OnPoint by Keith Ng

It reared its ugly head with ACT's “bracket racket” speech two weeks ago. Full marks for the rhyming, less for the making of sense. I counted a dozen statistics describing the same phenomenon, and all of them were increasingly useless derivatives of the same two numbers.

But contrary to Fran O'Sullivan's claim that Treasury has been muzzled, fiscal drag is not a secret. It's not a conspiracy. It's a part of the Government's fiscal strategy. Like, *literally* a part of the Government's fiscal strategy. It's on page 35 of the Fiscal Strategy Report that was part of the 2000 Budget. The forecasts that Treasury supposedly weren't allowed to make is on page 55 of the 2008 Fiscal Strategy Report. That's not to say that fiscal drag necessarily a good thing. It *is* kinda sneaky, but let's put it into context here: It's a left-wing government effectively raising taxes. Let's ease off on the shock-horror, eh?

So, what kind of perfect utopia would New Zealand look like, if only we were able to rid ourselves of Satan's fiscal drag? Here're something I prepared earlier. The graph below compares the current tax regime with an inflation-adjusted version of the 2000 tax regime, Labour's planned tax regime, National's assumed tax regime, and Australia's tax regime. It tracks the average tax rate – the tax rate that's paid on the whole income. The lower the line, the lower the proportion of tax paid. It does not take family assistance into account.

(Boring explanation about assumptions that you can skip: 1) The 2000 tax regime adjusted by inflation is what we would have if there was no bracket creep (i.e. If tax brackets were inflation adjusted). It takes tax brackets in 2000 and adjusts them by CPI to 2008 values. The rates remain unchanged. This does not adjust the brackets for real wage growth, but that's a different argument entirely. 2) Labour's tax cuts are taken at 2011 (when it is fully phased-in) values, then adjusted back to 2008 dollars with an assumed CPI growth of 2.8% per annum. 3) National's tax cuts are assumed to be the same as its proposals in 2005. That plan was to take effect in 2006, so the brackets have been adjusted by CPI growth between 2006 and 2008. 4) Australia's tax regime is taken at 2008-09 values, and converted by OECD 2007 PPP figures. The Google worksheet is here)

(Please, pretty please, click through to the big one or you'll go blind trying to read this graph.)

The single most noteworth feature is that the Labour and inflation-adjusted lines converge at around $47,000, and are virtually identical (with a 0.2% difference) from then on. Prior to that, the rates under the Labour tax regime is much lower. It means that the latest tax cuts are designed to nearly exactly cover the bracket creep for everyone who earns over $47,000.

Focusing solely on the shift in the top tax rate overlooks (*coughSundayStarTimesandDavidFarrarcough*) the obvious point that the new 12.5% rate is a big deal.

It's easy to assume, though, that the drop in the 12.5% bracket would have meant that everyone was better off, but the sneaky thing here was that the 21% bracket was shortened, so the 33% rate kicks in earlier. It's no coincidence that the two cancel each other out. The size of the total take at the bottom two brackets is the same as it was in 2000, if we adjusted it by inflation.

This means that the rejigging makes no difference to everyone who earns over $47,000, but it does make a different to everyone who makes less than that. For them, this is a genuine cut, above and beyond bracket creep. To put this into perspective, 71% of taxpayers have a taxable income of less than $50,000 per year (22% have a taxable income over $50,000, while another 7% of taxpayers have a taxable income of zero, so they don't count).

A warning, though - none of this takes Working for Families into account, which would obviously tilt the scales towards low-middle-income families. I'll do the fiscal stuff later. But here's the cheat-sheet:

* Fiscal drag is the increase in the average tax rate (*not* the amount of tax paid) caused by the tax system failing to keep up with wage increases.

* Fiscal drag is not a right-wing conspiracy. It is real. It is significant. It's a part of the Government's fiscal strategy.

* Fiscal drag means people pay a greater proportion of their income in tax. That does not mean that people are worse off, since income is rising, too.

