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Thursday, October 25, 2012

2.5 billion reasons not to sell state assets

With the Nats pushing ahead with their state asset privatisation programme the Crown's own borrowing position continues to improve.  The imprudence of privatising essential services (that exist in a money-for-jam cartel situation) when the alternative of issuing debt at record low interest rates is so obviously viable is ample evidence the Tory's grand plan for economic salvation is pure, inflexible ideology. There is definitely an alternative to hocking off productive assets to cover the  two or three years of projected deficits.
The Government says it's received strong investor demand for the first issue of its September 2025 inflation-indexed bonds.
The Debt Management Office has issued 2.5 billion of the 2% coupon bonds, which were heavily oversubscribed, with bids in excess of 4 billion.
It's the first issue of these types of bonds by the Government since 1999.
Finance Minister Bill English says it will help the Government to continue borrowing at competitive market rates, which will minimise its borrowing costs.

With inflation skimming along the recessionary plateau at just under 1% - but with uncertainty still high - an inflation indexed bond is proving popular. From what I've read from the NZDMO each quarter the capital value of the bond is increased by whatever inflation (the Consumers Price Index) is, plus they bear 2%, so it is an ultra-safe investment attractive to conservative funds.

Two tax-related observations:

Firstly, I note that an "Approved Issuer Levy" is mentioned. From the Act:
86J Approved issuer levy
  • Approved issuer levy shall be computed in respect of any registered security at any time at the rate of 2 cents for every $1 of the leviable value of the registered security at that time.
I've never heard of it before, but it appears to be on the interest - not the capital - and payable at the beginning (?). These are the sorts of things that a Financial Transaction Tax will tackle: having this levy idea extended to all classes of instrument, all markets and on every transaction (not just the initial issuance). 

Secondly, tax is payable on the portion of the inflation adjusted increase in the capital value. This may not be a capital gains tax per se, but it is an interesting that this value is being treated as such.

For those who argue that an FTT and a CGT are anti-competitive, a discouragement to investment, will impare markets, hamper the economy etc. it is just as well to keep in mind that some elements of these taxes already exist and don't seem to have crashed capitalism in a fireball of inherent counter-productivity, dead-weight loss, creative disincentive and wealth-destruction. It all depends on what the "mix" is with other taxation and what the levels are set at, but a modest levy on the perpetual friction of the money markets will be a relatively insignificant [I mean painless - because it may be that a significant sum could be raised] arbitrage compared to the other forms of taxation.



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