What will the tax cuts mean for you?KEY POINTS:
The tax cuts announced in yesterday's Budget are here to stay after Parliament today passed the law needed to put them in place.
Though it has heavily criticised Michael Cullen's Budget, National backed the tax cuts allowing the Bill to progress easily through Parliament.
Dr Cullen wanted the law change passed quickly to remove any doubt that the tax cuts would not appear in people's wallets from October. In 2005 he promised minor tax cuts only to scrap them a year later before they came into effect.
Meanwhile, economists running their rulers over yesterday's Budget agree that the Cullen tax cuts were bigger than expected, making it unlikely the Reserve Bank will cut official interest rates as much - or as soon as - expected.
Meaning what many homeowners get in one pocket from tax cuts may be cancelled out as the door shuts on anticipated cuts in official interest rates from the Reserve Bank.
ANZ Senior Economist Khoon Goh said the Government's previous strong fiscal position "is no more"
"While the economy is in a pothole, and we doubt tax cuts will be the economy's saviour, we suspect the RBNZ (Reserve Bank of NZ) will be more inclined to leave rates on hold for longer to assess the impact of fiscal policy. We are inclined to push out the timing of the easing cycle to December."
"In light of the current uncertain economic environment, and the fact that we believe Treasury's economic and tax forecasts are on the optimistic side, this is a very risky fiscal strategy to run."
Goh says current inflation forecasts of 3.7 per cent are likely to be too low, given the rise in petrol prices. He says the bank expects inflation to rise above 4 per cent by the end of the year.
The "upshot" of the Budget announcements was that the ANZ economists were "now becoming more inclined towards the RBNZ maintaining a vigilant stance for a longer period to assess the impact of the tax cuts when they are implemented from 1 October."
This was despite clear signs that the economy has been going backwards over the first half of this year. "Hence, we will be reviewing our interest rate view with a bias towards pushing the easing cycle further out, beginning December as opposed to September."
BNZ chief economist Tony Alexander also said yesterday's Budget tax cuts were larger than expected.
The "fiscal largess" improved the chances of a reasonable growth recovery from late-2009, he said.
"We still see scope for the likes of the two year fixed housing rate to settle just above 8 per cent very late this year before falling to the five year average of 7.8 pe cent in 2009."
"We still expect there will be an easing of monetary policy in September, but there is now a slightly higher chance it gets delayed until late October or even December."
"The extent of tax cuts and downward revision to fiscal surpluses announced this afternoon was far greater than anticipated and as a result the markets have pulled completely away from thinking there could be an interest rate cut from the Reserve Bank come June or July. Such thoughts seemed way too optimistic anyway," said Alexander.
"The Reserve Bank review their official cash rate on June 5 and it will be interesting to see whether they feel the large fiscal loosening in the Budget offsets weakness coming from other sources in the economy. That is doubtful so we still expect interest rate cuts before the end of the year though maybe not as rapid as previously was looking likely."
Alexander tries to answer the question: "If I were a borrower - what would I do?"
His answer? Alexander expects that by the end of the year two-year fixed rates would be "near though almost certainly above 8 per cent - probably close to 8.25 per cent."
"While most people continue to have a clear preference for the certainty that the two year rate offers in a time of major uncertainty about so much else, I personally would not fix longer than one year."
"I am not quite prepared to fix just six months but could opt for that choice a few weeks from now if we get some extra horrible weak data on the economy making more certain a period of speedy interest rate cuts from the Reserve Bank later this year."
ASB Bank chief economist Nick Tuffley said the Government's "fiscal largesse" came at a price. He too feels the Reserve bank will view the Budget as "more stimulatory than it has factored in, given that tax cuts alone are arriving earlier and will be bigger than the $1.5bn working assumption the Reserve Bank has already factored in."
But on the other hand, the economy was also slowing more noticeably than the Reserve Bank had counted on, which gave it additional headroom to absorb this kind of Budget.
"We don't see the Budget proposals as causing any reason for the Reserve Bank to lift official interest rates. However, relative to our expectation of a 50 basis point cut in September the risks are smaller and/or later."
- NZ HERALD STAFF
