National’s pledge to cut taxes can legitimately be characterised as inflationary until the party can specify what spending it would cut to offset the stimulus it’s promising to provide.
National leader Christopher Luxon focussed on skyrocketing inflation in his state of the nation speech delivered on Sunday.
He repeated National’s commitments to undoing the tax changes the Labour-led Government has made, and lifting income tax thresholds to account for inflation, as per below.
Luxon argued tax cuts wouldn’t be inflationary, as they would be paid for using the $6 billion expansion to the operating allowance, Finance Minister Grant Robertson has pencilled in for the year to June 2023.
He said tax cuts would essentially replace some government spending with spending (or saving) by New Zealanders.
Nonetheless, it’s impossible for National to specify how much of the $6 billion of new spending it would cut, because Robertson is yet to unveil exactly what he plans to spend the $6 billion on. This will only be detailed at the May 19 Budget, when he confirms the exact amount of new operational expenditure for the year.
Robertson, in his Budget Policy Statement, said the record-high $6 billion would be a "one-off" adjustment, a lot of which would be spent on climate-related initiatives and health reforms. Part of this could include writing-off district health board debt ahead of amalgamating the entities.
Expenditure on health reforms is the only operational expense National’s Finance spokesperson Simon Bridges last month told interest.co.nz he would get rid of.
But, we don’t yet know how much of the $6 billion will go towards health reforms in 2022/23. Robertson’s office declined to give interest.co.nz a ballpark figure ahead of the Budget.
So, at a high level, if the cost of National’s tax cuts is greater than the cost of the health reforms in the 2022/23 year, they will be inflationary.
Figures
As for the cost of the tax cuts, there is some murkiness around this too.
The figure Luxon has used when discussing the cost of his party’s tax policy - $1.66 billion in 2022/23 - only relates to the cost of adjusting income tax thresholds to take account for bracket creep.
This figure assumes the top income tax rate of 39% for income over $180,000 remains in place, although National has committed to removing it.
The party told interest.co.nz it is yet to say when it would remove this top tax rate, and when it would repeal all the other tax changes it has committed to undoing.
National has pledged it would enable residential property investors to write-off interest as an expense when paying tax, bring the bright-line test back to two years from 10 years, and remove Auckland’s fuel tax.
Highly variable projections suggest the cost of National’s tax policy would be $2 billion in 2022/23, and lift to around $3 billion by 2024/25, should it have made all its changes by then.
That’s a fair bit more than the $1.66 billion Luxon has been discussing (National has briefed interest.co.nz on how it came to this figure).
| Value of tax changes National would make ($m) in years to June 30 | ||||
| 2023 | 2024 | 2025 | Source | |
| Address bracket creep | 1,660 | 1,660 | 1,660 | National Party - Mar 2022 |
| Remove 39% top tax rate | None | 540 | 595 | Inland Revenue - Nov 2020 |
| Remove Auckland fuel tax | 150 | 150 | 150 | Auckland Council - May 2021 |
| Allow interest deductions | 200 | 350 | 490 | Treasury - Dec 2021 |
| Bright-line test back to 2 yrs | None | None | ? | Wouldn't make a difference in first 2 yrs |
| TOTAL | 2,010 | 2,700 | 2,895+ | |
What’s more, the $3 billion tax expense expected in 2024/25 would eat up all $3 billion of new operational expenditure currently pencilled in by Robertson for that year.
This would leave National no room to increase expenditure on the likes of health (as the population ages), education or salaries for nurses and police.
A mitigating factor for National, is that it has spoken of introducing congestion charging. So, the loss of government revenue from the removal of the Auckland fuel tax would be made up with a new tax.
National is also not saying whether it would halt government contributions to the NZ Super Fund, as it said it would at the 2020 election, and as it did when it was last in government.
Type of spend
While considering the quantum of money entering the economy is important in determining how inflationary a policy will be, it’s also important to look at where that money is going.
The question is, is putting more money in all income earners’ pockets more inflationary than lining the pockets of contractors tasked with carrying out health reforms?
