Instead of looking at this, I’m going to have a quick look at the Macro-economic concerns stemming from this tax policy. First lets ask Mr Market what he/she thinks:
That was a 70 basis point increase in our trade-weighted index of our dollar (update, as of 4.25pm the lift hit 100 basis points, if we keep going we might get back to where we were before the employment numbers came out 🙂 ) – compared to the 40 basis point fall from the poor retail numbers and the 50 basis point fall from a reduction in employment. Damn!
What does this mean. Well following Dr Cullen’s commitment to $4.6bn a year of tax cuts (once they are fully introduced – WFF benefits are being taken as tax cuts as they have the same stimulatory impact) will have a significant impact on consumer spending now – reducing the RBNZ’s ability to cut interest rates in the foreseeable future. This is contrary to his statement that:
in the current climate of low growth, with downside risks coming from international influences, and an easing labour market, I am reasonably well-satisfied that the package will not lead to further rises in interest rates
The fiscal stimulus from the October cuts alone is $1.6bn (three times what I was expecting) and the knowledge that taxes will be cut in the future will promote borrowing now – especially in the face of high food and fuel prices.
On the plus side, the tax side of this package will increase labour supply incentives – and should have some small impact on savings rates. However, overall this is a demand side expansion rather than a supply side expansion – with tax cuts having been focused at the areas of the economy that will spend rater then save it.
The economy is looking increasingly fragile as the result of severe aggregate supply shocks. The total result of this fiscal stimulus now will be to drive inflation over 5% by September (Note: This is wild conjecture on my part – it is a pretty wild forecast) – without avoiding a technical recession over the first half of this year. This situation seemed like a possibility before budget day – now it seems more likely. If only tax thresholds had been inflation adjusted to start with!
Update: Why are people complaining about the size of these tax adjustments – anything bigger would have been fiscally irresponsible, fiscal change is a gradual thing (especially in a high inflation environment). Surely no-one was expecting us to just copy the Australian tax system immediately – such a move would have been economically ridiculous and National wouldn’t have done it either (although they may have cut the taxes in different areas). Although to be fair not everyone is complaining.