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Good potential, will it deliver?

Written By: - Date published: 6:04 pm, August 2nd, 2009 - 31 comments
Categories: economy, unemployment, workers' rights - Tags:

17,000 youth jobs. That’s what Key has promised with a $152 million programme (some of this is existing money). Like Colin Espiner says “ambitious plan”.

We’ll see if he manages to deliver. The record so far has been big promises and bigger failure to deliver – the money hasn’t been spent and the jobs haven’t materialised.

As we’ve been saying for a long, long time, a lot of job creation can be done that is revenue neutral. The cost of $9000 per job will be largely covered by lower dole payments and more tax revenue.

The challenge will be to make the jobs that are created useful and sustainable. There’s no use creating jobs that aren’t contributing to infrastructure or serving as training opportunities to upskill the youth workforce. There will have to be work done to ensure that these minimum-wage jobs don’t compete with workers on better wages. We don’t need a whole lot of low-skill, low-wage jobs that aren’t going to help grow the economy in the long-term and only serve to undermine the wages of other workers.

So, some pitfalls they’ll need to be careful to avoid but this has the potential to deliver some of what we’ve been pleading for from the Key Government for half a year. Let’s hope they deliver this time.

31 comments on “Good potential, will it deliver?”

  1. Lew 1

    Lynn, I think Eddie’s account has been compromised. This post is fair!

    L

  2. DeeDub 2

    Yes, a very interesting set of ideas from Key. It got a lot of coverage at the expense of . . . .

    English is ‘refusing to count out’ a capital gains tax now I see? Oh, and proposing another tax cut for the rich to offset it but… wait for it…… an increase in GST to 15%

    Nice one, Bill. That’s fair.

    As a proportion of income who is hurt most by an increase in GST?

    I wonder?

    • Ari 2.1

      I understand treasury is pushing hard for a CGT, and frankly, it makes a lot of sense.

      Are they seriously floating raising GST?

      • RedLogix 2.1.1

        As I’ve said often before, CGT’s don’t work very well. They really only treat the symptom of an asset bubble, not the root cause which is irresponsible bank lending.

        The last big property bubble happened in every developed nation regardless of what kind of CGT regime they had in place. That fact alone tells you all you need to know.

        • Lew 2.1.1.1

          RL, that assumes the purpose of CGT is to prevent speculative property bubbles. It’s not, really. Their purpose (assuming that a family home is exempt, and that rates and such are comparable to other taxes) is to even out the tax landscape so that property isn’t hugely more attractive than any other any asset class, so any property bubbles which occur are at least due to market perceptions of the value of property, not due in any part to property’s beneficial tax status.

          L

          • RedLogix 2.1.1.1.1

            Well most people who are currently calling for a CGT are doing so in the belief that it will prevent bubbles from happening. Well they don’t.

            Besides that is exactly what you appear to be arguing anyhow:

            so any property bubbles which occur are at least due to market perceptions of the value of property, not due in any part to property’s beneficial tax status.

            Besides as I said, CGT’s don’t appear to have the desired effect in any other country, so why imagine it would work here?

            In fact the overseas experience is that they can have quite perverse effects:

            1. They create a huge incentive NEVER to sell, what happens over generations is that more and more property gets concentrated into fewer and fewer hands.

            2. They also create a huge incentive to NEVER do any improvements, beyond the bare minimum to keep the place rentable, because any money invested in improving the capital value, becomes taxable on sale.

            These effects directly combine to create slum landlording on a massive scale. (Exactly what the Nats would want of course.)

            Sorry about the threadjack..

            • Lew 2.1.1.1.1.1

              RL,

              Well most people who are currently calling for a CGT are doing so in the belief that it will prevent bubbles from happening. Well they don’t.

              Quite agree.

              Besides that is exactly what you appear to be arguing anyhow

              Not at all. I’m arguing for the status quo (or something closely resembling it) to be applied to all asset classes. Bubbles still occur in properly-taxed asset classes; they will still occur in property with a CGT, at least partially because not all the reasons for choosing property over other asset classes are wholly rational. That’s ok; that’s how markets are. All I’m arguing is that there be no additional reasons to choose property than those which already exist.

