Economic Week - September 11

by Nick Clark

Tax Policy to the Fore

The battlelines have been drawn with the Labour Party announcing its tax policy.

The long-awaited policy signals little change, except a new 39 percent top rate for personal income tax.  This is expected to affect only two percent of taxpayers and raise $550 million per year.

Although there will be no income tax changes for 98 percent of taxpayers, the policy does not address 'bracket creep' where more and more people have found themselves in higher tax brackets – with 21 percent now earning over the $70,000 top threshold.  Federated Farmers has long supported indexing income tax thresholds for inflation.

Targeting tax hikes on the ‘top two percent’ might sound reassuring for most voters and many voters will like the idea of 'taxing the rich'.  However, beyond adding some progressivity to the tax system, ensuring that only few people pay more means the money forecast to be raised is miniscule.  $550 million sounds like a lot but it’s equivalent to one week of the wage subsidy and it’s dwarfed by the $30 billion deficit forecast for the current 2020/21 financial year (on top of a forecast $28 billion deficit for the last 2019/20 financial year).

Even $550 million may be an overstatement.  When New Zealand last had a 39 percent top rate many higher income people formed companies and trusts which were taxed at their lower rates.  This could happen again, especially as the gap between the proposed top personal income tax rate and the company tax rate will be a lot bigger (11 cents under Labour’s policy (39 vs 28) compared to 6 cents twenty years ago (39 vs 33).

Labour’s promise to spend the extra revenue to ‘protect health and education, control debt, and support the recovery plan’ sounds imminently reasonable but it will be crucially important that any new or increased spending is good quality and provides value for money.  That dopey ideas like the 'Green School' were able to get ‘shovel ready’ funding ‘supporting the recovery’ indicates more emphasis is needed on quality over quantity.

Labour’s promise of ‘no new taxes, or further increases to income tax next term’ presumably means no land tax, no capital tax, no capital gains tax, no estate and death duties, and no environmental taxes.  If that is the case, then that will be a relief, especially for farmers who would be especially hammered by all these taxes.

Its promise not to raise fuel taxes will also make motorists happy but rises in ETS emissions prices happening over the coming years will flow through to higher petrol and diesel prices.

There was no mention of GST or company tax, other than the promise to ‘close loopholes’ so multinationals pay their ‘fair share’ of tax.

It’s important to note that this is Labour Party policy and the Greens have their own tax policy which involves heftier income tax rises affecting many more taxpayers as well as new taxes (e.g., capital tax and environmental taxes).  The Greens criticised Labour’s policy as ‘tinkering’ which will not solve issues like inequality.  If they have a say in the next government then some of their tax policies could end up on the negotiating table.  NZ First, Labour’s other partner in government, has yet to release its tax policy.

The National Party is also yet to release its detailed fiscal and tax policy (awaiting next week’s Pre-Election Economic and Fiscal Update to finalise it), but in the meantime it attacked Labour for adding a new higher top tax rate during a recession.  National has promised no new taxes or increases to existing taxes although at this stage it has not promised tax cuts.  Of the parties currently in Parliament ACT is at this stage alone in promising substantial tax cuts, both to personal income tax and to GST (a temporary cur to 10 percent).  Both National and ACT consider policies for higher economic growth and a more disciplined approach to government spending as the best way to chart a return to surplus and keep debt manageable.

It’s good that ‘bread and butter’ election issues like tax are getting a much-needed hearing and that parties are making their policies known.

 

Confidence improves

Preliminary data from ANZ Business Outlook Survey for September saw an marked improvement in business confidence, although it is still firmly in negative territory.  The relaxation in Auckland’s COVID restrictions relative to the previous month’s survey appears to have been a major factor.

A net 26.0% of businesses expect general economic conditions to worsen over the next 12 months, a 15.8 point improvement on the August survey’s -41.8%.  Meanwhile, a net 9.9% expect their own activity to reduce over the next 12 months, a 7.6 point improvement on the August survey’s -17.5%.

The preliminary data for this survey will be incorporated into the final results for September, which will be published at the end of the month.

 

Traffic volumes take a hit

August’s reimposition of lockdowns and roadblocks around Auckland caused a sharp drop in traffic volumes according to ANZ’s monthly Truckometer.  The Light Traffic Index fell 13.1%, while the Heavy Traffic fell 6.5%

This brought to an abrupt end the catch-up overshoot in traffic volumes evident in July’s Truckometer.  Traffic volumes should recover in September with an easing of restrictions. 

