Economist says Government might have 'temptation' to hike taxes as New Zealand tipped to plunge into recession

A leading independent economist says the Government might need to introduce tax increases after the blow dealt to New Zealand's economy by the Reserve Bank (RBNZ).

The RBNZ has been going hard on tactics to cut New Zealand's spending in an effort to curb inflation. The central bank, after last week raising the official cash rate by 75 basis points - the most significant jump on record - said the economy was set to shrink next year.  Annual inflation was forecast to average 7.5 percent for the rest of this year before declining in 2023. 

Thousands of New Zealanders were already struggling with a cost of living crisis. 

New Zealand's annual inflation was 7.2 percent in October, a near three-decade high. 

Independent economist Cameron Bagrie told AM on Tuesday the economic hit predicted by the RBNZ last week was the cost of getting inflation under control.

"We've got a good opening position, we've done well over the last couple of years - debt is lower than what was previously thought but it's going to be a lot [more] challenging over the next two to three years at a time when the Government's spending demands are intensifying," he told host Ryan Bridge.

Bagrie said there was still a lot of demand for better services and higher wages.

"You've got to prioritise," he said of Government spending. "It's going to be tough.

"I think there is going to be a temptation - and no one's talking about it out there at the moment - to get more money from the tax side of the ledger because I think the spending demands are going one way."

Labour hiked taxes after it was re-elected for a second term in 2020 - introducing a top rate of 39 percent on income over $180,000. 

The party also said at the time there'd be no new taxes or any further increases to income tax during this term but it has yet to set its tax policy for election 2023. 

"We will not be putting out tax policy that unnecessarily exacerbates inflation because that would be irresponsible," Finance Minister Grant Robertson told Newshub Nation last week

With 2023 being an election year, Bagrie said tighter public spending would be "tremendously difficult".

"There's more demand for public services, there's more demand for pay increases and it's going to be difficult to make the numbers stack up.

"I suspect there's going to be a little bit of temptation to grab some money on the other side of the ledger, via tax. What that tweak looks like is open to debate but the numbers are going to be very hard to add up."

Watch the video for the full interview.