This month marks the one-year anniversary of the Official Cash Rate being held at 5.5% but its effects are only just starting to be felt at their full intensity.
Monetary policy works with long and variable lags. It can take more than 18-months for the full impact of high interest rates to hit the real economy.
While retail banks have begun to lower their new rates, the average mortgage rate has been steadily climbing as home-owners refix their loans.
Last week, the Reserve Bank of NZ said the average mortgage rate had reached 85% of its estimated peak at 6.5% in the latter half of this year: crunch time for the NZ economy.
Already we are seeing parts of the economy breaking under the pressure. The property and construction sectors have fallen into serious trouble, with investors unable to finance projects.
Unemployment has risen an entire percentage point in the year ended March. That's a 30,000 increase in the number of people who can’t find work.
Two NZX-listed companies downgraded their earnings forecasts this week, citing challenging economic conditions, sending their share prices sliding.
Spark NZ, a telecommunications firm, said it was facing weaker demand from its enterprise and government customers as spending cuts had deepened.
It is one visible example of how a reduction in Government spending will be felt in the private sector — and there is more where that came from.
Treasury’s chief economic adviser, Dominick Stephens recently said the agency was in the process of “successively downgrading” its forecasts ahead of the Budget.
NZ was in the depths of recession equal to the 3.9% decline in per capita gross domestic product that followed the Global Financial Crisis, he reportedly said.
Four thousand cuts
The Coalition Government’s first budget will outline the details of cuts to public sector spending to pay for income and property tax cuts.
Like monetary policy, the full impact of job losses won’t be felt immediately as it takes time for redundancies to be actioned and laid off employees to adjust to their new situation.
RNZ has reported approximately 4020 job cuts have been announced so far, while Act Party leader David Seymour has said it could hit 7500.
Even though that upper estimate would be only 0.2% of NZ’s total workforce, it will still add some extra heft to the economic crunch coming at the end of this year.
Finance Minister Nicola Willis has little choice, however. She has committed to cutting income tax and has to offset that cost with spending cuts, or else be accused of Trussonomics.
A recent visit from OECD economists reiterated the constant refrain: do not borrow for tax cuts. They must be fully funded by new revenue or spending cuts.
Willis has repeatedly promised that the revised tax package, set to be the centerpiece of Budget 2024, will meet that criteria. Critics will be watching closely, ready to pounce.
Of course, there are others who argue that even fully-funded tax cuts aren’t appropriate when the Government is facing structural fiscal challenges.
The OECD recommended considering a capital gains tax and increasing revenue to tackle unsustainable cost pressure that will begin to build up in the 2030s.
“There is no silver bullet for increasing revenues or containing spending, but the medium-to-long run fiscal balance will remain a pressing challenge for years ahead,” it said.
But that is a problem for another day. Willis’ immediate job is to shepherd voters and Crown finances through the economic crunch coming at the end of this year.
Scraping the barrel
Mike Jones, chief economist at BNZ, said some forward-looking indicators had shriveled up and there was little hope of economic recovery until 2025.
Some factors that had been sheltering households from the storm were wearing off, he said.
“The savings buffers of some households are being chewed through, fiscal support is being withdrawn, and the labour market is no longer in a strong state”.
New Zealand was “scraping along the bottom of the business cycle” and households wouldn’t feel any improvement until “well into 2025”.
Jones expected the RBNZ would begin to cut interest rates in November, the 18-month anniversary of the 5.5% Official Cash Rate and when inflation is forecast to be well below 3%.
Clare Lombardelli, the visiting OECD economist, said NZ should be able to bounce back to its normal growth rate once monetary policy was loosened.
77 Comments
Yes, Treasury were advising Ministers that the economy would turn the corner in 2023 - and they were still doubling down on that in mid-2023, letting Grant talk nonsense in the media. I got so confused that I wrote to the Treasury forecasters and asked them some targeted questions about their assumptions. It turns out that Treasury do not include private credit flows in their models. Incredible negligence to be honest.
"... however Orr tightened hard and quickly ..."
Say what? (That's was a laugh out loud moment for me.)
