Editorial: Economic update presents a challenge for voters

Labour leader Jacinda Arden. Photo/ Michael Craig

Opinion

Labour leader Jacinda Ardern has wisely ruled out an increase in the top rate of income tax after reading the Treasury's pre-election economic and fiscal update yesterday.

On the strength of the update, Labour would have no need to raise the rate unless it was planning an excessive splurge in state spending.

Tax revenue for the current financial year is now expected to be $1 billion above the level in the Budget update just three months ago. Much of the unexpected harvest has come from finance and investment (strong stockmarkets), economic growth and high employment levels that were evident in May but had not yet to show up in tax data.

Economic activity has increased since March, having previously been reduced by the Kaikoura earthquakes and a wet summer. Exports recovered, both in volume and value, in the June quarter and the British and Irish Lions rugby tour in July gave a further boost to tourist receipts that has yet to be recorded.

With lower import prices, especially oil, the country's terms of trade are expected to show their highest level in 40 years. The international economy is improving too.

The economic outlook could hardly be brighter as the election approaches. The only cloud on the Treasury's horizon is the slowing of the housing market, especially in Auckland, which might dampen discretionary household spending a little.

But with interest rates remaining low, thanks to no significant inflation in the outlook, and net immigration expected to continue at current levels for the next few years, houses are unlikely to depreciate.

Business investment has picked up over the past year, mainly in equipment, and fulltime employment has risen by 3 per cent. Unemployment is down to 4.8 per cent. Over the same period, wages have risen, though mainly in the public sector.

The Treasury is concerned that private sector wages are not rising as much as they should when unemployment is so low. Though it does not say so, migrant labour must be keeping wages down.

Strong population growth, continuing improvement in the international economy, tax cuts that will take effect in April (election permitting) and low interest rates are all expected to help keep the New Zealand economy expanding for another two years. At that point its capacity to expand further would be limited. A challenge for the next government lies there.

Finance Minister Steven Joyce took a bearish attitude to the fiscal update, noting that economic growth and budget surpluses were down on the previous projection. There would be little spare cash for additional spending beyond the year ahead and he even ruled out further tax cuts after next year's threshold adjustments until 2020-21, the election year after this one.

Labour has no reason to be so dour. Since it will not raise that tax threshold next year, it has more to spend. And if it can spend it in ways that boost productivity as well as wages it could be expanding the capacity of the economy. But if it spends unproductively it runs the risk of taxing the economy to a standstill.

Voters must try to assess that risk.