A package of income tax cuts and credits will kick in at the end of this month, saving wage earners about $20 a week and costing the Crown about $2.3 billion each year.
An awful lot of ink has been spilled debating whether or not this policy change will add to inflation pressures and hold interest rates higher for longer.
Most recently an NZ Herald columnist called for the Beehive to release a memo, titled ‘inflationary impact of PIT package’, which was given to Finance Minister Nicola Willis back in April.
We know broadly what it will say. Tax cuts are inflationary relative to paying down debt, but are mostly neutral or disinflationary relative to Government spending that money itself.
There are also timing issues to worry about. If tax cuts arrive in the real economy before the corresponding spending cuts, then that might have a temporary stimulus effect.
But all of this is just messing about on the margins of a $400 billion economy. The package starting at the end of this month is only worth about 0.6% of annual gross domestic product.
It is highly unlikely to be the deciding factor when the Reserve Bank decides to loosen monetary policy, although it is one thing the Monetary Policy Committee is considering.
The committee members discussed fiscal policy at their July meeting and noted the “positive impact” of tax cuts on spending was still uncertain — but definitely positive.
Kelly Eckhold, the chief economist at Westpac NZ, said the committee’s broader comments on fiscal policy suggested they were less worried than he had expected.
That may be because consumers are becoming increasingly reluctant to spend any extra money while dark storm clouds are still gathering in their economic skies, he said.
It is almost becoming a consensus view that the Reserve Bank may have cracked down on demand too hard and could be causing lasting damage to the economy.
If that turns out to be correct, some fiscal stimulus from tax cuts could be a lucky accident.
Preventing scarring
Politicians are constantly fighting the last war. Inflation has been enemy number one for households and the Government doesn’t want to be blamed for making it worse.
But that war is almost over and it is time for policymakers to shift focus. No cannon can fire backwards in time and there is a new enemy amassing its forces on the border.
Monetary policy, which takes 18-months to work, and Budget 2025, which is just under a year away, both need to be targeted at helping the economy return to its full potential.
Recessions can cause ‘economic scarring’ aka persistent output losses. Studies show some advanced economies took more than a decade to recover from the Global Financial Crisis.
A 2015 research paper found 70% of all recessions are followed by permanent declines in the level of economic activity. New Zealand must strive to avoid that.
Economic downturns can cause long-term damage by reducing the workforce, leading to skill loss, and slowing down investment and technology adoption, all of which hurts productivity.
This is why a little boost from tax cuts could be good news, even if it makes the RBNZ nervous.
Politicians shouldn’t waste their time arguing about whether the package adds or removes half a pinch of inflation pressure, and should instead focus on the post-inflation recovery.
This will mean not shying away from making productive capital investments that compensate for weak balance sheets and poor sentiment in parts of the private sector.
It will also be critical to help the newly jobless New Zealanders stay connected to the labour market (hopefully using more effective tools than just benefit sanctions).
Actual experts can come up with a more comprehensive list of policy goals to to minimise scarring. But this is the war policymakers should be fighting, not inflation.
The Coalition Government will need to continue with fiscal consolidation but it shouldn’t be goaded into going any faster than is absolutely necessary.
46 Comments
Are any of the rates increases in the last quarter? I know AC is the current quarter.
Im picking it will come in lower than the RBNZ 0.6% prediction. I could be wrong of course. Even if it does come in at 0.6%, that would be 3 consecutive quarters of 0.6 or less, how much evidence do they need? More than 50% of the annual CPI would have come from one bad quarter almost a year ago that included the fuel tax reinstatement.
Only when the speculative property urge, embedded in psyche over 4 decades and more, has been so badly scarred that it's remembered for another 4 decades can we look forwards to a more productive economy. And we know what the chances of that being allowed are. So let's look forwards, by all means, but a look back down the road will tell us exactly where we are going = to exactly where we have been.
I am struggling to see much we still make in NZ that doesn't end up on a building site. I am not sure how we become more productive in primary agriculture when we are a price taker, and the greenies want less intensification. Any money I invest will be in defensive assets and offshore tech.
