Peter Dunne The Leader's Letter 20 June 2007

Kneejerk reactions seem to be the flavour of the month these days.

The Reserve Bank Governor seems to be the latest to be afflicted by this condition, with his call for the introduction of a capital gains tax on rental property transactions. He is in danger of falling into the same trap as the MP who recently abruptly left his party because, while opposed to Labour's view that conscience votes should mean everyone in the Caucus thinks alike, he was annoyed his own party did not do the same.

Kneejerk reactions, whatever the rationale behind them, seldom look considered and credible.

The Governor's problem is a complex one.

The combination of a growing New Zealand economy, and a weak US dollar, is boosting our exchange rate, thus affecting our export sector directly, and leading to inflationary pressures at home. A strong property market is a symptom of economic growth. But to control inflation, the governor increases interest rates, which makes our dollar a more attractive investment for offshore investors, who pump more money into our economy, thus stimulating growth and inflationary pressures, and setting off the whole vicious cycle once again.

Exporters are struggling, and home affordability is getting out of the reach of many Kiwi families.

So, the Governor says "Let's put in place a capital gains tax on rental properties, to cool the market and make property investment less attractive."

But here is where the facts get in the way. Property investment is not a tax-favoured form of investment in New Zealand. Moreover, capital gains taxes are not noted for their efficiency or fairness, nor is there a great deal of evidence that they actually work.

In any case, under our existing tax rules, IRD already spends about a quarter of its audit time looking at property June 20, 2007 No. 9 transactions, and last year alone that found a discrepancy of $113 million in tax revenue. That is why in this year's Budget a further $14.6 million was allocated to IRD to enable it to boost its property audit capacity.

Of course, enforcing the existing law is not nearly as exciting as the kneejerk option of a capital gains tax, or similar measures, but it is likely to be far more effective.

It is worth remembering that the Governor's primary role is the control and operation of monetary policy. His major, but not sole, weapon is the interest rate mechanism. Other options include direct intervention in the currency market which has been tried to limited effect, and increasing the level of funds banks have to hold back from the market.

The current situation raises questions about the way in which monetary policy is being operated, and whether more balance is required.

That is where the debate should be focusing, not the whimsical fantasy of a capital gains tax that is never going to happen. No homeowner or prospective homeowner has gained from the promotion of this side issue. Many exporters, especially small to medium sized businesses already coming to grips with the challenges of the global economy, are continuing to suffer as the dollar's relentless rise continues.

These are the issues the Reserve Bank needs to be focusing on, not getting bogged down promoting solutions that are never going to see the light of day.

Kneejerk reactions are no more than quick fix ways of avoiding harsh realities. Those who promote them invariably lose. Right now, the Families Commission is calling for research proposals ( http://www.familiescommission.govt.nz/ research/research-fund-call.php ).

This must be for work that is relevant to NZ families and be aimed at making a difference in NZ families (the exact criteria are listed on the website above.)

So if you are a researcher, belong to an NGO or community group why not have a think about applying?

This got me thinking about what kind of research into Kiwi families I would want to read – what are the questions I have right now about Kiwi families? They include:

1. 75% of mothers won’t consider sharing parental leave with the fathers – why? Shouldn’t fathers have bonding time & care responsibilities too? What are the effects of fathers taking parental leave to be with their child?

2. Is there a need for research to examine the impact of whether parents work or not during the first two years of a child’s life; for the child, parent and family as a whole?

What are the questions that you have? What keeps you awake at night?

Let me know ( peter.dunne@parliament.govt.nz ) and I will pass on your wish-list to the Families Commission – maybe we can find some answers! Be quick: submissions close 13 July 2007.

Earlier this week, I had the privilege of hosting His Holiness the Dalai Lama during his visit to Parliament to address the National Press Club.

During his speech he made an interesting comment about religion, an especially topical subject given the current inter-faith dialogue. He said religions the world over were essentially similar, although each sprang from a different philosophical base, because of their common commitment to justice, freedom, compassion, and tolerance.

It is a point well worth reflecting upon whenever one hears any particular faith seeking to claim exclusivity. As if to reinforce the Dalai Lama's point, while our meeting was taking place inside Parliament, a large group of young Catholics was outside on the forecourt celebrating World Youth Day.

Regards to you all.

ENDS

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