Paying subscribers can ask Bernard Hickey about the week’s news, including Budget 2023, how inflationary it was, what might happen to mortgage rates and what it means for the election
Thanks Andrew. Fantastic question. I'd love Treasury and RBNZ to put version of their models up for the public to play with to see what happens when the settings in the economy are tweaked. IE, what happens if you changed tax rates in a certain way? Higher inflation? Higher interest rates? Bit like Sim City or Minecraft, but for the political economy. The answer I think would depend on what other settings National would run, including migration and government spending elsewhere.
Question on inflationary impulse- I may have missed this but what are the big drivers? It doesn’t seem like it was deliberate changes but mostly inflation-driven increases to benefits and govt department operating costs? In other words caused by inflation - and given the scale of the govt in turn causing more inflation. Could the govt have done any different?
There were a few extras in there, including the various promises on school lunches, early childhood education, the 5$ prescription fees and extra Kainga Ora money, probably totalling about $4b of 'fresh' money up front. The Government could have done a bunch of things different, including increasing tax on those who could afford it most to suck some spending energy out of the economy, along with ramping up long term investment to increase supply of houses, transport and skilled and healthy workers.
I see Mr Luxon is now saying that National would scrap the $5 prescription fee for Community Services and Gold Card Holders. Isn't this group that are the most affected and there would be not much to gain from charging the other parts of the population? Also, The Government has said it will get the Commerce Commision to hold an enquiry into banks. Wouldn't be better for the Government to power up Kiwibank so it could compete with the Aussie owned banks.
Thanks Paul. Both good things to scrap it for Community Service Card holders and Gold Card holders. But that still leaves a bunch of people who can't afford the fee and don't have community service cards. It also leaves the costly charging infrastructure in place. Best to remove it completely, and much cheaper than building new hospitals.
In terms of the budget announcements, why is everything stated in 4-year expenses? GPD is per year, salaries are per year, government term is 3 years, so where did 4 years come from?
And how does this work for policies that are less than this time period? For example, "Extending the free school lunch programme until the end of 2024 ($325 million over four years)". How does a policy designed to expire in 18 months have a cost over 4 years?
Thanks Warren. Good question on why four years, and not one or three. I suspect it's designed to avoid the tyranny of only planning term by term, even though that happens anyway. I'll hunt down the history. On the school lunch thing, I've written four years, which is technically correct, but you're right that is only covers the period to the end of 2024, which includes two 'halves' of the 2022/23 and 2023/24 fiscal years. Details in this document on page 90. https://budget.govt.nz/budget/pdfs/summary-initiatives/b23-wellbeing-budget-soi.pdf Cheers
Do you think that better organised ( maybe via phone app ) volunteer based walking "bus" & similar cycling "bus", along with real public transport supervision by volunteers ( who should get free travel ) , could significantly reduce the traffic & pollution of school drop off & pick up times?
Hi David, I run the school road patrol in Brooklyn, Wellington. Parent and community volunteers are out at 8.20am rain or shine to make sure our tamariki are safe on their way to school. I love doing it and consider it to be an important part of my climate action but it can be really difficult to get volunteers and keep them. It was great post Covid when lots of parents were stilll working from home but that arrangement doesn't seem to have stuck. It can also be scary to step out onto a pedestrian crossing while Ford Ranger drivers are going 60km/hr in a 30 zone and are texting at the same time. I've had close shaves and that puts people off. But I'd love every kid to walk who can. My son walks 20 mins downhill, 30 min uphill to high school and it is the social highlight of his day.
Scary good and simple question. In theory, the Government would say it provides the infrastructure and services base for the rest of the economy to grow. Over the next four years, the Government will collectively actually detract from economic growth, but not in the next year or two because it is spending more than it 'earns', making up the difference with about $5b more borrowing per year.
Does the budget announcement add inflationary pressures, or is it just formalizing the pressures we already knew existed?
The reserve bank stated at its last OCR hike that it had to hike because of the stimulatory pressures that would be created from cyclone spending. So hasn't that stimulation has already been factored in, and therefore shouldn't push up interest rates/OCR further?