Secretary to the Treasury Caralee McLiesh, in a speech delivered last month, said that while the Treasury is forecasting inflation to remain above the Reserve Bank’s target range through 2022 and 2023, the “net effect” of the Government’s fiscal policy is actually “dampening pressure on inflation in the coming years”.
“While the extent of fiscal stimulus has been very large, the Treasury’s Half-Yearly Economic and Fiscal Update shows a fiscal tightening from June this year, with a return to surplus by 2024 and a negative fiscal impulse from next year onwards,” McLiesh said.
“This reflects the wind down of temporary-by-design Covid spending, and solid revenue growth - offset by significant allowances to achieve government’s budget objectives, which include tackling climate change and health reform.”
Conclusion
Until National can detail how it’ll offset tax cuts with lower government expenditure, its policy looks inflationary. It’s difficult to see how the medicine it’s proposing to give those suffering due to inflation won’t simply worsen the problem.
It would be more accurate, but less politically appealing, for National to promote its tax policies on their individual merits.
With the likes of Inland Revenue, the Treasury and tax accountants strongly opposing some of the tax changes the Labour-led Government has rushed through, there is enough material there for National to continue drawing on.
81 Comments
I disagree it's inflationary as it's not necessarily adding to the money supply.
It could easily be argued tax cuts:
- put downward pressure on worker remunerations
- richer citizens are less government dependent [less government support required]
- people spend their money better than the government
- it would increase peoples ability to raise capital [save, invest and start businesses]
- inflation is already here and such tax cuts add liquidity to the retail and tourism sectors
- consumers know their individual needs, governments don't
Unless employers are borrowing to meet PAYE, there would be no additional money being created through payroll-tax-cuts. Granted tax cuts could lead to money staying in the domestic economy rather than government balance sheets and consultant-trust-accounts.
No, I think it's a stretch Jenee, you make a good case, but it's a stretch.. especially considering inflation is already here and people are already starting to struggle to keep up.
I'm not convinced, I want to be convinced.. but I don't even think you're totally convinced lol :)
Not true, all things are required in moderation. Roads and bridges that help ambulances get to you or enable you to have higher wage jobs are things most people would consider money well spent. The difference between Labour and National appears to be precisely the difference between us. Labour implies that they must know best about everything, whilst National expects that everyone has their own strengths that enable them to know best about different things.
Who cleans a rental car before returning it??? "Not Many, If Any"
"People tend to look after their own property and purchases.. more so than public property and free stuff.." he said as his car lay strewn in Wild Bean Cafe wrappers and accoutrements from a months worth of giving custom.
Bear in mind here that you're talking about spending within the area most heavily interferred with by the government in NZ.
People bid up residential properties as a direct result of government policies. Whether that's legislation that slows down and increases the costs of supplying new product to the market, legislation that provides tax advantages to holding property over other assets, legislation that provides incentives and subsidies to people buying homes, legislation that directly increases the rents achievable (accomodation supplements are tied to rental costs and increase with rental costs... increasing rental costs :) ), irresponsibly high immigration under both national and labour at a rate that the system has no way of keeping up with or even our favourite primeminister literally setting a return expectation for this asset class!!!
In no other market has the government had as large a role in directing spending. If the market was allowed to be efficient, and residential investors not insulated from downside risks by the RBNZ or central govt, then people would certainly spend less on property.
Please tell me what legislation favors holding property over other assets, if I own shares and they go up I don't pay tax on that gain (if I don't sell too soon, i.e not a trader), If I own a car and its price goes up I don't pay tax on that (if you are not in the business of buying and selling cars). There is the disadvantage that you can't claim interest on back property which you can on any other asset. And you do have to pay capital gains tax if you are in the business of buying and selling house as well. The problem is people lie about what business they are in.
The thing that makes property attractive is that banks will readily lend you money on it at low interest rates, allowing you to multiply the gain turning a 20% gain into a 100% with an LVR of 20%. But that isn't legislation that's the banks.
