Nigel Latta only tells half the story on the economy

On Tuesday night Nigel Latta tackled the long-standing issue of the struggling New Zealand economy. For decades the country has been focused on working harder and producing more stuff rather than working smarter and making better stuff.

The Morgan Foundation has been a big fan of Latta in the past, particularly his documentaries on sugar and inequality. The documentary on the economy got a lot right but when it came to the issue of poor investment he overlooked the elephant in the room: our obsession with housing. We need to invest in productive businesses, we simply can’t get rich by buying and selling houses off each other.

What Latta got right
The show covered all the right things. Latta was ably assisted by Shamubeel Eaqub who pointed out that our problems of inequality and poor economic performance are linked because we fail to sufficiently invest in our young people. Making sure all our kids grow up healthy and educated is an investment that benefits all society in the long run. The alternative is raising kids who fail to achieve their potential and end up as a burden on the state.

Latta was also correct in pointing out that our economy is anemic, suffering from a lack of investment. Hence we tend to focus on producing a greater quantity of commodities rather than adding value or producing more knowledge-intensive goods. This is a problem that successive governments have pondered and fiddled with but, like Latta, none have been brave enough to face up to the elephant in the room. The fact is that we can’t invest in business because most of our money goes into housing.

Most of our money is in housing
More than half of our national wealth is tied up in housing, which is relatively high internationally. And, of course, this investment in housing has largely been funded by debt. As a result, our privately held net foreign debt is also relatively high, which opens our economy to risks if international lenders decide they don’t want to lend their money to New Zealand any more.

All this money tied up in housing can’t be invested in productive businesses. Our businesses are starved of the capital they need to invest, innovate and ultimately make the expensive step into overseas markets. That is why so many of our promising businesses are bought out by foreign multinationals when they are ready to take on the world. It is quite simply a lot easier to expand when you have ready access to existing overseas networks for raising finance and distributing products.

Housing obsession has a good reason – tax breaks
Of course, our obsession with investing in housing and land is not a recent phenomenon – it has been decades in the making and exists for a reason. In other words, the obsession is rational, and exists because of the tax benefits afforded to the owners of housing and land. New Zealand has some of the lowest rates of taxation of property (and indeed wealth generally) in the world, which explains why we have so much of our wealth tied up in these assets compared to the others.

Dealing with the supply side as the government is proposing will only solve half of our housing problem. By international standards our housing stock has been unaffordable for decades now; long before the current crisis in Queenstown and Auckland took hold. Housing is now a key driver of inequality. We simply have to quell the demand for housing as an investment, rather than shelter. Housing should be viewed as a key part of our nation’s infrastructure, rather than a get rich quick scheme.

A capital gains tax won’t solve the problem – this policy is used widely overseas, and causes large distortions with limited effect on housing speculation. That is because capital gain is but one of the tax benefits of investing in housing and land; imputed rental and writeoffs are other drivers. The Morgan Foundation has suggested a comprehensive capital income tax as a way of putting housing on a level playing field with other investments. That would ensure that businesses start getting a fair go when it comes to finance.

Geoff Simmons is an former Treasury economist working for the Morgan Foundation. This post first appeared on Gareth's World.

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