It took the RBNZ over a year to go from 0.25% to 4.25%.
You call that 'quickly'?
What the RBNZ should have done was immediately raised from 0.25% to 3.5% when they announced they were going to create a RECESSION back in October 2021 !!!!
That short, sharp shock, might have been all that was needed !!!
OCR graph here: https://www.interest.co.nz/charts/interest-rates/ocr
I find it hard to see the economic advantage of tightening gradually up to a higher level rather than just immediately shifting the OCR to the place where you think it needs to be. I suspect the reasons for not doing so - both this time and in the past - are more political than economic.
The delay in ticking up the OCR lead to the requirement to hike faster than usual, and due to fixed term mortgage rates this has taken much longer than say AUS to come to effect. I can't with any sense of integrity say that this redeems Orr, simply catching up on his faltering.
"The Coalition Government’s first budget will outline the details of cuts to public sector spending to pay for income and property tax cuts. "
Apparently a statement sourced directly from a Labour party spin office?
Another perspective would say that this is to reset the waste of taxpayers money resulting from Labour increasing the public service by ~40%, over 18000 with no significant improvement in quantitative measures & qualitative services.
with no significant improvement in quantitative measures & qualitative services.
that's the thing of last government, we can see they spending money, hiring more buracrates, but hospitals are more and more crowed, waiting list longer and longer. or water leaks everywhere in Wellington.
Unfortunately Ardern's parting shot was to install Orr in the RBNZ for another 5 years to carry out the globalist agenda, OCR higher for longer = recession and housing market collapse, ready for the big players to come in and scoop up all the cheap houses to rent back to their previous owners.
Maybe it takes a while for those changes to have an effect. For example changing from the DHB model costs a lot of money up front and may take a while to pay off, but it is way too early to judge it. Look at Auckland Council for example, 7% rates rise this year for the super city compared to much higher almost everywhere else, so maybe the super city was worthwhile compared to a bit of tinkering.
The other possibility is that an element of "lots of additional spending for no added benefit" rhetoric is willful ignorance or successful results of electoral propaganda.
Apart from that, this present government looks to be going to borrow to fund tax cuts for property speculators. Not spin, if they do it.
OK Nicola, whatever you say.
There is definitely fat in the public service but it's not where people like to think it is and this government is certainly not interested in finding it. It's approach has been ideologically driven infrastructure cuts and headcount targets. Neither one of these things will result in fat being cut, if anything it will add to the bloat.
In transport for example the govt has essentially banned NZTA from investing in the least expensive most efficient solutions and directed them to invest in the most expensive and least effective, basically the opposite of what you should do if you want to cut waste. It's what happens when your agenda is driven by culture wars ideology rather than evidence based policy.
"The Coalition Government’s first budget will outline the details of cuts to public sector spending to pay for income and property tax cuts. "
Sounds correct to me. Whether the public services being cut are wasteful spending is an entirely different question.
The only spin I have seen is the claim that reinstating interest deductibility on residential property will lead to lower rents. Can someone show me an economic model that supports this claim.
I haven't seen anyone claim reinstating interest deductibility will lead to lower rents. Rather they have said it will reduce upwards pressure on rents. Rents skyrocketed under the Adern / Robertson regime and we are still seeing the effects of their poorly thought through policy. Landlords were having so many costs enforced on them they had no choice but to raise rents. Many private landlords keep rents down for good tenants but after the attack on them from the labour government something had to give
Here it is! An interview from Corin Dann with the revenue minister Simon Watts:
Revenue Minister Simon Watts told Corin Dann on Morning Report that as a result of Labour's policy, a number of landlords were not breaking even and had left the market.
"That reduction in supply puts pressure on [the market with] less rentals being available and as a result prices go up."
The new policy would put downward pressure on rental costs and was a "win-win" for both landlords and renters.
Under the previous policy, some landlords had left houses vacant, he said.
You can check it here: https://www.rnz.co.nz/news/political/511351/david-seymour-on-coalition-…
I'm the first to admit that if pissing money up against the wall with nothing to show for it were boxing, then the last government would be late 1960s Muhammad Ali ... that is to say "the greatest".