Indeed. We need to be careful not to double count some of these pressures. The key thing is Budget 2023 does have new policies and the 'fiscal impulse' detailed in the chart above is collectively about 1 percentage point of GDP stronger than the Reserve Bank knew and assumed from the December half year statement and forecasts. Yesterday's Budget is the new news for the RBNZ to digest. I said in today's email the net change is about 1 percentage point and 25 basis points worth of tightening, according to Treasury. We'll see next week if that's also how the RBNZ sees it, and whether the RBNZ calls out the Government on it.
Hi Bernard, this is an idea for your advocacy of LVT. Could you, or in combination with TOP, get computer modelling of the introduction of a revenue neutral LVT offset against a reduction in one of the taxes on labour and labour products? A reduction on GST on food would most benefit the poor but all sources of GST or income tax could be chosen.
In the late 19th and early 20th centuries in Victoria, Australia local councils sent example bills and then held a plebiscite for a change to site value rating. Nearly always the change was voted for. Now with computer modelling this would be relatively easy, getting the data would be the challenge. Perhaps a limited area like Canterbury could be used.
I think the changes Labour has made like the Bright Line test and landlord tax deductibility mainly impact on Mum and Dad investors. I doubt it impacts much on the super rich such as the 311 families the IRD found to have a mean estimated net worth of 276M. Even a CGT would have more impact on the small investor as you only incur the tax if you have to sell.
It was sad that neither major political party saw the IRD figures as a significant issue.
Great idea Sally. Something anyone could do, and it would be great for someone with the best and real models. It would be a good exercise for someone publicly minded in Treasury to do. Hope they're watching here. I know they subscribe. :)
What's Standard & Poor's deal with our credit rating? We're one of the most fiscally conservative countries in the world - if we're "frightening" them with our slightly less than austere (but still highly austere by global standards) budget then surely they aren't fans of lending money to the vast majority of countries out there?
I find all of this ironic given they are the company that stamped toxic subprime mortgage backed security bonds that send the global economy into the toilet in 2008 with AAA credit ratings...
(Slight rant at these ratings agencies thinly disguised as a question today)
Thanks Nick B. I'd agree we should take S&P and Moody's comments with a grain of salt. They don't have a great track record of predicting big events or protecting end investors. They are fundamentally conflicted in that they represent the interests of bond issuers, especially the corporate and bank ones. They see themselves more as independent arbiters on sovereign ratings, but I'm also sceptical on that too, given their view and advice is almost always the (previous) Washington Conensensus favouring lower taxes, deregulation, low public debt and austerity. In many ways, it's their job to discourage talk tough to suggest they're all about protecting investors, especially on government bonds where there's no question about whether the bonds will be issued and that they need to be rated. Actually, the demand for these bonds is enormous because there is such a concentration of wealth now in so few hands that want risk-free assets to protect, rather than growth wealth. Also, banks are forced to buy them by central banks for liquidity and safety reasons.
Maybe a few of the pitch forks will be put down, but there's still plenty of room to brandish fire brands and agricultural implements. It doesn't touch the vast bulk of wealth or income. Plenty more taxing of wealth to do, in my view.
Interesting piece by Henry Cooke on his substack, Museum Street, trying to put some flesh on National's idea of a tax receipt. Bernard, do you think this approach is misleading? The usual media reporting and politician spouting, talking in figures beyond most of our comprehension, comparing wildly dissimilar quantities, etc, seems to disguise a multitude of sins. This begins to give some proportionality. I wonder if it might backfire on the blue meanies in National when it becomes clear they're talking about peanuts in terms of 'government waste'. If not this, then what?
