Economic Week – Tax Working Group announced

By Nick Clark, 24 November 2017

This week the Government announced that Sir Michael Cullen will chair the Tax Working Group and released its terms of reference.   With it being eight years since the last major review of the tax system it is timely to have another look at it.

We agree with the starting premise that New Zealand’s tax system is simple and efficient.  These qualities, including GST’s broad base with very few exemptions, should be maintained and not eroded.  Although the Government wants to make the tax system ‘more progressive’, it is reassuring that it has ruled out increasing any income tax rate, the rate of GST, or introducing inheritance taxes.

It is also reassuring that the Working Group will look at the tax system in context of it being able to fund Government’s operating expenditure around its historical level of 30% of GDP – not to grow that share.

The Working Group will look at how the tax system can contribute to positive environmental outcomes.  This shouldn’t just be about using tax as a ‘stick’.  ‘Carrot’ approaches to help farmers with investment in environmental mitigation should also be considered.

On the table is capital gains tax and possibly also a land tax.  Federated Farmers has long opposed these taxes.  Because of exemptions, most notably on the family home, a CGT won’t do anything to add to the efficiency or effectiveness of the tax system or result in more affordable housing. As well as imposing a significant cost on farmers when they sell their properties, a CGT will likely have a negative impact on farm values generally and we would be very concerned if this put undue pressure on indebted farmers who might find their equity eroded.  Land taxes would hit farming particularly hard, especially if land under the family home is excluded.  Rates are enough of a burden for farmers.

Given the likely work on environmental taxation, capital gains tax and land tax, Federated Farmers believes it important for the Working Group to include a person with knowledge and experience in the agricultural sector and its tax issues.

Dairy Auction

 

Dairy prices fell again in this week’s Global Dairy Trade auction.  Overall, the GDT Price Index was down 3.4%.  Whole milk powder was down 2.7%, skim milk powder down 6.5% and butter down 5.9%.  The average winning price was $US2,970 and 35,042 tonnes were sold.

This weeks’ auction was the fourth consecutive fall and the GDT Price Index is back where it was in March and is 7.4% lower than the same time last year.  As a result of these falls, Fonterra’s 2017/18 milk price forecast of $6.75 per kg MS is looking at risk of downgrade.

Food prices fell 1.1% in October 2017, according to Statistics NZ’s Food Price Index.  The decline was driven by a seasonally driven fall for fruit and vegetables, which fell 6.8%.  Meat, poultry and fish prices rose 0.8 percent (with beef & veal up and mutton, lamb & hogget down) while grocery food prices fell 0.8% (with bread & cereals and milk, cheese & eggs both down)

On annual basis, food prices were up 2.7%.  Fruit and vegetable prices were up 4.4%, meat poultry and fish prices were up 1.4% (with beef & veal up 3.7% and mutton, lamb & hogget up 5.7%), and grocery food prices were up 2.8% (with bread & cereals down 0.7% and milk, cheese & eggs up 5.9%).

Much media attention was on the price of butter, up 62% for the year.  With international butter prices having fallen recently, this should flow on to retail butter prices here.

Farm sales have responded slowly to spring according to the Real Estate Institute’s monthly Rural Market Statistics.

Overall there were 261 farm sales for the three months ended October 2017, down 24.4% on the same period last year.  For the full year to October 2017 there were 1,649 farm sales, down 6.3% on the year to October 2016.  There were big increases for finishing farms and dairy farms but big drops for grazing farms and arable farms.

The median price per hectare for the three months ended October 2017 was $24,982, down 3.8% on the same period last year.  However, the REINZ All Farms Price Index was up 7.3% on October 2016.  The index adjusts for differences in farm size, location and farming type, so is a more accurate indicator of movements in sales prices.

REINZ believes the slow rural market reflected the legacy of very wet weather, but October was also a month for political uncertainty and reductions in dairy commodity prices.

Producer Prices

 

Statistics NZ’s quarterly Business Price Indexes have shown a healthy improvement in farmers’ margins and especially for dairy farmers.

The Producer Prices Outputs Index, which measures prices received by businesses, increased by 1.0% in the September quarter and by 5.3% for the year.  For dairy cattle farming output prices were up 6.1% quarter-on-quarter and up a hefty 27.1% year-on-year.  For sheep, beef cattle and grains farmers output prices were up 5.8% quarter-on-quarter and 13.5% year on-year, still pretty healthy.

The Producer Prices Inputs Index, which measures prices paid by businesses, also increased by 1.0% in the September quarter and by a slightly lower 4.3% for the year.  For dairy cattle farming input prices were down 0.2% quarter-on-quarter and up 0.5% year-on-year, while for sheep, beef cattle and grains farmers input prices were up 0.5% quarter-on-quarter and up 3.4% year-on-year.

Also released with the Business Price Indexes was the Farm Expenses Price Index.  The FEPI for all farms was up 0.4% in the September quarter.  The main downward influences were fertiliser (down 3.2%) and fuel (down 2.0%) but they were offset by increases for most other inputs, especially electricity (up 4.4%).

For the year ended September 2017, the FEPI for all farms was up 1.6%.  Fuel (up 8.2%), livestock purchases (up 5.9%), local and central government rates and fees (up 4.4%), and electricity (up 4.2%) posted the biggest increases, but there were declines for fertiliser (down 2.7%), lime (down 1.3%), interest rates (down 1.1%), and weed and pest control (down 0.7%).

Inflation for dairy cattle farmers was lower (0.4% year-on-year) than that for sheep, beef cattle and grains farmers (2.9% year-on-year).  This reflects different price pressures and different weightings of spending, which can result in similar price changes (for example interest) having a bigger impact or smaller impacts on overall prices.

Net migration continued to be strong but is easing back off its peak, according to Statistics NZ’s monthly International Travel and Migration Statistics.  For the year to October there were 131,600 arrivals and 61,000 departures resulting in a net migration gain of 70,700.  This is down slightly from the July 2017 peak of 72,400.  Annual net migration with Australia turned slightly negative after a couple of years of positive net migration, but other migration flows remain strongly positive.

 

 

Exchange Rates

NZ Dollar versus

This Week (23/11/17)

Last Week (16/11/17)

Last Month (24/10/17)

Last Year (23/11/16)

US Dollar

0.6871

0.6860

0.6984

0.7062

Australian Dollar

0.9023

0.9032

0.8936

0.9541

Euro

0.5815

0.5823

0.5938

0.6648

UK Pound

0.5158

0.5208

0.5288

0.5690

Japanese Yen

76.35

77.49

79.13

78.50

Chinese Renmimbi

4.5458

4.5483

4.6366

4.8643

Trade Weighted Index

72.66

72.90

73.90

77.80

Source: Reserve Bank of NZ

 

Wholesale Interest Rates

 

This Week (23/11/17)

Last Week (16/11/17)

Last Month (24/10/17)

Last Year (23/11/16)

OCR

1.75%

1.75%

1.75%

1.75%

90 Day Bank Bill

1.91%

1.92%

1.94%

2.03%

10 Year Government Bond

2,76%

2.84%

2.98%

3.08%

Source: Reserve Bank of NZ