Thursday, January 22, 2009

What to do?

Danyl asks the question here. I thought I would lay out my thoughts as I placed on his blog. Unconventional I know, but these are unconventional times. My main three ideas:

1. Raise OCR to 8%+.
2. Slash corporate and personal taxes to 10%.
3. Allow 100% tax write-offs for new company investments.

Reducing taxes will offset the costs of borrowing from having a high OCR. A high OCR will flood the country with money allowing lending and investment. Let's face it, there is no money to be made in stocks, property or bonds right now so cash deposits is the only possibility. The loss to exporters from the resultant high dollar is offset by reducing taxes to 10%. The loss to mortgage holders is offset by reducing tax to 10%. The import imbalance as a result of a high dollar will be a problem to an extent but the cheap imports will encourage consumer spending saving the retailers. Petrol will be cheap enabling cost savings for businesses.

There will not be a drop in government revenue. Lower taxes and a high OCR will actually bring about an increase in revenue. At the rate we are going now, there won’t be any corporate profits to tax anyway. 10% corporate tax of some profit is a whole lot better than 30% of nothing (that is not even taking into account the increase in personal income tax receipts from all the new jobs that companies will create). In the long run, profitable and growing companies will produce a lot more total revenue to the government than today’s 30% corporate tax rate.

Taxes can be increased when the economy turns around - in about 7-10 years.

With the jobs created by this, including government infrastructure spending, there will be a reduction in the welfare bill.

Japan had interest rates at zero for 12 years + and it didn’t work to revive its economy. It won’t work to revive ours as long as there is no confidence.



Well said Gooner.
In Britain I see the high bailout spending and low interest rate policy not working.
More than three thousand jobs are being lost everyday which is what new Zealand has lost since the election, says Granny Herald.
The latest bailouts are apparantly 'needed' because the banks are not lending.
Is this because they see the risks of lending greater than the 2% or so interest rate they will be charging.
So why lend?
Obvioously in Britain, interest rates need to rise not fall.
It is also most unfair that blameless savers are being punished by the low interest rates, and the irresponsible spoenders who got into too much debt are being rewarded for their failures.
My only concern about an OCR of 8% would be what would happen to the $NZ. I could imagine it going sky high which while good for inflation would damage the competitiveness of NZ industry.
There again, lower taxes would copmpensate.
Interesting analysis there Gooner, well worth a wider airing and debate.

Danyl said...

Lower taxes and a high OCR will actually bring about an increase in revenue

Will it also get me 72 virgins or do I have that confused with another religious cult?

Anonymous said...

Well if you think a low OCR and high taxes will work Danyl just go look at Japan.

There is a saying in multisport training that if you keep doing the same thing you'll get the same result. You have to do something different to achieve different and better results.


Anonymous said...

The real reason why we need to put the OCR up to realistic levels is to encourage rapid de-leveraging - not more borrowing.

As Bill English said: NZ's total indebtedness is at third-world levels thanks to Labour. High OCR - and a low exchange rate - will both encourage that change.