* Labour's tax cuts will negate the fiscal drag of the last eight years for everyone earning over $47,000 per year (22% of tax payers). For those earning under $47,000 (71% of tax payers), it will be greater than the amount lost to fiscal drag.

(In partisan terms: “Labour's rightthinking tax cuts have obliterated the fiscal drag which threatened the ability of New Zealand worker to buy cheese, while redistributing to the workers more of their rightful dues. Labour is for tax cuts. Labour has always been for tax cuts.”

Or: “Labour's devious tax cuts have barely managed to keep the insidious fiscal drag in check, yet they continue to purchase votes from the underclass with the money of hard working New Zealanders. National will only use the money from hard working New Zealanders to purchase votes from hard working New Zealanders.”)

In the meantime, check out the New Zealand Political Stock Market. It's just a game – there's no real money involved (yet – there might be prizes in the future). The idea is that you trade “stocks” of political parties based on what you expect they'll get in the election.

The game aspect of it draws people in, and then commentators can use it as a kind of punditry-aggregator. It's robust because it's self-correcting. If party hacks try to rig results by trading their own party at a very high price and the opposition at a very low price, then people will simply snap up all the underpriced stock and sell them the overpriced one. The result will be a lot of play-money changing hands (away from the party hack), but little change in the price. It also takes advantage of the Delphi Effect – the idea is that large groups of people in general, beloved Public Address readers in particular, will make more accurate predictions than, say, Bill Ralston.

Just remember that it's about “who you expect will win”, rather than “who you want to win”. I'm pretty pleased to have been able to unload all my National stocks last week at $48/share (i.e. Betting that National would win less than 48% of party votes). I was hoping that the National would have taken more of a hit post-Budget (which would allow me to buy back the National stock at a cheaper price) but that hasn't really happened yet. Just stocked up on the Greens, at $6.20, as long-term investment, but I'm hesitant about Labour at $35.

The plan is to hook the Political Stock Market with commentary here on Public Address, and get you lovely folks to do some trading after reading about political events. Essentially, get your feed of information here, quantify your predictions there. Good luck!

Every working mouse will get a tax slice from October 1 as part of a three-year plan which is the main platter of Finance Minister Michael Cullen's ninth Budget.

Dr Cullen told the Delicatessen this afternoon the three-year programme will deliver between 1 to 2.3 kg of cheese per week more in take home fondue from October this year, rising to between 1.8 to 4.6 kg a week by April 2011.

The long foreshadowed slices will cost 126,000 tonnes of cheese in first year and 883,000 tonnes of cheese in total.

The curdflation adjustment of Working for Cheese assistance has also been brought forward.

National Big Cheese John Key mocked the Government's offering as too little, too late and said Dr Cullen expected people to be grated after nine years for what amounted to no more than 28 “dollars”, New Zealand's former currency. Key is expected to announce a tax slice “north of four kgs”.

Dr Cullen has had to cut budget allowance for future cheese toppings and slightly increased debt levels to accommodate the tax slice. Gross Sovereign-Issued Debt is expected to rise to 2.9 million tonnes of cheese by 2012, 194,000 tonnes above previous forecasts. This figures excludes the 625,000 tonnes held by the Reserve Bank as settlement dip.

While the latest opinion polls have shown cheese to be the most important issue for voters in this election, none of the major parties have release details of their cheese policy at this point in time.

Technical note: For the purposes of this study, the standard value of the "dollar" has been measured against a 1 kg block of Alpine Tasty cheese, at an exchange rate of $12/kg. If Key is only getting an exchange rate of $16/kg, I suggest that he shops elsewhere.

It's time to pull the brakes on the latest meme-plague: Reports of New Zealand's death have been greatly exaggerated.

Exhibit A: “Average family in the red just to get by”. According to the story, in 2004, the “average family” was just getting by, but in 2008, the “average family” was in deficit each week and getting further and further into debt.

Skyrocketing living costs mean the average New Zealand family is going into the red simply to cover everyday expenses, according to detailed new analysis.”

