This is causing me a little bit of confusion. New Zealand’s yield curve has become normal – this is very rare. However, the Bank doesn’t like it – not one bit. They went as far as complaining about it. My first impression was to say – this means they will cut further and commit to a lower interest rate path. But now I want to figure out why the hell they actually want that.
The Rates Blog points out a very interesting exchange between John Key and Phil Goff – they have the video available here. The transcript is:
Hon Phil Goff: Is it correct that low-income families with children will get nothing from the tax cuts today, and that that is why the Prime Minister told high-income earners who get hundreds of dollars extra in tax cuts that they should give to charities, in line with his trickle-down theory?
Hon JOHN KEY: No, that is not true. They get a Working for Families increase, which started on 1 October. Let me make this one point: let us take somebody on $44,000 a year, with two children. It is true that he or she gets a small tax cut—
Hon Phil Goff: No tax cut!
Hon JOHN KEY: On $44,000 the person does, Phil; do the maths. But that person does not pay any tax. Somebody on $44,000 a year, with two children, pays zero tax.
So many people are talking about the fact that low income people are getting a small tax cut – but even a “standard” family on $44,000 is effectively paying zero tax. Note that as our tax system is progressive this implies that all “standard” families earning below this level are actually paying negative tax. When it is framed that way, the fact that this group getting a bigger tax cut makes a bit more sense doesn’t it 😉
Chris Worthington from Infometrics has spoken out against a fiscal stimulus in NZ in the current environment.
I agree, as I have said before. Note, I also raised some criticisms of my idea which could be applied here.
Overall, there is a time and a place for special, temporary, fiscal policy (although, even in this special case monetary policy may be superior). However, even now we are not in this special place …
The RBNZ stated today that long-term interest rates have risen too quickly. There forecast recovery was premised on a low dollar and a relatively flat yield curve – however, it seemed a bit disingenious to suggest that we would have a foreseeable strong recovery and a flat yield curve 🙂 . However, this logic was based on a special assumption – a slumping terms of trade.
As a result, the bank is likely to slash rates by at least 50bp at the next meeting. This was already more likely than during the meeting given the exchange rate – as we’ve discussed. This is a big announcement on their part – effectively we may well be pushing towards the lower bound of the OCR. In this case, we need to think more carefully about our monetary policy …
There will be a post at 11am that points out some good suggestions on this issue.
Note that the general market also feels this way – hence:
Source NBNZ
It’s great to see the government taking economic incentives seriously. Their latest initiative considers imposing a 5c/bag tariff on plastic bags in supermarkets. The idea is that the market price for the bags doesn’t take into account the full environmental cost of non-biodegradable bags. By taxing the bags the government can adjust the market price of the bags to match their social cost.
What gets me so excited about it is that green regulations usually seem to take the form of rather arbitrary quotas and limits. Read more