COVID-19: Would ACT's proposed $250 tax incentive for double-vaccinated worsen inflation?

ACT's policy of giving tax back to the double-vaccinated would likely add to inflation, a top economist says, but a strong incentive to get the jab could be key to ending billions of dollars of lockdown stimulus. 

ACT has launched a policy that would see fully vaccinated New Zealanders receive a $250 tax credit to reward them for "doing the right thing and following the rules", because the vaccinated "deserve some relief". 

"This policy would reduce Government revenue by $1 billion and those eligible for the tax credit will need to be fully vaccinated by December 1," ACT leader David Seymour said on Monday.  

"When you file your tax return next year, proof of vaccination by My COVID Record will qualify you for a $250 vaccination tax credit. However, you can also redeem it at any time, even on the day of your second vaccination."

But it comes as new Stats NZ data shows inflation has soared to a decade-high 4.9 percent, with sizable rises in food, transport and house prices. The increase came off the back of a 3.3 percent inflation rise in July

With an extra $250 in their pockets, ACT's policy would probably contribute to inflation pressures, says Infometrics senior economist Brad Olsen, but it could also push Kiwis not too fussed about getting vaccinated, to do it.

"Higher spending would increase demand, which given the current constrained economic environment would likely add to inflation," Olsen told Newshub. 

"But, and this is a big but, the Government is already pouring a substantial level of stimulus into the economy anyway each week to support the economy, and this current level of government stimulus is already adding to inflationary pressures.

"If the tax credit incentive increased vaccination rates and stopped lockdowns, then the Government presumably wouldn't need to continue with the same level of weekly stimulus, and so the tax credit idea might be less inflationary than enduring levels of current government support through lockdown."

ACT leader David Seymour.
ACT leader David Seymour. Photo credit: Newshub / Zane Small

Seymour says private sector spending isn't the problem. 

"The Government right now is spending huge amounts of money. We'd rather, if money is going to be spent, that it's spent by the people who are facing those challenges with the costs of living," he told reporters.

He says Kiwis pay far too much tax, evident by the $98 billion collected by the Government over the past year, $12.9 billion higher than in 2020. Meanwhile with interest rates so low, the Government's borrowing increased by $9.8 billion compared to last year, to reach $162.6 billion. 

With Government spending up by more than 40 percent in four years, it's "no surprise" New Zealanders are now seeing costs increase all throughout the economy, says National MP Michael Woodhouse. 

Inflation is a term used to describe the rise of average prices. It essentially means money is losing its value, and the underlying cause is often that too much money is available to purchase too few goods and services, with demand outpacing supply. 

Fuel, for example, has never been so expensive in New Zealand - with the national average of 91 octane now $2.39 per litre - because demand for it has soared across the world due to economies slowly opening up from lockdowns, but supply chains have been disrupted. 

However, some of New Zealand's inflation causes are more local. Blame has been pointed at the Reserve Bank due to what's described as 'money printing' throughout the COVID-19 pandemic, to stimulate the economy through the global economic slump. 

Infometrics senior economist Brad Olsen.
Infometrics senior economist Brad Olsen. Photo credit: The AM Show

By slashing interest rates to record lows, demand for housing soared due to cheap borrowing, which kept cash flowing into the economy. But it also sparked an astronomical 30 percent annual rise in house prices. 

"The next big cost increase is unfortunately likely to now be mortgage costs as the Reserve Bank is forced to painfully increase interest rates as Kiwis and businesses try to recover from the current COVID outbreak," says Woodhouse. 

The Reserve Bank has increased interest rates slightly, for the first time in seven years, due to inflation pressure, and it has signalled plans to do more. 

It had intended to raise interest rates in August as the economy boomed with the country at alert level 1, but the Delta outbreak threw a spanner in the works. 

Finance Minister Grant Robertson defended the Government's high spending last week, saying any responsible administration would do the same during a pandemic. 

"The level of debt remains lower than expected and far lower than most of our international counterparts," he said. "The average for advanced economies is above 90 percent net debt. In addition the cost of servicing that debt also remains very low by historical standards."