You are correct that we have a massive problem with evasion of due capital gains tax in property investment in NZ. That open tolerance of this over the last decades has certainly been a part of what has made property a much more favourable investment.
Obviously, restrictive zoning and taxpayer subsidising of rental yields and prices also is an advantage over other investments.
GDP per capita went from 31,000 USD under Helen Clarke to 43,000 USD under John Key / Bill English before gradually dropping to 42,000 under Jacinda Arden. Once adjusted for inflation Jacinda’s figures look even worse.
Inflation adjusted wage growth was slowest under Helen Clarke, and negative in some years under Jacinda Arden.
National got us through the GFC so well that some people say it skipped us, can Jacinda say the same of COVID?
Please do enlighten me as to where your wage and GDP conjecture came from.
You don't think it's due to the fact they wuss out on tax reform every time they get into power? Or the leaky building crisis? Or Labour-aligned councils restricting land supplies? Or doing nothing meaningful to reign in investors? Or any of the other things that have been shown to contribute to house prices exploding under their watch?
No, it's because they 'grew wages too fast'. That is some grade-A level spin. I'm honestly kind of impressed. But I'm also seriously annoyed because I have a mortgage I won't pay back before I die so I guess I have little time for political dilly-dallying.
They let things get bad from 2000 - 2008; Key let things get worse and now it's beyond stupid. This country will go nowhere if people keep making excuses or trying to rewrite history because red team good, blue team bad. For God's sake, demand some basic accountability, or at least that they live up to their own standards and policies.
It is interesting to note that interest.co.nz has built in a a 0% conversion of the combustion cars in Auckland to electric over the next 3 years.
Also please explain how much of the projected additional pay will be recovered by gst and/or taxation by the businesses that receive the money from those consumers as well as their employees and the establishments that they spend at. From memory these types of bracket adjustments usually have their cost drop every year (washing out after 2-3 years) after implementation unless new adjustments are made.
Enjoyable reading - Luxon has been clueless on this the last week or so, and Bridges is similarly incoherent. Mind you Labour are not much better - still stuck in the thoroughly disproven paradigm of 'Govt spending increases the money supply and this creates inflation because there is too much money chasing too few goods'. Decent economists have left this nonsense behind.
I also think politicians (and less decent economists) misunderstand how the economy actually works. For example, when the price of necessities like petrol increase, people spend more on petrol and less on everything else. Thus sustained high oil prices have a deflationary impact on demand. If you add increased mortgage / borrowing costs to the mix, and Govt trying to return to surplus (dumb!), we could be heading for major reductions in disposable discretionary income, big drops in demand, and rapidly rising unemployment (which will only compound the reduction in demand creating a a doom spiral). Maybe we actually need some well chosen tax cuts to offset some of the demand loss caused by this toxic combination of international disasters and domestic stupidity?!?
Whether the collapse in demand and increase in unemployment will actually lead to a reduction in the price of building houses, global oil prices, price of wheat etc is a separate point. But you can guess my views.
But what would cause the 'other goods' to reduce in price? How many of the factors driving the price paid in NZ for goods are sensitive to reduced demand in NZ? Our domestic butter and milk prices are determined by export prices for example. The costs of fruit and veg are a function of minimum wage, international fertiliser etc. The price we pay for second hand cars and car parts - will they reduce?. Local Government rates and energy prices? Will the demand for builders and new houses reduce enough to drive the cost of building materials down?
All of this said, I take the point. I just think the only place you might see some movement is a reduction in price gouging / profit margins - and with a duopoly-heavy economy, I kinda doubt that will balance out the deflationary drivers.
Those look pretty fringe to me. The implication is that a rebalancing of prices would not occur in the absence of inflation.
Big corporations tend to be more objective in their pricing of inflation so it is expected that they will do better than small companies that just use “intuition” to deal with it.
Your comments are a breath of fresh air. Listening to national talk about how government is source of inflation is rediculous. Its the money supply. The media bite as well and our uninformed NZ population listen.
