Matt Nolan

RBNZ to cut rates today?

/9 Comments/in , /by

So a whole bunch of central banks have cut rates overnight (ht Rates Blog, Big Picture). Australia cut 100 basis points the other day.

If the RBNZ ever cut rates inter-meeeting, it would currently sound like a fair time. In order to avoid it sounding like a panic they could say:

  1. Funding costs have risen markedly, and the Bank’s goal is to keep funding pressures consistent with their goal in September until the next meeting – ergo, we need an OCR cut,
  2. The Bank wishes to keep a certain interest rate differential with the rest of the world. With the rest of the world (virtually) cutting 50 basis points more than we had anticipated in September, it seems appropriate to lower our OCR by 50 basis points now.

Today is the 9th of October – the meeting is in 19 days. I think there is a fair chance the RBNZ may be pushed into cutting today, or at least announcing it.

I don’t have a problem with them doing it – as long as they are willing to lift rates relatively once (if) funding pressures ever come off.

Update: Ipredicit puts up a prediction stock on a possible cut today!!! (ht Nigel Pinkerton)

Update 2: The collapse in our currency (the TWI has fallen to 60 – we are talking 2003 levels) may prevent the Bank cutting. However, I am not sure how much attention investors are actually giving to our OCR at the moment – as a result, the cut may not have a big impact on the dollar (relative to global events).

Update 3: Good articles by David Hargreaves. Looks like the RBNZ will not go after this statement.

Matt Nolan

Taxes are self-funding?

/in /by

I just read this over at the Hive:

“New operating allowances will be the same for National over the next three years as they would be under Labour. National’s rebalancing of the tax system is self-funding and requires no cuts to public services or additional borrowing.”

What the hell? Self-funding? We aren’t on that side of the Laffer curve. But then we hear that:

Mr English says over the next term of government the total cost of National’s personal tax cuts is balanced by the revenue savings from:
Changes to KiwiSaver.
Discontinuing the R&D tax credit.
Replacing Labour’s proposed tax cuts.

Ahhhh. Ok, so by tax system they are talking about other areas (like Kiwisaver) where they are cutting spending.

So just to be clear, it isn’t that the tax cuts that are self financing – the set of changes to tax and spending packages are expected to be neutral, whew!

Matt Nolan

2008 Election: Tax offer comparisons

/1 Comment/in /by

Kiwiblog (*, *) and the Standard (*) discuss the size and scope of the tax cut. (Note: some of the discussion can be viewed as partisan).

NZIER economist Patrick Nolan created a calculator that allows you to compare the packages on offer from Labour and National for yourself (Media release, Calculator). Enjoy!

Note:  Other NZIER calculators can be found here.

Matt Nolan

Fundamentalists vs Realists: The gap in economics

/2 Comments/in /by

Paul Romer states that the current crisis represents the gap between the Fundamentalist economist and the Realist economist (ht Economist’s View, Greg Mankiw, Econlog – as I had them all open at the same time and would have felt mean only picking one 😛 ). I find this characterisation a bit extreme, and definitely subjectively loaded.

Fundamentally, a better characterisation (which more fairly divides up the discipline) was provided by Mankiw, comparing the groups to scientists and engineers (we have discussed this here).

Anyway, let us put down the definitions that Romer provides, and see what we can get out of them.

Read more

Matt Nolan

Opinion on National’s tax policy

/7 Comments/in , , /by

I’ll be honest, I don’t think too much of it. I view tax as a structural thing that just needs to be set. Both National and Labour have this “incrementalist” view of changes taxes, which gives the potential for shifts in policy and creates uncertainty in the economic environment.

I am also disappointed that they leave the tax bands fixed – when inflation adjustment of the tax thresholds is the only way to ensure that the real tax burden isn’t rising over time.

Finally the independent earner rebate seems like an ad hoc addition that they tacked on in order to provide “$47” relief to the “average worker”. This policy does nothing to increase efficiency in the economy – the very issue that National said it was trying to chase.

The reduction of the 39c tax band makes sense – as it is a dis-incentive to save and punishes people with highly variable annual income. But reducing it at 1c a year is just too slow for a structural issue like tax policy – if it is going to grow the economy so much, why not just cut the damned thing now.

Matt Nolan

NZIER September QSBO: A troubled quarter

/in /by

The September NZIER Quarterly Survey of Business Opinion told us that businesses were more confident in September (than in June). However, they also experienced less activity started laying off workers and are still facing record cost pressures (ht NZIER).  The decline in firms activity was the sharpest since March 1991!

Although this isn’t wildly out of line with the National Bank results – it is weaker. Overall, the poor own activity result implies that GDP could easily fall in September and December – a whole year long recession. This definitely shoots my pick of a September month pick-up in economic activity out of the water (*). Although, I still don’t believe that December will be a negative quarter – and I’m not convinced that we haven’t hit a bottom, a bottom that we will stay around for a little while, but a bottom none the less (note this is something I would like to discuss if anyone wants to talk about it in comments).

My advice is still, watch commodity prices, watch interest rates. The difference between a slightly bigger than 1997/98 style recession (as a result of the tanking housing market) and a 1991/92 style recession will be commodity prices.