 

Retail spending down

Unsurprisingly, Auckland’s spell in Level 3 lockdown hit retail spending in August, according to Statistics NZ’s monthly Electronic Card Transactions statistics.

Retail card spending fell $530 million (8.9%) in August compared with July, although it was down only $46 million (0.8%) compared to August 2019.  On an annual basis, spending on consumables (e.g., groceries and liquor) and durables (e.g., furniture, appliances, hardware) were both up but the other sectors were down, with particularly large falls for hospitality and fuel.

 

Dairy and meat prop up manufacturing

Statistics NZ’s Economic Survey of Manufacturing showed manufacturing sales plummeted in the June quarter, but it would have been much worse if not for dairy and meat processing.

In current prices, the value of manufacturing sales fell 9.5% ($2.7 billion) in the June 2020 quarter compared to the June 2019 quarter.  The standout sector was meat and dairy processing, with its sales up $837 million (9.5%).

Excluding meat and dairy processing, the value of manufacturing sales was down 18.1% ($3.5 billion), with the biggest drops for petroleum and coal products, down $1.16 billion (52.2%), and metal products, down $611 million (21.3%).

Manufacturing sales volumes, removing price effects, were down even more – 12.1% ($3.1 billion).  This was mainly because meat and dairy volumes were unchanged after removing price effects.

 

Building work down

The volume building work plummeted in the June 2020 quarter, according to Statistics NZ’s Value of Building Work Put in Place.

Total building volume fell a seasonally-adjusted 21.6%, following a 5.4% fall in the March quarter.  Residential building volume fell 18.6%, following a 6.3% fall in the March quarter.  Non-residential building volume fell 26.6%, following a 4.3% fall in the March quarter.

 

Next week

It’s a big week coming up with the Pre-Election Economic and Fiscal Update on Wednesday, the ‘opening of the books’ rescheduled after the delay to the General Election.  The National Party has said it will be finalising its fiscal and tax policies once these numbers are out.

Also happening on Wednesday is the June quarter Balance of Payments and International Investment Position and on Thursday it is the June quarter Gross Domestic Product, which will show just how much the economy was hammered thanks to the earlier nationwide lockdown.  Most economists expect a 12-15% drop.  Australia had a 7% drop.

There is also a Global Dairy Trade auction (Tuesday), and data on international travel and migration (Monday).

 

NIWA Soil Moisture Data

NIWA’s latest soil moisture maps (as at 9am Thursday 10 September) show that soils across most of the North Island have about average moisture for this time of year.  The South Island is more varied, with Kaikoura wetter than usual and areas in Hurunui, Mid Canterbury, South Canterbury, and North Otago down to Strath Taieri significantly drier than usual.


Exchange Rates

Over the past week the NZ Dollar weakened 1.0% against the TWI and it was down against all our major trading partners, except the UK Pound. 

 

 

NZ Dollar versus

This Week

(10/9/20)

Last Week (3/9/20)

Last Month (10/8/20)

Last Year (10/9/19)

US Dollar

0.6678

0.6770

0.6601

0.6435

Australian Dollar

0.9186

0.9243

0.9214

0.9388

Euro

0.5650

0.5722

0.5598

0.5828

UK Pound

0.5142

0.5077

0.5052

0.5213

Japanese Yen

70.90

71.92

69.83

69.13

Chinese Renminbi

4.5660

4.6205

4.6018

4.5806

Trade Weighted Index

72.10

72.83

71.84

71.67

Source: Reserve Bank of NZ

 

Wholesale Interest Rates

Over the course of the week the 90 Day Bank Bill interest rate was unchanged while the 10 year Government Bond yield was down 2 basis points.  The Reserve Bank will next review the OCR on 23 September.

 

 

This Week

(10/9/20)

Last Week (3/9/20)

Last Month (10/9/20)

Last Year (10/9/19)

OCR

0.25%

0.25%

0.25%

1.00%

90 Day Bank Bill

0.30%

0.30%

0.30%

1.15%

10 Year Government Bond

0.60%

0.62%

0.77%

1.17%

Source: Reserve Bank of NZ