Opinion: Dr Cullen urges us to become a nation of shareholders

By Simon Louisson of NZPA

Friday 25th February 2005

It is a measure of how far the political spectrum has shifted that a Labour government can suggest we become a nation of shareholders without causing us to do a double take.

Finance Minister Michael Cullen's comment this week echoed the 1980s dream of the Left's bete noire, Maggie Thatcher, to turn Britain into a nation of "worker owners".

His comments were prompted by his alarm at New Zealand's overall lack of savings and the concentration of those meagre holdings in housing.

He is setting the scene for some changes he will undoubtedly trumpet in this year's budget due on May 19. These include some encouragement for work-based superannuation schemes, accelerated depreciation on IT equipment, changes to the tax treatment of managed funds and incentives for first home buyers.

Cullen told National Radio his comments had been misconstrued.

His main point was he wants the country to lift its overall saving rate as well as to diversify away from just saving in housing.

"We are not saving enough overall. We save much less than many other countries around the world including many under-developed."

He later released a statement "strongly rebutting" suggestions that he was promoting shares as a primary investment vehicle rather than residential property.

Cullen also rejected suggestions people can't afford to save.

"We save less now than when we did when we were poorer, and we save less than countries that are poorer than us."

His worry is that New Zealand is running massive current account deficits, resulting in foreigners buying more of the country because people are not saving enough to generate required investment.

He said he has nothing against investing for homes. Indeed, he acknowledged alternative investments would be hard pressed to beat paying off a mortgage.

In fact, he is concerned at the big drop in home ownership in the last 20 years - hence the Government's planned new policy to assist people into first homes.

"We don't over-invest in housing, we under-invest in everything else," he said.

But he noted the advantages of actual, long-term returns from housing had been "nothing like as big as many kiwis think".

"If you look at investment over the long-term - over the last 80 or 90 years - then investment in equities has generally speaking out-stripped investment in housing."

However, he was quick to say he was not advising people to go and directly trade in the sharemarket.

"I wouldn't do it."

He recommended managed funds, unit trusts, building societies, credit unions as more appropriate vehicles for most people.

National Party leader Don Brash agreed with Cullen the country should be saving more and broaden the diversity of assets.

But he said it was unclear precisely how Cullen planned to encourage savings and it was uncertain whether minor policy changes ever altered savings behaviour.

"People just do not change their savings pattern in general in response to relatively minor changes in tax incentives or whatever."

Brash pointed out that kiwis enjoyed their life style and were unlikely to want to change.

He also noted the Government was saving on behalf of New Zealanders with it very large budget surpluses which were being used to insulate a relatively generous pension scheme for the future.

"It leaves not much money in the pockets of New Zealanders to save for themselves."

Gareth Morgan of Infometrics castigated Cullen for talking the talk without walking the walk.

If he was serious about changing behaviour, Cullen would remove the tax advantages of property investment, where investors can offset tax for interest, maintenance, depreciation and other costs, Morgan said.

"There is a tax distortion that has caused over-investment in residential property," he said.

"That is well known. Why doesn't the Government address that, rather than pointing the finger and accusing the public of being naughty."

Cullen ruled out a capital gains tax on non family homes as "potty" while saying such a tax already existed for short-term owners.

Philip Macalister of website Good Returns said managed funds, unit trusts and super schemes were disadvantaged by having to pay tax on capital gains.

Cullen has strongly hinted he will abolish this distortion at a cost of $250m a year but not until April, 2007.

If he really wanted to give the savings industry a boost, he could revisit an idea he raised two years ago that funds be taxed on a TET (taxed/exempt/taxed) regime rather than the current rapacious TTE model.

Macalister believes the professional investor industry had to sharpen up to attract investors from the property market.

"They have had some pretty poor returns and it would be fair to say that a lot of people who were invested into say a balanced fund five years ago have only just got back to zero now after the international sharemarket fell out of bed, and also the high dollar has penalised them hugely.

"They look at managed funds and say `these aren't a very good product'."

Unsurprisingly, stock exchange chief executive Mark Weldon welcomed Cullen's comments as "tremendously significant".

"Dr Cullen's put it all together and said we actually need a mindset and a culture that's comfortable in investing in productive instruments, and that means the sharemarket for a number of reasons - to grow savings and to grow the economy," he said.

Having too much wealth tied up in housing was risky for families, Weldon said.

The Shareholders Association said past corporate excesses, inadequate regulation and preferential treatment for big shareholders had put people off shares. However, better corporate governance and regulation of takeovers and insider trading had dramatically improved the environment.

Weldon said a substantial lift in small trades on the sharemarket last year showed mum and dad investors were returning to the market.

Two successive years of gross returns for the top 50 share index of nearly 25% have no doubt added encouragement.

Against that, the housing market has defied predictions of a downturn.

Real Estate Institute (REINZ) figures this week showed the national median selling price for houses in January rose to $265,000 from $260,000 in December. This was despite a fall in house sales and a $10,000 drop in the key Auckland market.

REINZ president Howard Morley said the risk profile of shares was vastly higher than for property "and the average New Zealander has demonstrated time and again a preference for property as a low risk, well performing investment".

"In the end most people would want a roof over their heads when they retire and not to have to rely on the state or other local authorities for accommodation."

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