Saturday, May 30, 2009

John Armstrong Continues To See Trees

Yesterday I posted on John Armstrong's assessmentt of the budget and today he continues in similar vein - trying to see how the budget will be 'bad for National.'

Mr Armstrong is an excellent writer with an astute political mind (He would have been a bloody good cricketer.) but for some reason he seems to have made it his task to paint one of the most outstandingly successful budgets as a potential disaster for National.

John Armstrong

The first glaring but not obvious example is his continuing focus on tax cuts and Labour's futile pursuit of their deferral. Here is Mr Armstrong on Labour and tax cuts.

"Labour has also put much effort in the past couple of days into slamming National for promising tax cuts during the election and legislating them into law under parliamentary urgency before last Christmas when it already knew the cuts were unaffordable."

However, the priceless pearl of information is here.

"The Treasury estimated a downgrade would push up the cost of borrowing by 1.5 per cent."

Repeat after me:

A credit downgrade would push up the cost of borrowing by 1.5 per cent.

Got that, have you? Well get this. A credit downgrade was widely expected but we got instead, a surprise credit UP GRADE. That means a net 3.0% reduction in the cost of borrowing compared with where we would be under Labour or a 'tax cut induced' credit downgrade..

Armstrong (and National) should now be talking about mortgage interest cuts of up to three percentage points. They should be leaning hard on the banks to pass on this windfall reduction in their costs of borrowing.

(This windfall far exceeds anything related to recent RBNZ cuts in the OCR because the banks borrow most of their money overseas and the gummint's sovereign credit rating largely determines the price the banks will pay for their money.)

This budget's surprise credit upgrade will put more cash money in the pockets of middle income voters than the tax cuts they were not really expecting anyway. The budget is a bonanza for salary and wage earners - all those middle class people who live in My Albert electorate. The message needs to be hammered home before voting day. Melissa Lee's party just gave you the mother of all tax cuts. She not only saved you from a $170 per week hike in your interest bill, she reduced it by a further $170 per week. That's cash back in your hand. Far more than you were going to get from some lousy tax cut the country can't really afford, thanks to Labour.

Three points off the interest bill for Adolf's $80k salary Mt Albert voter with an LAQC investment property and a $600k loan (There will be thousands of them because that's where BlueChip went prospecting for sales) means this guy gets an immediate benefit of $346 per week! Yes I had to double check - it's not $34.60 per week. It's a whopping eighteen grand per year.

The second glaring example is this already worn out furphy

"...........the big clanger in the Budget - the suspension of Government contributions into the Superannuation Fund for the next decade and possibly longer."

Michael Cullen himself prescribed this very measure in his introduction of the fund to the Parliament. It is Michael Cullen's woeful extravagance in government spending and parsimony over tax cuts when they WERE affordable which brings us to the point when we must implement HIS remedy which is to suspend contributions.

Get over it please, Mr Armstrong. Get over it Labour.

The as yet unrecognised political genius of this budget, Mr Armstrong, is that it is designed to win the seat of Mt Albert.


mawm said...

A credit downgrade would push up the cost of borrowing by 1.5 per cent...and put the brakes on any growth of new businesses and put many existing ones into receivership with the concommitant loss of jobs.

"...........the big clanger in the Budget - the suspension of Government contributions into the Superannuation Fund for the next decade and possibly longer."Too many commentators are are being dishonest in heaping blame on National for the potential destruction of our super when the reality is that super is becoming unaffordable, as we know it, in most countries because of the projected longevity of the healthy baby-boomers.

Farmer Baby Boomer said...

Yes mawm I understand from relations who are health professionals and administrators that we who are boomers are healthier on average than the following generation.That could mean both generations competing for the super and healthcare dollars. A bit a worry any who cannot afford their own.


