Finance Minister Nicola Willis may need to find almost $1.6 billion across the budget forecast period to neutralise her tax package and avoid worsening New Zealand’s fiscal position.
National campaigned on lowering property and income taxes by $14.6 billion, while raising $6.3 billion in new revenue and cutting spending by $8.4 billion in Budget 2024.
However, the party miscalculated some of the costs and one key revenue stream, the foreign buyers tax, was ruled out during the coalition negotiations.
There have been some “unders and overs” but the net result is that the package would cost $1.6 billion if it were put forward without further adjustments.
Losing the foreign buyers tax cost almost $3 billion, the cost of restoring interest deductibility for landlords and closing a gambling tax loophole were overestimated by over $1.2 billion.
These costs have been partly offset by repealing SmokeFree laws which may result in the Government earning another $1.5 billion in taxes over the forecast period.
Some other offsets have also helped but not enough to make the package neutral.
Economists agree that cutting taxes without an equal reduction in spending would be a form of fiscal stimulus, according to a survey of the New Zealand Association of Economists.
However, they were split on whether tax reduction should be included in Budget 2024 regardless. About 28% supported lowering taxes, while 58% were opposed.
The survey was done in April and included 48 economists working across academia, the private sector, and government.
No new debt
Willis reiterated in her first pre-budget speech that she would deliver lower taxes without adding to net core Crown debt.
“Our tax relief will be funded from within the operating allowance through a mixture of savings, reprioritization, and additional revenue sources,” she said.
New revenue included items outlined in the National Party’s fiscal plan as well as empowering Inland Revenue to chase down those who hadn’t met their tax obligations.
She said Treasury had advised that fiscally-neutral tax relief would reduce inflationary pressure and nominal interest rates, as an individual was likely to save the additional cash.
Of course, the Government could also choose to save the proceeds of any spending cuts itself by reducing the deficit and paying down core Crown debt.
Willis also confirmed the public sector had met its target of finding $1.5 billion in annual savings, which is $6 billion across the forecast period.
However, it is not clear if all of this money can be counted against the tax cuts as it includes roughly $2 billion in savings started by Labour that were forecast as debt reduction.
This contributed to the pre-election books which showed Crown expenses falling from 33.4% of GDP to 31.4% in 2027/28.
If the Coalition Government were to redirect that money into tax cuts, they would be delaying a return to surplus and adding to net core Crown debt.
While calculating the $1.6 billion figure referenced above, Interest.co.nz has only counted $4 billion of those savings towards tax cuts.
Forget tax cuts, Treasury wants hikes
While preparing the 2023 Mini-Budget, Treasury warned Government finances would be under pressure this term and long into the future. Achieving fiscal sustainability would be difficult.
Creating fiscal headroom at this scale was best done over several years and should include both spending cuts and tax increases, it said.
“This represents a significant enough challenge that you should think of it as an ongoing goal to be pursued, rather than something which can be achieved through a single set of decisions”.
To fund the manifesto, Treasury suggested cutting agency budgets, spreading campaign promises across the term, and increasing taxes through fiscal drag or structural reform.
It also suggested considering “active balance sheet management” which is code for asset sales. This has been ruled out by the current Government, which owns $537 billion in assets.
Most advice related to income tax cuts was redacted in the mini-budget document release but Treasury did warn that fiscal drag had helped previous governments achieve their goals.
“If you wish to offset or end fiscal drag, through adjustment of personal income tax rates and thresholds, the fiscal headroom which needs to be created will further increase”.
Its “best advice” was to begin structural reform of the tax system focused on introducing a capital gains tax and a way to manage differences between personal and company taxes.
Treasury also pitched some alternative options such as increasing GST or establishing an inheritance tax. It said advice could be provided on smaller ad hoc taxes as well.
59 Comments
National should introduce a capital gains tax which includes shares and business sales just like in Australia. They will get my vote if they did. We need to make NZ liveable for young people with less tax burden on them and have more investment going into productive things.
The Total fertility rate has just been announced at 1.52 for the last year. This is a drop from 1.56 last quarter. It really means the actual number for this last quarter will be under 1.5 and that will show in the coming quarters.
How will a CGT reduce the tax burden? Tax cuts and less obstructionist legislation at least has the potential to motivate citizens to improve productivity with more effeicent practices and new products/services. This has not been utilised for decades and is probably a major contibutor to NZ poor productivy.
