New Zealand Government abandons capital gains tax
On 17 April, Prime Minister Jacinda Ardern announced that her Government would not introduce a capital gains tax because it had been unable to reach an internal consensus. The property market breathed a sigh of relief at the news.
Jacinda Ardern said that although she still believed a capital gains tax could make a difference, she acknowledged that New Zealanders appeared to lack support for the policy: “Our governing parties need to represent the majority of New Zealanders. I cannot cross that line of democracy.”
However, she stressed that the Government would pursue a fairer tax system through other means.
Winston Peters of coalition partner New Zealand First reportedly vetoed the proposal. Some, however, suggested that Labour and New Zealand First had staged a coordinated performance. Labour voters supported a capital gains tax, but opposition, including from New Zealand First voters, was very strong.
By abandoning a capital gains tax, the Prime Minister had responded to public opinion, while New Zealand First could also demonstrate that it had delivered for its voters.
New Zealand releases the world’s first Wellbeing Budget
On 30 May, New Zealand unveiled the world’s first government budget based on public wellbeing: New Zealand’s 2019 Budget. The Labour-led Government described its release as “a landmark moment for the Government and New Zealand”.
The 2019 Budget stated that New Zealand’s economy would continue to grow steadily and the overall outlook remained positive. Average annual GDP growth was forecast at 2.6% over the five years ending in June 2023. Annual GDP growth was expected to rise from 2.4% in 2019 to 3.0% in 2020, above that of other countries with circumstances similar to New Zealand’s.
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The 2019 Budget incorporated living standards alongside other economic indicators for the first time, earning it the name “Wellbeing Budget”.
It specifically allocated NZ$1,900,000,000 to improving mental health, NZ$1,100,000,000 to improving child wellbeing, and a further NZ$1,000,000,000 to KiwiRail.
Most economists believed the Government could achieve its fiscal targets, provided it lowered expectations and tightened spending.
New Zealand sounds the call for global interest rate cuts
On 8 May, the Reserve Bank of New Zealand announced a 25 basis point cut to the Official Cash Rate (OCR), from 1.75% to 1.5%. This was its lowest level since New Zealand introduced the OCR in 1999.
Since November 2016, New Zealand’s OCR had remained at the record low of 1.75%. In September last year, Reserve Bank Governor Andrian Orr said the OCR would remain unchanged “throughout 2019 and into 2020”.
New Zealand was also the first developed country in the world to announce an interest rate cut in this cycle. In theory, this also took New Zealand into an era of zero interest on deposits, as domestic inflation was likewise 1.5%.
A lower OCR is good news for mortgage borrowers, but also means lower deposit rates. An interest rate cut also means a weaker New Zealand dollar: “As the New Zealand dollar falls, our imported goods will become more expensive,” economist Shamubeel Eaqub said.
Furthermore, with Australia cutting interest rates and the US Federal Reserve signalling cuts, the likelihood of the Reserve Bank of New Zealand cutting rates a second time this year has increased significantly. If that happens, New Zealand will enter an era of negative interest rates.