The story was based on this analysis by Bernard Hickey. Hickey's analysis compared average income data from the Household Economic Survey with an independent estimate of the cost of maintaining an average mortgage. That is, he took the burden of the average homeowner, and compared it with the income of an average household.

Why is this a problem? Because the latter includes those who don't have a mortgage, such as those who don't have a mortgage because they can't afford one. So he included people who can't afford a mortgage in the averages, and the numbers show that the average family – woah – can't afford a mortgage.

Hickey's defence was that there aren't income numbers more accurate that the HES, and that it was probably a reasonable estimate. I agree. Hickey's number are not wrong, per se, but there are limitations to how his data can be used. He was clear about it, the Sunday Star Times wasn't.

These “average families” are statistical constructs. When independent data is introduced, the number they arrive at is not a measurement of anything in the real world – it's just a comparison of two different statistics. It is arbitrary, and can't be talked about as if it was real. That's why Hickey draws the conservative conclusion:

...the average household with 2 kids and a NZ$170,000 mortgage is now $38 a week worse off in the last four years because higher food, petrol and mortgage costs have overwhelmed wage increases and Working for Family tax breaks over that period.”

He compared the same household using the same methods, noting the difference between the two, but not going any further. Whereas the SST say:

Where four years ago a family on the average income could each week expect to earn $23 more than it spent on its bills, that figure has now fallen below zero to $15 in the red.”

What's “in the black” and what's “in the red” is simply arbitrary. If we change assumptions about taxes (e.g. Income split between two earners, etc.), or the mortgage, we could easily make both “in the black” or “in the red”. Which means that you definitely can't say things like:

People wanting to maintain the living standard they enjoyed four years ago are being forced into debt or must face the difficult task of sacrificing day-to-day items.”

Which is, plainly and simply, un-fucking-founded.

But one conclusion can be clearly drawn from the analysis: Mortgage, mortgage, mortgage. The biggest change in the four years is the cost of servicing the mortgage.

In 2004, spending on food was 15.6% of after-tax income. In 2008, spending on food was 15.4%. Expenditure on food has not grown faster than income. Petrol has, but remains small: from 4.4% in 2004 to 6.1% in 2008.

Mortgage costs, on the other hand, has risen from 24.7% of after-tax income in 2004 to 29.8% in 2008, according to Hickey's figures.

The upshot is that, before we start going on about food prices, GST and so on, let's keep our eye on the ball here: Housing cost is the biggest and has risen the fastest. So let's talk about interest rates, not bloody cheese.

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The biggest BS of last week would have to go to Richard Prebble:

Mr [Richard] Prebble said it was a myth to say rail was environmentally friendly if the production of rail, locomotives and the need for trucks to take goods to destination were counted.” – NZPA, 5 May

How does he know? According to Prebble, when he was the Minister of Railways in the late 80s, the rail bosses told him. It's hard to find any evidence to back him up, but there's a mountain of material to prove him wrong.

The most authoritative is a Energy Efficiency and Conservation Authority (EECA) report from 2000. It worked out the energy intensity of different kinds of transport, and found that freight transport by road used 3.10MJ/t-km (that's 3.1 million units of energy to move one ton of goods one kilometre), while rail only used 0.61MJ/t-km. And that took into account the energy used by trucks to get goods to the railway station.

Chris Kissling, Professor of Transport Studies at Lincoln University, says that the gap is probably not as big now. With rising fuel prices over the last ten years, fleet operators have worked hard to find ways to become more energy efficient. And although rail is New Zealand is less efficient than other countries because of our terrain, Kissling was unequivocal: “[Rail] is less energy intensive, and will always be less energy intensive.”

But what about the cost of laying tracks and building trains compared with building roads and trucks? It's hard to find such studies, but this one conducted by the University of Karlsruhe estimated that the environmental cost of the “up- and down-stream processes” for heavy road vehicles was three time higher than similar costs for freight rail. All the evidence is weighed heavily in rail's favour – unless you count the dark horse of transport, coastal shipping.

