Purchasing power, poverty and tax systems

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Who would have thought New Zealand children go hungry?

With child poverty a major political embarrassment it is time to examine causes and propose solutions. Not only are there 146,000 people out of work in New Zealand but the working poor are really feeling the pinch. Many part-time workers want full time work.

So it isn’t any surprise that even the National Government has realised that it is important to make some effort to feed hungry school children. Schools are the perfect indicator of the state of household wellbeing in this country. No measure proposed so far will get at the root cause.  Nurses in schools won't give families sufficient purchasing power to feed and clothe their children. Raising tax rates of those on high incomes won’t do it either. Nor will legislating for a minimum income.
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The problem is there is not enough money to buy essentials

So let's look at the family budget spelt out in the Dominion Post Sat 1 June. The family was a real Porirua family with three school aged children. The income was two benefits plus accommodation supplement plus family tax credit, which brought in a total of $685.29. The itemised expenditure tallied $752.69, leaving a weekly shortfall of $67.40.  There was no tobacco, alcohol or gambling listed in their expenses. Expenditure was $180 for food, $300 for rent. There was also a weekly payment of $80 for a car loan, and presumably this was for both capital and interest repayment.
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GST, income tax are reducing purchasing power.

Now let's analyse the family’s expenditure in terms of taxes and interest.  For decades we have lived with income tax and assumed it is fair and normal to tax income. Since Roger Douglas introduced it we have also taxed spending in the form of GST, now at 15%. I don’t know how long we have taxed enterprise but our company tax is projected to bring in $10 billion in the 2014 year. So income tax, GST and company tax now comprise over 79% of our Government revenue. Yet we completely fail to tax the use of the commons for private purposes – “the commons” being defined as that which is given to us by Nature.  Such resource rentals should include all private land and all commercial operations requiring the use of part of a natural resource e.g. aquifers, forests, fisheries. It includes minerals, oil, coal, gas, waveband spectrums and of course the 49% of Mighty River Power which is now in private hands and the proportion of any port or airport which has been sold off. The potential for gathering resource rent is significant. images-3This means taxing us for the use of residential land, valued by various reports at approximately $300 billion. Numerous tax reviews have recommended taxing land, but no government has adopted their recommendations, largely because the banks have sewn up all possible security on land. Since land will always be there (give or take an earthquake and a subsidence or two), banks want it as their security on their loans. And so government has to have the second best security – the labour of the people. Banks oppose any proposal to tax land. 98% of our money supply is created when banks issue loans. With most of the population blithely unaware, we allow private banks to create our money as interest bearing debt. When a farmer or a manufacturer has to borrow from a bank at interest, that interest is inevitably built into the cost of every item they sell. Secondly when a bank creates a loan, it creates the principal but not the interest. So everyone has to compete to earn enough interest to pay the bank. Because there is never enough money in the system to pay back all the loans with interest at the same time, someone has to go back for further loans. The Porirua family is a case in point. If their budget remains the same, they will have to borrow $67 every week to keep afloat, and pay interest on that. Unless WINZ issues them with another loan, the loans sharks with their exhorbitant interest rates will be circling. So where is this all coming through in prices? Well the landlord is paying interest on his or her mortgage and paying tax on income derived from rent, as well as GST on all landlord related expenses. If he or she buys a heat pump, carpet or curtains, GST is in the price. When the landlord employs a painter the wages have to be large enough to allow for income tax. imagesThe Porirua family’s meagre food bill includes 15% GST. The electricity, petrol, vehicle maintenance, vehicle registration and clothing bills all contain GST. Each of these items also contain a labour input. The mechanic had to pay income tax so calculates the charge-out rate to allow for this. Each of the items listed also contains an interest input. For example, the clothing factory may have borrowed from a bank for capital and the selling price of clothes allows for the interest the firm has to pay the bank. We are talking here about purchasing power. My granddaughter says she can easily live on $90 a week in Mexico because prices are low. It is wages relative to prices that is important for purchasing power. According to Matt McCarten (on Q&A 2 June), real wages in the last 20 years have gone down 30%.  It doesn’t matter how cheap an item is if you have only a few cents to use as payment. Purchasing power is a better indicator of wellbeing than inflation What this means is that until we change our tax system and return the money-creating privilege back to the people where it belongs we will continue to scratch our heads about hungry children and the growing number of people who can’t make ends meet no matter how hard they try. As you can see, both reforms will have to go together, because no government is going to tax land while the banks have this monopoly on land. While we live with the private creation of money, we won’t be able to tax land rather than labour, sales and enterprise. I am not suggesting the sum of resource rentals should raise all government revenue required. We would still need excise taxes and a Financial Transaction Tax. It’s just that once we face the money issue we can then face the tax issue and liberate purchasing power of the nation so that all may have enough to feed their children while labour is encouraged and enterprise is unleashed.  

If you have term deposits in a NZ bank watch out!