              In fact the overseas experience is that they can have quite perverse effects

              These sorts of arguments against CGT I can agree with in principle, though I’d question their magnitude and whether other things could not be done to mitigate them.

              L

            • SPC 2.1.1.1.1.2

              Red Logix

              The idea that a CGT will simply result in people not selling is spread by those arguing against a CGT. Its not a difficult problem to resolve.

              Simply apply an annual land tax on rental property and have this deductible against any CGT liability when it is sold.

              As for the idea that a CGT would ruin the property business as we know it – why it would be no higher a tax than applies on other forms of income?

              All property is improved for sale to maximise value. Property is also improved to attract tenants and improve rent income in the market. If not tenants go elsewhere and pay for better accomodation, or buy up the cheap run down properties and do them up as their homes.

              The idea that people would not seek a 70% cut of a capital gain if they were not gaining 100% is nonsense – many existing operators are already run rental property businesses and pay tax on their profits buying and selling houses. It should be an even playing field in this business and all income should be taxed.

              Of course the inflation component should not be taxed and thus the annual CPI would need to be deducted from any assessment of a capital gain (a property from 300,000 to 400,000 should not be taxed on the $100,000 value increase but this amount less the CPI factor over the years the property was held).

            • Quoth the Raven 2.1.1.1.1.3

              How about simply apply a land tax full stop and offset it by reductions in income tax, GST, sin taxes etc?

            • SPC 2.1.1.1.1.4

              QtR

              I don’t support a land tax falling on peoples homes only rental property.

            • RedLogix 2.1.1.1.1.5

              As for the idea that a CGT would ruin the property business as we know it

              Never said that. All that would happen is that the costs would ultimately be passed onto tenants, AND still not have the desired effect of preventing property bubbles.

          • Quoth the Raven 2.1.1.1.2

            SPC – It’s not alright for it to fall on people’s homes (technically it is not on people’s homes but their land), but it is alright for it to fall on people’s incomes?

            • SPC 2.1.1.1.2.1

              Red Logix

              You wrote (7.12) that landlords would not sell their property and they would not improve their property – so we have slum landlords like they do overseas.

              That’s not ruin the rental property business as we know it?

              I disagreed, I explained why these things would not happen.

              You now say the cost of a CGT would be passed onto tenants and thus for the sake of the “tenants” we should not do it.

              The CGT revenue would/could fund an increase in accomodation supplement. Thus a fairer tax regime for all and at no cost to tenants.

              QtR

              Land is taxed now via rates.

              A separate land tax in lieu of CGT (until it falls due) falling on the property business is additional to this and for a singular purpose.

    • SPC 2.2

      I personally have no problem with a higher GST rate – I prefer 20% and introducing it when there is no inflationary pressure (and yet external upward pressure on finance costs) is the ideal time to do so.

      Of course the only fair way to introduce it would be to cut GST on food to zero and cut income taxes equally for all tax payers – say by lowering tax rates up to the minimum wage to around 10% adjusting upward WFF and increasing tax paid benefits by an equivalent amount (at the same time deducting the CPI from interest before the income is taxed to increase after tax income from saving to distribute revenue to those with the capacity to save and not spend).

      The amount of tax revenue from GST has declined against other forms of revenue over the past decade (one reason is that so much of our spending has moved into an area outside the range of GST – on property).

      Another option to introduce GST on mortgages (which would allow a commensusrate fall in the OCR – lower business norrowing costs and a lower dollar beneficial to exporter income and tax receipts would result). This would be similar in effect to a surcharge on mortgages which Bollard proposed a few years ago after ideas proposed to Cullen many years before that.