Thanks for the heads up on that Glen. I need to go over and read Henry's piece. He's often excellent. My first impression was it looked like a dumb gimmick that will be good for NZ Post's revenues, but little else. But I'd like to take a deeper look. It will all depend, of course, on how the information is organised and framed. It will be hard to make it look independent or reliable, given the potential for propagandising. The IRD and Treasury won't be loving the prospect. Just seems like more jobs for comms people...but I should withhold judgement... :)
Thanks Paul. I missed this yesterday. I actually think this is a fantastic result. Te Matatini is the most amazing force for good and a spectacular combination of entertainment, cultural expression and community building. It will be some of the best money the government has ever spent. I'd recommend watching some of the videos and the coverage. It is a thrilling and often moving thing to watch.
I'm naive in these things. Could you elaborate on why this budget is inflationary? Is it simply the amount of spending or it the kind of spending matter? What could they have done (within what little they seem willing to do) to make it less inflationary?
True. Although some of that money from local funds will be from within the local ecosystem. Arguably more inflationary when bringing in overseas fund money. Maybe.
I'm with Mr Anderson on this one. We've seen from 30 years of experience that starving government services and investors has made so many poorer, sicker and less productive. A false economy in the end.
So to give an idea of the end goal and to solve the problem, what is the quantum you need to give to help catch-up? Is it a $10k, $50k or $100k per person to solve. Is it a free house to anyone who's not a millionaire? As the strategy seems to be buying some fish’n’chips, rather than teaching to fish?
We are not creating healthy children, very year, every govt puts more money into the pot for education, housing and welfare. We have $2B for mental health, an insane some, yet years later no one can point to meaningful outcomes?
The theory is the Government will add to inflationary pressures by bidding for more stuff and people already in the economy, thus pushing up prices and wages. The (roughly) $5 billion being spent is going into school lunches etc that wouldn't otherwise have been demanded. Good for Goodman Fielder and Fonterra.
Given how severely the current Reserve Bank Governor Adrian Orr has been criticised by members of NZ National party, what chance do you think he might hold off unpopular actions that might significantly reduce the chances of the NZ Labour Party staying in power?
Thanks David. Fair question. I could ask it in the news conference next week, although I would expect a volcanic response along the lines of accusing me of suggesting he was partisan. I don't think he is and he will do what he thinks is right under the Act. But I agree the tone of what he says will be interesting. Will be must-see-TV. I'll be in the news conference asking questions on behalf of subscribers. I welcome your well-crafted suggestions.
Hi Bernard. To what extent do you think the funding crisis in Auckland Council is real or simply generated to provide a rationale for austerity measures?
It is ideological. Auckland has clearly had the sort of shocks that anyone with a sensible approach to balance sheet management would use debt to buffer. It's just nuts that a AA+ rated council in the fastest growing city in the fastest growing country in the developed world thinks it has run out of money.
Thanks, that's what I suspected. There is a lack of public outcry on this which is disappointing perhaps due to few reporters and commentators taking them to task on it!
Given Chris Luxons personal unpopularity(see the taxpayer union poll that out his net likeable rating at -7 compared to +22 for Hipkins and the TV3 poll showing half of voters thought he was out of touch) do you think there is any way National can win the election with Luxon as leader, even with more OCR hikes? I think not and see Luxons unpopularity as an albatross dragging National down
Thanks Nicholas. I agree it's looking harder for National the more we hear from Luxon. But there's plenty of variables that could change the trajectories of the various parties over the next five months. And National will be loathe to dump a leader five months before the election. There is no obvious Ardern v 2.0 lurking in their ranks and ready to explode with popularity at the last minute on the big stage. And National is a conservative party. Its first instinct is to do nothing. Which is sometimes the right one. And sometimes not.
A lot of commentary on the inflationary impact of the budget. What would be the effect if National’s tax proposals had been followed?
Thanks Andrew. Fantastic question. I'd love Treasury and RBNZ to put version of their models up for the public to play with to see what happens when the settings in the economy are tweaked. IE, what happens if you changed tax rates in a certain way? Higher inflation? Higher interest rates? Bit like Sim City or Minecraft, but for the political economy. The answer I think would depend on what other settings National would run, including migration and government spending elsewhere.
An idea for the gaming industry to put their subsidy to good use?