We could lower incomes taxes by having a tax free threshold, reduce fuel taxes, and lower GST all like in Australia. This would make it easier to save for a deposit etc. Having life stack up better here would keep more of our best and encourage more to come back. There may be less speculation in the housing market also.
A nation that taxes sweat and not speculation might as well put up a big flashing sign reading "closed for business" at its borders.
Funny how Luxon wants Kiwis to have more kids but will do f**kall to stop tens of thousands of young and educated from moving overseas in search of decent economic opportunities and to not be treated as cannon fodder for blowing up house prices here.
Sure, our birth rate is a ticking socioeconomic timebomb. But what's already in meltdown mode is the ongoing exodus - 79K Kiwis left NZ in the last 12 months or 1.5% of our native or naturalised population.
Imagine the long-lasting economic damage this could inflict even if only 20% of the leavers were engineers, nurses, doctors, policemen, tradespeople or similar high-skilled individuals?
I have contacts at Treasury and there are absolutely people there who "get it". The public tend to see economists as part of the problem - and perhaps in 2008 they were - but these days I think the economists see what needs to be done more clearly than politicians or the general public. Politicians with outdated econ 101 understanding of the world is a big barrier. So is the hegemony of homeowners at all levels of the democratic process.
The bigger problem is that our politicians don't care about economic analysis.
Often the politicians make up their mind or have been influenced in a certain policy direction by vested interests and simply want their advisors to find the data to justify their decision.
Interesting how we all come with different perspectives and with different knowledge. Have been told Nicola is a breath of fresh air and admired for her level headedness amongst many having to make difficult fiscal calls in Wellington. Economists? Yes, definitely have their place but lack some of the indepth knowledge of our up to date fiscal position.
I've said it before. If the rationale for the tobacco law repeals being good for us is that we kill people earlier than they need to die which saves super why are we messing around. Let's just euthanize everyone at 65 as they are not producing anything just consuming. If you support the repeal of the tobacco laws you must logically support this option as being more efficient and cleaner.
Luxon & Willis should seriously consider a U-turn on residential interest tax deductibility . Use the money saved to give another $10 a week to people in the form of income tax breaks. People need the money and will be very appreciative.
This interest deductibility reversal policy is a policy that should only be implemented in the "good times" and times are not good.
I don't think Luxon is a very good politician. Key would have done the U-turn 6 weeks ago.
Being a coalition limits the PMs ability somewhat. Would need buy in from the other parties.
The very different ideologies of the three will limit acceptable compromise solutions.
They are all hellbent on delivering to an agreement made 6 months ago, things have moved on rather fast.
The whole thing is dumb the more I think about it. The policy of interest deductibility reinstatement was meant to be paid for by the foreign buyer tax. The foreign buyer tax was scuppered by Wintson. This should have been the end of interest deductubility. However somehow the policy survives. Now 6 months later we are facing a serious recession. We need a Keynesian infrastructure package. The 3 billion this policy is costing could be a part of the package......but we get nothing but platitudes.
Wonder if this will be the last National government. Say what you want about Labour at least they can read the room. National live in the 1990's.
Donny - you miss the point interest dedcutability relates to business expenses so if residential rentals are not a business then they are either not taxable or they were discrimintaed against. If you support such discrimination then disllow interest deductability and apply the discrimination at raise very significant tax - deem trade unions trusts and their income taxable at the truste rate of 39% then deem all Maori land and trusts as taxable on net income just like business. On this basis Nicola could increase tax relief and pay off some core crown debt.
But rents are rising 8.3% despite the forthcoming policy. Show me an economic model that mathematically shows how reinstating interest deductibility will lead to lower rents? The only "evidence" I have seen of this is in the form of a reassurance from our finance minister who was an English Literature major.
So do you want reduced rents through more rental properties or do you want $10 more in your pocket?
Neither, I want reduced rents quickly via lower immigration.
Then I also want reduced rentals by taxing land and rental investors in a way that encourages home ownership. So pretty much the opposite of the last 30 years.
So do you want reduced rents through more rental properties or do you want $10 more in your pocket?
Treasury modelled removing interest deductibility would have minimal effect on rents but result in house prices 16% higher than otherwise over the period. The other thing is, we're heading up to 40% of the housing stock being rentals, not because people don't want to own but because they can't afford it. I think we should be aiming for a decrease by getting people into their own homes.
You seem to be suggesting that the reintroduction of interest deductability will tempt more 'investers' back into the market to buy a home that could otherwise be purchased by a FHB.
