NZ: we’ve been living beyond our means for too long.

Bernard Hickey (of interest.co.nz) wrote a column on the NZ Herald website concerning New Zealand borrowing its way into poverty. Already the government is borrowing $300 million per week and accumulating significant debt. He has come up with 5 steps to help the NZ economy out of its current state:

1. Cut the middle-class welfare
Dropping Working for Families, interest-free student loans and “free” early childcare would be the fastest way to reduce the budget deficit. It would also reverse one of the great deceptions of the 2000s: we convinced ourselves we could afford these improvements to our standard of living, but we hadn’t earned it. As a nation we borrowed to consume – it is not sustainable.

2. Introduce land and capital gains taxes
The International Monetary Fund and the Tax Working Group have told the Government that these taxes are needed to quickly and fairly bring the budget deficit under control. They would take back some the windfall gains from the property boom and some of the air out of New Zealand’s property bubble.

3. Bring the NZ dollar down

Everyone, including the IMF, argues that New Zealand’s currency is about 15-20 per cent overvalued. The Reserve Bank should take on the speculators and drag the currency down. It has done it before. It can do it again.

4. Restrict bank funding and lending, and companies borrowing offshore

The Reserve Bank is already looking at various macro-prudential options to restrict our banks from borrowing hot money offshore and pumping it into our housing market. The Government could also impose a tax on New Zealand corporates borrowing overseas, as the Brazilians have done. Many New Zealand companies have leaped offshore in the past six months to borrow cheaply from markets where official rates are near zero. Those companies include Transpower and Kiwibank.

5. Invest heavily in infrastructure
The Government and businesses should invest in the physical and intellectual infrastructure needed to improve our productivity. That means better broadband networks, roads, rail, power, education, more staff training and a more aggressive approach to lifting output per hour worked.

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