There are a few major information releases due out ahead of the RBNZ next reviewing the official cash rate (OCR) on May 24.
These include the release of Inland Revenue and Treasury research reports on Wednesday into how much tax different income and wealth groups pay on both their taxable and non-taxable incomes, a pre-Budget speech by the Prime Minister on Thursday, publication of March quarter labour market data on May 3 and the 2023 Budget on May 18.
While bank economists believe the RBNZ will lift the OCR one more time, from 5.25 to 5.5 per cent, as it suggested in February, there is still a bit of water to go under the bridge.
The RBNZ has already said it’ll look closely at how the Government intends to cover the costs of Cyclone Gabrielle and flooding in the upper North Island.
Basic economics suggests paying for the recovery by injecting newly borrowed money into the economy could be more inflationary than reprioritising existing spending or generating new streams of tax revenue.
Finance Minister Grant Robertson has hinted he believes we can afford to cover the costs without introducing a temporary tax like a cyclone levy.
“The Government’s actively working on how we can reprioritise and save money, and that will play its part,” he said on Newshub Nation earlier this month.
“I think the scale of it means this is manageable for the Government … I don’t think we’re at the scale where we need to be thinking too much about huge amounts of additional revenue.”
Prime Minister Chris Hipkins may address the cyclone levy issue in his first pre-Budget speech on Thursday.
It’s difficult to see how, politically, he could campaign on easing the pain of the “cost of living crisis” while taxing people more – particularly in an election year where National is offering tax cuts.
What about taxing the “rich”?
Some of New Zealand’s largest companies have been reporting bumper profits. And while share and property values are tumbling, low interest rates in the decade to 2021 saw them appreciate substantially.
What’s more, Revenue Minister David Parker got Inland Revenue to do a big project to figure out how much tax the country’s wealthiest families pay on all their income – including that which isn’t taxed. Surely Labour is paving the way to somehow tax the rich more?
While Parker will do a speech at the release of the Inland Revenue research (which will be contextualised alongside Treasury research that looks beyond the wealthiest families), it’s unlikely the Government will try to tweak the tax system ahead of the election.
Sure, the research might help inform Labour’s tax policy. But it’s hard to see Parker or Hipkins unveiling a wealth or capital gains tax (as some are speculating) next week.
Hipkins has been reducing the Government’s workload; culling controversial policies and targeting centrist swing voters.
Clogging up an already tight legislative programme with a tax change that would make it even harder for Labour to secure a victory at the election seems doubtful.
Some form of “wealth tax” would be complex to design and politically risky.
Meanwhile, we already have a de facto capital gains tax in the form of the bright-line test. Gains on an investment property bought and sold within 10 years are taxed at the marginal income tax rate.
So while a capital gains tax (which would presumably exclude the family home) may see an investor be made to pay a flat rate of, say, 15 or 20 per cent, they currently might have to pay as much as 39 per cent (the top income tax rate) on gains from a sale.
The Government could reasonably argue in support of a capital gains tax replacing the bright-line test to simplify the tax system. But it might struggle to make the argument on the basis of generating substantial revenue – and revenue generation is what’s required right now.
So then, why rock the boat for the sake of tidying the tax system?
Parker’s interest limitation rule is also quietly biting investors particularly hard, preventing them from writing off (currently relatively large) interest bills as an expense for tax purposes.
The Government started phasing in this policy in 2021, when the property market was red-hot, without widespread fanfare – partially because it’s quite difficult for the layperson to understand.
Why put the spotlight back on the controversial issue now – particularly given the fact that tax changes, high interest rates, an updated Credit Contracts and Consumer Finance Act and tight loan-to-value ratio restrictions have seen investor demand for property drop right off?
Again, the Government is unlikely to unveil new taxes this week. But Labour is yet to release its tax policy. When it does, it might campaign on making changes if elected to govern.
This brings us to the Budget. If the Government doesn’t introduce a cyclone levy, the RBNZ will be looking at the extent to which Robertson cuts spending elsewhere and borrows.
Figuring out just how inflationary the Budget will be, will be difficult. Money allocated on May 18 won’t actually go out the door on May 18.
It’s a matter of considering the timing of new expenditure and estimating how much capacity may have been freed up in the economy (by a larger workforce for example) to absorb that expenditure so it doesn’t push up prices.
Robertson has already signalled the capital allowance is likely to increase to cover the cost of repairing or replacing damaged infrastructure and building what’s required for the future.
However, he will be wary that increasing operational expenditure to pay for election-year sweeteners (including inflation painkillers) risks being inflationary and putting upward pressure on interest rates.
While inflation likely peaking is a relief, the RBNZ still has a lot to contend with before its next rate decision.
Mortgage holders would be wise to keep cautious and stick to the prosecco before indulging in the champagne.
