Economic Week - March 8


by Nick Clark


Environmental taxes threat
With most of the fall-out from last month’s Tax Working Group report on its proposed capital gains tax, there has been much less attention on environmental taxation.  Yet for farming the ideas in the report on environmental taxes could be at least as profound as a capital gains tax.  As one farmer rather bluntly told me “a capital gains tax will affect me once in my life – probably just before it’s about to end – but environmental taxes will kick my arse each and every year”.

Examples of potential environmental taxes include:
Changes to the Emissions Trading Scheme to include agricultural biological emissions;
Possible new taxes to address water pollution and water abstraction or using input-based tax instruments (including on fertiliser); 
Reviewing existing tax concessions available to farming with a view to scrapping those that might have negative impacts on the environment (although it also suggested keeping existing concessions or putting in place new concessions that would have positive impacts).  

The Working Group also recommended increases in the scope and rate of the existing Waste Disposal Levy, which is a charge on waste sent to landfills, and the use of congestion charging for high volumes roads.

The Working Group didn’t provide detail on what new environmental taxes might cost but an analysis by the National Party using data from DairyNZ and Beef+Lamb NZ’s highly reputable economic services, suggested the following potential costs per year after 10 years.

Potential new taxes for farmers

Average dairy

Irrigated Dairy

Average sheep & beef farm

Hectares

150

222

640

Stock / stock units

430 cows

737 cows

4,000 stock units

Emissions tax

$14,800

$29,800

$6,400

Water tax

$200

$22,900

Farm dependent

Fertiliser tax OR

$9,900

$36,600

$4,800

Nitrogen tax

$10,500

$16,000

$14,100

              

These are averages and the impacts will vary for individual farms.  The list doesn’t include the costs to farmers from losing existing tax concessions or increases in the Waste Disposal Levy, let alone other more amorphous long-term ideas floated in the report like an ‘environmental footprint tax’ and a ‘natural capital tax’. 

As well as the amounts of these taxes, there are also potential problems like: 
What to do with the revenue raised and, if it is to be used to fund environmental improvements, how to allocate it; 
Unintended consequences like behavioural changes inconsistent with the intended policy, potential for unfair advantage to some businesses over others;
Farmers having less money to spend on investments and practices that would actually improve environmental performance; and 
The likely heavy costs of administration and compliance.

Imposing new environmental taxes is not the best way to address environmental problems.  Education and information, industry-led initiatives, funding of more research into problems and solutions, and the use of sensible, practical and affordable regulation have and will in future address environmental issues.  

Finding a way forward requires a whole of government approach and a genuine willingness to work with the agricultural sector and with individual farmers and groups of farmers.  Without that approach any environmental taxes will be an even mangier dog than the capital gains tax.

February lift for commodities 
Commodity prices posted a healthy gain in February, with ANZ’s Commodity Price Index up 2.8% for the month.

Dairy was the main upward driver, with its prices lifting 6.6%.  Meat and fibre prices were also up, albeit a more modest 0.7%.  Lamb prices softened a little but this was more than offset by higher beef prices.

A stronger NZ Dollar in February dampened some of the rise in world prices but the NZ Dollar Index was still up 1.8% for the month.

February’s increase followed another in January, which had arrested a run of losses from mid-2018.  Compared to the same time last year the World Price Index was down 2.2% but the NZ Dollar Index was up 3.2%.

GDT up
The Global Dairy Trade increased again at this week’s auction, the seventh successive increase since the start of December.

Overall, the GDT Price Index was up 3.3%, with increases for six of the eight commodities on offer.  Whole milk powder, by far the biggest commodity by volume, was up 6.0% and while the next biggest, skim milk powder, was down 4.3%, the others were mostly up in price.

The average selling price was $US3,309 and 23,930 tonnes were sold.

After a long run of falls from May to November last year, the recent run of rises means the GDT Price Index is back to virtually the same level as this time last year.

Terms of trade fall
New Zealand’s terms of trade for goods fell 3.0% in the December 2018 quarter, according to Statistics NZ’s Overseas Trade Indexes .  This was the biggest fall since the September 2015 quarter and reflected lower export prices and higher import prices.

Export prices for goods fell 1.7% and import prices rose 1.4%.  Dairy was the main downward influence on export prices, falling 5.7%, while meat prices slipped 0.3%.  Dairy and meat export volumes were both also down (1.3% and 3.8% respectively).

Petroleum was the main upward influence on import prices, up 7.5%, although its import volumes were down 15%.

Although the goods terms of trade weakened the services terms of trade rose 4.1% with services export prices up 2.3 percent, while import prices fell 1.7%.

Actual export prices lag indicators like the GDT and ANZ’s Commodity Price Index.  Last year’s falls in commodity prices will likely linger into export prices for a few months to come.  

Building consents strong
33,576 new homes were consented for the year ended January 2019, up 7.4% on the year ended January 2018, according to Statistics NZ’s monthly Building Consents Issued Statistics .  This was the highest number of new homes consented in a year since early 1975.

Meanwhile, the value of non-residential building consents was $7.1 billion for the year ended January 2019, up 7.0% on the year ended January 2018.  Of that, farm buildings consented were worth $359 million, up 20.1% for the year.  

For the month of January 2019 the value of farm buildings consented was $21 million, less than half that of January 2018’s $44 million, but still more than January 2017’s $18 million.

NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 7 March) show very dry conditions over much of the country.  Most of the North Island is significantly dryer than normal as are the Nelson-Buller and Southland areas of the South Island.  This time last year most of the country was relatively wet.


Exchange Rates

Overall, the NZ Dollar was down slightly for the week against the Trade Weighted Index.  Individually it was down 0.6 cents against the US Dollar but up a similar amount against the Australian Dollar.

 

NZ Dollar versus

This Week

(7/3/19)

Last Week (28/2/19)

Last Month (7/2/19)

Last Year (7/3/18)

US Dollar

0.6779

0.6838

0.6769

0.7286

Australian Dollar

0.9638

0.9577

0.9530

0.9358

Euro

0.5993

0.6011

0.5956

0.5867

UK Pound

0.5143

0.5136

0.5234

0.5243

Japanese Yen

75.67

75.80

74.38

76.98

Chinese Renminbi

4.5491

4.5702

4.5596

4.6197

Trade Weighted Index

73.81

73.96

73.50

74.98

Source: Reserve Bank of NZ

 

Wholesale Interest Rates

Over the week, the 90 Day Bank Bill was fairly stable, while the 10 Year Government Bond rate was again down slightly – 5 basis points following a 6 basis point drop last week.  The OCR has been unchanged on 1.75% since November 2016 and seems likely to be unchanged for another year or two.

 

 

This Week

(7/3/19)

Last Week (28/2/19)

Last Month (7/2/19)

Last Year (7/3/18)

OCRn

1.75%

1.75%

1.75%

1.75%

90 Day Bank Bill

1.90%

1.89%

1.92%

1.90%

10 Year Government Bond

2.12%

2.17%

2.15%

3.06%

Source: Reserve Bank of NZ