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Finance minister Nicola Willis and prime minister Chris Luxon (Photo: Getty Images)
Finance minister Nicola Willis and prime minister Chris Luxon (Photo: Getty Images)

The BulletinDecember 1, 2023

Sticky inflation and expensive policies give new government a fiscal headache

Finance minister Nicola Willis and prime minister Chris Luxon (Photo: Getty Images)
Finance minister Nicola Willis and prime minister Chris Luxon (Photo: Getty Images)

The PM says deep spending cuts are needed to fix the ‘economic vandalism’ of the previous government. But Luxon and Willis are already running up some big bills of their own, writes Catherine McGregor in this excerpt from The Bulletin, The Spinoff’s morning news round-up. To receive The Bulletin in full each weekday, sign up here.

OECD outlook muted as business confidence skyrockets

On Wednesday, the Reserve Bank combined an announcement that the official cash rate was staying at 5.5% with a warning that rates will need to stay higher for longer in order to properly quell inflation. Those higher rates are hitting many homeowners hard: almost 20,000 home loan accounts are now past due – 25% more than a year ago – according to credit bureau Centrix. The OECD’s latest economic outlook for New Zealand offers little hope for stretched mortgage-holders, either. The RBNZ will need to “maintain tight monetary policy” next year to keep a handle on inflation, it said. The inflation rate is currently sitting at 5.6% – well off last year’s peak of 7.3%, but still a long way from the central bank’s target of 2-3%. The OECD is forecasting growth to slow to 1.3% next year before ticking up to 1.9% in 2025, RNZ’s Gyles Beckford reports. While the economy will be soft for a while, business confidence is sky high post-election. A net 31% of respondents to the latest ANZ business confidence survey expect the overall economy to improve over the next 12 months – the highest proportion since 2015.

Coalition concessions challenge National’s ‘fiscally neutral’ tax cut package

Economic indicators are slowly moving in the right direction, but tax cuts could put that progress in jeopardy by raising inflation, the OECD warned. National has promised its tax cut programme will be fiscally neutral, however as Thomas Coughlan notes, that promise will be harder to keep in light of some expensive concessions made during coalition talks, such as scrapping the foreign buyers tax and accelerating the reinstatement of mortgage interest deductibility. On the other hand, some new policies will boost the government’s bottom line, including overturning the Smokefree Aotearoa policy and scrapping the plan to increase the Working for Families abatement threshold. As a result of the latter u-turn, families on the lowest incomes will see just $30 a week extra rather than the $67 they were promised, writes Marc Daalder at Newsroom. Prime minister Chris Luxon has blamed the RBNZ’s tighter-than-expected fiscal outlook on the previous government’s “economic vandalism” and said his government would do its part to drive down inflation by cutting wasteful spending across the public service.

Faster interest deductions for landlords mean higher costs for government

Here, courtesy of the Council of Trade Union’s Craig Renney, is a closer look at that mortgage interest deduction policy, and what it means for both rental property owners and the government’s coffers. When National campaigned on reinstating the tax deduction for landlords, its plan was for deductibility to be at 50% for the 2025 tax year, then gradually increased to 100% by 2027. Now, under pressure from Act, the government will move faster, allowing a 60% interest deduction in the 2024 tax year, and 100% by 2026. By Renney’s calculations, the sped-up implementation will cost the government $900m on top of the $2.1b already set aside to fund the change. The deduction would be retrospective, meaning some investors may be refunded for tax paid earlier this year. “That’s hugely unfair and simply rewards landlords for nothing,” says Renney.

Residential construction may be turning a corner

Not surprisingly, the faster phase-in of interest deductions has delighted property investors. Mega-landlord Matt Ryan – owner of more than 100 Wellington properties – calls it a “game-changer” for investors and says he’s already seeing a “dramatic shift” in property sales partly as a result. The housing market doldrums have been particularly tough on developers, who have been hit by a double whammy of high costs and lower prices. New Stats NZ figures show that the number of new-build homes dropped more than 20% in the past year, compared to the year before. But the cost of construction appears to have stabilised, reports’s Greg Ninnness. The average cost of building a three-bedroom home rose 4.9% this year, down from 11.3% in 2022. With dropping costs and a hotter property market, the new-build sector could be set for a turnaround in 2024.

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