IT GUY what you’ve said is bang on…and it’s surely a huge red flag, I’m not advocating for house price rises before the pitchforks come at me as a “spruiker”, but the production of construction materials in NZ factories, forestry/sawmilling, labourers, the huge far reaching flow on effect into our economy (rangers to pies) from the construction industry…let’s say they do (or have?) overshot the mark and they panic what’s the easiest way to get quick (well quicker) action in the economy…housing and construction? Can we seriously rule out rate slashes and removal of restrictions if shit goes south…dumb/easy/lazy sounds way more likely than smart/hard/efficient 🤷🏻♂️
Problem is that system isn’t stable. The only way that we’ve been able to prop it up is with over-inflated demand for housing in the form of easy money. Economic demand is both desire AND means to purchase, no easy mortgages = less people with the money to buy = lower house prices.
As a country we need to put more emphasis on finding valuable productive work to do, either services for other countries or innovative goods exports. Governments could continue to encourage this with tax incentives. As a founder myself I also strongly believe that tax free capital gains on the sale of my business is always incentivising me to sell out to a foreign company rather than continuing to run my business and retain the earnings here in NZ. You could kill two birds with one stone here, CGT with a portion of the revenue used to cover further R&D incentives…
SKF
Yeah same old same old.
Make debt cheaper so that people can borrow to stock up on more overpriced unproductive assets.
The resurgent FIRE sector will bring consumer confidence back creating thousands of low wage service jobs. These crappy jobs will need to be filled with cheap migrant labour who will also add to aggregate demand albeit at a lower per capita level than those already here (more diminishing returns).
The tax cuts will have trivial if any impact on inflation. For most people they will be unnoticeable and hardly cover cost of living increases over the past 6 months.
Having said that, every $20 counts. When I add that to some cut backs I have made on insurances, subscriptions etc, it gets me up to about $80 pw better off, which covers more than half of the increase in my mortgage payments that started in June.
Interested to hear others' ideas of where post-inflation/post-recession recovery could come from?
I think back to the 2009 Job Summit where the best they could come up with was the New Zealand Cycle Trail. A nice idea but didn't move the dial that much.
Likely we see the NZ dollar sink significantly as rates reduce. Back in 2011 NZD got down to AUD$0.76 and in 2009 NZD was USD$0.50.
Tough for import pricing including construction materials, fuel and vehicles etc, but makes our export returns improve, and makes tourism and international education attractive to visitors.
Good question.
Firstly, I would say that the recovery will be a slow grind back over several years.
I imagine the government will look to provide some economic stimulus through road building. That will take some time to build momentum.
Another obvious area of their focus is residential construction. However, the problem here is that they won’t be building so much public housing.
Rather, they will try to enable the market.
My view is that this will eventually start to reap *some* economic rewards around 2026-2027, once policies are in place and interest rates are significantly lower. However, it will be far from ‘boom times’. Probably somewhere between today’s lows and the building boom between 2020-2022 will become the new norm.
I think you are right that exports, and hence the agriculture sector, will start to recover with the currency shift.
So a few things there that will likely lift the NZ economy out of the doledrums from 2026 onwards. But I think the rest of the decade is likely to be pretty average in terms of the economy.
Yep surely roading. Since the election herein Wellington it’s been gangbusters with roadworks, stop gos, closed lanes and roads. Nearly got carpal tunnel throwing so much mana. Great for anyone who can run or cycle to work, not so great for anything else in the meantime
'I think you are right that exports, and hence the agriculture sector, will start to recover with the currency shift.'
Not with the latest data coming from China. Their imports from NZ are 16% lower. I strongly agree with the nature of a number comments here that NZ has been sleeping behind the wheel when the opportunities to innovate the NZ Economy were there the last decades.
I think back to the knowledge wave conference in 2001. It was all about pivoting our economy towards tech and it was the right idea at the right time but we had no follow through and just soon after we just put most available investment funds into the property market instead for the next 20 years.
I think they should have given scholarships to students to study computer science as long as they stayed in NZ for 5 years after graduating. We probably would have created more Xero's during the last 20 years since.
Govt publish the net stimulus they pump into the economy in the budget. It's called Core Crown residual cash and it covers capital and operating expenditure - basically how much more money they spend into the economy than they tax back out again.
In the year ending June 24, Govt deficit spending was forecast to be 5.3% of GDP (~$22bn) all up. That is how much they added to private sector bank accounts (or bond holdings).
