Reserve Bank Governor Adrian Orr yesterday

Reserve Bank Governor Adrian Orr could not have been more clear.

If the Government includes raising taxes in its plans to pay for the Cyclone Gabrielle rebuild, then that will take pressure off him to raise interest rates.

Twice in his Monetary Policy press conference yesterday, he carefully stated that position.

“Reprioritisation of current spending and revenue arising through other alternatives makes the job of monetary policy easier because it’s redirecting current income rather than creating new cash in the economy,” he said.

And then: “If they (the Government)  chose the reprioritisation and tax increases, then that does mean less increase in aggregate demand; less monetary policy pressure.”

Orr’s comments came after National Leader Christopher Luxon, Finance spokesperson Nicola Willis and ACT Leader, David Seymour, had all piled on to Prime Minister Chris Hipkins and Finance Minister Robertson during this year’s first Question Time in Parliament, claiming that Labour intended to raise taxes.

Robertson, presumably unaware of what Orr was about to say at the press conference, did not put the possibility that not raising taxes could lead to higher interest rates to Parliament.

Instead, he insisted the Government had yet to make any decisions.

“However, what responsible Governments do in this situation is assess options,’ he said.

Orr’s comments came after the MPS  forecast an increase in inflation of 0.3 per cent in each of the March and June quarters.

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But that is in the short term.

The MPS contained a warning about the medium-long term

“Any additional capacity pressure over the medium term may need to be offset through monetary policy to ensure that inflation sustainably returns to the target band,” it said.

In other words, the sheer scale of the rebuild is by itself likely to be inflationary.

That will mean a continuing high Official Cash Rate which the Bank yesterday raised to its highest level since June 2008, 4.75 per cent.

However, Orr said he did not expect that would lead to any immediate mortgage rate increases.

“These are priced in, but we would like to see movement in the deposit rates,” he said.

The political danger is now that if Orr has to move the OCR beyond his forecast track which is expected to peak at 5.5 per cent in the last quarter this year, then pressure on households from increased mortgage payments will become even more intense.

Thus that is the trade-off; higher taxes or higher mortgages.

It was a debate that also took place yesterday at the Finance and Expenditure Committee when Robertson appeared to discuss last December’s Budget Policy Statement and Half Yearly Economic and Fiscal Update.

Willis asked whether he stood by Labour’s commitment not to introduce any new taxes this term.

“Nothing has changed in terms of what we intend with respect to revenues, and it would be irresponsible to not now sit back, look at the total cost and work out how we will pay,” he said.

Willis: “Well, I disagree; I think it’s irresponsible to impose additional costs on New Zealanders when you could reprioritise your own spending. “

In response to a question from ACT Leader David Seymour, Robertson said reprioritisation was part of the Government’s overall agenda.

“I would say it’s constantly part of the agenda, so it’s not that we suddenly invented it,” he said.

“We have a dedicated process within our baseline updates to go through.

“And in addition to that, late last year, the former Prime Minister asked all Ministers to go through and look at their programs, and then the new Prime Minister has doubled up on that and asked us to redouble our efforts.”.

Robertson faced more questions on tax.

Green MP Julie-Anne Genter asked whether he would consider excess profits tax on fossil fuel companies.

“We’ve discussed the fact that we’re looking at what revenue options we have for the budget,” he said.

“But. I am weary of windfall taxes because of the exact words that sits in there about what is and what isn’t. (a windfall).”

Willis also continued her tax questions to the Secretary of Treasury, Caralee McLiesh.

She asked whether Treasury had been asked for or given advice on potential revenue-raising tools to help fund the cyclone response. 

McLiesh’s response was a masterpiece of bureaucratic evasion.

“We are right in the midst of providing a wide range of advice to government on policy measures in response in the recovery, including different types of funding arrangements for that response,” she said.

“Those conversations are ongoing.

“We’re also in the middle of a budget process right now, so consistent with long-standing convention, I can’t talk about any specific elements of it, but we’re very actively providing advice on a range of different matters.”

In 2011, Treasury and Inland Revenue reported to then-Finance Minister Bill English on the prospect of a one per cent levy on all tax rates to help fund recovery.

They said it would raise a net $1 billion a year ($1.27 billion today) and warned that it could be difficult to exclude earthquake survivors or affected businesses from the levy.

“As the levy would have no legal status separate from income tax, it may be hard to position it as a temporary tax,” the paper said.

“Legislative pre-commitment to the removal of the levy would be essential, but may have only a limited effect on taxpayer perceptions as in recent years several NZ governments have made legislative pre-commitments to reduce taxes that have subsequently been reversed.”

Nevertheless, the scale of the challenge is immense.

Unallocated new operating expenditure in this year’s Budget is $4.9 billion.

That has to cover everything from new Government programmes through to increased debt servicing costs and compensation for inflation, particularly on wages.

The political battle will be whether that sum should be supplemented by some additional taxes or whether the money should be borrowed, potentially forcing the Reserve Bank to raise interest rates.

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