Tax on interest rate unorthodox

Friday, February 9th, 2007

Tax on interest rate unorthodox; better options available

Any tax or levy on interest rates to check house price inflation would be highly unorthodox and likely to distort investment in business, says Alasdair Thompson, chief executive of the Employers & Manufacturers Association (Northern).

"We understand why people float ideas like this because the high interest rate policy of the Reserve Bank is plainly not working," Mr Thompson said.

"Kiwis love being able to borrow and spend and higher interest rates have proved a very slow deterrent to our behaviour.

"Reserve Bank figures show the money supply, including credit to households, has been growing at over 15 per cent year on year thereby helping fund the inflation rate which has lately between three and four per cent.

"But placing a tax on mortgage borrowings is no more likely to work than raising interest rates.

"Two other routes should be explored in advance of further taxes: curtailing government spending, and adjusting the ratios that govern money supply.

"Government spending on administration rocketed by 18.3 per cent in the first five months of the financial year to reach $936 million.

"Overall the government spent $569 million more in the first five months of the year than it budgeted for.

"Employment by the government has been growing nearly twice as fast as in the private sector.

"These excesses are harming the economy's ability to boost productivity and the wealth of ordinary New Zealanders.

"The other way to control the inflation generated by excessive borrowing on home mortgages could be to adjust the ratio of capital to loans required of our banks. Banks overall lend over 12 times their capital but lend even more than this for housing because of its perceived low risk.

"At present it is far easier and much more profitable for banks to lend on housing than for business investment.

"Brian Gaynor writing in the Herald (3/2/2007) noted that 'residential property security requirements are a major deterrent to the development of small companies in New Zealand.' We agree.

"The last thing our exporters need on March 8th this Export Year is another rise in the official cash rate as that will further underpin the rise of the NZ dollar.

"But such an increase appears increasingly likely unless the government gets serious about its own spending, and serious about the real, not punitive, alternatives open to it."

ENDS

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