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Grant Robertson and Jacinda Ardern (Photo: Lynn Grieveson/Newsroom/Getty Images)
Grant Robertson and Jacinda Ardern (Photo: Lynn Grieveson/Newsroom/Getty Images)

OPINIONBusinessApril 1, 2021

Bernard Hickey on Labour: Great antennae, but still no radar

Grant Robertson and Jacinda Ardern (Photo: Lynn Grieveson/Newsroom/Getty Images)
Grant Robertson and Jacinda Ardern (Photo: Lynn Grieveson/Newsroom/Getty Images)

Despite its majority and popularity, the Labour government remains in MMP-mode with finely tuned antennae for the 2023 election, but lacking a vision that voters can believe in, writes Bernard Hickey.

Labour’s high-impact interest deductibility move appeared to suggest a change of direction and a bigger appetite for political risk. But its lack of a proper housing affordability strategy or target shows how the incrementalism of MMP and fear of “the vision thing” remains embedded in its governing DNA. It is still a handicap to solving the two greatest problems of New Zealand’s political economy: unaffordable housing and unsustainable climate emissions.

Watching governments change policy over the last 20 years of MMP has been a lot like watching grass grow. The fastest moving thing was the snail of a PM with a finely tuned set of antennae measuring every risk right in front of its nose, allowing it to slide around and avoid being squashed in the next election.

The fineness of the margins of defeat or victory under MMP, along with the need for policy-moderating coalition partners, made this sort of incrementalism a feature, rather than a bug, of New Zealand’s democracy.

Until now.

Labour’s stunning 2020 win of a parliamentary majority, the first under MMP, created the perception there might be another way. It didn’t last long. Prime minister Jacinda Ardern dampened any hopes of a “we won, you lost, eat that” approach to policy reform in her election-night victory speech that promised not to betray those voters who had crossed the aisle from New Zealand First and National to Labour for the first time.

In the latest episode of my podcast When the Facts Change, brought to you by Kiwibank and The Spinoff, I look for the vision missing in the housing plan, and consider how working from home is changing the worlds of work and labour relations in a post-Covid world with Dr Paula O’Kane of Otago University.

Listen and subscribe on Apple PodcastsSpotify or your favourite podcast provider.

The government’s initial approach to the fresh worsening of the housing crisis in the second half of 2020 seemed to suggest little had changed. Ardern’s Labour won an MMP election in first-past-the-post fashion, but couldn’t bring itself to unleash its inner policy desires, even though it had a mandate to. That policy risk-aversion seemed ingrained into the political instincts of Ardern and Grant Robertson, both of whom grew up politically in the anti-nanny state backlashes of 2005-2008 when they worked in Helen Clark’s ninth floor offices.

Until now.

There were unsubstantiated rumours very early last week that Ardern and Robertson were at odds over a “bold” policy direction opposed by the status-quo protectors in Treasury and IRD. Maybe, some on Labour’s left thought, the PM and her fiscally conservative right-hand man were finally about to unleash a big and politically risky shift.

At first glance, last Tuesday’s interest deductibility policy was that hairy lump of a tax increase guaranteed to aggravate ‘mum and dad’ investors and small businesses alike. It seemed about as anti the median voter as it could possibly be without being a full capital gains tax and a ban on double cab utes to add insult to injury.

It had the potential to stop the rental property investment lark dead in its tracks, ripping away hundreds of millions of dollars worth of tax exemptions from landlords and forcing them to cut their bidding prices 10-30% overnight to make the same returns. The 10-year bright line test was a less surprising part of the package, but a just as irritating cherry on top for those in Labour who campaigned at three elections for a capital gains tax. It even seemed to outright break a promise Robertson made last year.

An indication of how hairy it initially appeared came in the reactions. BusinessNZ compared it to the oil and gas ban of 2018 as an unexpected shock-and-awe policy disrupting the virtual status quo of post-1993 policy. Landlords could barely believe the audacity of the “tax grab” presented as the closure of a loophole.

A selection of headlines on the day the rule changes were announced.

But look a little closer and both median voters and landlords have less to fear, certainly in the long run. The bark is much less than the bite, because it has failed to change expectations in any sort of credible or sustained way. It’s also not as politically damaging as those on the left or right might think. Firstly, the exemptions for new builds in the bright line test’s shift from five years to 10 years and the (albeit ill-defined) exemption to the tax deductibility rule for new builds mean investors have a clear path to helping increase housing supply. That would seem to kill two birds with one stone: reducing demand for existing homes and increasing demand and financing for new homes.

Large developers who feared a collapse in demand for off-the-plan apartments and townhouses from landlords on Tuesday morning were much more relaxed on Tuesday night once it was clear that the source of 40-50% of those pre-sales would not be affected. That’s both a policy win and a political win for Labour.

Secondly, the once-positive view of median voters in the suburbs about sharply-rising house prices has drained away in the last year as it dawned on older home owners they would spend the next decade having to help their kids and grand-kids find monstrous deposits and then service stomach-churningly large mortgages. The celebrations of 2014 and 2017 turned queasy by late 2020.

So the political risks taken by Ardern and Robertson weren’t as big as they seemed, but the package still fails to say what it really wants to achieve, or how it plans to get there. It is missing the true ingredient of a believable policy shift that has staying power beyond a change of government. It lacks a real and meaningful target that both the centrist parties can agree on, and therefore convince those who need to believe it, that it can be delivered.