However, I don't think the line about the budget was particularly unreasonable - it's true that this government's trade off is basically saying we are going to cut public sector spending and in exchange try to give more back to private individuals (whether that works or not is a different story, but that isn't implied one way or another in the writing).
The really offensive part is we have been duped by successive governments. The last lot falsely spending too much at the wrong time and equating the input side to output (that is to say that as long as money is spent - no matter how incompetently - there will be results) and the current lot cutting spending when it should probably be going up or at least staying flat, as the private sector pulls back hard.
I'm the first to admit that if pissing money up against the wall with nothing to show for it
Seems to me that the LSAP money went straight into mortgages and housing development. I'm not sure that is nothing, but it would be fair to say that that expenditure/debt isn't 'working' for us now.
You've heard of "helicopter money" as a response to an economic shock? (Look it up, if you've not.)
The NZ government's response to covid was a bit different.
One thing they did do well IMO is they threw money at the public services to get people into jobs rather than throw money out of a helicopter to be spent by people who got no "on the job training" as part of the deal. (Training is an oft overlooked investment which often carries a significant return on investment).
Alas, at the same time the RBNZ thought it was a good idea to throw out any and all economic theory and flood the economy with cheap money - while at the same bloody time! - throwing out capital controls that allowed massive asset bubbles form in many markets (not just residential property as too many seem to think.)
So no - we did get something in return. On the job training. And little unemployment.
Just a terrible shame we also had an immature reserve bank running around like an overenthusiastic puppy creating financial destruction (while being watched by laughing grown-ups who should have known better).
There is no such thing as taxpayer money, taxpayers are not currency issuers, they are currency users and counterfeiting our currency is illegal. We spend the governments money and it never spends ours. https://www.levyinstitute.org/pubs/Wray_Understanding_Modern.pdf
Two parts -
One is that the current govt must make cuts to public spending in order to reduce their tax revenue from PAYE and re-introduce interest deductibility. As per the comment you quoted.
Two is that they also wish to reduce the deficit spending above and beyond the existing and forecast tax revenue, which is what your rebuttal is on about, and what they are currently failing to achieve. But I guess that's Labours fault and we shouldn't be so concerned because they know something we don't.
So yea nah the other side of a similar looking coin.
Agree. Firstly, they are not income tax cuts. They are restoration of a little purchasing power after 13 years of stalled tax thresholds (most countries like USA adjust annually). Second, it's the Reserve Bank's stated policy to engineer higher unemployment and to achieve that it hits industries and consumers with higher interest rates. Result more money being siphoned to Oz banks and crunch to the construction sector in particular. So much for improving the supply of houses for renters. Thank goodness for private landlords who provide their $800k plus property assets for people to rent (and sometimes abuse).
This period of NZ economic history will be taught in macro 101 classes for decades. Students will laugh out loud as their lecturer says, 'these crazy people on this little Island believed *so* hard in the medieval monetarist reckonomics of the time, that they practically destroyed their country!... They literally cut stimulus into a recession! Like speeding up as you approach a cliff!!!!' 😂
The cynic in me thinks this is part of the plan, make it even worse than it needs to be so that people will be more willing to stomach more extreme 'solutions'. e.g. privatisation and or running down of public services to the point where people's expectations of what a strong coordinated government and public service can achieve together is diminished to the point we get to the libertarian's dream of failed state status.
Bill English did the same in the GFC, yet the average kiwi still reckons he was great. Had he invested in housing and infrastructure after the GFC and kept the building sector going, NZ would be in a much better place right now.
National's economic policy matches the pensioner's who vote for them: if I close my wallet tight I will be better off. That may make sense for a pensioner that has a fixed income, but for a government a reduction in expenditure normally leads to a reduction in income.
Don't forget John Key's legacy of opening up migration floodgates wide for the first time with multi-year work visas and an easy pathway to residency to low-skilled foreign workers and low-value students. Jacinda then doubled down on this rort for the low-hanging tax gains from it.
