The starting lights just turned to orange and the two political dragsters of Labour and National are getting ready to burn budgetary rubber in the race to Election 2023.
They now both know they have a lot of nitromethane and rubber to burn in a fiscal drag race over the next year, especially at the end when inflation is likely to have receded as a near-and-present danger for the Reserve Bank. By then, mortgage rates and bond yields are expected to have gone over the hump and be on their way down.
Expect Labour to be dreaming up new forms of middle class welfare over the summer that it can pitch as healthy for society and not (very) inflationary in the election campaign. Expect National to double down on the rhetoric about 'fiscal creep' and look to hand back plenty of those tax revenues to those who earn the most and those with multiple properties. Unlike Liz Truss, both Grant Robertson and Nicola Willis have plenty of budgetary room to move without spooking markets or worrying the Reserve Bank too much.
This week's Crown Accounts show the Government's financial position is in rude, good health, despite Covid. In some part, it's so strong because of Covid. The Operating Balance Excluding Gains and Losses for the year to June 30 was $9.7 billion, which was just half the deficit expected just five months ago. That's because tax revenues were $5.8b more than forecast and spending was $3.9b less than expected.
The Inland Revenue Department's new computer system is now a finely tuned machine sucking every last drop of tax out of PAYE, corporate income and GST in an economy that grew 5.1% in nominal terms over the year. Just as the dragster with the biggest wheels and engine goes fastest, the Government with the fastest growth in nominal incomes grows its tax revenues even faster. High inflation turns the IRD's Hoover into a Dyson with a turbo button.
Government subsidies boost profits to $71b
The phenomenon of fiscal drag and higher profit margins with fast-growing top-line business revenues is an impressive thing from an IRD point of view. Households are seeing (but not feeling) annualised income growth of 8% to 10% because they're working more hours and are getting hourly wage increases of around 5%. That means they're migrating up the PAYE tax thresholds to the higher tax rates. That $180,000 per year threshold for the new 39c tax rate seemed a long way away for most in 2020 when Labour pitched it at the election. Now it's racing up in many taxpayers' rear vision mirror at a great rate of knots. PAYE revenues rose $4.3b or 11.2% for the year, which was more than double nominal GDP growth and included $3.3b in extra taxes from higher wages and jobs growth.
The same leveraging effect of strong nominal GDP growth was evident in corporate tax revenues being $4.1b higher than the previous year, in part also because of the nearly $9.6b in cash in wage subsidies, resurgence payments and loans paid to companies in the financial year and an estimated 13% increase in profits. So much for the squeezed profit margins companies talk about all the time in business confidence surveys. These figures indicate corporate profits rose by $15b to $71b in the last financial year. That's after companies had to pay extra for wages and input costs. Top-line revenue growth from price increases obviously outpaced input costs, although nearly two-thirds of that top-line growth came from a very friendly source: the Government. A 28% corporate tax rate is one way to get back some of that cash gifted to companies, I suppose.
Inflation is the Government's friend
The end result of the Hoover turning into a Dyson because of fiscal drag and strong nominal GDP growth is that the Budget is powering its way towards a surplus before the election and net debt is sitting at just 17.2% of GDP. That is well below the new 30% net debt ceiling the Government has set for itself and just a fraction of the 60-120% debt levels that New Zealand's AA+-rated peers are laden with. It also illustrates what strong nominal GDP growth (ie inflation plus a bit of real growth) does for the denominator in a debt-to-GDP ratio. It's why Governments of all persuasions love a good burst of inflation. They can use fiscal creep and the diluting effects of fast-rising nominal GDP and negative real interest rates to water down the strength of public debt.