What real reform looks like

Unlike the ‘Big Four’ suite of reforms passed or launched in 1989 (Reserve Bank Act, the Public Finance Act, the Resource Management Act and the amalgamation of 850 local bodies into 86 councils), the changes were essentially agreed by both sides and effectively changed both targets and processes. The RMA process, for example, was started under Labour and finished by National. Labour’s PFA was turbo-charged by National’s Fiscal Responsibility Act of 1994. National doubled down on local government reform by creating the Auckland Council and trying, unsuccessfully, to drive through amalgamations in Wellington and Hawke’s Bay.

The Reserve Bank was mandated to shock the economy’s ability to generate inflation back down to two percent. That target has survived four changes of government over 32 years. Governments of both colours enacted massive and painful financial reforms to achieve net debt of 20% of GDP or lower through ongoing surpluses and capital investment droughts. The RMA gave property owners and voting ratepayers the effective power of veto over new developments and has held firm for 30 years. It won’t change for another two years at least, and that not certain at all. These were long-lasting, irreversible, measurable and credible reforms.

The housing package was none of these things. It was much more tactical than strategic in nature. The intense political pain of double digit house price inflation in the face of a once in a generation economic shock forced the government to do something substantial.

But the adhockery and apparently last-minute nature of the change was laid bare in the way Treasury said it had not had time to analyse the impact of the tax deductibility move on rents, house prices and the wider economy, and IRD’s inability to provide estimates of the likely tax revenues. It was bizarre to go ahead with such a major policy without having even worked out the details around the boundaries of what a rental property is for deductibility and bright line purposes, or how long the exemption for new homes will last.

Will holiday homes rented out for a month or two mean interest can’t be claimed? Will homes rented out to extended family members be covered? What about homes that shift back and forth between owner-occupied and rented out? What about mortgages covering both owner-occupied and rentals where equity is shifted back and forth? What about family trusts that own properties, rather than businesses?

Some of this will be hammered out during the consultation and parliamentary process, but the laws will apply from last Saturday and kick in from October 1. It feels like a last-minute course adjustment, rather than the natural conclusion of a strategic process with an agreed target in mind.

That’s because there is no target. That was best expressed in this exchange (13:50 to 14:50) between Robertson and Jack Tame on what the government saw as the right level of affordability in terms of a house price to income multiple, which is the accepted measure internationally for measuring home ownership affordability. New Zealand’s multiple was around 3-5 until 2003, but has exploded to between 8 and 11 by early 2021.

Where’s the beef?

So what did Labour want this package to achieve? Robertson would not say or commit to a level. He said 8 to 11 was too high and he wanted to get it down, but would not say by how much. To be fair, the “right” level will depend on future interest rate levels. If they have fallen permanently to a lower plane, then a multiple more like 5 than 8 can be sustained.

But to not say where you want affordability to get to is to admit you either don’t want to get there, can’t get there, or haven’t really thought about it. None of those options are attractive, but they’re all better in the eyes of a risk-averse politician than putting up a target and failing to get there. The carcass of KiwiBuild sits stinking in the background of this approach.

But it also means investors thinking long term know that the government isn’t really serious when it can’t be held accountable. Robertson and Ardern have both openly said they want inflation to moderate, possibly to around 4% per annum, rather than for house prices to fall.

That means, given nominal household income growth of 4-5% expected over the next decade or two at best, that it would take decades to whittle away from a multiple of 8-11 to 3-5. It would mean admitting that the current abandoned generation of first home buyers have no chance of buying a home and starting a family before they age out of being able to have children at all.

So the best option was not to set a target. To be fair to Labour, National is no better. Housing spokesperson Nicola Willis has also been loath to commit to a house price to income multiple. Within hours of the housing package, her leader Judith Collins committed National to reversing the bright line and interest deductibility policies as soon as it was in government.

Investors can simply wait out Labour’s apparent change of heart. Unlike in 1989 when everyone knew and most agreed that inflation would be pushed to 2% no matter what and the government would get back into surplus, cut debt and cut taxes no matter what, this time they can take any commitments to affordability with a bucket of salt.

There is no target. There is no cross-party agreement. There is no structural or irreversible legislative change. It’s just a half-baked policy passed under urgency that is unsupported by any commitments to increase housing supply faster than population growth or identify the size of our housing surplus.

Leaving a trail of slime…

It’s a tactical slide of a policy because Labour’s political antennae sensed danger. What was needed was more of a well-constructed radar seeing a target over the horizon and launching a policy designed to seek it out.

Just as John Key had great antennae, but a poor radar, Labour suffers the same affliction, even though it has the parliamentary tools to build one. This policy appears to have exposed the government’s culture and DNA as  incrementally MMP to its core.

Many thanks to Kiwibank’s Chief People Officer Charlotte Ward and Otago University’s Dr Paula O’Kane for their insight and expertise on how Covid-19 turbo-charged the working from home trend, but has also exposed a range of weaknesses and new opportunities.

O’Kane suggests the government and IRD may have to look at how employers compensate home workers for their costs without punishing both bosses and workers, and how New Zealand has fallen behind the UK in dealing with the rise of the gig economy.

Listen and subscribe to When the Facts Change on Apple PodcastsSpotify or your favourite podcast provider.

Keep going!