So yes you might be increasing the rental stock, but you are also increasing the pool of renters.
Not sure how this would keep rents down?
You can't be talking about actually adding to the housing stock, as interest deductability was unaffected for new builds.
Back in '32 when the wool price dropped and the farmers all started bossing themselves, all us boys who'd been let go drifted into the city looking for work. We didn't have the National back then, they didn't turn up until '36 if I recall correctly, but the blokes in charge at the time tried exactly the same thing. Them and the council would put on parties to try and cheer the economy up, get the money moving again.
Treats for landlords is just the same thing dressed up, a ham-fisted attempt to bully the economy along. Didn't work then, and damned if it'll work now. Let's hope we find some sense before we get to smashing up Queen St again, it's an ugly business when men can't feed their families.
No it didn't, rents were falling when this legislation was passed. Any landlord that raised rents could have done so anyway based on supply and demand of rentals.
However, just because they did, doesn't mean they haven't taken on more risk e.g. the tenant leaves down the track because of it (not necessarily on the day/month/year of the rent increase).
Or, to put it another way, how much did a landlord with no mortgage raise rents due to this change in other landlords costs?
My mortgage free landlord put up the rent anyway, to "match the market", even though they are after upper quartile rent for a mid market property.
Anyhow, even if landlords did hypothetically pass on costs. It makes sense to then just hold current levels of deductability as these costs would already have been passed on. Obviously no landlord will be passing on the savings..
My mortgage free landlord put up the rent anyway, to "match the market", even though they are after upper quartile rent for a mid market property.
Of course, why would they have to take even a cent of a hit (by hit, meaning a little less profit) when you, the tenant, could pay the increased insurance and rates costs for them. Of course they can't have a dime spare after the raw profit of years of rent with no mortgage, woe be the poor landlord.
Exactly my point. They didn't put it up due to their cost increase because they had no interest to deduct. They put it up based on supply and demand for rentals (your 'match the market').
Now to prove my other point about risk, have you considered moving out due to the rent increase?
Seems to me these public service personnel cuts are poorly done with a blanket 5-6.5% or thereabouts. I would expect some departments would only need say 2-3% while others may need 10%. But there again someone mentioned that ministers couldn't get involved in operational matters so deciding whose to go requires a blanket % across all departments otherwise ministers would need to get involved in high level operational matters.
While true its also easy to say
It seems to me that the past increase in public service personnel was poorly done with little consideration of what was required, or efficiencies / benefits associated with those increased costs. Past Ministers should have asked for evidence that increased costs would provide taxpayers benefits.
The current head count cuts process doesn't require any cost-benefit analysis. It is driven by ideology not evidence.in fact the ministers do not want their senior bureaucrats to tell them the impacts as not having that information means they can blame the bureaucracies and say service cuts were not their doing. It is standard process.
"However, they were split on whether tax reduction should be included in Budget 2024 regardless. About 28% supported lowering taxes, while 58% were opposed."
This doesn't sound that split to me, 30% is a pretty big difference. The majority of economists surveyed oppose tax cuts would be a more accurate statement.
Willis reiterated in her first pre-budget speech that she would deliver lower taxes without adding to net core Crown debt.
Does the expiry of this government bond ($13.95bn 0.5% 15/05/24) today count?
"She said Treasury had advised that fiscally-neutral tax relief would reduce inflationary pressure and nominal interest rates, as an individual was likely to save the additional cash."
What planet are they on???
And then there's the, reduce smoking as much as Labour's plan , but collect an extra $1.5 billion in tax.
yup , i can see how that figures.
Given that many consumers have their wallets locked tight, and many are in fear of losing their jobs, I think any 'stimulus' provided by PAYE tax band adjustments will be minimal.
(With the caveat that any PAYE tax cuts actually goes to lower and middle income people - which of course it won't as this would require increasing tax rates in the bands above whatever is consider "middle income").
The tax cuts for landlords is another story. The whole approach needs a complete rethink to make it fair to all housing groups (aged, young, renters, OOs and LLs, and developers / builders), and without restarting the Ponzi doom loop.
"Treasury also pitched some alternative options such as increasing GST or establishing an inheritance tax."
Snuck in right at the end where they hope no one will notice, and throw in the diversion of an inheritance tax as if that would ever happen.
Too convenient and too easy.
All budget problems solved in one blow and a boot in the guts for those they despise.
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