National and Labour are campaigning on very similar macroeconomic policy platforms but differences in specific sectors could lead to some noticeable outcomes in the next three years.
Economists think the policies proposed by National could drive house prices higher, reduce food prices, and have a minimal impact on interest rates.
Whoever forms the next Government will have to operate within tight constraints and stay in line with fiscal responsibility rules that were baked into law by the 1989 Public Finances Act.
The pre-election update set out an extremely tight set of budget forecasts that many economists think neither party will be able to actually stick to.
“Despite the campaign rhetoric, the policy positions of the major parties are not substantively different, and we don’t expect transformative change,” ASB economists said in a note.
There has been inter-party support for funding core public services, including health, education and policing, just with differing positions on the details.
Labour and the Greens tend to lean more heavily on greater regulation and centralised control, while National and ACT favour a lighter touch regulatory regime and devolving services to the regions, they said.
Where there are differences between the two political wings, they are completely overshadowed by much bigger forces that are impacting the New Zealand economy.
For example, most of the world is grappling with high inflation and the sudden increase in interest rates which has eroded asset prices.
“The global outlook is tenuous with concerns over the Chinese outlook impacting broader risk appetite. Rising geopolitical tensions in the Middle East point to a more unsettled global environment going forward,” ASB said.
ASB economists said these dynamics would have longer-lasting impacts than policy tweaks put forward by either party during this election.
Pro-property policy
For example, National’s housing tax policies could encourage some investors to buy existing residential property, but rental yields will stay well below debt servicing costs.
Still, most economists agree that restoring tax deductibility of mortgage interest on investment property and bringing the Brightline Test back to two years from 10 will boost prices.
Kelly Eckhold, Westpac NZ’s chief economist, said these measures will “make investment in housing more attractive” and backed up his forecast that house prices will rise 7.7% next year.
Analysts from UBS agreed, saying the “clearest implication” of a National and Act coalition forming was a boost for the housing market.
Westpac NZ and Goldman Sachs have both said the National Party’s total tax package was likely to have a slightly expansionary, meaning inflationary, impact on the economy.
“Our view is that while this package might be fiscally neutral, it will still likely have a modest expansionary impact on the economy; perhaps to the tune of 0.2% to 0.3% of GDP,” Eckhold said.
Goldman Sachs went even further and suggested the cuts could lead to further increases in the Official Cash Rate (OCR), a claim which National has disputed.
ASB economists cast doubt on whether the policy would make it through coalition negotiations, with both Act and New Zealand First, in its current form.
“Tax relief will likely be scaled back, some proposed new taxes shelved, with more focus on government expenditure restraint. Such a scenario would help cement the Reserve Bank’s on-hold stance for the OCR,” they wrote.
Specifically, National’s controversial foreign home buyer tax could be shelved and decisions to raise the retirement age could be left for a future government, if NZ First holds the balance of power.
A wealth of taxes
If Labour did surprise pollsters and secure a third term, with the help of its left leaning allies, it would have to overcome a substantial disagreement over implementing a wealth tax.
The party considered putting one in place at Budget 2023 but backed out at the last minute.
Te Pāti Māori and the Green Party still support the policy and have insisted they will fight for it during coalition negotiations.
Treasury gave advice prior to the budget which said a wealth tax could help generate revenue and make the tax system more progressive.
However, it could discourage saving and investing, it would come with high compliance costs, and could be tough on people who hold valuable assets but have limited cash flow.
It could also cause some of the wealthiest New Zealanders to move their assets offshore.
Eckhold said this policy would likely discourage investment in rental housing and other low-yield assets.
“Such assets may generate limited cash flows relative to their purchase prices, but potentially sizable capital gains. The introduction of a wealth tax would therefore be likely to result in lower house price inflation,” he said.
National has also pledged to get rid of the Auckland Regional Fuel Tax, but Westpac believes any household savings would be offset by an increase in local rates and a higher carbon price.
Tread lightly on farmland
National and Act’s policies to reduce regulation of the agricultural sector could put climate goals at risk but should lead to lower food prices.
This could be a vote winner, with food prices up 8% in the past year and almost 30% in the past six years, even though regulations are not the main cause of this increase.
Eckhold said the proposed “lighter touch” climate and immigration regulations demonstrated a “clear distinction” between the left and right political blocs.
Looser immigration policies would allow for more employment at a lower cost, while less regulation and compliance could drive down production costs even further.
“When combined, these policies would also likely result in an increase in (food) output and thus lower food prices,” he said.
However, there was also a risk this lighter touch could mean New Zealand failed to meet its climate obligations and got hit with trade barriers or less demand from overseas buyers.
Lawyers at Chapman Tripp said the architecture created by the Zero Carbon Act and the Paris Agreement commitments should ensure all parties travel towards carbon neutrality by 2050.
This should be the case with either a National or Labour led Government, “notwithstanding ACT’s commitment to require the repeal of the Act as a bottom line in coalition negotiations”.
Meaningless mandate moves
Almost all economists think National and Act’s plan to remove employment objectives from the Reserve Bank’s mandates will have little-to-no effect on monetary policy.
“[It] could mean tighter policy settings in the near term given current high NZ inflation, but in practice this would not significantly change how the RBNZ operates,” ASB said.
The central bank’s policy response could change during a large supply shock, when inflation and unemployment were both increasing, but generally they travel in opposite directions.
Stephen Toplis, BNZ’s head of research, said he’d found “a number of investors” were nervous about the proposal to drop maximum sustainable employment as an objective.
“We think any such nervousness is unwarranted. We will not be making any major change to our view on monetary settings this cycle in the event the remit is adjusted,” he said in a note.
“We have long held the view that the secret to getting inflation to acceptable levels this time around is to get the heat out of the labour market. We will hold to that view.”
Only UBS seems to disagree with that view. It said the proposed change was “hawkish and implies a higher-for-longer OCR”.
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