New Zealand’s top-five Budget bombshells … plus, how can economists be so divided on the need for rate hikes – Inside Economics

Well, yeah, this will be my 25th Budget day as a business journalist, and yes, I am a bit jaded.

I think the whole thing is more about politics than economics these days.

Or if you want a pure business angle, I’d be looking at the accounting department rather than economics.

Anyway, Wellington business editor Jenée Tibshraeny drew the short straw and took a comprehensive look at what to expect from a fiscal point of view.

The Government will increase its operational expenditure by $2.1 billion in Budget 2026, which is $300 million less than previously signalled, Tibshraeny writes.

But the Government’s capital allowance will be $5.7b, a decent amount more than the $3.5b previously signalled.

Economists believe Treasury will also have to issue a bit more debt than planned when it last updated its forecasts in December.

No surprises

Of course, I remember Budgets a long way further back than the turn of the millennium.

I’m in my mid-50s now, which qualifies me to wax lyrical about the olden days.

They were pretty wild.

Before the Fiscal Responsibility Act of 1994, governments used to save a lot more surprises for the day itself.

While it probably wasn’t so great from the point of view of New Zealand’s credit rating, it must have made it all a lot more fun for journalists.

My earliest memories are the Muldoon Budgets of the late 1970s, when people were braced for big tax hikes on booze, cigarettes and petrol.

Budgets in those days were delivered in the evening and the taxes were often effective from midnight.

So people headed out en masse and queued to stock up before the excise tax increases.

I also remember the so-called Mother of All Budgets delivered by Ruth Richardson in 1991.

It was the first televised Budget, still delivered in the evening.

I remember watching in horror as I did the maths on the tens of thousands of dollars the cuts to student allowances and the introduction of the student loan scheme were going to cost me.

We’re not expecting anything so dramatic tomorrow, although my hunch is there will be something to grab a front-page headline.

With the big bureaucracy cuts already announced, here’s hoping whatever the Government has up its sleeve has a pro-growth angle.

Anyway, while we wait, here’s my nostalgic list of bombshells from days gone by.

Feel free to disagree …

New Zealand’s top-five Budget bombshells

5. The 1975 Muldoon Budget

Sir Robert Muldoon’s first Budget as Prime Minister introduced National Superannuation – the universal, taxpayer-funded pension which replaced Norman Kirk’s compulsory saving scheme.

For those too young to remember, Kirk was the left-wing (Labour Party) guy, and Muldoon was the right-wing National Party guy.

Strange times, I know.

The scheme was really popular and generous, with eligibility from age 60.

While it’s been cut back over the years, it created a fiscal time bomb that’s still ticking.

4. The First Douglas Budget – November 1984

This was an emergency Budget delivered after the 1984 election, when Labour inherited a shocking set of books from Muldoon.

Finance Minister Sir Roger Douglas slashed the top income tax rate from 66 to 48 cents per dollar and announced plans for a 10% goods and services tax (GST) to cover the shortfall. He also abolished agricultural subsidies, devastating the rural sector.

3. The Mother of All Budgets – July 1991

As mentioned above … As well as the cuts to student allowances, Richardson cut social welfare benefits at a time when unemployment was in double digits. Some say she went too far, but there are others who celebrate the fearless way she tackled the deficit. However you look at it, this was the Budget that nobody forgot.

2. The 1938 Social Welfare Budget

With a sweeping Keynesian (some might say socialist) response to the Great Depression, Sir Walter Nash, Finance Minister with the first Labour Government, unleashed the comprehensive, world-leading “cradle to grave” universal healthcare and social welfare system.

Genuinely extraordinary in ambition and scope.

Historic politics: New Zealand Labour politician Sir Arnold Nordmeyer, ONZ KCMG, leaving his office in Parliament on the night of July 22, 1960 to present his Budget. Photo / NZME

1. The Black Budget – June 1958

Hard to believe there is a Budget more unpopular than 1991 – but the historical records suggest this one was.

National managed to get re-elected in 1993 at least. The 1957-60 second Labour Government did not.

Faced with a large deficit caused by the collapse of butter prices in Britain, but reluctant to cut spending, Labour Finance Minister Arnold Nordmeyer hiked excise taxes on cigarettes, alcohol and petrol.

Coming as a surprise, this did not go down well with the public.

The fact that Nordmeyer didn’t drink or smoke didn’t help and earned him a reputation as a wowser and a puritan.

The great OCR divide

Hi Liam,

I see from your Reserve Bank preview that there is a big divide in economists’ opinions about what should happen to the OCR [Official Cash Rate].

You’ve got Westpac saying rates should go up now because inflation’s getting out of hand, and then Kiwibank saying hold your horses, the economy’s already struggling and hiking will only make things worse.

These are clever people with the same numbers in front of them – how on earth can the hawks and the doves be so far apart? Is one of them just wrong, or is this genuinely one of those situations where nobody really knows what’s going on?

Ray P.

A: Hi Ray,

Yes, you’re right, there is a real diverse range of views opening up.

I’d stress the divide is largely about what the Reserve Bank (RBNZ) should do, rather than what it will likely do.