Yes the "levers are in place" as Minister of Finance announced earlier. In the event of a banking crisis, part of your term deposit could help bail out the bank . Listen to Radio New Zealand interview by Kathryn Ryan today at http://podcast.radionz.co.nz/ntn/ntn-20121112-0908-banks_making_record_profits-048.mp3. Bernard Hickey says banks ought now to give you a higher interest rate in your term deposit because the Reserve Bank now has in place what is called the Open Bank Resolution. This means that those who hold assets with a bank will be called on to help bail out the bank in a bank crisis. What is so disturbing in this interview is that the size of a banking crisis can be 35% if GDP and an expert being interviewed told us that this figure is common. Nicole Foss reminded us that Government bonds are much safer. Personally I have moved my term deposits to Government bonds and I know others who have taken Nicole's advice. If you don't want to do this then take Bernard Hickey's advice. He says that because your term deposit is now at more risk due to the Open Bank Resolution being in place, you should go to your bank and demand a higher interest rate. All of which reminds me of what Bernard Lietaer has been saying for decades. If banking crises happen that often there must be something systemically wrong with the system itself. Read his website or any of his books, including the Club of Rome book Money and Sustainability, available from Triarchy books.  He lists the number of banking crises, sovereign debt crises and currency crises which have happened round the world in the last ten years. It is horrifying. He says the on-going financial crisis results not from a cyclical or managerial failure, but from a structural one: more than 96 other major banking crises occurred over the past 20 years, and these crashes have happened under very different regulatory systems and at different stages of economic development.

NZ borrowing to lend to IMF, the latest absurdity

It’s a strange world this world of money. In the melee of the Greek elections and the frantic ramming through of the asset sales legislation came a strange announcement, but it was lost. It wasn’t even reported in the Dominion Post. The Government would be lending $1.26 billion to the IMF’s new bailout fund for the debt-wrecked Eurozone, but it would have to borrow this first. In addition to earlier billions for the stabiility fund, the total cost to NZ would now be over $4 billion, according to Bill English. Ponder on that one! We borrow in order to lend in order to save Europe. Whew. The child in us will ask how money is created in the first place. Can only banks create money? Of course not. We the people can create our own money without the burden of interest. But we stupidly use banks. These days we don’t even use our own banks. So to add insult to injury, when we want to borrow, we go to overseas banks for loans because their rates are cheaper. So let’s get this again. We borrow $1.26 billion at interest and then lend it to the IMF. What? At interest? They don’t say. And they will give it back, the part they don't use apparently. The Minister of Finance says it is our insurance policy. And it is the banks who are in trouble.  So we pay interest to the overseas banks so we can protect them from future bad debts. This is Alice in Blunderland stuff.  Where is the cartoonist? Reuters has just reported “Ireland's High Court began hearing a challenge to the European Union's new bailout fund on Tuesday, launched by a politician who said the European Stability Mechanism (ESM) was not compatible with the Irish constitution.” The Guardian reports: “This, for certain, is a high stakes game. Part of Europe's fighting fund has already been spent on bailing out Greece, Portugal and Ireland. Spain has also pledged funds to the EFSF and ESM, and these clearly cannot be spent buying up the country's own debt…. If the gamble fails, Spain will still need a bailout and Europe will have nothing left in the kitty for Italy.” So let's go back to the Pre-election Fiscal Update and see what it assumed about Europe. I seem to remember ...yes here it is: The PREFU's main forecasts critically assume the reasonably orderly resolution of sovereign debt problems in the euro area. Wow they were so wrong. And these our best economists and financial experts? An ordinary person listening to the news can do better. They could see that if you are solving debt by lending ever more money to a country, the problem won't be solved. And here is another thought. If Greece is too big to fail, and Spain is too big to fail and Europe is too big to fail, then it is going to apply to UK, US and China too.  Who knows where it will stop? The size of the global economy is about $63 trillion. According to Bernard Lietaer et al in Money and Sustainability, the Missing Link, "one day's currency speculation represents more than the annual economic output of Germany or China changing hands. The notional amount of currency derivatives are now more than $700 trillion today. Currency derivatives by themselves represent therefore almost nine times the entire global annual GDP". And that is only one type of derivative. No, the IMF's bailout fund is going to fail and it must fail because it can never match the power of the investment banks.    

As Europe counts down to Friday, global temperatures set to rise further and further

Today we heard the greenhouse gas emissions had risen by 5.9% in 2010. The world is on track for an 11 degree F rise in temperature and this came from the normally conservative Fatih Birol of the International Energy Agency. He had quite recently stated "We need to leave oil before it leaves us." Something will have to happen quickly or else it will become completely irreversible.

Meanwhile our Treasury has of course stated that it has to revise the preelection forecast for economic growth, which, as I pointed out before, was predicated on three inaccurate assumptions. As I was gardening today I wondered how they managed to get it SO WRONG. Anyone with a brain who was following the developments in the Eurogeddon crisis could see there would be no smooth resolution of the debt crisis there. You can't solve debt with more debt, it just puts off the day of reckoning.  And they assumed the price of West Texas oil would not go beyond $93 a barrel by 2016. Well I looked at the trend of that and it has already been beyond $93 but has dropped back. It is the lowest of the three types of oil quoted in our paper every day. On 2 Dec it was $100 a barrel and Dubai, which is the oil we rely on, was $106. As for growth of our trading partners, forget it. I don't know why we pay these Treasury officials so highly if they are so stupid.

This week five people from Transition Town Lower Hutt put out a warning on the Euro crisis and suggested planning for a crisis by having a store of food, money and water. Sensible people all of them. Robin Westenra does a wonderful blog.

But good news. Today we heard from two people in Nelson who want to start our first branch there so we put them in touch with each other! And some really good people have now joined including a well respected environmental economist.

I received a letter back from the Minister of Defence last Friday saying no they had not received any information on the security implications if ur oil supply is disrupted.  He referred me to the Defence White Paper 2010  on www.defence.govt.nz. I haven't had time to read it all, but once again I despair if our Minister of Defence and his officials don't read the military reports put out in Germany and in US on the implications of oil supply for defence. Maybe there is a frustrated official somewhere in the Ministry of Defence. A job for someone?

So we await the Merkosy solution to the Europe debt issue