As I have said over at my blog, Bill English is to be commended for the credit upgrade.
Where we have to agree to disagree is over the taxcut.
I would have preferred Bill English to have found the $900 million from somewhere, say a spending cut, so on the same deficit projections we would get taxcut AND the credit upgrade.
Now, there are other factors at play, such as the USA under Obama needing so much money to fund its exploding deficit that long term interest rates are rising globally, which led some of our banks to raise some of their fixed rate mortgages this week.
We can applaud Bill English for not adding to the crisis Obama is causing and instead Bill is helping with our interest rate situation.
I hope National really does give the budget the really hard sell to win over those like me who had a grumble over the abandonment of National's central election policy.
Certainly, business and homeowners will benefit immensely and this is a message we need to hear more of.
The question still remains however, what would Goff and Cunliffe have done?
Would they have implemented the same budget they now condemn or would they have gone for bigger deficits which would have cost us the credit upgrade and more likely maybe even made matters worse?

Sally said...

Sorry Adolf, This is one of the worst budgets and National does not deserve to regain the treasury benches in 2012. Bill and John totally wimped out on this one.

What was required was a bold, innovative, budget that allowed Kiwis to lift their game, hike their productivity and take their competitive advantages to the world.

It was blatant hypocrisy of National (and Act) who ranted about how Labour's excessive tax rates were crippling the country. We now are told that the tax-cuts are off the table.

A credit downgrade would likely have cost the government an extra $600m in interest on its borrowings was no big deal.

The ratings agencies should have been told to go and get stuffed.

Only a year ago a whole bunch of countries and companies crashed badly who had top-ratings from S&P.

A golden opportunity has been lost because of 'wimpy' John & Bill. Kiwis are in for another decade of unnecessary mediocrity.

"Socialism crushes human rights, builds the state, impinges on the liberty of conscience, and breeds social, cultural and economic degeneration." - Llewellyn H. Rockwell, Jr.

Anonymous said...

So Sally, you are voting Labour back in for 2012 sre you!
Top Tax rates up to 45% and interest rates in the 20's due to their tax and overspend.
Looking forwsrd to that.

Adolf Fiinkensein said...

Sally, every day I thank God people like you are not in power.

Anonymous said...

A credit downgrade would likely have cost the government an extra $600m in interest on its borrowings was no big deal.

The ratings agencies should have been told to go and get stuffed.
Someone other than Bill English needs to read up on how the banking system works...

Anonymous said...

The as yet unrecognised political genius of this budget, Mr Armstrong, is that it is designed to win the seat of Mt Albert.
Oh there's no fucking question that this budget is good for National. That's not the point. The last 9 budgets were good for Labour; Labour started capping government spending in the 2008 budget and about the only thing English did that Cullen wouldn't have done was not cap insulation rebate at family income of 100K
That's your only different? Dickhead.

The problem with this budget is not that it is not good for National - the problem is that is is extremely bad for the country!
Frankly, Goff and Roger are both right - No vision; no hope; just borrow and hope like hell Europe and the US somehow turn their economies around.

Roger has the only credible plans for NZ - cut all taxes to 30% immediately; and start on the vitally urgent work of taxing a chainsaw to the "welfare state' - or as hellen put it: light the bonfire!!
So Sally, you are voting Labour back in for 2012 sre you!
Oh that's just crap: labour were never going to wack the rate up to 45% (they get their via bracket creep, same as the tories). Fact is: this budget is basically just what Cullen would have done.

Which is the real problem

Adolf Fiinkensein said...

Anonymous, the flaw in your already skeletal argument is that if Cullen had delivered the very same budget (And Labour never would have done so) we would have been given a credit downgrade just because the prick who fucked it all up was still there.

Anonymous said...

Looks like Sally does her homework.

Adolf Fiinkensein said...

Sally, it's not the extra cost on Government borrowing that is so important. It's the extra costs imposed on all private borrowing, personal and corporate. That's what puts people out of work and sends businesses broke, while those that are not broke defer all productive investment because the cost is too high.

Sally said...

very good article by John Roughan. Gives an excellent snapshot of the National Party

Anonymous said...

Hey--what about the exporters in all this?

By exports we live.With socialism some survive.

Google " Hard times come again no more" sung by Nanci Griffith and others which may well be our next National Anthem.

Lucia Maria said...

I'm just wondering how someone on 80K could afford a 600K loan. Surely there would be hardly anyone in that demographic?

Adolf Fiinkensein said...

Lucyna, it's covered by the rental income from an 'loss making' investment property and allows him to write off the tax on his salary.