Now petrol prices are inflationary in general. Material cost + Labour + Transport = Price. If transport goes up for all goods then prices will rise. BUT this cost is almost uncontrollable as it is just linked to international prices. But it could be influenced by reducing taxes on petrol to reduce this inflationary pressure. You could also make it targeted by making it targeted on only business RUC.
I agree petrol can also be deflationary like you as it essentially removes money from our money supply and is paid to saudi arabia etc. So this will reduce spending that should cool the market and reduce demand. And this will likely happen on a global level. Unfortunately the war that is causing these petrol prices is also like to drive up prices of many goods reinforcing inflation, but not due to demand, due to supply side issues so after the war it should correct fast.
Don't really agree with the premise of this article.
I doubt the tax cuts would exert any significant inflationary pressures. For many battling households the extra weekly money is hardly going to be enough to splash around, it will simply help cover some of the cost of the growing bills.
But it's not money. It's debt. Either way you look at it, it has to be 'paid back'.
And 'paid back' is ALREADY proving impossible; for every $1 of global GDP claimed since 2008, $3.50 of debt has been issued. That cannot go on; either we mass-default (in which case what is $1 'worth'? Or we devalue a dollar to make debt-repayment fit the remaining planetary underwrite. Which means: increasingly downwards.
https://surplusenergyeconomics.wordpress.com/2022/03/04/223-trading-wit…
"In this situation, prosperity deterioration is inescapable, though the chaos of a disorderly economic ‘collapse’ remains avoidable, at least in theory, if the right choices are made."
Jenee - you need to read it too :)
Be assured that I agree that the real limits to the economy are real resources - energy, raw materials, machines, labour etc. But, your views on financial debt are confusing. The world literally cannot be 'in debt' unless people have secretly been borrowing money from aliens. The world has creditors and debtors, which, in each currency, have to balance. The obscene wealth of the few is the debt of millions of others (including states).
Reducing the civil service is always proposed, but usually not well actioned.
But we need to get some productivity for expenditure. I suggest the Wellington crew numbers be cut in half. Then half of those left relocated to the 'provinces'. Sure they are busy. But it's mostly talking to each other.
Health? I worked there for a long time. It's a sacred cow for sure. But there serious efficiencies to be made. You could double the usefullness at the same cost.
Every inefficency means less benefit for NZers, compared to what it costs them.
Dead right Rick. That civil service is a fearsome beast if it's self interest is threatened. Indeed they spend much time each day ensuring complication that is difficult to unwind.
Just look yesterday. The useless Commerce Commission comes up with non solutions over supermarkets. But carefully builds in a monitoring role for itself over the next few years. ($60 million they cost us each year)
More austerity for health, like their last government.
Tax cuts for property speculators. Taxes are for working plebs, it's they who must fund services for everyone - including the pension for wealthy older folk. Property speculators are salt of the earth and deserve a free, subsidised ride.
Unless income tax cuts are balanced out with something like an LVT on the unimproved value of land all we're getting from John Key 3.0 will be 20th century ideas for 21st century problems.
I dont really think now is a good time for tax cuts, but the threshold lines at 53 and 78 are a good place to move them if we did. I would have been against moving the 70 to 90 which some in National might have wanted, so well done Luxon on deciding 78k. I can see the huge need we have coming up for hospitals and their staff, superanuation, infrastructure, and paying off the 50 billion however.
There's a critical assumption missing here - the government's spending has to be without dead-weight loss and inefficiency, otherwise it's not really comparable to someone at an individual level. Give me a dollar back of my own pay increase that was mostly just to keep up with the inflation cause by the Crown and their various institutions and I now have a whole dollar I can spend on myself. By the time that dollar has been through the public purse and spent, it's probably only buying us what, 90 cents, 60 cents, 40 cents worth of stuff?
And we know this must be the case, because we keep getting told how underfunded everything is despite the tax take rocketing up, and any suggestion we might let people keep more of their own earnings met with cries of austerity. So one can only assume that inflation within Crown departments is sprinting away faster than it is in the wider economy... at which point you can't really say letting people have that dollar is any more inflationary than letting the government get even less for it when they spend it.
