In other words, these measures wouldn’t offset the stimulatory effects of National’s plans to provide income tax cuts by adjusting tax brackets for inflation, and reduce the tax burden on residential property investors by bringing the bright-line test back to two years and phasing out the interest limitation rule.
“National’s proposed reductions in spending on public staff and ‘bureaucracy savings’ may also be difficult to achieve in the short run,” Boak and Nixon said.
If fully implemented, the Goldman Sachs analysts said National’s tax cuts and spending plans would amount to around 0.8 per cent of gross domestic product (GDP) and would see households’ disposable incomes increase by 1.5 per cent a year.
They said National’s plans would see New Zealand’s Budget deficit narrow at a similar rate to that which it would under the current Government.
However, if National only cut taxes and couldn’t increase revenue or cut spending by as much as promised, the Government’s books wouldn’t reach surplus by 2026-27 as forecast by the Treasury. Rather, the books would be about a couple of billion dollars in deficit by this time.
Boak and Nixon said National’s proposals to reduce the tax burden on residential property investors and allow foreigners to buy residential property worth more than $2 million could stimulate house prices. This could “pose upside risks” to its interest rate forecasts.
The analysts expected the RBNZ to keep the OCR at 5.5 per cent throughout the rest of 2023, before gradually starting to cut it in the second quarter of 2024.
The RBNZ is reviewing its monetary policy this afternoon. All eyes are on whether it suggests it might need to hike the OCR again later in the year, or early next year, as some economists are forecasting.
Boak and Nixon also noted the fact National is campaigning on requiring the RBNZ to only target inflation, not inflation and employment.
They believed this was unlikely to have a material effect on the bank’s decision-making in the near term.
They noted the adoption of a dual mandate in 2018 didn’t make a big difference, “given RBNZ staff had long considered the labour market as a factor when setting policy”.
The analysts recognised the “maximum sustainable employment” target isn’t pegged to a number, “making it flexible in practice”. Furthermore, the RBNZ has been focused on reducing inflation, regardless of this target.
Boak and Nixon noted National’s pledge to scrap Fair Pay Agreements, which boost employees’ power to collectively bargain for higher wages, would have a dampening effect on inflation.
Nonetheless, they concluded that on balance, they see “incrementally hawkish risks to the RBNZ from a National-led Government”.
“From the perspective of currency markets, this could imply some upside risks to our standing NZ dollar/US dollar forecasts,” Boak and Nixon said.
“Although we are mindful that elevated political uncertainty in New Zealand has historically seen the NZ dollar depreciate in the weeks around elections.”
Because the Goldman Sachs analysts now see the US’s Federal Reserve delaying its interest rate cuts from the second to the fourth quarter of 2024, they believed the RBNZ could likewise delay when it starts cutting the OCR.
This said, they were mindful that an economic slowdown in China could dampen the New Zealand economy, prompting the RBNZ to cut the OCR sooner.
The RBNZ will update its OCR track and provide a fresh set of forecasts when it releases its next Monetary Policy Statement after the election on November 29.
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
