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Brash sees merit in Parker's big tool

FFormer Reserve Bank Governor Don Brash sees some merit in Labour’s monetary policy.

“I do see some merit in the scheme. Labour has recognised that there's a need for another instrument to get some pressure off the exchange rate and I think it's a sensible thing to do. Will it work? I'm not sure,” Dr Brash told TVNZ’s Q+A programme.

But the fomer National and ACT leader isn’t keen on Labour’s proposal to make KiwiSaver compulsory.

Earlier, Labour Leader David Cunliffe told Q+A the move to a compulsory savings rate of 9 percent would be slow and gradual.

“The movement into compulsory KiwiSaver and the gradual increase in the contribution rate will be very gradual, very slow, half a percent to one percent a year.  We do not want to see people's real incomes going backwards.”

He says KiwiSaver would not be guaranteed by the Government:

“But people will have the choice to put them in very low or very moderate risk investments, and because this is broad based across the economy and there will be a large number of institutions involved, we think that risk will be extremely low.”

He promised the new monetary tool would benefit all New Zealanders:

“Lower income New Zealanders will benefit from having lower rents.  Those who have their own homes will have lower mortgages, they’ll also have higher wages starting with an immediate increase in the minimum wage to $15 and then a second increase during our first year in government.  Many will find themselves at least on the living wage across the state sector.”

Watch the view the full interview here.

 

Comments and questions
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A living wage across the state sector? Wages on the private sector have to face market conditions?

Oh what a guarantee for life of state servants. David doesn't seem to realise it's only the private sector that produces the taxes for the state sector to exist, let alone give a guarantee.

Madness.

It's not your money to throw around on a series of wage rises Mr Cunliffe.

It's employers who have to cough up. And there's no guarantee forcing every worker into a savings scheme will have any great cooling effect on the economy.

It's unlikely mortgagors will have any interest rate advantage, yet will still be forced into saving until turning 67, the retirement age prescribed by Labour.

It's also hopelessly unfair on the disciplined saver who pours every cent into repaying a mortgage firstly for the tax advantage of investing in your own mortgage compared to any other investment, and secondly, such savers are deprived the opportunity of raising a tax effective loan for investment.

It seems to me this scheme is designed for the financially illiterate, but even that is questionable as Australia has learnt.

Many Aussies go through life not reducing their mortgage because they intend to do that when they get their nest-egg.

Sorry Messrs Parker and Cunliffe. I do not like this at all. It simply won't achieve a thing other than a few votes from those who are prepared to gamble on this working, which I suspect is the main reason you are promoting such nonsense.

Age must be catching up with Brash for him not to see the flaws in Labour's proposed Big Tool. The simple fact is that the property price boom is first and foremost due to artificially low interest rates globally. Also, a Capital Gains Tax will not pop a property bubble. And low interest rates do NOT necessarily translate into a low currency. My Exhibit A is the UK, which has a CGT (and stamp duty), 0.5% cash rate (and Quantitative Easing to boot) but London still has a bigger property bubble than Auckland while the Pound sterling is at a multi-year high against the US dollar.

There are logical explanations for all of this. A CGT that exempts the family home but applies to every other investment tilts the balance MORE towards property rather than less. In any case, a CGT of even 30% means 70% of the profit is pocketed (nice work if you can get it!).
As regards the currency, the FX market realises that interest rates have to go up sooner or later to pop the bubble, so is pushing up the British pound in anticipation. In other words, what matters for the level of the currency is the FX market's expectation of the FUTURE, not the present, level of interest rates.

To quote Farrar on Kiwiblog today on this issue:

I’ve seen that figure from a bank economist also. So what does that means if you are on say $60,000 a year. It means your take home pay will drop by $3,600 a year or a massive $70 a week to stop interest rates rising by 1%.

Now you may not even have a mortgage. Most people do not. Everyone who does not currently have a mortgage will have their take home pay slashed.

But what if you do have a mortgage. Say you have $300,000 owing on it. Let’s say the VSR means your interest rate is at 6% instead of 7%. What difference does that make to your weekly repayments? At 7% a $300,000 20 year mortgage costs you $536 a week. At 6% it is $495 a week so that saves you just $41 a week.

If you’re very wealthy, you’ll benefit from this policy. If your mortgage is say $1 million you’ll save $136 a week and your KiwiSaver contributions won’t increase as you’re self-employed.

Top marks for the heading.

In the unlikely event that this compulsory scheme works, it must eventually fail as retirees cash in and begin spending. In other words, it can at best provide a short term 'extra tool'. A compulsory retirement scheme needs to be better than this proposal. So does any means of controlling inflation. They are two quite separate things.

I agree. Within a decade funds would be flowing again. So it is only a temporary fix. However I do not know what Labour has in mind as part of their overall economic scheme, but I would be surprised if they don't bring back death and gift duties. That would solve the problem. Cunliffe spoke of a 'red Labour'. Work and save all your life so you can create a nice little pile for the taxman. Rather frightening I reckon.

So David thinks we have high interest rates.How on earth did people survive the 80s when interest rates were 23% on mortgage and 29% on overdraft.

Capital gains tax is nothing but an envious tax which will raise nothing .If you have capital gains you also have capital losses. 4 out of 5 new businesses fail so imagine the refunds. It is also a tax on risk. If we dont have people taking risks there is no new employment or productivity.

David will take NZ backwards 40 years.

Why is it that the rest of the world manages with a capital gains tax?
And why is it that we manged to cope with a capital gains tax up until the late 80's?
It certainly needs to be revisited according to John Shewan and other experts

It is sure a big loss to NZ not having Don Brash in the political mix somewhere. He has intelligent understanding of our position and more importantly he has solutions.

Labour's Big Tool is aimed at a problem that is not of New Zealand's making. Rather the problems of the "overvalued" NZ dollar and Auckland property bubble stem from the massive money printing in the US, UK, Japan and, covertly, in Europe and China, done to bailout grossly indebted governments and financial institutions. After each economic bust: 1987, 2001 and 2008, Central Banks in these places have resorted to ever more ridiculous easy monetary policies. But ultimately these policies will fail for the simple reason that they can print money (which creates the illusion of wealth by increasing the prices of assets such as property and shares) but NOT real wealth, i.e. productive enterprises. So what may be in store for the global economy is a massive crash, as early as 2015, that will make the Great Depression look like a walk in the park. Not every country will be equally badly affected - New Zealand has a lean and mean economy with low sovereign debt and so should fare less badly.

"......for another instrument to get some pressure off the exchange rate"

crocodile tears. A strong dollar is an aid to keeping inflation down. Brash knows this, he deliberately used it for twenty odd years.

Any move to reduce the exchange rate will of course be of benefit to exporters but will also increase the price of all imports including petrol, white-ware,, vehicles, furniture, and most groceries - this will in turn cause a rise in the rate of inflation. And as we will still have higher interest rates will continue to be a haven for off shore money speculators. This policy of David Parker is a no win for everyone expect exporters and speculators.