Tax cuts locked in as Nicola Willis stays the course in first Budget

Thursday, 30 May 2024

• Finance Minister Nicola Willis' first Budget has set aside $14.7 billion over four years to deliver tax cuts and rebates.

• It includes cuts to income taxes, rebates for early childhood education fees and tax cuts for landlords.

• For many median income earners, those changes together will mean the promise of an extra $50 per fortnight by August.

Tax cuts are locked in. Budget 2024 has set aside $14.7 billion to deliver tax cuts and rebates.

Delivering her first Budget, Finance Minister Nicola Willis has essentially stayed the course.

For median income earners, that means the promise of an extra $50 per fortnight will be delivered as of August. The Government had initially promised tax cuts in July, but Willis said officials told her payroll systems would need an extra month to adjust.

That $14.7b, across four years, includes a suite of tax promises: Cuts to income taxes, rebates for early childhood education fees, and tax cuts for landlords.

To pay for all of that, the Government has chipped away bits and pieces from almost every department. Spies, the Commerce Commission, climate change projects and university students who won’t finish their degrees will all face funding cuts, as well as over 200 other “savings initiatives” that have been found in the Budget.

But even after the multi-billion tax package and spending increases for public services such as health and police, as well as Shane Jones’ $1.2b regional infrastructure fund, the Treasury still expects the Government to return a modest operating surplus in 2027.

If the Government had followed Labour’s forecast operating allowances, surplus would not have been reached until at least 2030/31.

Willis announced her first Budget on Thursday saying: “I have kept my promise.”

“We are doing more with less,” she said.

Her election campaign estimate, that National’s tax plan would cost about $14.6b was only $100 million off, according to the Budget.

By finding long-term savings, this plan would also avoid entering into long-term Government debt to fund those tax cuts.

The Treasury, in its economic forecast, said “consolidation” - also known as ‘spending cuts’ - across the the public sector would help limit inflation despite the Government’s plan to deliver tax cuts.

“In the medium term, interest rates may be lower than would otherwise be the case,” the Treasury’s report said.

It predicted inflation would fall below 3% by the end of 2024, before staggering on for a few years. It would not be until “around mid-2026” that inflation would return to the target of below 2%.

The official economic forecasts were subdued. As Treasury previously warned, population growth remained the only real driver of economic growth. Strained household budgets, increased interest rates, falling Government expenditure and low business confidence had put the brakes on economic growth.

And that GDP growth would be limited in the year ahead, it said. This would see unemployment reach 5.3% by the end of 2024, according to Treasury’s Economic and Fiscal Update.

Despite a lower operating allowance, Government debt would still be increasing year-on-year. It was forecast to reach $178b in 2024, up $23b from the previous financial year.

In total, core Crown expenses would continue to increase. It would rise $11b in the year ahead.

Willis said the only way to avoid that would have been “extremely dramatic moves to radically cut spending”. Ministers considered this, she said, but she thought it would have been a step too far.

In Budget 2024, Willis had an operating allowance of $3.2b in new spending - the smallest amount of new spending since Steven Joyce was finance minister under prime minister Bill English.

Looking ahead, Willis said future budgets would be required to pull back on spending - although there would be some new spending.

“We are weaning off. We are a Government that has inherited a bloated state and we are gradually bringing it back to order,” she said.

“The Government’s books have been in deficit since 2020, and it will take time to get them back in order.”

Alongside “sizeable declines” in productivity, hampering the nation’s GDP per capita, Treasury warned of a “sluggish housing market”. It noted residential investment was down 11% since the pandemic.

But inflation would continue to track down, according to the latest official advice.

How tax cuts will work:

By adjusting income tax brackets, most workers will receive a tax cut.

Someone earning double the median wage of $62,500, with no children, would receive $40 per fortnight in tax relief.

A median wage, full-time worker with no children, would receive about $50.75 per fortnight.

A minimum wage, full-time worker with no children would get about $4.31 per fortnight.

A couple, both earning the median wage, with two children in early childhood care, would receive about $252 per fortnight.

Initially, a retiree would receive $9 per fortnight.