Tax on commercial construction could redirect resources towards housing, ESRI says

A tax on commercial construction could redirect resources towards housing as a way of offsetting the inflationary impact of the Government’s infrastructure plans and could allocate scarce resource towards an area of need, a new Economic and Social Research Institute (ESRI) paper has argued.

The institute also says the Government could also look at the sequencing of large-scale capital investment projects contained in the National Development Plan (NDP) to avoid stoking inflation at a time of historically low unemployment and to prevent increasing the cost of delivering on its plans at a time when construction capacity is constrained.

The paper, authored by ESRI director Prof Alan Barrett and researcher Prof John Curtis, argues that despite the ambition of the NDP new figures suggest it may not be ambitious enough. “Population growth is exceeding expectations, partly as a result of the inflow of Ukrainian refugees, and targets on greenhouse gas emissions look increasingly challenging,” they said.

While the “obvious response” would be to increase the “near-term ambition” of the NDP through higher spending and the expedition of existing projects, constraints within the economy, labour shortages in particular, risk increasing inflation.

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Prof Barrett said this means the Government has a “dilemma” on its hands. “On the one hand there is a clear need for investment in public infrastructure as our population and economy grow and our climate targets remain challenging. However, on the other hand the economy is operating at full employment so the resources needed to accelerate the NDP are not readily available.”

In that context in the Government there was a need to “think creatively” about the speed and sequencing of NDP delivery, the researchers said.

One option would be to use taxes to “redirect economic activity” towards particular areas of need, the paper argues. Housing, for example, accounts for around 30 per cent of output within the construction sector, while “a much larger percentage is made up of non-housing construction and a question arises as to whether it is economically or socially optimal”.

The ESRI said a tax or specific regulation on non-housing construction activity could be used to redirect scarce resources towards housing or other areas of need.

“An alternative simple approach is a slower roll-out of the NDP, with no alteration in the sequencing of projects,” the researchers said. This means the economy would “miss out” on enhanced infrastructure in the short-term but means the Government could increase spending on large-scale projects as the economy slowed and thus reduce the cost of delivery.

Prof Barrett said the report ultimately argues for a reassessment of NDP projects to account for the demands they will place on resources. “This reassessment should also consider the potential of projects to ease inflationary pressures. While decisions must ultimately be made by those who have been elected, the use of quantitative metrics can aid decision-making”.

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