It has even lower energy intensity than rail, but is currently held back because of dirty fuels. While Kissling was optimistic about the rail buy-back, he says that it needs to be well-managed, otherwise, New Zealand would be better off turning to the sea.

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My Herald on Sunday columns are now here on Public Address. Feel free to peruse. If you are interested in the topic and would like to get your hands on the source material, please let me know. I'm happy to talk with anyone, regardless of political or media affiliation. I'm too lazy to link/reference everything properly, but will endeavour to do posts like this one on a regular basis.

“Skyrocketing living costs mean the average New Zealand family is going into the red simply to cover everyday expenses.” – Sunday Star Times, 4 May

The Sunday Star-Times claimed that in 2004, the average household was just scraping by, but in 2008, the average household is going into debt just to pay the bills – that is, every week, they spend more money than they earn.

Sure, households are facing the squeeze from several different areas, but the idea that the latest series of price rises have pushed the average household “into the red” is arbitrary and unfounded.

The last Household Economic Survey (HES), conducted by StatsNZ in 2007, showed that the average household expenditure on the purchase of housing was $38.30 per week. Unbelievably little? That's because the HES includes everyone over the age of 15, and many of them don't have mortgages. For example, people who are renting or own their house mortgage-free.

So the SST used independent mortgage data for the average household mortgage, but didn't adjusting the income. The “average family” in that model had the burden of an average homeowner with a mortgage, but only the income of the average household (which is arguably lower).

It’s a mismatch that highlights the bigger issue. All this “average family” business is just a big fat statistical construct. The fact that a column of numbers add up to a negative doesn’t mean families have crossed a magical threshold and are suddenly “in the red”. It just an arbitrary comparison between two different sets of numbers, and they weren’t really comparable to begin with.

The only clear conclusion we can draw from these numbers is that most of the squeeze is coming from the mortgage. Average mortgage rates have gone up from 6.9% in 2004 to 9.7% in 2008. Mortgage repayments have shot up, and that's put pressures on families with mortgages. But it also tells us that the bad news about food isn't so bad after all.

According to the 2004 HES, households spent 12.3% of their pre-tax household income on food. In the 2007 HES, it dropped to 12%. Even we take into account the significant increases in the last two quarters, that still only gets it up to 12.1%. In the last four years, income has grown faster than expenditure on food. So, while prices might have risen, Kiwis are making sensible choices at the supermarket and getting by.

“Mr [Richard] Prebble said it was a myth to say rail was environmentally friendly if the production of rail, locomotives and the need for trucks to take goods to destination were counted.” – NZPA, 5 May

How does he know? According to Prebble, when he was the Minister of Railways in the late 80s, the rail bosses told him. It's hard to find any evidence to back him up, but there's a mountain of material to prove him wrong.

The most authoritative is a Energy Efficiency and Conservation Authority (EECA) report from 2000. It worked out the energy intensity of different kinds of transport, and found that freight transport by road used 3.10MJ/t-km (that's 3.1 million units of energy to move one ton of goods one kilometre), while rail only used 0.61MJ/t-km. And that took into account the energy used by trucks to get goods to the railway station.

Chris Kissling, Professor of Transport Studies at Lincoln University, says that the gap is probably not as big now. With rising fuel prices over the last ten years, fleet operators have worked hard to find ways to become more energy efficient. And although rail is New Zealand is less efficient than other countries because of our terrain, Kissling was unequivocal: “[Rail] is less energy intensive, and will always be less energy intensive.”

But what about the cost of laying tracks and building trains compared with building roads and trucks? A European study estimated that the environmental cost of the “up- and down-stream processes” for heavy road vehicles was three time higher than similar costs for freight rail. All the evidence is weighed heavily in rail's favour – unless you count the dark horse of transport, coastal shipping.

It has even lower energy intensity than rail, but is currently held back because of dirty fuels. While Kissling was optimistic about the rail buy-back, he says that it needs to be well-managed, otherwise, New Zealand would be better off turning to the sea.