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Capital gains tax, debt-to-income ratios among IMF's policy prescriptions for NZ

Tuesday 7th March 2017

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A capital gains tax aimed at encouraging more investment outside housing and the introduction of a debt-to-income limit on mortgage lending are among the International Monetary Fund's recommendations for New Zealand to support its solid economy and sound financial system. 

The global body of 189 member countries, set up to foster international monetary cooperation, was largely upbeat about New Zealand's economy in a preliminary statement at the end of a two-week visit by officials, saying there was "strong expansion driven by record high net migration, strong construction activity and accommodative monetary policy" and growth was set to stay above trend heading into 2018. A sister mission to gauge the nation's financial sector found New Zealand's settings were sound. 

IMF mission chief Thomas Helbling told a briefing in Wellington targeting bottlenecks in the housing supply, redirecting savings from property into other investments, beefing up support for innovation and continuing to pursue trade liberalisation would help lift potential growth for New Zealand. 

A tweak to the country's existing capital gains tax such as extending the brightline test on property sales was seen as addressing both housing issues and supporting savings and other investments, Helbling said. 

"There is a sense that the asset allocation in New Zealand households has a bit too much emphasis on housing versus other investments. We think a capital gains tax at the margin would help," he said. "We think small distortions there would probably be beneficial in the sense of redirecting savings towards other instruments and deepening the capital markets." 

The IMF's outlook for New Zealand's economy was favourable, but household debt remained high and was a risk to financial stability. 

On the financial sector assessment, IMF mission chief Alejandro Lopez-Mejia said the programme found New Zealand's financial system was generally resilient to severe shocks but that the regimes could be enhanced. 

Those enhancements included the introduction of a debt-to-income ratio tool to the Reserve Bank of New Zealand's macro-prudential suite of policies as a means to directly target the most acute household vulnerability, although the IMF didn't see such a measure needing imminent use. 

Both policies have attracted political wariness, with a capital gains tax seen as eroding the wealth of large sectors of the voting population and the debt-to-income ratio attracting caution from new Finance Minister Steven Joyce who wants to see more evidence before adding it to the RBNZ's tool-kit. 

The IMF also recommended the Reserve Bank lift capital requirements for lenders as a means to strengthen their balance sheets due to the "strong similarities and business models with high concentration in mortgage lending and to some extent dairy sector and significant reliance on wholesale funding" among New Zealand banks, Helbling said. 

RBNZ deputy governor Grant Spencer today announced plans to review the definition of bank capital, the measurement of risks that the banks face and the minimum capital requirements and buffers to set up a regime that provides confidence in the banking sector. 

Helbling avoided commenting specifically on Prime Minister Bill English's proposal to raise the pension age of entitlement announced yesterday, while noting the world's population was ageing, most pension plans weren't sustainable in their current forms, and that the IMF's general view was that increasing the retirement age in line with life expectancy should be part of the solution. 

"In this broader context, the government's move shouldn't be surprising," Helbling said.

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