'A balanced approach to buying a third term'
Finance Minister Grant Robertson was preaching a good sermon on Wednesday about fiscal conservatism and taking a 'balanced' view that kept a lid on debt and didn't add much to inflation. He has a multi-decade and probably unending task to rebut the argument that Labour is the 'tax-and-spend' party that is 'addicted to spending' and is 'always blowing out the debt'. That has not been objectively true for 30 years, but these public narratives are hard to turn. The idea that National is the natural party of Government and always better for business is a hard idea to shift. Mere evidence that Labour and National have been just as fiscally conservative (or rightly not during crises) as each other since 1990 is not nearly enough to change voters' minds.
The fact that a Labour Government generated two-thirds of a $15b increase in corporate profits to record highs will not touch the sides. Or that a Labour Government ran Budget deficits of just 1.3% and 2.7% of GDP respectively in two of the most economically dramatic and risky years in our history. Governments elsewhere have racked up deficits of 10%-plus and have happily pushed their net debt to GDP ratios over 100%. Just imagine if you had just had a massive shock to your household's usual income of $100,000 per year and had feared a complete collapse, only to come out the other end of the crisis with a mortgage that rose from $10,500 to $17,200. That's what just happened to the Government's finances. No wonder Mum and Dad are not worried about promising some holiday spending next year.
National Finance spokesperson Nicola Willis will also see room to use the Government's strong finances to try to win the Treasury benches, but through handing back the fruits of fiscal drag to those who have to pay most of it, but also those who need it least.
Robertson, meanwhile, will be dreaming up ways to use that strong position to repeat the magic trick of 2005 when Labour won a third term against the political odds by promising interest-free student loans. That was also a Grant Robertson special when he was an advisor to then-Finance Minister Michael Cullen. There is an even bigger hat for him to pull a rabbit out of next year.
Crown financial results
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58 Comments
I'm not sure I see things quite as positively as this. The NZ economy is about to go down a dark hole for a year or two because of the stimulatory overshoot. Housing is already on the slide.
We, of course have the Ukraine situation with a nuclear threat hanging over the world and mounting evidence that China may be preparing to go to war.
Nothing there to feel good about.
The NZ economy is about to go down a dark hole for a year or two because of the stimulatory overshoot. Housing is already on the slide.
And Bernard has publicly stated that no NZ govt would allow a crash to happen. He seems to think that the Australasian monetary mechanisms can be adjusted accordingly to prevent this. Of course, if this were possible, the consequences would be huge.
Bernard may be a nice fellow
But he doesn't seem to join the dots - perhaps because of dinned-in mantra, perhaps because of the Upton Sinclair thing about jobs and emanations...
Either way, waves are breaking now which render this conversation obsolete before he penned it.
Come on, BH. :)
Why do we even let this become a political issue?
I will vote for a party that promises to legislate that the tax brackets to be adjusted by either 2% or actual inflation - whichever is higher - automatically, every single year.
It's basic tax administration and we're letting lazy governments boost their fiscal chops at our expense.
It is insulting to the public how long it’s been since the tax brackets have been adjusted. In fairness they should be inflation indexed, but leaving them manual does allow more fiscal manoeuvrability.
It’s a shame that they have been left this long as the public have now lost faith that they will be adjusted regularly.
The government is sucking 39 % of the nation's GDP in tax ...and spending 42 % ...
... that giant vampire bleeding us dry ... the IRD , courtesy of Robbo ...
And in his words , adjusting the tax bands to allow PAYE folk to keep more of their wages is " frittering it away " ... whereas when he spends it , its targeted & not inflationary ... ... Yeah , right !
If the government is running a budget deficit then it must be putting more money into our bank accounts through its spending than it is taxing back out again and so the private sector which is all of us must be in surplus. (Sectoral Balances). A funny sort of vampire that gives us its blood.
What's the bigger problem though?
Wages not keeping up or tax brackets not moving?
As a counterpoint, surely government spending is also impacted by inflation. So if we want our tax brackets to move with inflation, then the nurses, teachers, police have a comparatively (due to inflation) smaller of bucket to be paid from?
We failed to invest in productive enterprise, but pushed all money toward land speculation.
