayers’ rights bill as a proportion of GDP and manage the sector down to that level, which could be, say, 30 per cent of GDP.

I don’t necessarily agree with this, the government needs to spend on what it is committed to and targets for the sake of targets is actually quite a dumb idea, but cut the spending on things that they don’t need to makes a lot of sense.

10. Allocate every adult New Zealander a certain pot of ‘free’ money to spend on fees for tertiary education, particularly for retraining.

Yes. This is better than losing money on interest free loans. Reduce the cost of the course and you reduce the amount of money that needs to be borrowed.

I have been planning to blog on this all week but have not had the time…

Simply read this: http://blogs.nzherald.co.nz/blog/show-me-money/2009/6/23/dear-generations-x-and-y-leave-asap/?c_id=3

Or if your even too lazy for that, check out the TV interview on the subject.