By Susan Edmunds of RNZ
Tax cuts are coming – but they are unlikely to do much to ease the squeeze on struggling households.
From July 31, new tax thresholds apply, which will reduce most people’s income tax bills.
Someone who is single and earning $75,000 a year will save about $36.50 a fortnight in tax. A couple, each earning $100,000, with no children, would save about $80 a fortnight between them.
Someone on the minimum wage, without a partner or children, working a 40-hour week will save $25 a fortnight.
“They’re small tax cuts,” said Kiwibank chief economist Jarrod Kerr.
“They’re not life-changing. They’ll definitely help some households a little bit. I just don’t feel they’re going to be spent the way you might think - people running down to the retail store and buying some clothes. I think this will just be absorbed into people’s budgets.
“There is a lot of stress out there at the moment. If you’re a renter, your rents have gone up 5% in the last year. If you own your own home, interest rates have tripled, your council rates have gone up quite a lot, your insurance has gone up more than 20%. There are some big costs households are facing. [So] $20 a week will help, but it’s not going to solve any of those problems.”
Susan St John, associate professor at the University of Auckland, said the lowest quintile of earners would get just 5.4% of the total tax cut, and 64% would go to the top two quintiles of earners. “About 130,000 households get nothing at all and 8000 are slightly worse off.”
She said the adjustment to the Working for Families in-work tax credit which also takes effect on July 31, increasing it by $25 a week, was more significant but would be of no use to people who had lost paid work during the downturn.
Retail NZ chief executive Carolyn Young said retailers were not pinning their hopes on a tax cut spending surge.
“For those that don’t have a mortgage, we know that they are spending more. They’ve got more disposable income to start with. They’ll be in a position whether they’ll have an extra $20 to $40.
“For those that have a mortgage or a family and things are quite tight it’s almost too soon. I believe it will take a few months before people are feeling confident enough that firstly their job is secure, and any resetting of any mortgage will be at a lower rate.”
Beyond – but related to – the impact on households is the wider impact of the tax cuts on inflation, which the Reserve Bank has been battling to get under control.
Westpac chief economist Kelly Eckhold said the cuts would be an addition to growth, because they were targeted at lower-middle income earners who were generally more likely to spend what they earned.
“Whether that generates inflation or not depends on what else is going on at the moment and economic momentum is pretty weak right now.”
He said the Reserve Bank would be monitoring things like retail sales to see the impact of the cuts.
Infometrics chief economist Gareth Kiernan said the extent to which cuts added to inflation would depend on how much was being funded by spending cuts, compared to government borrowing.
“If the tax cuts were all funded by government spending cuts, then they are actually slightly disinflationary, because households will save some of their tax cut money, so there will be less spending across the economy than if the Government had spent all the money itself instead.
“The really difficult question is how the tax cuts have been funded or, more correctly, what would the counter-factual have been if the Government didn’t progress its tax cut policy. The Finance Minister was at pains to point out that the cost of the tax cuts were about the same size as the fiscal savings that had been achieved.
“By this argument, they are not being funded by more borrowing, so they’re not inflationary. However, there’s a degree of semantics in this argument. If the Government had not cut taxes, would it therefore have not cut spending as much, or would it simply have reduced debt more quickly?”
He said it could be harder to gauge the inflationary impact of tax cuts in an environment where inflation as slowing, anyway.
Miles Workman, a senior economist at ANZ, agreed it was a question of how the balance was struck.
“To pay for them, the Government has reduced government spending, which will flow through to demand for workers because the government is a relatively large employer.
“If you think about in an aggregate sense it is looking broadly neutral - although the tax package timing is quite front loaded so the tax relief is likely to boost household incomes a bit faster than the Government will reduce spending. It could all else equal make the Reserve Bank a little cautious in terms of assessing what this might mean for consumer spending.”
But he said consumers were so pessimistic, and the data showed confidence was so weak, that tax cuts on their own were unlikely to be enough to turn that momentum around.