Now we have an aging population that's needing more pension money each year and more healthcare, and we've already tapped out working Kiwis to a great degree. Pension and healthcare costs will bleed us dry.
Expect Labour to be dreaming up new forms of middle class welfare over the summer
The current Labour leadership does not care about the middle class. Their target voter base is clearly welfare-dependent classes, ethnic and sexual/gender minorities, chardonnay socialists and bureaucrats.
Since 2020, the Labour party has also somewhat pivoted towards speculators and property investors by adopting trickle down economics in the name of emergency policy measures.
I think the reality for labour comes down to this:
Make life financially easier to own a rental property , or be voted out.
A huge number of the public who actually votes, own a rental property. They have taken a beating in the form on interest deductibility, rising interest rates etc.
Many simply can’t actually afford to vote labour anymore.
A huge number of the public who actually votes, own a rental property. They have taken a beating in the form on interest deductibility, rising interest rates etc.
If you think "taking a beating" includes making a 40%+ return on leveraged investment within 18 months, then you have no idea what "taking a beating" means.
It just blows my mind to see property investors who feel sorry for themselves, or feel somehow hard done by, when they have just made STUPIDLY high WINDFALL, ONCE IN A LIFETIME gains from leveraged property. And they are still sitting around with their hands out, whingeing and asking for more.
Reminds me of the old joke:
Q. Why did the undertaker bury the landlord just 2 feet deep?
A. So he could still get his handout.
The currency market was not impressed with yesterday’s announcement of a $9.7 billion deficit in Crown Accounts for year ending 30 Jun 22. Since it is $10 billion better than Treasury forecast you would have expected an increase in the NZD/USD but there has hardly been a ripple.
The reason for the lack of enthusiasm for NZD Is that NZ’s current account deficit (Exports - Imports) of $27 billion for year ending 30 Jun 22 or $5k per person shows that NZ is living beyond its means. This deficit has to be funded from overseas cash inflows.
At 1 July 2021 NZD/USD was 0.7000. At 30 June 2022 NZD/USD had fallen by 8.9% (0.6225) and as of today has now fallen 18% (0.5740)
The drop in NZD shows an increasing lack of confidence in the NZ economy.
This is the real story. NZ’s wealth has dropped dramatically through excessive money printing & government spending.
The majority of NZ Dollars are created by the banks through their lending. We only spend NZ Dollars in NZ and which all originate here and foreigners cannot create NZ Dollars to lend to us. Banks don't borrow money to lend and the government doesn't borrow money to spend, foreigners may choose to keep their NZ Dollars in NZ bank accounts or government bonds but they are not financing us.
If we are running current account deficits then more NZ Dollars must be created to finance it either by the banks or government. This is explained by the sectoral balance accounting identity (S-I) = (G-T) +(X-M).
"The drop in NZD shows an increasing lack of confidence in the NZ economy.
That may not be right for the times. The USD is appreciating against every currency. (yearly basis AUD/USD down -10.99%; JPY/USD down-22.87%; EUR/USD down-14.73%; GBP/USD down-16.87%). The reason being if everything comes crashing then USD will save the day- the premise. Only time will tell. The NZ economy is facing not so BAU times.
Bernard Hickey seems to think that the government cam be compared to a giant household that must find money before it can spend. But households are not currency issuers and so the comparison is meaningless.
Neither taxation nor borrowing have anything to do with financing the government, it always finances its own spending through the direct creation of new central bank reserves.
Robbo spent much of yesterday crowing about his skills as finance minister , in light of a mere $ 10 Billion operating debt , half of what treasurey predicted ... he also savaged the Gnats repeatedly for their proposed tax cuts for wealthy people ...
... wakey wakey , Gnats ... people earning over $ 180 thou do not need tax cuts ... if you adjust the lower tax bands , everyone ( high income earners too ) benefits ...
Robbo will hammer you mercilessly into next years election if you're so thick that you believe targeted tax cuts for wealthy folk are a necessity.