It is not surprising that real GDP per worker in NZ has barely grown since 2011 (actually in freefall since late 2021 levels).
How do you keep spending going during high inflation without further destroying the buying power of an (aging) population, or rapidly increasing taxes?
The problem is Labour kept rates down for a year longer than they should have. We had COVID emergency rates without COVID. Everything else since then is the shockwaves from that.
Govt spending can increase or reduce inflation. One way...
Inflation typically happens when prices go up quickly in a systemically important sector (e.g. energy). These price rises are propagated through to other sectors. For example, fuel prices go up, so hauliers that rely on diesel increases prices; gas prices go up, so manufacturing costs go up. Eventually that propagation of price pushes enough on the cost of living to have a widespread impact (a change in the overall price level). This puts pressure on wages, which can then feedback through to prices (to a degree).
Govt can invest in things that interrupt that propagation. For example, temporary tax reductions when fuel prices spike, can prevent that cost spreading into other prices and 'infecting' the whole economy. Or, far less efficiently, the central bank can try and stop the higher costs of living spreading through to wages... by increasing unemployment and worker bargaining power.
The medieval monetarists have such incredible faith in the false god of reckonomics, that they can't see that the whole purpose of monetarism was to crush organised labour so that energy price shocks and episodes of inflation were always 'paid for' by workers (i.e., businesses gained a greater share of income). The Chicago school proponents of monetarism were quite open about this.
"The medieval monetarists have such incredible faith in the false god of reckonomics, that they can't see that the whole purpose of monetarism was to crush organised labour so that energy price shocks and episodes of inflation were always 'paid for' by workers (i.e., businesses gained a greater share of income). The Chicago school proponents of monetarism were quite open about this."
100%. And it's a painless exercise when you're enjoying a multiple six figure income while orchestrating it all from behind a PC screen.
Oct 2021
The rate hike puts New Zealand ahead of most other developed economy nations as central banks look to wind back emergency-level borrowing costs, although countries including Norway, the Czech Republic and South Korea have already raised rates.In Australia, the central bank held interest rates at a record low 0.1% for an 11th straight month on Tuesday.
"The problem is Labour kept rates down for a year longer than they should have."
Labour did no such thing!
That was the 'independent' Reserve Bank of New Zealand.
Why does this distinction escape so many people?
Get this into your heads: The Reserve Bank of New Zealand is independent of the NZ Government. And worse? The Reserve Bank of New Zealand is (almost) accountable to NO ONE!
It only has independence over monetary policy though and that was purely a political decision. The Reserve Bank belongs to The Treasury and it is responsible for meeting all of the Governments payments by creating new currency through computer keystrokes.
Figure 3: Stylised base money system
https://www.rbnz.govt.nz/-/media/518b0156a77949d08cfee13723f98974.ashx
Of course, there are others who argue that even fully-funded tax cuts aren’t appropriate when the Government is facing structural fiscal challenges. - The point missed is that with no bracket or rate adjustments to tax for a decade many are demotivated to even try being inventive so concentrate on adapting to a lower standard of living. So with tax cuts and removal of bureacratic obstructionist legislation some may start to travel the long road of inceasing productivity ebing the only way to increase Govt revenue sustainably.
The OECD recommended considering a capital gains tax and increasing revenue to tackle unsustainable cost pressure that will begin to build up in the 2030s. - NZ like many Western economies is already at peak taxation so increasing the burden will likely lead to reduced effort and increased outward migration. This effect is clear in NY, SF and LA were the exodus of Business and individuals to more attractive states with lower taxes and less onerous regulations - Texas & Florida - Gavin Nonothing the Governor is suggesting a tax on those wantiong to leave California - a level of stupidity unimaginable.
I don’t understand everyone here thinking that NZ is over taxed? We are one of the lowest in the OECD, and we wonder why our services are so terrible. Then we only tax productive parts of the economy in wages (PAYE) profit, and spending with GST. Our obsession with borrowing money from overseas to trade existing houses with each other was always foolish, and voting in another government who wants to go back to that way of making us “rich” is frankly moronic.
The money that we borrow from our banks is created by them as credit and not borrowed from overseas.