      Increasing the incentive to save and not spend and taxing property via bringing it into GST and also some form of CGT. My preference is to regard ALL residential rental property as a business, taxed as a business. I would however annual land tax these properties in lieu of any CGT liability and they can deduct land taxes paid from any subsequent CGT liability (after all otherwise they would simply borrow against the unrealised profit and buy more rental properties with this money and then place them all into a Trust for the children A). Oh and some exemption for newly built property – say for a period of years afterward would help direct investment into this area and this is necessary to prevent housing shortages.

      • RedLogix 2.2.1

        My preference is to regard ALL residential rental property as a business, taxed as a business.

        Common misconception. In fact residential rental businesses are ALREADY taxed exactly the same as any other business.

        There are already quite strict rules about the distinction between an rental business and a developer/speculator. Furthermore IRD is poised to implement new and quite draconian ‘associated persons’ rules, that will close the loopholes on all the common dodges.

        In general it seems hugely underappreciated that anyone whom IRD deems to be in the business of developing/speculating WILL have company profit tax imposed on any net capital gain. In effect if you are running a business and you sell more than two properties inside a few years, or buy and sell a property within 10 years… you are already being taxed on capital gains.

        The people who are NOT being caught are individuals who buy and sell outside of any formal company structure, people with second homes and baches, etc.

        I agree however with the Land Tax idea. It has a credible intellectual history going back to the Georgists and earlier. It should however be applicable to ALL land, not just rental properties. I cannot see any way to justify penalising tenants, who will have the cost passed onto them, in a way that homeowners are not liable to.

        Oh and some exemption for newly built property . It’s what I do; I’ve built six units in seven years… I appreciate that someone understands the distinction.

        • SPC 2.2.1.1

          QtR

          That was the point I was trying to make some people are paying CGT while others in the same business are not.

          I favour a CGT on all rental property and this paid up front via an annual land tax until it is sold (and written off against any CGT liability at this point).

          We will disagree about land tax on homes and baches, though the idea of one applying at higher values is not without merit.

          I am on the side of those who build new homes – they grow the economy with their investment (in a risky business) and meet real need for new housing: unlike the real speculators who just buy up and on sell property and try and avoid CGT while doing so.

          • SPC 2.2.1.1.1

            Red Logix (unable to edit my earlier post)

            What misconception?

            That was the point I was trying to make, some people are paying CGT while others in the same business are not.

            I favour a CGT on all rental property and this paid up front via an annual land tax until it is sold (and written off against any CGT liability at this point).

            We will disagree about land tax on homes and baches, though the idea of one applying at higher values is not without merit.

            I am on the side of those who build new homes they grow the economy with their investment (in a risky business) and meet real need for new housing: unlike the real speculators who just buy up and on sell property and try and avoid CGT while doing so.

            • RedLogix 2.2.1.1.1.1

              OK. I’ve nothing especial against a CGT, but please be aware that it will likely not have the hoped for effect of preventing asset bubbles.

              Also if property prices deflate can I get a tax rebate?

              That was the point I was trying to make, some people are paying CGT while others in the same business are not.

              The problem is that the Nat govt in the 90’s deliberately directed IRD to write some very vague rules around all this. As a result billions of dollars of tax was avoided to the benefit of wealthy friends of the National Party.

              Later on as more and more people got in on the scam, Cullen had IRD tighten the rules considerably. What is not appreciated by lots of people is that capital gains are already taxable if you are deemed by IRD to be a developer/speculator.

              By contrast the majority of residential rental businesses that hold a properties long-term are not… if for no other good reason other than ultimately the costs would simply be passed onto tenants anyhow.

            • SPC 2.2.1.1.1.2

              Red Logix

              My prime hope is that because of a fairer tax system people put more of their investment money into new house building, bank deposits (reduces our foreign debt) and venture capital or new issue share capital etc.

              I have no problem with ALL landlords paying CGT (and doing so via annual land taxes deductable when they sell up). The money raised being used to increase accomodation supplements as/if their rents rise as a consequence.

              Sure there may be some periods of decline in property values and those forced to sell then (most would obviously try and avoid this) might realise losses and have them offset their other tax liabilities (just as in any business where there are lines in profit and lines making a loss).