Question on inflationary impulse- I may have missed this but what are the big drivers? It doesn’t seem like it was deliberate changes but mostly inflation-driven increases to benefits and govt department operating costs? In other words caused by inflation - and given the scale of the govt in turn causing more inflation. Could the govt have done any different?
There were a few extras in there, including the various promises on school lunches, early childhood education, the 5$ prescription fees and extra Kainga Ora money, probably totalling about $4b of 'fresh' money up front. The Government could have done a bunch of things different, including increasing tax on those who could afford it most to suck some spending energy out of the economy, along with ramping up long term investment to increase supply of houses, transport and skilled and healthy workers.
Good point - I was underestimating what that new money added up especially with the extension of 20 hours free.
Two questions Bernard.
I see Mr Luxon is now saying that National would scrap the $5 prescription fee for Community Services and Gold Card Holders. Isn't this group that are the most affected and there would be not much to gain from charging the other parts of the population? Also, The Government has said it will get the Commerce Commision to hold an enquiry into banks. Wouldn't be better for the Government to power up Kiwibank so it could compete with the Aussie owned banks.
Thanks Paul. Both good things to scrap it for Community Service Card holders and Gold Card holders. But that still leaves a bunch of people who can't afford the fee and don't have community service cards. It also leaves the costly charging infrastructure in place. Best to remove it completely, and much cheaper than building new hospitals.
In terms of the budget announcements, why is everything stated in 4-year expenses? GPD is per year, salaries are per year, government term is 3 years, so where did 4 years come from?
And how does this work for policies that are less than this time period? For example, "Extending the free school lunch programme until the end of 2024 ($325 million over four years)". How does a policy designed to expire in 18 months have a cost over 4 years?
Thanks Warren. Good question on why four years, and not one or three. I suspect it's designed to avoid the tyranny of only planning term by term, even though that happens anyway. I'll hunt down the history. On the school lunch thing, I've written four years, which is technically correct, but you're right that is only covers the period to the end of 2024, which includes two 'halves' of the 2022/23 and 2023/24 fiscal years. Details in this document on page 90. https://budget.govt.nz/budget/pdfs/summary-initiatives/b23-wellbeing-budget-soi.pdf Cheers
From Canada, Why did Kids Stop Walking to School?
https://www.youtube.com/watch?v=DqvQ-5784po
Do you think that better organised ( maybe via phone app ) volunteer based walking "bus" & similar cycling "bus", along with real public transport supervision by volunteers ( who should get free travel ) , could significantly reduce the traffic & pollution of school drop off & pick up times?
Great idea! We need many more of these types of community-based, voluntary and 'active urbanism' style things. More power to you David!
Hi David, I run the school road patrol in Brooklyn, Wellington. Parent and community volunteers are out at 8.20am rain or shine to make sure our tamariki are safe on their way to school. I love doing it and consider it to be an important part of my climate action but it can be really difficult to get volunteers and keep them. It was great post Covid when lots of parents were stilll working from home but that arrangement doesn't seem to have stuck. It can also be scary to step out onto a pedestrian crossing while Ford Ranger drivers are going 60km/hr in a 30 zone and are texting at the same time. I've had close shaves and that puts people off. But I'd love every kid to walk who can. My son walks 20 mins downhill, 30 min uphill to high school and it is the social highlight of his day.
AT runs a perfectly fine volunteer--led 'walking school bus' program in Auckland - with focus on small rewards and celebrations for participation.
https://at.govt.nz/cycling-walking/travelwise-school-programme/walking-school-bus/
How does this budget grow the economy?
Scary good and simple question. In theory, the Government would say it provides the infrastructure and services base for the rest of the economy to grow. Over the next four years, the Government will collectively actually detract from economic growth, but not in the next year or two because it is spending more than it 'earns', making up the difference with about $5b more borrowing per year.
Does the budget announcement add inflationary pressures, or is it just formalizing the pressures we already knew existed?
The reserve bank stated at its last OCR hike that it had to hike because of the stimulatory pressures that would be created from cyclone spending. So hasn't that stimulation has already been factored in, and therefore shouldn't push up interest rates/OCR further?
