KEY POINTS:
Does Finance Minster Michael Cullen want to give the Reserve Bank power, in effect, to start taxing mortgages in order to curb inflation?
He hasn't said so. In response to a journalist's question he singled out the option of a mortgage rate levy -- imposed when the bank
is trying to slow the eonomy down -- as the most credible of the options considered so far and one which warranted further consideration.
What makes it a bit of a non-starter is the need for broad cross-party support, because "vote for us so we can tax your mortgage" isn't much of a political slogan.
Whether it would work depends on where the problem lies.
Is it the switch from floating to fixed mortgages, which means it takes monetary policy longer to work, so interest rates are higher for longer, sucking international speculative money into short-term New Zealand assets and driving up the exchange rate?
If that's the problem, a policy to in effect turn fixed loans into floating ones (from the borrower's standpoint) might help by making the Reserve Bank's interest rate moves work faster.
But there would be the normal problem that as soon as you erect a tax wall between people and what they want to do, an industry springs up to find ways to dodge around it or burrow under it or pole vault over it. Remember when people went to solicitors for mortgages?
If instead the problem is that a large and growing proportion of the funding banks use for mortgages comes from foreign savers (whose yen and euros have to be swapped for kiwi dollars, again driving up the exchnage rate), then the issue is really much more fundamental: why are New Zealand households so much keener on borrowing and buying houses than saving and investing?
Much of the answer to that lies in the tax laws: Roger Douglas's punitive regime for taxing retirement savings on the one hand, and the aversion to a capital gains tax on investment property on the other.
Cullen has done much to encourage private retirement savings, but he has not attacked the fundamentals of the Douglas regime, which would be a costly exercise.
A mortgage interest levy would require Parliament to delegate to an unelected official the right to levy a tax, so the constitutional issues are significant. What bounds would be put around it, what accountability imposed? And would those compromise the Reserve Bank's operational independence?
But if this turns out to be too hard, the problem remains: how can the Reserve Bank curb the willingness of households to borrow and spend, buoyed by apparently ever-rising house prices, short of spear-tackling the economy into recession?
