Private property issue #111 - The Budget announcement

Nicola Willis said she’d give us a no-frills budget.

That’s what I was hoping for. I’m not sure if that’s what we got.

I’ve been looking at the budget for the last hour. Here’s my first take on what it means for property investors.

I’ll have more to say on the Property Academy Podcast next week once I’ve had time to process it.

1) The tax cuts were way bigger than I expected

Nicola Willis’ tax cuts were bigger than I expected.

She and the National-led government gave us what they promised at the election.

Most economists and forecasters thought they’d pare it back. After all, the economy isn’t doing so well.

You’ll get an extra $4.50 to $135 a week, depending on how much you earn and if you have kids. You can calculate your exact tax savings here.

Most investors I work with will get about $20 extra a week.

To be honest – I wish we didn’t get the tax cuts.

Interest rates are the biggest issue for homeowners and investors. That’s why I didn’t want taxes to come down by this much. Here’s why:

• If you cut taxes without cutting government spending, then demand in the economy goes up.
• That pushes prices up.
• So inflation doesn’t fall as fast.
• The Reserve Bank doesn’t like that.
• So, they keep interest rates high.
• We end up paying more to the bank than the tax we got back.

For context, a $ 20-a-week tax cut is the equivalent of a 0.2% cut to your interest rate on a $500k mortgage.

I’d rather get inflation down and get a 0.5% interest rate cut rather than a $ 20-a-week tax cut.

But it all depends on how they pay for it. So, what’s the impact on inflation?

2) Inflation to come down faster, according to Treasury

It’s up for debate whether the tax cuts will cause more inflation.

Nicola Willis says all these tax cuts will cost $3.68 billion a year. But that she’s cutting costs / raising revenue of $3.71 billion a year.

So, on the face of it, it shouldn’t impact inflation.

But here’s the issue. The tax cuts all come at once on the 31^st of July. So, we all get more money from then.

But those other spending cuts and new taxes (“revenue-raising measures”) will take time to come in.

There is a risk that we get a bit more inflation in the short term.

I want to see what the Reserve Bank thinks before I put a firm stake in the ground.

Having said that, Treasury thinks inflation will come down faster than it did at the end of last year.

That’s good for property investors.

Treasury’s economists expect that inflation will be back within the Reserve Bank’s 1-3% target band by September this year. That’s 3 months earlier than they thought back in December 2023.

3) Interest rates to come down faster, according to Treasury

Treasury also thinks that interest rates will come down a bit faster than they did 6 months ago.

The 90-day interest rates closely track the OCR. Treasury expects to see some quick cuts in September and December this year.

This means we could see some quick OCR cuts at the end of the year and into 2025.

Is it good? Or is it bad?

All up … I think this is good for property investors and homeowners. Nicola Willis plans to cut spending (by a lot).

This should tame inflation and interest rates.

But I am a little disappointed. I wish we’d delayed the tax cuts. If we brought them in next year, we could reduce inflation (and interest rates) faster.

If we accepted a little more short-term pain by delaying the tax cuts, we could get long-term gains through lower interest rates.

But I understand why the National-led government wants to keep its election promises.