That’s the good news.
But the Reserve Bank this week warned, while increasing interest rates by 0.5 percentage points, that “overall spending continues to outstrip the capacity to supply goods and services.”
The deficit still stands at $9.7 billion dollars. Core crown expenses, in 2022, were some $17 billion higher than they were in 2020 and 2021, when lockdowns and wage subsidies warranted substantial fiscal support.
Fiscal policy continues to provide too much stimulus in an overheated economy.
And at least some of the Crown accounts’ improvement comes down to inflation working its magic. Inflation has been higher than Treasury expected in May and higher inflation currently helps the Crown accounts. Income tax thresholds do not move while inflation pushes wages up.
Median full-time weekly earnings for wage and salary workers, in 2017, were $1,100. A worker on that median paid $10,200 in income tax for the year: an average income tax rate of 17.8%. If that worker’s wages had only kept up with inflation, never touching the next tax bracket, they would pay $12,900 in income tax in 2022 and an average income tax rate of 19.5%. Parliament never authorised that tax increase. It simply failed to prevent it.
Running deficits to cover necessary pandemic costs is eminently defensible. Debt-funding make-work projects, like the $1.2 billion Jobs for Nature programme, when the economy is substantially overheated, is not.
RBNZ’s job is hard enough. It has been working to re-establish credibility as an inflation-fighter after years of caring about everything other than core business. That removes some flexibility that could have been valuable; a European winter energy crisis is coming.
Having to lean against continued unnecessary fiscal stimulus makes the job harder.
While less government spending has been debt-funded than had been expected in May, paying the bills through bracket creep combines inequity with opacity.
At Budget 2022, the Government projected a return to surplus by 2025, with Core Crown expenses levelling off at about 30% of GDP.
At Budget 2023, the Government should end spending that mainly serves to worsen price pressures.
It should set income tax rates and thresholds to match its desired levels of spending, in ways it considers fair.
And it should inflation-index the tax thresholds, so future happy surprises in the Crown Accounts reflect real strength rather than inequitable tax bracket creep.
Fiscal policy continues to provide too much stimulus in an overheated economy.
And at least some of the Crown accounts’ improvement comes down to inflation working its magic. Inflation has been higher than Treasury expected in May and higher inflation currently helps the Crown accounts. Income tax thresholds do not move while inflation pushes wages up.
Median full-time weekly earnings for wage and salary workers, in 2017, were $1,100. A worker on that median paid $10,200 in income tax for the year: an average income tax rate of 17.8%. If that worker’s wages had only kept up with inflation, never touching the next tax bracket, they would pay $12,900 in income tax in 2022 and an average income tax rate of 19.5%. Parliament never authorised that tax increase. It simply failed to prevent it.
Running deficits to cover necessary pandemic costs is eminently defensible. Debt-funding make-work projects, like the $1.2 billion Jobs for Nature programme, when the economy is substantially overheated, is not.
RBNZ’s job is hard enough. It has been working to re-establish credibility as an inflation-fighter after years of caring about everything other than core business. That removes some flexibility that could have been valuable; a European winter energy crisis is coming.
Having to lean against continued unnecessary fiscal stimulus makes the job harder.
While less government spending has been debt-funded than had been expected in May, paying the bills through bracket creep combines inequity with opacity.
At Budget 2022, the Government projected a return to surplus by 2025, with Core Crown expenses levelling off at about 30% of GDP.
At Budget 2023, the Government should end spending that mainly serves to worsen price pressures.
It should set income tax rates and thresholds to match its desired levels of spending, in ways it considers fair.
And it should inflation-index the tax thresholds, so future happy surprises in the Crown Accounts reflect real strength rather than inequitable tax bracket creep.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
1 comment:
Eric,
You pen:
“It should set income tax rates and thresholds to match its desired levels of spending, in ways it considers fair.”
With respect, you are the expert? What are the “rates and thresholds” that you reckon, are appropriate – today?
I read elsewhere, pseudo experts from the MSM say “Freeze interest rates!”
Umm. That’s monetary policy as I recall my 101 economics. And as I recall, that is the path Rt Hon Sir Rob Muldoon pursued – early 1980ies.
Followed by price freeze. Then wage freeze. Then chaos erupted.
Hon Sir Roger Douglas arrived (thank goodness) and opened the door to privatisation (that’s another story) but lowered company tax (good idea I reckon- as it helps the unsung heroes who mortgaged their homes to raise capital to start a business which provides employment and results in more taxation to Treasury – helps them to stay afloat without government handouts).
Your assessment of “the situation” is one thing. I genuinely am interested in your opinion – as to “the solution”.
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