              I am surprised that currently IRD target developers when they have the highest risk of failure and loss and do most for economic development with their investment (meet rising demand for housing). The rest of the sector should ALSO be subject to CGT and ways to favour new property found so as not to discourage housing starts which benefit the economy (perhaps exempting those landlords who buy new homes from any land tax/CGT for * number of years).

    • rave 2.3

      Its called the even playing field.
      They own the field and will even let you play after work.

  3. Ari 3

    Yeah, we’ll see. I mean, if this ends up to be painting building’s roofs white to offset climate change, that’s not exactly a great jobs program. But if there’s some really good apprenticeship stuff in there, that’d rock.

  4. Nick C 4

    “We don’t need a whole lot of low-skill, low-wage jobs that aren’t going to help grow the economy in the long-term and only serve to undermine the wages of other workers.”

    I find it absurd how you use the word ‘undermine’ here. Would you say that free trade ‘undermines’ prices of food and clothing?

    • Bill 4.1

      Putting aside speculative gambling and it’s effect.

      Depends whether the power resides more with the buyer or with the seller.

      If with the buyer, then prices fall. If with the seller, they rise.

      Food and clothing prices are skewed rather than undermined.

      There is no free trade, just layers of power differentials pushing the price of traded goods (labour and commodities) higher or lower and a whole pile of resulting knock on effects

  5. SPC 5

    It’s smart politics.

    Progressive/Labour had the idea of education or training or a job for those under 18 and then later age 20. So they cannot question this focus.

    However a number of existing programmes training young people have had cuts and one wonders whether starting new ones to be seen to be doing something is the best use of money (new programmes have start up and running costs).

    Also the full funding will only be realised if employers want to take on people and pay them the minimum wage. The subsidy for the Friday off take up rates shows there is likely to be a gap between the idea and the practical impact.

    I give some credit for them paying young people the minimum wage rate for the 30 hour programme (let’s hope there is some workskill development realised as well) – this will allow them some self respect (which was denied those on work for the dole programmes). And over the years turnover on this sort of programme will give more and more the awareness of the difference to be made working over the dole amount (it’s over $15,000 net after tax even at only 30 hours a week and well under $10,000 on the dole for those under 18) and inspire some aspiration.

    If they want some free advice – for older beneficiaries they should offer similar but more part-time work at the minimum wage. Thus these beneficiaries can top up their meagre incomes by working for extra money (this work option and an increase in the non abatement rate to $120 a week from $80 is so necessary to alleviate poverty amongst those long term on DPB, IB and SB unable to work full-time one is still staggered Labour did nothing).

  6. Mike 6

    Good plan,
    Bill needs some people to work on his house.

  7. Ed 7

    I’d be interested in a comparison between the programmes that National has cut since they were elected with these now being announced.

    My impression is that the gap between getting rid of modern apprenticeships (for example) and this announcement is so that they can claim this as new spending, and also because by delaying they are saving some costs and spreading announcements out.

    They seem to be keener on subsidising employers for unskilled jobs rather than assisting development of a skilled labour force as well – is this just encouraging cannon fodder rather than intelligent use of capital – and in the process cementing in a low wage economy?

  8. BLiP 8

    National Inc’s latest jobs plan looks like the thin end of the wedge in the privatisation of social services. Why not spend ALL the money with existing government providers? The whole thing has got corporate welfare written all over it.

    • just another student 8.1

      Business is surely going to win out of this scheme. I do wonder though, how many employers will ditch these employees as soon as they are able, in order to obtain new subsidised ones. (This was already happening for the few that were subsidised).

      I much preferred the idea of apprenticeships, allowing people to gain real training and a real marketable skill, rather than some work experience in menial tasks.

      Have got to say I find it interesting that a week ago they were saying “we are in a recession, we have to make tough decisions”, yet now they can find all this money to pay to the businesses.

  9. What? 9

    ED – Did National actually get rid of Modern Apprenticeships? I’ve seen this said before on this website but can’t see any proof it’s happened.. http://www.modern-apprenticeships.govt.nz/ the website is also live.

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