$2.3 billion sting in the Budget’s tail

Written By: - Date published: 12:47 pm, May 30th, 2010 - 19 comments
Categories: budget 2010, Economy - Tags: ,

We had a guest post last week about the effect of the Budget on a retired couple’s savings. Bernard Hickey has hit the same topic in his latest post.

Most taxpayers will (just) have their higher GST bill covered by the income tax cut but there’s no compensation for the effect of all that inflation on savings.

Hickey says there is $153 billion in savings accounts, term deposits, and other cash savings. Inflation will be 5.9% thanks to the GST hike.

That means, the $153 billion would have get $9 billion of returns, increasing the total to $162 billion, just to match inflation – ie for savers to be no worse of next year savers need to get a 5.9% return.

But the Reserve Bank says the average  month term deposit rate at the moment is 4.4% per annum and it is not forecast to rise much. If the average return on that $153 billion is 4.4% then it will total $159.7 billion in a year’s time. Less than the minimum amount needed to cover inflation.’

Collectively, New Zealand’s savers will be $2.3 billion worse off in a year’s time than they are now, thanks to the Budget. That’s a huge destruction of wealth for only vague promises of economic gain.

Of course, the same thing happens to mortgages – the real (after inflation) value of mortgages will fall.

Borrowers will win and savers will lose. Kind of funny considering this Budget was meant to be all about encouraging savings.

19 comments on “$2.3 billion sting in the Budget’s tail”

  1. It never was. Around the world the banks are destroying the middle class. No middle class, no democracy and back to a feudal system with them in charge.

  2. Draco T Bastard 2

    $2.3b is what, ~1.5% of GDP? And the Treasury thinks that we may, possibly, if we believe in the fairies at the bottom of the garden really hard, see 1% growth in the economy due to this budget in approximately 7 years?

    Kind of funny considering this Budget was meant to be all about encouraging savings.

    This budget was always all about making NZ and NZers worse off.

  3. Sanctuary 3

    Bill English is ex-treasury dry as dust new right ideologue. He thinks that as long as you keep delivering tax cuts today, tomorrow will never come.

    It is voodoo economics, and the head zombie is in charge of your country.

    • ianmac 3.1

      Experts say that they can see “Key’s hands all over the Budget.” The cold steel fist underneathe the velvet glove?

  4. Zaphod Beeblebrox 4

    A lot of the changes going on in the NZ economy (less manufacturing especially) will condemn the unskilled to very low wages and limited employment prospects. Thats not exactly English’s fault but you see very little planning of how our society is going to cope with an increasing underclass and a decreasing middle class. Social issues don’t really seem this government strong suit.

  5. marsman 5

    English’s own soundbites describe him very well, ‘inept’ and ‘mismanagement of the economy’.

  6. “Hickey says there is $153 billion in savings accounts, term deposits, and other cash savings. Inflation will be 5.9% thanks to the GST hike.”

    A simple point, the GST hike isn’t inflation. The GST increase will increase the price level but will do so instantaneously which, by definition, isn’t inflation.

    • Marty G 6.1

      Paul, CPI is the official measure of the price level. It is CPI that will go up by 5.9%. Technically you’re right but for all intents and purposes, CPI is inflation and the effect of the GST hike as felt by consumers will be inflation. The GST hike will mean the the purchasing power of savings falls.

      It’s pretty sad that the depth of your contribution is a pedantic point that is meaningless.

      • Paul Walker 6.1.1

        Actually CPI is just one many possible measures (approximations) of inflation, you could also use the GDP deflater or a producers index, for example. And depending on what you are trying to measure each has its advantages/disadvantages. Also its doesn’t matter which one you use, it is still true that inflation is not affected by jumps in the price level caused by one-off increases in things like GST. All the increases in measures like CPI due to the GST increase tell us it that such measures miss-measure true inflation.

        All very simple really.

        • Puddleglum 6.1.1.1

          Thanks for the technical clarification Paul. You’ve convinced me that the effect is actually worse than Bernard suspected. After all, inflation only slowly (rather than ‘instantaneously’) erodes savings and, being ‘patchy’, it’s possible to judiciously spend one’s savings to avoid the most rapidly inflating parts of the economy.

