Here is an example: Those who advocate for money being spent into existence by government interest-free,( the positive money people) sometimes think that their solution is all that is necessary. But during Covid-19 our Government (actually the Reserve Bank, an agent of government) spent millions into existence to ensure that everyone had money for groceries and power. And what also happened? The price of housing went up. There was too much money in the system for the current tax settings.
You see, the government didn’t accompany this action with a full rent on the value of land. When the price of houses rises, it is the price of land that goes up not the house. Solve one problem and another arises for you to solve.
Tax reform is a political impossibility
You may now ask if the government is likely to impose a land rent or land tax. Impossible. The current government of New Zealand won’t even contemplate a capital gains tax or a wealth tax which are the easy options when you should be imposing a land tax. And the opposition even wants to get rid of capital gains for those who speculate in housing.
No, a majority of electors own houses and they don’t want a land tax. The government wants to get re-elected, doesn’t it? So no action is likely there.
Money creation reform is a political impossibility at national level
Until Covid about 97% of our money came into existence at interest when commercial banks issued loans for buying houses. If the mortgage was to be $500,000 they would write a debt of $500,000 on one side of the ledger and at the same time write a credit of the same amount on the other side. Then would charge interest.
This creates a situation where there is more debt in the system than there is money to pay it with. Banks create the principle but not the interest. So mortgage holders have to go out into the world and compete with others for money. Then there isn’t enough for everyone to pay back the mortgage with interest. So some simply have to go into more debt. They borrow more and the total money supply increases. Then the economy has to grow to use it.
You can see that net savers are going to gain at the expense of net debtors, widening the gap between rich and poor.
And there is a more sinister result at bay. If banks (or governments) create money as interest-bearing debt, that builds in a growth imperative into the economy. When the economy grows there are more greenhouse gases, more species extinction, more soil and water pollution etc. In effect more overshoot of planetary boundaries. is the government likely to change the money system? Not a hope in heaven! The banks are too powerful. They don’t want land taxes, not even a 1% land tax. They want us to continue to tax labour – something good. Banks are delighted when we introduce GST or sales tax – which is known to hurt the poor more than the rich.
When the value of land under a house rises due to community activity and building of infrastructure like hospitals, schools or transport hubs, the next buyer of this house will most likely have to get a larger mortgage. And the banks benefit because interest is paid on a larger sum. That is why banks don’t want land taxes.
What else besides tax system and money creation system?
We have talked about money creation and we have talked about tax and concluded you can’t reform them at national level. Where does this leave us?
But we also have local government. Unfortunately in New Zealand, our local government is very poorly funded. Local government revenue in the year ended 2022 accounted for 9.5% of total combined government revenue. And a lot of local government funding – just under 40% –comes from various fees other than rates.
Economist Brad Olsen in a June 2023 paper writes, “In 2022, local government rates revenue was only worth 2% of GDP, and total local government operating revenue was less than 4% of GDP. Central government’s funding dominance is clear to see.”
And if we look at the total powers of local government we would have to conclude they are puny. No wonder councils struggle to keep rates rises low. They simply can’t perform all the functions imposed on them by central government with the revenue they have. And that is before they deal with paying for Cyclone Gabrielle or the Auckland floods.
This imbalance of power between central and local government must be corrected. I deal with this whole dilemma in my book The Big Shift – Redesigning Money, Tax, Welfare and Governance for the Next Economic System