Against a backdrop of global volatility and geopolitical uncertainty, New Zealand’s capital markets face two significant issues with potential impacts that need real focus.
First, there are the discussions underway on the proposals from Sir Michael Cullen’s Tax Working Group. Second, there are the changes proposed by Reserve Bank governor Adrian Orr. Both have potential to impact the New Zealand markets in the short and long term.
These are structural issues that change capital formation — not just cyclical ones that impact short-term profits.
Both proposals have their origins in an economy where the housing market was going up and up. But given that house prices are cyclical — and the latest rising cycle appears to have faded — these proposals need to be carefully reconsidered.
Likewise, the timing of implementing not just one, but two such significant proposals — in an economic environment very different from when they were initially considered — should be enough to give pause.
Does the inherent problem we were originally trying to fix still remain once these two proposals take effect? What are their anticipated or unanticipated structural consequences, particularly in terms of capital formation?
We think each proposal may lead to a fundamental change in capital formation, structurally changing the cost of debt and equity.
Capital formation is the way an economy uses equity and debt in conjunction with ideas and people to grow. In turn, this determines tax revenue, the availability of new jobs, funding of new ideas and replacement of our infrastructure.