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creati…
https://www.bankofengland.co.uk/working-paper/2018/banks-are-not-interm…
One of the most prosperous eras of humanity was during the post-war boom. The entire world kicked into gear and built economies around the world that brought untold numbers of people out of poverty and gave more power to the average joe than every before - the golden age of the middle-class. This did not happen in a head in the sand la la land of zero taxes, it was not a given that incredible recoveries follow incredible devastation. It happened because governments leveled the playing field. Prior to WW2 there was a major gulf of inequality, the difference between the haves and the have nots was massive. The US government seized assets during the war to pay for the effort, and following the war through a combination of top marginal tax rates above 90%, unavoidable inheritance taxes, land value taxes, and inflating out of debts borrowed from the wealthy - they closed the inequality gap by taking from the rich and spending it in ways that ended up in the pocket of the average joe.
Taxes are not as simple as money in vs money out. Taxes are decisions about redistribution of wealth. Add in a capital gains tax plus land value tax as a net zero tax change reducing income tax and GST is how you start to fix inequality. Not only that but as a business owner the prospect of selling your company for tax free capital gains vs taking taxed profits through dividends firmly incentivises NZ companies to sell out over doubling down and continuing to grow in our country. That is why the tech sector here will never thrive here, founders will always be too tempted to sell to foreign investors because it gives you time back - the rarest currency in life.
SKF
The issue today is when the above methods of redistribution were implemented, it was a less open world and those who had to fork out the higher end of it, who already had wealth, had less methods of avoiding it. Today the world is more open than ever before and the wealthy or even middle class can simply up sticks and leave to somewhere which is more financially advantageous, or less punitive to them. This creates the challenge of locking down umpteen more loopholes that have to be thought of to prevent capital flight and ensure the measures implemented are most effective.
So explain to me why all the richest people in the country haven't already moved to Dubai, Monaco or Brunei? And in fact, many of the world's billionaires seem to have set up contingency plans to be in NZ should any significant global problems arise in the future? The real conceptual problem we have today is believing that for a country, money = wealth when it should instead be industrial, technological and national strength.
You've probably all heard of me saying using tax increases (and decreases) is a way to tackle inflation (and deflation / provide stimulus). The link below provides an explanation of what I'm rabbiting on about.
While reading this it occurred to me that that by raising interest rates to tackle inflation, we are in fact "socializing" the cost of tackling it because wealth get's transferred from the have-nots (those with debt) to the haves (those with net savings).
Using interest rates to tackle inflation is one of the major reasons why the rich are getting richer. If this comes as a surprise to you then you really do need to bone up on this.
https://www.slowboring.com/p/tax-increases-are-the-best-cure-for
So as you're reading Dan's article above - and wondering why we need to go through such pain - consider an alternative way.
(FYI - Before posting this link, I searched for opposing views that were written in a direct response to this blog post. Guess what? Right-wing / "all praise capitalism" thinktanks funded by the rich were the most vociferous objectors. And, given who owns news media, their retorts got heaps of media coverage. That's to be expected. But what wasn't expected was the absolutely nonsensical economic arguments used to disagree which were astounding. The same you'd hear from pub-economists.)
The economy is on its knees.
Tax revenues have plummeted.
Job opportunities are scarce, and competition for available positions is intense, with over 350 applicants vying for a single job.
I can't think of a single small business that isn't in desperate need of support.
Trucking companies are dismissing drivers because there's hardly anything to transport.
It seems likely that quantitative easing will soon be reinstated worldwide.
I think the "experts" dont know how to deal with this.
GFC never went away and its back with a vengence.
Firstly, they are not income tax cuts. They are restoration of a little purchasing power after 13 years of stalled tax thresholds (most countries like USA adjust annually). Second, it's the Reserve Bank's stated policy to engineer higher unemployment and to achieve that it hits industries and consumers with higher interest rates. Result more money being siphoned to Oz banks and crunch to the construction sector in particular. So much for improving the supply of houses for renters. Thank goodness for private landlords who provide their $800k plus property assets for people to rent (and sometimes abuse).
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