Next year, Govt are planning to deficit spend 2.1% of GDP (~$10bn) all up. So, they are withdrawing 3.2% of GDP of stimulus relative to this year. That's half the reason the economy will continue to drop off a cliff (the other half being low bank credit stimulus). Economists don't understand this because their models assume that Govt borrows the money it spends from the private sector - i.e. that they reduce the cash available to the private sector when they borrow, and then spend the borrowed money back into the economy. This is absolutely, categorically, wrong. Govt spending adds new shiny money into the economy, taxation sucks it back out again (and destroys it).
So, tax cut for swing voters, or extra spending, same difference. What matters is who gets the new money that Govt 'print' and spend, what they do with that money, and how much of the money Govt choose to tax back out of the economy.
Don't think roading boosts the economy much beyond a slight increase in employment, most of the expenditure ends up going to semi-monopolies like FH and a few big consultancies.
However international education and tourism ripple through the wider economy pretty quickly via hospo, accommodation, local activities, etc.
Fast bang for buck is to increase exports to Aust and get current NZD$1.10 per AUD$1 in sales, or to USA and get $1.63 for every USD$1 sale. As NZD drops exports will become even more attractive.
Question is, what exports can we ramp up? Wine? Aquaculture? Gold? Rockets?
I doubt we will get much of a rebound in international tourism. Perhaps a little as our currency weakens. We should be aiming for the cashed up retiree market. Young people through much of the world won’t have as much disposable income in coming years. And the mass Chinese market won’t bounce back much.
Good article - we *really* need our media to ask Govt and policy makers the big questions like how are you *actually* going to change things so that there are enough jobs for our young people? How will you prevent this recession causing the permanent sparring that has very obviously started? What can we invest in now that will both create jobs, increase productivity, and ensure our economy is more resilient to future shocks? How do we make those investments without creating rent generating assets for the richest 1% here and abroad?
Gold is a significant contributor to Western Australia’s economy. in 2021-22, gold mining in Western Australia generated a value of AUD17 billion. This value has a significant impact on the state’s revenue. Gold mining in Western Australia employed 36,087 people in 2021-22, making it a significant employer in the state.
While the exact revenue generated from gold royalties in Western Australia is is hard to quantify, the state is trying to improve its budget position by increasing gold royalties by 50%. This suggests that the revenue generated from gold royalties is a significant contributor to the state’s revenue.
50% of 4% and we are not Australia when I last looked?
That's not a strong rebuttal of how the gold sector is not a positive contributor to the WA economy.
Also, the WA govt wholly owns Perth Mint. People at the neighborhood BBQ may yawn and sneer at this, but it's a significant asset for the state and WA citizens, for economic sovereignty and independence.
Did you see Shane Jones on Q and A. He looked pretty thin on the numbers. Income through royalties generated for the country is minimal, sure it employs people. He was waffling on about GST take. Does most gold get exported ? If it does it would be zero rated. If my reckon is correct, I would say most gold mines would be GST negative in nature, massive costs and zero rated output.
I stand to be corrected.
Well a major investment push into green energy and de-carbonisation technologies is a distinct possibility to stimulate the economy.
Look at what the USA has done with the Inflation Reduction Act and Chips Act etc. Australia is going down that path too with Powering Australia and the Critical Minerals Strategy.
Love to see our government take that approach. We are woefully under-powered with solar for example compared to most of the OECD.
Not holding my breath though.
There was talk of establishing back office settlements in NZ but I think our wages will be too high for that, we outsource from NZ to India and Manilla ourselves. Many modern manufacturing , even clean room, need 24/7 operation shift work and drug free workers.
Anyone operating in NZ understands how hard it is to find these type of workers.
We are losing light engineering companies now, often as the owner moves a smaller part of their business back onto their own rural property and just chases the higher margin business. Heavy engineering skills went with the offshore workers, and we have such a limited requirement ourselves.
I still see gaming and movies as good business but it needs tax help to compete with even Aussie.
The real question is can anyone design a system that can account for declining energy, declining resources and the absence of "growth"....it appears to date that none can....until such time as someone can (and convince enough they are correct) then we will continue to delude ourselves that the 'good times' are just around the corner.
Hope springs eternal.
declining people may be a problem in aggregate...but as the likes of NZ, Oz and Canada et al have demonstrated it is not necessarily a problem per se....whereas energy and resources are becoming an increasing problem in ratio to that potentially reducing aggregate population.
Access to those resources will also likely impact access to 'people'
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.