Some economists think a National-led government would be more inflationary than Labour

Goldman Sachs analysts have warned a National-led Government would push mortgage rates higher than would otherwise occur under Labour, in a recent research note.  

Local economists at Westpac NZ agree the opposition party’s tax plan would be inflationary, but think the fiscal risks would be marginally higher with a Labour-led coalition.

The Reserve Bank opted to hold the official cash rate at 5.5% on Wednesday and suggested it was happy its policy was tight enough to quell inflation over time. 

Nicola Willis, the National Party’s finance spokesperson, later told the media that Labour was responsible for the fastest increase in the official cash rate in history. 

“New Zealand mortgage holders simply can’t afford the re-election of a big-spending, big-taxing Labour-led Government,” she said in a statement. 

But Andrew Boak, Goldman Sachs' chief economist for Australia and New Zealand, and William Nixon, vice-president of global investment research, disagree with her. 

They said National’s policy suite would boost property prices and households’ disposable income which could potentially push the Reserve Bank to lift interest rates even further. 

“While National has pledged to offset the new spending and lower taxes with a reduction in spending and new taxes, overall we view the risks as skewed to more stimulatory fiscal policy in 2024 under a National-led government,” Boak and Nixon wrote in a recent note. 

Both bad

This criticism was not reserved only for the National Party, the pair of analysts said new policy pledges from Labour also looked “marginally stimulatory”. 

“From the perspective of monetary policy, on balance we see incrementally hawkish risks to the RBNZ from a National-led government,” they wrote. 

Willis said this was wrong as National planned to spend less than Labour overall, and swap additional spending for tax cuts — which can be less inflationary.

The Goldman Sachs analysts were making their assessment from offshore and had missed some “major factors” that local analysts had picked up on. 

She pointed to a recent note by Kelly Eckhold, the chief economist at Westpac NZ, which reached the opposite conclusion about which party was the bigger risk to rates. 

“We would assess the risk around the Labour Party’s fiscal plan as being skewed towards delivering a slightly weaker fiscal position compared to the right leaning parties,” Eckhold said.

However, he also thought that National’s tax plan would be slightly inflationary as it would boost economic demand by about 0.25% of gross domestic product.  

Revenue raised from foreign purchases of properties, online gambling, and increased immigration charges would be money flowing into NZ — similar to export income. 

Either way, he said the election would have a minimal impact from a macroeconomic perspective since there was “broad agreement” on aggregate spending levels. 

“Importantly, the overall fiscal strategy that will be pursued appears likely to be reasonably similar under either a centre-left or centre-right government,” Eckhold said.

Coalition negotiations could add pressure to Labour’s fiscal plan, since Te Pāti Māori and the Greens both have spending goals that were supposed to be funded by a wealth tax.

Quantification 

Goldman Sachs said even if National delivered on its revenue and spending cuts in full, the overall plan could add marginally more inflation pressure than Labour. 

The promise to reduce income taxes would boost aggregate household income by roughly 1.2% or about 2.5% for middle income earnings. 

“The tax cuts would be skewed to lower-to-middle income earners, who likely have a higher marginal propensity to spend than high-income earners,” they wrote. 

Westpac NZ, Goldman Sachs, and analysts at UBS all agree that National’s policy platform would push house prices higher. 

“National’s proposed changes to property taxes and laws allowing foreigners to purchase property, which could stimulate house prices, also pose upside risks to our rates forecast,” Boak and Nixon said.

Higher house prices can be stimulatory as it makes homeowners feel wealthier and gives them the confidence to spend more. This is called the wealth effect. 

Eckhold said restoring tax deductibility of mortgage interest on investment property and bringing the bright-line test back to two years would make property more attractive. 

Westpac NZ has forecast a 7.7% increase in house prices during 2024, but these policies would “tilt the risks for house prices to the upside”. 

However, it would be deflationary if it did lead to reduced rent price increases and more supply of rental homes in the long term. 

While Goldman Sachs thinks National’s policies are (marginally) the more inflationary set, they don’t expect the added pressure to move the dial. They are still forecasting the official cash rate to stay at 5.5% until the middle of 2024, regardless of the election outcome. 

“While the re-election of Labour would not have a material impact on the RBNZ outlook, in our view, a win by National would skew the risk to the RBNZ needing to keep rates on hold at 5.5% for longer than we currently expect — or even hiking above 5.5% if consumption and house prices rebound strongly enough to the proposed tax cuts”.

Employment mandate

Goldman Sachs and Westpac NZ both agreed that removing the Reserve Bank’s employment mandate would not have any material effect on monetary policy. 

Boak and Nixon said RBNZ staff had always considered the labour market as a factor when setting policy and would continue to do so without the formal mandate.

Eckhold said none of the monetary proposals put forth by politicians would have much impact on policy in the foreseeable future.

With inflation above the target range and employment above sustainable levels, the policy choice was the same regardless of whether the RBNZ had a dual or single mandate. 

“We don’t think that the current high rate of inflation can be attributed to the fact that the RBNZ has a dual mandate,” he said. 

However, the UBS economists disagreed and said switching to a single mandate would result in higher mortgage rates.  

“National's proposed change to the RBNZ's mandate (i.e. no longer targeting Maximum Sustainable Employment) is hawkish, and implies a higher-for-longer OCR,” they wrote in note.