A medium-term tax issue and a three-way coalition

Currency and bond traders are short-termers. Three weeks is medium-term. The Key government is the short-term government.

Policy wonks are medium-to-long-termers. Three to four years is medium-term. The English government is the medium-term government.

For project managers the job is the term. They push through, shove aside or shout down those in the way. The Joyce government is the project government.

This three-way coalition government is bidding for a third term on September 20.

John Key is the nice chap, relentlessly optimistic, nerve-endings attuned to the latest poll twitch as once they were of a basis-point shift in an interest or exchange rate. For Key, 2020s health and pension funding challenges are over the horizon.

Steven Joyce is the GDP guy, painting Labour and the Greens as destroyers of jobs: witness his treatment of Grant Robertson on TV3 on Saturday on China buying farmland. Chris Finlayson made the same anti-jobs attack on Labour’s idea last week that film workers might organise to pursue wage negotiations.

Bill English can scoff with the best of them — last Thursday in Parliament, for example, on Labour’s leader problem. But his usual focus is on medium-term matters, substantial but below the media, poll and public radars.

Through him have come a tax restructure (though without a land tax and capital gains tax, which will likely come sometime), a shift in public service management to focus on government-wide issues, actions and “results”, now beginning to be followed by setting them in a four-year strategic context, a world-first government asset management system, an actuarial/investment approach to elements of welfare reform and the beginnings of an attempt to assess laws against what they are supposed to achieve.

It is English who rescued the freshwater policy from Amy Adams whose crash-through technique crashed into iwi . It is English who expanded housing (non)policy from market-led ideology and got someone to do some innovative thinking.

As an aside, noting Jamie Whyte’s line on “race-based” law last week, it was English who recognised back in the 1990s that National would be less often in office if it did not strengthen its Maori vote, which Key has done short-term by adding proxy votes through the Maori party deals.

Key, English and Finlayson also understand that for about 140 years after 1840 the laws disadvantaged Maori by devaluing the language and spiritual beliefs, allowing confiscation and other purloining of iwi assets, forcing low rentals on land that was left and letting banks and landlords discriminate freely against Maori, even those different from whites only in colour.

But English has not gainsaid (in public) Key’s Pollyanna attitude to funding retirement income from the 2020s. That issue worries the Treasury in its long-term fiscal forecasts and the intergenerational implications worry most rational people who look into it. As with climate change, the earlier the action the lower the eventual cost. Short-termers’ and project managers’ lexicons don’t stretch to the word “eventual”.

Apart from issues such as the age of eligibility and levels of public pensions, saving is a core factor in retirement income. Saving is also the foundation of investment, which is the source of jobs, productivity improvements and real income rises, which all parties say they want. For 40 years we have topped up, at times near-drunkenly, with the savings of foreigners.

English has said he wants people to save. Actually, household-by-household, they are on average dissaving, despite KiwiSaver.

One factor is how savings are taxed. The Financial Services Council and some commentators say the taxation system is stacked: income tax is levied on interest but not on capital gain (which Labour and the Greens would partially tax) and is charged on all the interest earned despite the fact that inflation eats some of it. So it makes sense to invest in property, some of the income from which (the capital gain) is not taxed, which helps push up house prices.

“No other country has our combination of comprehensive taxation of the return on debt instruments as they accrue, no superannuation tax concessions, no tax on capital gains on rental properties and the unconstrained deductibility of the nominal value of interest against other income on debt used to purchase rental property,” the FSC said last week.

The FSC reckoned the “effective” tax rate on interest is higher than the marginal tax rate — by up to nearly 50 per cent. It said on today’s figures the average-wage, balanced-fund KiwiSaver investor would lose $110,000 over 40 years. Its solution: tax only the above-inflation bit of KiwiSaver and interest income.

No party is going there, so English has political company. But the issues raised by the FSC suggest serious rethinking on saving, including the influence of tax, is due from October.

Meantime, we are in an election campaign, a time for short-termers and project managers.