The economists are all in much the same ballpark about what they think the RBNZ is likely to do in the coming months.

But while Westpac is picking three rate hikes this year, chief economist Kelly Eckhold says his “personal view” is that the RBNZ should hike today.

In direct contrast, we’ve got the KiwiBank team – led by chief economist Jarrod Kerr – arguing that the RBNZ should not be hiking this year.

Essentially, this is a debate about the extent to which the supply-side price shock from the oil crisis will embed itself in the economy over the next year or so.

Are the downstream effects from the oil shock so certain that central banks should move on the expectation of higher inflation?

Kerr and KiwiBank are saying no.

“We hope that this supply-side shock will be short-lived.

“We hope … In the meantime, it is simply too early to assess the inflationary pulse and the likely unwind.

“It is too early to gauge the impact on demand. And it is too early to see the adverse effects in the labour market. Therefore, it’s too early for the RBNZ to hike.

“If they do hike in July or September, they will be pre-empting inflation’s second-round effects. Time will tell, and they have time to tell.”

But Eckhold argues that inflation is already outside the target band (at 3.1%) and set to move above 4% for the balance of 2026.

So it would be better if the OCR was near neutral already (ie about 3% instead of the current 2.25%).

Getting there now seems a “pressing priority”, he says.

“I understand that the Iran war has delayed the economic recovery. However, that isn’t in the mandate, and there are clear risks that this cost shock, coming so soon after a long period of above-target inflation, will influence pricing behaviour in the economy.”

Eckhold has the current, inflation-focused single mandate on his side.

Technically, the RBNZ is no longer charged with worrying about how bad unemployment gets.

But if the economy does tank in the second quarter, it will be disinflationary.

And if the demand shock spills into the third quarter, gloomy commentators like me will start worrying about a recession.

It would be strange to be hiking interest rates into a recession.

So there you go. Two compelling arguments, from two clever people.

Take your pick.

Sports editor Winston Aldworth doesn’t call me “on the other hand Dann” for nothing.

CGT debate

A capital gains tax (CGT) is one of those topics that never fails to deliver in terms of reader reaction.

I thought I’d quietly backed out of the debate on the grounds that we don’t have any capital gains to worry about right now.

Labour has it on the policy bingo card this year, of course.

But it was moves across the Tasman, by the Aussie Labor Party, to toughen existing CGT rules that have kicked things off again in my comments section.

Some cheeky Aussie CGT opponents have been pointing to New Zealand and calling us a tax haven.

Could wealthy Australians avoid the CGT by investing in property in New Zealand?

Last week, Willis, the Finance Minister, welcomed them with a soundbite that got a lot of pick-up in Australian media.

Suddenly, I found myself on Australian radio trying to explain exactly why we don’t have one.

I wrote about it all last Sunday and the responses poured in:

Here are a few of the best:

Does a lack of CGT promote property investment?

Hello Liam,

Your recent article was interesting. There have been many times in the past when Aussies have been interested in our property market.

But one comment puzzles me, and it seems to be a theme that is attacked with terrific popularity. That is the notion that no CGT creates an “unfair advantage” for property investors.

But there is no CGT on any asset. Unless you count the bright-line test – which, interestingly, ONLY applies to residential property. So this is a disadvantage of this asset class, not an advantage.

Income is taxed, not capital gains.

Property: rental profit is taxed. Not capital gains. Unless the gain is realised from selling within two years.

Shares/business: profits are taxed. Not capital gains.

(Both asset classes are taxed equally if the owner is running a trading business)

So how does this create an unfair advantage for property investors?

And how, please explain, does it funnel capital away from shares, which are effectively treated the same way as property?

The one advantage I see, potentially, is that property is easier to leverage with debt. This can be done with shares, too, just not as easily. But many listed companies are already geared, so this is already baked in with many such companies.

Thanks, Adam Cockburn.

From property to equities

Hi Liam,

Just reading the capital gains tax situation in Aussie with interest.

We are New Zealand property investors getting out of the market and investing in a worldwide Vanguard fund.

Even the personal home is going (we are a couple with no kids, so we can take on some risk).

Basically, we plan to live off the ETF capital gain … there is some dividend, but only 1-2%.

Therefore, having no capital gains tax on ETFs in New Zealand is huge and we feel it won’t happen.

If it does, then KiwiSavers would be in the gun, and the fallout would be messy for the Government of the day.

A 30% tax on an ETF would be huge for us, especially with the S&P 500 likely to hit 9000 next year (JP Morgan).

Assuming there are people like us in Aussie, wouldn’t the CGT difference be a massive incentive to move here?

And then add on the start-ups?

Regards, Ivan.

Come on over!

Hey Liam, just a quick note to say I really enjoyed your column on CGT today.

Had a good chuckle in a few parts.

As an Aussie living in NZ, I am often amazed at the low levels of tax here, as are my friends back home! Has never quite convinced them to move, however …

L.A.

Don’t forget to check out the Herald’s new podcast, The Economy of Everything, with Liam Dann and Tamsyn Parker – thanks to CMC Markets.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts.

He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”.

For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.