Norman Russel William: Crown Retail Deposit Guarantee Scheme Bill — In Committee Third Reading 
Norman Russel William: Crown Retail Deposit Guarantee Scheme Bill — In Committee Third Reading 
[Volume:657;Page:6120] 
Dr RUSSEL NORMAN (Co-Leader—Green) 
: 
 I stand to speak on the Crown Retail Deposit Guarantee Scheme Bill. The Green Party will be supporting this bill. We think that it is essential to maintain long-term stability in the financial sector. 
The only reason we are here today is because of the global financial crisis. The only reason we have to deal with this bill is because the “masters of the universe” as they like to call themselves just collapsed the global economy. The reason taxpayers have to underwrite the banking sector both in wholesale and retail and the reason taxpayers have to underwrite the global financial system is that the people who were running it collapsed it through mismanagement poor management and genuine greed. They collapsed the global financial system and hence collapsed the global economy. 
In New Zealand we have a particular problem. Our problem is not the same as the problems that are found elsewhere in the world. Fundamentally our problems revolve around the distortions that are present in the tax system and in the economic system that encourage investment in property rather than in the productive sector. That is the fundamental problem we have; it is quite different to some of the problems elsewhere in the world. New Zealand has a very specific problem. 
Some of the evidence we received during the bank inquiry underlined that problem. I want to point to a few statistics around it. Over the last 9 months—during 2009—the banks have loaned another $3 billion into the housing market which takes it up to around $165 billion. At the same time lending by banks to businesses slumped by about $3 billion. Over the last 9 months of this year lending into the housing market increased by $3 billion while lending to businesses decreased by $3 billion. To me this epitomises the problem that we have. We have a banking system that is accustomed to and is entirely comfortable with loaning into the housing market. It is what it does well. But we do not have a banking and financial sector that is good at supporting New Zealand businesses. It is not as easy to loan to a productive enterprise working in the tradable sector as it is to loan on housing. The banks do not do it. In fact over the course of the last 9 months of this year they have taken $3 billion out of New Zealand businesses and loaned another $3 billion into the housing sector. 
The incentives around the financial system are wrong: we are incentivising investment into the non-productive part of our economy. The cost of that is enormous. The social cost is enormous. Housing is tremendously expensive in our country and it is now very difficult for people to get into the housing market. Housing consumes a vast amount of people’s income: they have to pay their mortgages and their rent. We have set up incentives that are not good for the New Zealand tradable sector or the New Zealand productive sector and that at the same time inflate the housing market. 
If we look at what those incentives are we see that the incentives around the tax system in particular encourage investment in property. The reason is that by investing in property one can offset the losses on those investment properties against one’s taxable income. One of the most commonly used mechanisms to do that is the loss attributing qualifying company. Losses on loss attributing qualifying companies increased from $750 million in 2003 to $2.3 billion in 2008. We have set up a system that is encouraging people to invest in investment properties and use the losses on those investment properties quite lawfully to effectively offset their income tax so the taxpayer ends up picking up the tab. People are doing it and banks are loaning into the housing market. We have a tax system that encourages the banks to loan money to people so that they can buy investment properties. They can then offset the losses on those investment properties against their tax. We have established a stupid incentive scheme. It is bad for the New Zealand productive sector. It is bad for the New Zealand tradable sector. In the long run it is extremely dangerous to the New Zealand financial system to lock up billions and billions of dollars into an overinflated housing market. We have set up a bad system. 
If we want in the long run to guarantee the stability of the financial sector which this bill is ostensibly designed to do and if we are serious about doing that we need to address those underlying incentives. The Greens have been criticised because we want to change the tax incentives around housing and investment property but I ask what the alternatives are. We currently have a series of incentives that encourage speculation in housing. We should change those incentives. We know what is involved. We know that we can introduce a capital gains tax excluding the family home. We know that we can ring-fence the losses on investment properties. These policy measures are available to the Government if it has the courage to do what is in the long-term interests of New Zealand—what the Government knows is in the long-term interests of New Zealand. It is worried about short-term political risk because it has a short-term approach I guess. But one has to look at the long-term interests of the New Zealand economy. We cannot continue to throw all of our money into housing while businesses are starved of the money they need to make investments to support productive enterprise in our country. 
The tradable sector is under pressure constantly because the Reserve Bank tries to control inflation by increasing interest rates. The Reserve Bank should be cutting the official cash rate tomorrow. One of the concerns of the Reserve Bank—and why it may not cut the official cash rate—is what will happen to the housing market. If interest rates are low then the housing market will start to bubble again and it knows that is a problem for inflation. Why do we not have additional tools to target the housing market so the Reserve Bank can cut the official cash rate make capital available to businesses and at the same time target the asset bubble in housing so that more inflation does not come out of the housing market? 
We can adopt those tools; this Parliament can adopt those tools. It would be good for New Zealand businesses. It would be good for New Zealand households in the long run to have stable housing prices. We just have to have the courage to say to people that we know they have made legal investments in investment properties and we totally understand why they did it but the long-term interests of our country means we have to make the decision to ring-fence those losses and move away from that system we set up. It is in our children’s interests so that they can have affordable housing. It is in the interests of our children as well so that they do not inherit a massive overseas debt that is being used to fund speculation in the housing market. We are handing over to the next generation a net international investment position of negative 100 percent of GDP. That is what we are passing on to the next generation. We have the choice to change direction. We have dramatically increased the level of overseas debt in order to fund housing speculation. We have housing speculation because of the tax rules. We can change the tax rules. It is within the power of this Parliament to act in the long-term interests of the New Zealand economy and the New Zealand people and change the rules. 
I call particularly on Government members to embrace their responsibility. Over the course of however long their term of Government is they will never be in a more popular stronger position than they are now. We can all read the polls. The Government is in a very popular strong position. Government members should use that popularity and strength to do what they know is the right thing for the New Zealand economy. Even though they know some political risk is associated with it in the long run they know it is the right thing to do. We all know it is the right thing to do. We cannot continue to borrow to pay the interest on previous borrowings. That is the route to destitution. A country that continues to borrow to pay the interest on previous borrowings is destined to have an economic crisis. We all know that. The Minister of Finance says it every day. We have the opportunity in this House to make the changes that we all know need to be made. I call on the Government to do the responsible thing and make the changes. 
Touching very briefly on affecting reserve ratios it is true as Mr Foss says that in some ways it is an old-fashioned idea but we have a specific problem. We need to look at reserve ratios particularly loaning into the housing market. If it is a way to try to constrain the flood of foreign capital that is being channelled by the banks into the housing market I think we should consider it. We have a major problem. We should not put things off the table just because they have been done before and are associated with a former National Prime Minister. We should consider all options because we now have a major problem. In order to protect our sovereignty housing affordability for future New Zealanders and the productive sector of the New Zealand economy we need to look at all of these measures in order to control that housing asset inflation so that we can get on and assist the tradable and productive sectors. This bill is part of that and we will support it but we need to go beyond the bill.