This government has already ravaged the middle class, who are now seeing the management of the government and fiscal policy has landed them paying out much more per week. The public are starting to see the stealth tactics and lack of transparency, and we don;t want a snake in our bed after next election.
.. whether it is or isn't isn't the point ... Robbo will endlessly hammer the Gnats with " tax breaks for rich mates " from here until election day 2023 ...
And , given our progressive tax system ... everyone gains from tax changes to the lower 2 or 3 bands ... lower , middle , upper earners ...
... compared to most OECD countries , our top tax rate of 39 cents/$ is comparatively modest ...
The TOP proposal:
To understand how much better off you’d be with our new income tax thresholds:
- With an annual income of $15,000, you’ll have an extra $1,645 a year.
- With an annual income of $30,000, you’ll have an extra $1,270 a year.
- With an annual income of $45,000, you’ll have an extra $895 a year.
- With an annual income of $60,000, you’ll have an extra $2,020 a year.
- With an annual income of $75,000, you’ll have an extra $3,670 a year.
The income tax-free threshold and new income tax rates will deliver approximately $6.35 billion of tax cuts to hard-working Kiwis.
https://www.top.org.nz/higher-incomes-policy
Labour should just take whatever amount National is promising in tax cuts - say $3B - and apply that solely to the lowest tax bracket. Then they can say we’ve given everyone a pretty much equal tax cut, who would rather have nationals tax cuts for rich mates and property speculators?
Being a centrist, I hadn't given too much thought to ACT's policies before but now I find myself agreeing with most of them, environment, firearms and immigration aside.
In matter of environment and firearms, a carrot or stick approach works and markets don't function properly without regulations.
Simplify the Accredited Employer Work Visa scheme by abolishing labour market tests and wage rules - Yeah nah, that's what the visa scheme looked like pre-2017 and all it did in the name of higher economic output was increase the number of cafes and takeaways across the country.
Surely it's a no brainer for Labour to adjust the tax brackets instead of a middle class handouts.
keep the 39% rate, big hike to the brackets, and introduction of a modest 5K tax free personal allowance.
Should kill Nationals narrative that Labour are the 'tax and spend' party.
That neutralises National policies, the only thing they are left with helping the super rich by getting rid of the 39% rate and the landlord taxes.
They need to get rid of the Accommodation and FHB supplements (welfare to speculators and landlords), and phase out WFF (wage bill subsidies). This also means needing to liberalise zoning - in progress but battling against authoritarian NIMBY entitlement mentality.
Certainly there's a need to balance taxation between productive working Kiwis and property speculators...Can't have working Kiwis bearing all the load while speculators freeload again.
Flagrant violation of the Nuremberg Code, knowingly promoting a dangerous experimental "vaccine" as safe, coercion of employees to take the jab or bugger off, suppression of information about safe and effective alternatives, suppression of nurses saying what they were seeing in the wards, suppression of information of death and injury from the "vaccine".
https://nzdsos.com/new-zealanders-stories-and-suggestions/
Guy Hatchard, a kiwi medical research analyst:
https://www.conservativewoman.co.uk/vaccine-damage-is-a-matter-of-healt…
Unfortunately our sad Deluded Puppet Woman is a liar, a traitor and the useful idiot of foreign interests. I suspect the curated alternative is not much better. Sorry if that seems excessive, but these are very strange times.
Someones slipping down the misinformation rabbit hole...
Facebook posts aren't evidence of anything. Nuremberg Code is only concerned with experimental treatments AFAIK, COVID vaccines once past the fairly rigourous testing phases (where people DO give their consent to be experimented on) aren't experimental after that...so doubt it applies. While people were coerced a wee bit, they always had the option of opting out, just with consequences. Was it harsh? Yes, but COVID killing thousands and overwhelming the medical systems appeared to be a lot harsher given that's what happened overseas. At some point the government has to choose the lesser of two evils.
Just a bit of critical thought here should see you through.
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