          What a GST hike does, as you point out, is provide an inescapable AND instantaneous devaluing of the exchange value of savings. So, in the short term, it’s worse than the equivalent level of inflation. It’s a bigger body blow to savers than we all thought – thanks for clearing that up.

        • Zetetic 6.1.1.2

          Will GST raise the price level? Yes.

          Will it lower the purchasing power of savings? Yes.

  7. sean14 7

    What monetary policy is Labour going to fight the next election on? Assuming anyone (including the Labour party) knows, what will its effect on inflation be?

    • Zaphod Beeblebrox 7.1

      Pretty sure it won’t involve extra borrowing to pay for tax cuts for the top wage earners- that might be a help!

  8. jcuknz 8

    Interesting use of tenses in your introductory box …. the future in the past? …. “National’s second budget has induced a lot of inflation 5.9% over the next year. ”

    The CPI is based on a given selection of items so the way to beat it or fall sucker to it is to choose what you buy … that assumes you are that worried about it.

  9. Zak Creedo 9

    Further to Paul Walker’s point — gee you can be pretty rude, marty! — the price increase to my reckoning amounts to some 6 cents on present GST-included pricing. You care to explain how the heck inflation runs at + 5.9 percent as a result of this..?

    • Puddleglum 9.1

      Zak, I genuinely can’t understand how hot under the collar you’re getting over use of the word ‘inflation’. (Heck, you’ve even used the word ‘heck’!). MartyG conceded that, technically, it isn’t inflation.

      Outside of ECON 101 classes ‘inflation’ just means price increases. Sad, but true – and that’s perfectly justified. Academic disciplines don’t have a ‘mortgage’ (sorry) on ordinary English language terms.

      Think of this: If a company advertised it’s price reductions (i.e, a sale) by saying ‘We’re deflating our prices by 10%!!!’ would you be inclined to take them to the Commerce Commission (or wherever such ‘breaches’ are taken) on the grounds of ‘misleading advertising’?

      I also distinctly remember (and I’m old enough to) Roger Douglas, on television sitting in front of a graph of quarterly, or whatever, inflation records some months after GST had been introduced and pointing out that the inflation from the GST was only a ‘blip’ and it had now passed through the system (to paraphrase in digestive terms). To his credit, he didn’t try to wiggle out of it by saying it wasn’t inflation (which, technically, it wasn’t), just that it was temporary.

      Of course, nothing is ever black and white. I suspect that the post-GST price then becomes the benchmark for some (unscrupulous) traders to have one over on their customers by putting their ‘inflation-adjusted’ prices up, yearly, on the post- rather than pre-GST component of the retail price (competition is never perfect, after all). If I’m correct, then wouldn’t GST actually contribute to ongoing inflation? But maybe I’m wrong.

  10. Zak Creedo 10

    Puddleglum,

    genu-wine question: are you using both oars up this creek of yours..?

    BTW: collar..? me..? why not start over.

    To the blighted souls herein this commentariat I was seeking actual use of the figures, not blind reassertion of others dictat… like what GST-included price would result in an increase of 6 cents on it at the new rate… answer: $100. Now proceed from this to tell me how a projected 5.9 percent overall price increase in our economy will result.. will it, for instance, arise solely from the gst hike..?

    If not, why not, so we can all get things straight.. and not find ourselves(the blogger above) a channel to \’toldya so\’ blah so obliging the price hikers now licking their lips at growth that likely fewer people will afford.

    • Puddleglum 10.1

      Aaah! Now I get it. You’re objecting to the comment that “Inflation will be 5.9% thanks to the GST hike.” in Marty’s post.

      You’re reading that as “Inflation will be 5.9% thanks [solely] to the GST hike.” I read it as “Inflation will be [as high as] 5.9% thanks to the GST hike.”

      I was assuming that other sources of inflation (other than GST, and notwithstanding Paul’s technical point about what part of price increases is or is not ‘inflation’) would be less than the 4.4% average return and so, while they would diminish the return on savings they would not wipe out that return and put it in the black.

      The GST hike, I think the argument goes, pushes that return into the red. So, thanks to the GST hike, we are projected by Treasury to have an ‘inflation’ rate – because of the budget – that will diminish the value of savings. If other sources of inflation amount to more than 4.4% then, of course, savings would have gone into the red without a GST hike – though any hike would have made that shift into the red worse.

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