Consumer Price Index figures are out next Wednesday
The impact of tax cuts will be known when they are applied from July 31
In March more than 480,000 Kiwis are behind in debt payments
Matthew Hooton has over 30 years’ experience in political and corporate communications and strategy for clients in Australasia, Asia, Europe and North America, including the National and Act parties, and the Mayor of Auckland.
OPINION
If Stats NZ reports on Wednesday that June-quarter inflation was 3% orlower, mortgage rates will fall the same day and the Reserve Bank will cut the official cash rate (OCR) on August 14.
Much more likely, the situation will remain ambiguous. With September-quarter inflation not being available until October 16, the risk is an OCR cut will prove impossible until November 27.
The good news is that the Reserve Bank made clear this week that almost every variable points to an earlier cut.
It said so-called imported inflation was down, spare capacity including labour is growing, consumer activity has fallen and domestic pricing pressures are receding. It even worries domestic demand may be falling faster than expected.
The bank gave a tick to the Government’s spending cuts and the very tight allowances for new spending over the next three years – including election year – promised in Nicola Willis’ first Budget.
The first is whether Willis will be able to meet “the challenge of delivering fiscal consolidation” in the face of everyone from the army to social agencies demanding more money.
The second is the tax cuts that will start to arrive in middle-class pay packets in about a month. The Reserve Bank warns that “the positive impact of tax cuts on private spending is yet to occur and is more uncertain”.
In other words, it says the tax cuts will stimulate aggregate demand but it doesn’t know how inflationary that will be just yet.
The final answer won’t begin to be revealed until October 16 and then will become clearer through summer and into 2025.
But the Government has always claimed to have evidence its tax cuts will not fuel inflation.
Christopher Luxon, who first promised the tax cuts just before Simon Bridges resigned as his first finance spokesperson, has always insisted his tax cuts wouldn’t be inflationary.
Willis, loyal to a fault, has always backed him up.
According to the Finance Minister, the Prime Minister’s and her public position was also supported by the Treasury in a memo entitled “Inflationary Impact of Personal Income Tax Package” she received way back on April 4.
Yet, despite such a memo becoming public being of considerable political benefit to the Government, it has so far refused to release it under the Official Information Act, instead keeping it secret.
That’s despite both the Beehive and Treasury promising more than a month ago that it would soon be made public – whatever “soon” means when used by a politician or bureaucrat.
It doesn’t mean today. The Beehive said yesterday that Treasury currently wants to keep it secret until at least the end of August.
Governments wanting to keep secret memos they insist would help them politically is certainly strange, but ultimately of little importance.
But in light of the Reserve Bank’s claimed uncertainty about the inflationary impact of Luxon’s tax cuts, the secret memo takes on genuine macroeconomic and thus public importance, not least to the nearly half a million New Zealanders who are behind on their debt repayments because of high interest rates.
It has always been difficult for those schooled in mainstream macroeconomics to understand Luxon’s, Willis’ and apparently Treasury’s argument that tax cuts are not inflationary.
Prime Minister Christopher Luxon has always insisted his tax cuts wouldn’t be inflationary. Photo / Mark Mitchell
Again, that didn’t matter so much when it was just a political debate, even if one central to the National Party’s election campaign and the new Government’s economic credibility.
But it is altogether different now it seems the Reserve Bank is also struggling to understand Luxon’s, Willis’ and the Treasury’s unconventional economic position.
It is overwhelmingly in the public interest for the memo to be released unredacted immediately.
If it really is true that Treasury has modelled a way for tax cuts not to materially add to aggregate demand and so fuel inflation, then that model needs to be made public to see if it can stand up to scrutiny by other experts, including bank economists and the Reserve Bank itself.
If the Treasury’s logic did stand up to scrutiny, the economic benefits would be instantaneous, not just in New Zealand but further afield.
It would allow the Reserve Bank to confidently cut the OCR when it issues its next Monetary Policy Statement on August 14, less than five weeks away.
The benefits to borrowers would be even more immediate since the retail banks would also know that an OCR cut was coming next month.
Mortgage rates, bond yields and the dollar would all fall within minutes of the memo appearing on the Treasury website, while the sharemarket and thus most KiwiSaver accounts would rise.
Willis’ forward accounts would also immediately look better since the cost of issuing new debt would fall. Pressure by police, nurses, doctors and teachers for pay rises would also ease knowing inflation and mortgage rates would be lower over the next year and beyond.
The Reserve Bank also reports that global economic growth remains below trend and is expected to pick up only gradually. While the US economy is stronger than most, China’s growth is picked to be “subdued relative to recent norms”.
The recent downward trend in global inflation has now stalled, so that interest rates in many other economies will remain higher for longer than recently hoped.
If the New Zealand Treasury really has found a way to deliver non-inflationary personal tax cuts, then the whole world economy would benefit from learning how.
Whoever wrote the memo would deserve a Nobel Prize. Their name would join Sheppard, Rutherford, Ngata and Hillary as the greatest New Zealanders who have ever lived. There would be a case for their face to replace the late Queen on the $20 banknote.
If the secret memo indeed says what is claimed, then, in addition to Willis’ and the Treasury’s legal obligation to make it available as soon as reasonably practicable, they have an even greater moral duty to publish it today.
Unless, of course, the secret memo does not say what Luxon and Willis say it does, or the work was so sloppy that its release would prejudice New Zealand’s substantial economic interests by making our Treasury and Budget-making process an international laughing stock in the financial and policymaking communities.
There’s only one way to find out. And late August, after the next Reserve Bank OCR review, is surely too late.