Indeed. We need to be careful not to double count some of these pressures. The key thing is Budget 2023 does have new policies and the 'fiscal impulse' detailed in the chart above is collectively about 1 percentage point of GDP stronger than the Reserve Bank knew and assumed from the December half year statement and forecasts. Yesterday's Budget is the new news for the RBNZ to digest. I said in today's email the net change is about 1 percentage point and 25 basis points worth of tightening, according to Treasury. We'll see next week if that's also how the RBNZ sees it, and whether the RBNZ calls out the Government on it.
Hi Bernard, this is an idea for your advocacy of LVT. Could you, or in combination with TOP, get computer modelling of the introduction of a revenue neutral LVT offset against a reduction in one of the taxes on labour and labour products? A reduction on GST on food would most benefit the poor but all sources of GST or income tax could be chosen.
In the late 19th and early 20th centuries in Victoria, Australia local councils sent example bills and then held a plebiscite for a change to site value rating. Nearly always the change was voted for. Now with computer modelling this would be relatively easy, getting the data would be the challenge. Perhaps a limited area like Canterbury could be used.
I think the changes Labour has made like the Bright Line test and landlord tax deductibility mainly impact on Mum and Dad investors. I doubt it impacts much on the super rich such as the 311 families the IRD found to have a mean estimated net worth of 276M. Even a CGT would have more impact on the small investor as you only incur the tax if you have to sell.
It was sad that neither major political party saw the IRD figures as a significant issue.
Who are they representing?
Great idea Sally. Something anyone could do, and it would be great for someone with the best and real models. It would be a good exercise for someone publicly minded in Treasury to do. Hope they're watching here. I know they subscribe. :)
How can anyone employed by Treasury not be publicly minded? What is their job if not to look after the public’s interests?
What's Standard & Poor's deal with our credit rating? We're one of the most fiscally conservative countries in the world - if we're "frightening" them with our slightly less than austere (but still highly austere by global standards) budget then surely they aren't fans of lending money to the vast majority of countries out there?
I find all of this ironic given they are the company that stamped toxic subprime mortgage backed security bonds that send the global economy into the toilet in 2008 with AAA credit ratings...
(Slight rant at these ratings agencies thinly disguised as a question today)
Thanks Nick B. I'd agree we should take S&P and Moody's comments with a grain of salt. They don't have a great track record of predicting big events or protecting end investors. They are fundamentally conflicted in that they represent the interests of bond issuers, especially the corporate and bank ones. They see themselves more as independent arbiters on sovereign ratings, but I'm also sceptical on that too, given their view and advice is almost always the (previous) Washington Conensensus favouring lower taxes, deregulation, low public debt and austerity. In many ways, it's their job to discourage talk tough to suggest they're all about protecting investors, especially on government bonds where there's no question about whether the bonds will be issued and that they need to be rated. Actually, the demand for these bonds is enormous because there is such a concentration of wealth now in so few hands that want risk-free assets to protect, rather than growth wealth. Also, banks are forced to buy them by central banks for liquidity and safety reasons.
Does lifting the Trust rate to 39% appease those with tax pitch-forks, given the wealthy (mostly) will receive their dividend (income) though trusts
IMHO - this was a master stroke.
Indeed. It was politically and financially clever, particularly in the wake of the IRD report a few weeks ago.
Maybe a few of the pitch forks will be put down, but there's still plenty of room to brandish fire brands and agricultural implements. It doesn't touch the vast bulk of wealth or income. Plenty more taxing of wealth to do, in my view.
Interesting piece by Henry Cooke on his substack, Museum Street, trying to put some flesh on National's idea of a tax receipt. Bernard, do you think this approach is misleading? The usual media reporting and politician spouting, talking in figures beyond most of our comprehension, comparing wildly dissimilar quantities, etc, seems to disguise a multitude of sins. This begins to give some proportionality. I wonder if it might backfire on the blue meanies in National when it becomes clear they're talking about peanuts in terms of 'government waste'. If not this, then what?