So I ask, at what price do we accept 'the greater good' more deserving of inflationary driven tax components of earnings, given that we're also copping it in terms of inflation and that the DIA gets pretty upset with you if you start printing your own :P
Where is the vision going to come from for this country? Maybe the next generation. We need a 100 year plan that elected parties need to adhere to its priciples with self correction rights. A nation led by short term thinking, wealth creation by land & still largely our very original path of supplying protein to the world. Rinse & repeat, no vision offered. Get JK back to finish the cycle way, what a plan.
I have said before that you could cut the bureaucracy in Wellington by 30-40% and save a few billion a year. Totally reorganize and streamline it, and get it really focused. There's just SO much wastage right now. I firmly believe it could become better if much smaller and focused, not just much cheaper for the taxpayer.
But I bet Luxon wouldn't have the chutzpah to do it.
I believe that he did cut a lot of the bureaucracy and inefficiency out of Air New Zealand, taking it from “junk” grade to investment grade (one of the world’s most profitable airlines despite our position in the middle of nowhere) whilst he was CEO. It has since dropped back into the “junk” grade.
I don't see how this belief has any root in reality at all. Insiders I know suggest he largely was able to cruise along on the legacy of Norris and Fyfe's massive restructuring efforts before. But a very good salesman.
Is there a bit of reputation creation going on in the media and blogosphere?
“Until National can detail how it’ll offset tax cuts with lower government expenditure, its policy looks inflationary.”
This article misses the point, which should be about the quality of the proposed $6 billion spend by the government. In my opinion its record on expenditure to date doesn’t even get a pass mark. I can’t find any areas of spending that have been a success. Perhaps those who disagree can identify & quantify their successes?
To increase government spending by $6 billion is clearly inflationary & there seems to be a reluctance to challenge government on the quality of the spend.
Instead this article chooses to focus on whether National’s policies are inflationary rather than what would be a better way to spend of $2 billion of tax payer money. Eg Should the government spend it on Health reform & 3 water reform or give it directly to the tax payer via a reduction in newly introduced “unfair taxes” & bracket creep on personal taxes?
A clear majority of New Zealanders do not want the Health or 3 Waters reforms so why aren’t survey results on this published so all New Zealanders can get a true understanding of public opinion?
I don't need a tax cut either, and that's why it's not enough to con me into voting for them. But I'm sure there are plenty of people on struggle street earning 50-60K on full time jobs that do need it. Don't you think?
It's also a principle thing, the tax thresholds haven't changed for ages. Relatively speaking, lower income people are paying far more in tax than they did 15 years ago.
Yes there should be a higher threshold before the lower incomes pay any income tax, also lower income people spend a higher proportion of their income on essentials such as food. There is no VAT/GST on food in UK, why do we tax essentials here? $15 per week off income tax will make very little difference. One extra cauliflower at current prices.
Smartest and easiest thing to do is to make the first say 20-25k of earnings tax free. And apply it even to people earning a benefit on a progressive basis. Why?
- Simplified tax system. Removal of GST on certain goods is very challenging to do and creates an army of public servants figuring out what should and shouldn't be taxed
- Still encourages people to work
- 20-25k is just under what a person currently needs just in terms of daily life expenditure (food/power/rent). Would be pretty close for a couple
- Helps the lowest incomes first, which is who need it the most
In the end a small cut on income tax is pretty inconsequential while working plebs are being forced to carry the unproductive asset speculators of society. Significant income tax cuts balanced by more equitable sharing of the load for social services - e.g. through an LVT on the unimproved value of land - would both improve the lot of the strugglers while getting more people to contribute their fair share to society.
Carrying the speculators is too big a burden for working NZers.
Aus only did it as a political sop - the kind of one that introduces waste into a system and then you can never get rid of. They initially wanted to follow our model of GST for this exact reason. And the only reason ours doesn't work is the safety valves (e.g. clawbacks for low income earners) were never fully implemented, just like the CGT that was meant to get personal tax rates lower was never implemented. Making GST as close to universal as possible is one of the few things this country has actually seen through to completion but it doesn't tell the full story.