Investment properties are tax dodges for salary earners. That's what the racket was all about. That's why house prices went through the roof.

ZenTiger said...

What are the numbers Adolf on 600K, with an 80K salary? All a LAQC allows a person to do is, at best, pay no income tax on 80K. They can offset losses.

The thing about losses is that when a 600K mortgage is involved, then your monthly interest payment is not an item to move about on a bit of paper, it's a required monthly amount of money to find.

Have a rental property empty for 3 months, and some-one on 80K with a huge mortgage will probably be stuffed.

I'd be interested in seeing the sample figures that makes such a scheme a "great idea".

Seems to me the middle class tax payers end up funding both sides of the income bands so that a proportion of the population don't need to work whilst another proportion doesn't pay taxes so they can play at investing.

ZenTiger said...

FFM - I agree. If National need to save a billion to match a billion in tax cuts, they could do it in other ways. That they are not inclined to try shows that we have a centre-left party that thinks pragmatism is waiting the recession out.

Not to take anything away from the points of Adolf's post - I just don't see them as mutually exclusive.

As for Labour - their criticism should be roundly castigated by all and sundry. Cullen would have delivered us a recession we never had to have, earlier, harder and longer. They need to be in court explaining why their PREFU figures had all kinds of omissions prior to the election - ACC blowout for example.

Adolf Fiinkensein said...

Zen, that's why they had all those bullshit 'guaranteed rental' clauses in their sale and purchase agreements.

If you are on a salary of $80k and you own a $700k house with a mortgage of $200k and you buy a rental for $400k with annual net rental income of $20k and your loan interest rate is 8% then you annual interest bill is $48k. You fund the interest from $20k rental and $28k salary which is effectively that part of your salary which would have been paid over in tax.

If as a result of the credit upgrade, your interest bill reduces by $18k, you are doing quite well. That is, until there is an exodus of tenants and your property goes vacant for six months.

Whamo, mortgagee sale and goodbye tax free capital gain.

Ed Snack said...

Uh, Adolf, I think you need to work on your arithmetic a bit. 8% on $400K is not $48K pa. And, your deductions against income come from the loss the LAQC runs plus depreciation if you claim it. But, remember this, you pay cold, hard, cash upfront every month, and you probably don't get enough back to compensate the cash cost.

Quick sum, Interest $32K, rent $20K, depreciation, say $9K (if you properly separate fittings you can get a bit more), allow, say $4K for R&M, rates, insurance, and you run a cash loss of $16K, gross loss of $25K, tax refund at 0.39 of around $10K. So you spend $16K in cash, and get back $10K, and you repay the depreciation when you sell out of any capital gain.

Now, before the credit upgrade, you could get 2 years at 5.7% or so, saving around $10K, it ain't going to drop much more, maybe to 5.5, I doubt it will go much lower. At this rate you more or less break even on cash over a year, but lose a bit because you get a refund at the end.

So I don't think your numbers make a lot of sense. Now Blue Chip investors, different story, sheer greed and poor advice in most cases. The deals were never going to work out without unrealistic capital gains, which the poor sods could well have been taxed upon anyway as they were quite probably going to be classed as not investing for the long term.

heisenbug said...

The issue here is bigger than the tax cuts - in the face of the knowledge that an election promise had to be broken, the cowards broke the wrong one. Instead of ditching tax cuts, they should have made clear that welfare benefits are not "entitlements" by scrapping WFF and instituting sweeping reforms of other benefits along with scrapping a whole screed of other useless Government spending. With the right measures the tax cuts would have been trivially affordable - they weren't even that large, FFS. Welcome to pinko-land. Just like the fools who voted for Obama, the fools who voted for change here just got reamed again.


Adolf Fiinkensein said...

Ed, you idiot, the loan is $600k not $400k.

Heine said...

Labours criticism of the budget is a joke, they helped put us in this situation. However, Labour are also the reason why National has strayed so far off their normal thinking - no National Govt I remember (apart from Muldoon) would keep WFF AND a top tax rate of 38%.

National has the opportunity to do what Labour did and change the political landscape and set the agenda. If at the next election, National has to count on anybody else other than ACT - then I bet the momentum will be lost. This could be their only chance to get it right.

No pressure eh?