Thanks for the heads up on that Glen. I need to go over and read Henry's piece. He's often excellent. My first impression was it looked like a dumb gimmick that will be good for NZ Post's revenues, but little else. But I'd like to take a deeper look. It will all depend, of course, on how the information is organised and framed. It will be hard to make it look independent or reliable, given the potential for propagandising. The IRD and Treasury won't be loving the prospect. Just seems like more jobs for comms people...but I should withhold judgement... :)
Is $34M for kapa-haka a quality spend, given it could fund the construction of over a hundred family homes (more if Shane B builds them)
Thanks Paul. I missed this yesterday. I actually think this is a fantastic result. Te Matatini is the most amazing force for good and a spectacular combination of entertainment, cultural expression and community building. It will be some of the best money the government has ever spent. I'd recommend watching some of the videos and the coverage. It is a thrilling and often moving thing to watch.
I'm naive in these things. Could you elaborate on why this budget is inflationary? Is it simply the amount of spending or it the kind of spending matter? What could they have done (within what little they seem willing to do) to make it less inflationary?
They are spending borrowed money.
True. Although some of that money from local funds will be from within the local ecosystem. Arguably more inflationary when bringing in overseas fund money. Maybe.
Its a low quality spend that doesn’t creat economic growth - (increase productivity)
Healthy people and educated children don't create economic growth?
I'm with Mr Anderson on this one. We've seen from 30 years of experience that starving government services and investors has made so many poorer, sicker and less productive. A false economy in the end.
So to give an idea of the end goal and to solve the problem, what is the quantum you need to give to help catch-up? Is it a $10k, $50k or $100k per person to solve. Is it a free house to anyone who's not a millionaire? As the strategy seems to be buying some fish’n’chips, rather than teaching to fish?
We are not creating healthy children, very year, every govt puts more money into the pot for education, housing and welfare. We have $2B for mental health, an insane some, yet years later no one can point to meaningful outcomes?
The theory is the Government will add to inflationary pressures by bidding for more stuff and people already in the economy, thus pushing up prices and wages. The (roughly) $5 billion being spent is going into school lunches etc that wouldn't otherwise have been demanded. Good for Goodman Fielder and Fonterra.
Given how severely the current Reserve Bank Governor Adrian Orr has been criticised by members of NZ National party, what chance do you think he might hold off unpopular actions that might significantly reduce the chances of the NZ Labour Party staying in power?
Thanks David. Fair question. I could ask it in the news conference next week, although I would expect a volcanic response along the lines of accusing me of suggesting he was partisan. I don't think he is and he will do what he thinks is right under the Act. But I agree the tone of what he says will be interesting. Will be must-see-TV. I'll be in the news conference asking questions on behalf of subscribers. I welcome your well-crafted suggestions.
Hi Bernard. To what extent do you think the funding crisis in Auckland Council is real or simply generated to provide a rationale for austerity measures?
It is ideological. Auckland has clearly had the sort of shocks that anyone with a sensible approach to balance sheet management would use debt to buffer. It's just nuts that a AA+ rated council in the fastest growing city in the fastest growing country in the developed world thinks it has run out of money.
Thanks, that's what I suspected. There is a lack of public outcry on this which is disappointing perhaps due to few reporters and commentators taking them to task on it!
Given Chris Luxons personal unpopularity(see the taxpayer union poll that out his net likeable rating at -7 compared to +22 for Hipkins and the TV3 poll showing half of voters thought he was out of touch) do you think there is any way National can win the election with Luxon as leader, even with more OCR hikes? I think not and see Luxons unpopularity as an albatross dragging National down
Thanks Nicholas. I agree it's looking harder for National the more we hear from Luxon. But there's plenty of variables that could change the trajectories of the various parties over the next five months. And National will be loathe to dump a leader five months before the election. There is no obvious Ardern v 2.0 lurking in their ranks and ready to explode with popularity at the last minute on the big stage. And National is a conservative party. Its first instinct is to do nothing. Which is sometimes the right one. And sometimes not.