I've never seen the forecast costs on the interest deductibility policy. Very interesting and much higher than I would have estimated.
It is policy that needs to be retained in my opinion, that money is better being spent for NZ than lining the pockets of property investors.
If our best plan is "tax less and spend about the same" when we're already running a deficit we are in real trouble. Given a recession is increasingly likely if we don't reduce cost of living I suggest we either tackle it or plan for make-work schemes by next election.
There is some brilliant discussion in this stream.
to the critics of Luxon though, is it possible he will just use deficit spending (not debt) to continue with projects to build and maintain economic infrastructure or build national resilience? For recent Governments how much spending has been directed to that sort of thing? It's early days yet before the next election and I doubt Luxon would be letting too much out on their plans at this point?
Seems like Mr Luxon is unsure of what the NZ tax rates actually are...
https://www.nzherald.co.nz/nz/politics/christopher-luxon-wont-say-if-ta…
Christopher Luxon won't say if tax cuts will be staggered, or if landlords should cut rents after being given tax cuts.
People on $72,000 currently have $2000 of earnings taxed at 33 per cent, costing them $660 a year. Overall, a person earning that income would pay $14,680 of it in tax. Under National's plan, they would save $860 a year.
Luxon continued, "at $79,000 when you kick into 39 per cent that's a challenge. That's not a lot of money I'd say $70,000 to $80,000. Yes it's a lot more than others but you're still feeling the cost of living squeeze here".
In fact, the top tax bracket kicks in not at $79,000, but at $180,000. IRD's most recent estimates suggest only the top 3 per cent of income tax payers pay the tax.
Not so sure if this will lose them more votes than it gains.
After 5 years out of government I thought they would have cottoned on to the fact that one of the reasons they got voted out last time was their sheer refusal to accept or do anything about the massive blowout in house prices.
Despite not really being that happy with Labour, if all national are going to do is line the pockets of property investors again I won't be voting for them, we've been there and done that, and it didn't work last time.
And Labour has done something about the massive blowout in house prices? What will truly put out property investors is not tinkering with tax deductablity but making house prices fall, and significantly that is where property investors make and loose their money. The first thing the government can do is state categorically that they want house prices to fall by say 50%. But neither National or Labour are willing to do that, my only hope is that increasing interest rates will force the fall.
If house prices fall property investors will not make put up rent because that will just encourage tenants to move out, and they may able to do so because house prices will be cheap. It doesn't really effect people who bought a property to live in since they can still live in it, and owe exactly the same amount of money that they did before.
I know its a hard pill to swallow, but its one we have to take, it will have an impact on the wealth effect but we can't continue to base the economy on people feeling wealthy.
You're not a property investor if you think it was "tinkering with tax deductablity" I think it was the most meaningful thing any government has ever done to get investors out of the market, and the reason a lot of them didn't bail straight away is because it's phased in.
But I think you will find there is more investors bailing out now than ever in the past, which is great as it gives owner occupiers more of a chance to get back in the market, but if that's going to be unwound, how does National expect Kiwis who just want to afford their own house to want to vote for them?
As a former National voter I really think that National has fumbled badly with this announcement.
Ordinary middle class voters can see the rising cost of living with their own eyes. They experience the squeeze every time they buy groceries or fuel and worry about whether their eftpos card has enough money to cover the purchase.
National should have offered a policy suggestion that would provide a tangible and significant improvement to the lives of those people. Instead they went down the tired and transparent path of offering a policy that would provide the greatest amount of benefit to the highest wage earners.
Tax cuts will win neither hearts or minds. They need to offer tax reforms
Excellent policy that will help keep money in every worker’s pocket. Thanks to out of control inflation, the average worker has been pushed into the 33 cents in the dollar tax bracket and its outrageous.
Why would Grants 12 Billion dollar spend up on a train and who knows what else not be inflationary, yet the 2 billion cost of this is ? Not credible.
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