The Coalition Government says it cannot cut taxes again before the next election, as it needs future revenue to pay down public debt, projected to hit $100 billion this term.
It also won’t commit to indexing the new income tax brackets—which kick in today—to prevent inflation from pushing incomes into higher rates and effectively raising taxes.
Indexing tax brackets is popular with voters, according to a May poll, but politicians are reluctant to give up this tool, which makes it easier to raise taxes.
Finance Minister Nicola Willis said bracket creep was a flaw in the tax system, but the coalition couldn’t afford to index brackets or make other adjustments during this parliamentary term.
“We want to get the books back into surplus so we can pay down debt. That commitment means we're not in a position to commit to dealing with fiscal drag again this term,” she said.
New Zealand Debt Management (NZDM), a unit of Treasury, oversees government borrowing. NZDM issues debt via nominal bonds, inflation-indexed bonds, Treasury bills and Kiwi bonds. These interest paying securities are private sector investments, sold to investors including KiwiSaver fund managers, in NZ and overseas and are all denominated in the NZ dollar.
Willis has raised the income tax brackets and some tax credit thresholds by 11.5%, which will save the average household about $30 per week or $1,560 annually.
By coincidence, this adjustment perfectly corrects the tax brackets for the excess inflation that has occurred over the past three years.
The consumer price index has increased 17.6% since inflation broke above the Reserve Bank's 1% to 3% target range in the second quarter of 2021, while on-target inflation at 2% would have compounded to 6.2%.
If you deduct the normal amount of inflation from the total, you get 11.49%, which is exactly how much the tax brackets have been shifted upwards. Spooky, huh?
This means bracket creep has been tolerated at an annual rate of 2% for 14 years and may continue indefinitely.
Analysis by Infometrics showed tax revenue was roughly $4.6 billion higher in 2024, prior to the tax cuts, than it would have been if income brackets had been indexed to CPI since 2011.
Transparency needed
Terry Baucher, a tax consultant and commentator, said New Zealand had been much less transparent about bracket creep compared to many other countries, such as the United Kingdom.
New Zealand’s income tax brackets have only been adjusted five times since 1989, showing successive governments have knowingly relied on fiscal drag to bolster their revenues.
Brackets should be reviewed every three years, with a vote in Parliament to approve or reject an inflation adjustment for better transparency, he said.
James Ross, a policy and public affairs manager at the Taxpayers’ Union, said allowing fiscal drag was a “deliberate design choice” that hits people on low incomes the hardest.
“If politicians want a bit more spending money, they should find it by slashing waste. But for 14 years, their go-to has been punishing hard working Kiwis who are already doing it tough by slapping them with these tax hikes by stealth,” he said.
Despite this, New Zealand’s personal income tax rate remains very low by international standards. It was ranked as having the fourth smallest tax wedge out of 38 OECD countries in 2023, although this is partly offset by above-average taxes on goods and services.
Voters’ appetite for both relatively low taxes and high-quality public services could be one reason policymakers allow fiscal drag to continue.
Barbara Edmonds, the Labour Party’s finance spokesperson, said there was an obvious case for indexation if you looked at tax policy in isolation.
“[But] there's going to be a fiscal cost to indexing tax thresholds. Does that mean less money for health and education? There’s always a trade-off,” she said.
Deborah Russell, the party’s revenue spokesperson, said she doesn’t support indexation as it makes fiscal policy less flexible.
“What that does is constrain a Minister of Finance in their decision-making and imply that the current tax threshold levels are exactly perfect.”
“I think we need to leave the capacity for ministers of revenue and finance to adjust as needed, rather than being constrained,” she said.
28 Comments
Cough cough… Adrian Orr made a far worse dent in unsustainable debt with emergency rate setting for too long leading to wealth hoarding, unproductive lending and investing and filling Aussie bank’s pockets with funding for lending programme that continued far far longer than it should have.
"The key reason for Treasury’s downgraded economic growth forecast is a reassessment of future productivity growth in New Zealand. Recent data outturns and revisions to previously published GDP estimates have seen our estimates of labour productivity and potential output growth revised downwards relative to our Half Year Update forecasts. This results in forecast potential GDP being 2% lower by 2026 while labour productivity levels are around 3% lower than in the Half Year Update."
https://www.treasury.govt.nz/publications/efu/budget-economic-and-fisca…
"The consumer price index has increased 17.6% since inflation broke above the Reserve Bank's 1% to 3% target range in the second quarter of 2021, while on-target inflation at 2% would have compounded to 6.2%."
Which most people fail to appreciate. And it is still compounding this very day.
In essence, pay rises of 11.4% are required over that timeframe, just for workers to stand still. (Let's not even get into the real cost of living increase vs the CPI)
They are all tarred with the same economic brush, and it's all they know. Although how much Willis actually knows it....debatable.
"she graduated with a degree in English literature...and a post-graduate diploma in journalism.... She was a member of the Victoria University Debating Society, competing in international tournaments." All crucial prerequisites for our Finance Minister......
Just to make sure we’re not being misogynistic… Richardson studied law, Cullen studied history (though did thesis on poverty in UK), English studied commerce and English literature. You can be smart and grasp what you need with good advisors to be a great finance minister. She’s just plain ignorant and has no idea how to assess net economic and social benefits of ideologically driven ‘policy’ - ironically given the social investment charade.
Willis has also been central to the coalition's three biggest political mistakes so far:
1. Scrapping the ferries with no idea of how much it will cost to replace + how much of a penalty we will have to pay and hoping the current ones will last for a currently unknown timeframe.
2. Walking away from Nationals election promise to fund cancer drugs by not including any funding for this in the budget - then magcially finding the funding after the fact.
3. (in progress) Not being properly across the financial challenges within HealthNZ in the first six months of the government
The first two of these things have contributed into National's poor polling and lack of a honeymoon so far. The latter who knows how damaging this might be for them. But if people see no improvements in the health system by the election - it will be bad for them.
So - it means so far she has proven to not be a great operator - hopefully for the country's sake that changes.
NZ is in crisis and there is the need for more govt spending in critical areas.
However, there is a strong need to force all central and local govt spending through socioeconomic cost / benefit analysis (including the distribution of the impacts) that is made publicly available before the spend.
This is the only way we can have better public services through targeted spending increases and also cut wasteful spending on projects that don't stack up. This way taxes and property rates can be held around their most optimal levels.
(National is not doing this & and is slashing its neoliberal financial knife irrespective of the impacts on NZ Inc while giving handouts ($3bn to landlords) to its mates.
Also councils need to hold reasonable tenders and hold their contractors to account for costs, as well as saying no to constituents for silly vanity projects to try and improve their image and responsiveness. People want prudence core services, and would likely forego the wants for the needs in the name of the balance shheet
A reminder that these tax cuts are (a) being paid for by more borrowing, b) all else equal adding to demand & delaying falls in interest rates, & c) are partly paid for by new distortionary taxes on business. A shame no party seems to care any longer about budget surpluses. Link
“[But] there's going to be a fiscal cost to indexing tax thresholds. Does that mean less money for health and education? There’s always a trade-off,” she said.
Or you could look at taxes other than personal income taxes? Broad base low rate and all that good stuff?
I'm not a National voter but given the priority to get inflation back under 3%, it's good to see the government doing their bit, especially if they do follow through with debt reduction rather than adopt the hyper spending habits that Labour governments usually have.
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