Budget 2024: Tax cuts, $12 billion in extra borrowing, and no surprises

Thursday, 30 May 2024

ANALYSIS: Some savings, spending and some back pocket relief.

This is the best way to describe a modest Budget document that hits all of the areas that the Government indicated that it would.

Finance Minister Nicola Willis declared that instead of delivering radical cuts, she is intent on “weaning” the country off what she has previously described as “an addiction to spending.”

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

Willis promised that hers would not be an austerity budget and it certainly is not. Spending will continue to rise - almost $11 billion in the next year alone - there will be some tax relief, some handouts, more money for infrastructure and some budgetary nipping and tucking across the board.

There’s more money for health, education, law and order and infrastructure - primarily roads. Two-thirds of new spending is on the key areas, long telegraphed, of education, health and law and order.

But the scope of the Budget turnaround will not be able to be assessed for a couple of years. It is designed to better target spending in the hope of catching the upside of dropping inflation, interest rates and higher growth in a year or two.

The political imperative of this Budget was to give some non-inflationary tax relief, while also trimming spending and laying out a credible path to surplus. Insofar as a wafer-thin surplus on the operating balance before gains and losses (OBEGAL) is forecast for 2027/28, it is credible. But this will also be a watching brief and there should be room for improvement. It is worth noting that Grant Robertson also produced forecast surpluses.

The forecast cash deficit for the year is a significant $21 billion, while there will be no cash surplus produced over the forecast period.

The retail centrepiece of the Budget - the National Party’s tax relief package - remains minimally changed from the election campaign.

These have a component of tax cuts - through shifting up the tax brackets which have been in place for 14 years - but will also boost incomes through transfers by increasing the in work tax credit and independent earner tax credit. There are not tax cuts, but spending increases via tax rebates aimed at targeted voter groups.

Tax thresholds will modestly rise. The 10.5% tax rate will rise from $14,000 to $15,600; 17.5% rate will rise from $14,001- $48,001 to $15,601 - $53,500; the 30% rate will lift from $48,001 to $70,000 to $53,501 - $78,100; and the 33% rate will now apply from $78,001, up from $70,000. The 39% rate remains unchanged.

The other component is a childcare subsidy called FamilyBoost for households earning up to $140,000, tapering off to joint incomes of $180,000. This is an effective daycare subsidy of up to $75 per week, certainly welcome for those eligible - but calling it tax relief is a stretch.

However, Willis did note in her speech that flattening the tax scale - an ACT and David Seymour initiative - remains an idea of merit for the future.

These combined measures are expected to cost $3.7 billion per year. It has been financed by savings in other areas. The important point about the tax cuts being “fully-funded” was that they are financed within the current fiscal track and so should not be inflationary.

Talk about borrowing (or not borrowing) for tax cuts is therefore simultaneously true and false. Money is fungible so what was really borrowed for what is a bit of a red herring. The important political thing is that it doesn’t add to inflation and therefore keeping interest rates higher for longer.

However, the Reserve Bank of New Zealand’s view on that will be the one that matters.

On the fiscal side, the forecasts are more or less as expected. Government spending continues to rise. Core Crown expenses are forecast to rise by almost $11 billion in 2024 to $138 billion, while total Crown expense will rise to $175 billion, up from $161 billion in 2023. After that, dollar increases will come back to between $5 billion and $6 billion.

Willis has committed to an operating allowance (new spending) of $3.8 billion for the coming year, and then keeping them flat at $2.8 billion over the forecast period. This is down from the elevated levels during Grant Robertson’s tenure which averaged $4.1 billion from 2018 to 2023.

Net core Crown debt will also continue to rise from $155 billion to $209 billion in 2028. Spending as a percentage of the economy is expected to rise to 33.5% before falling to 31.1% in 2028.

Yet the overall picture is still one of significant spending increases. In part this is caused by inflation, which continues to mean more money needs to be found for various areas to keep up current funding levels.

The savings made across the board are detailed and signal both intent and some actions, but so far they have been broad-based.

If New Zealand was addicted to spending prior to this Government - as both Luxon and Willis have been wont to say, it remains so - or is at least on a very heavy dose of fiscal methadone in the hope of kicking the habit. Both Prime Minister Christopher Luxon and Willis have been at pains to make the case that fiscal repair is a long running project.

At the current rates outlined, that is a masterful understatement.

This also demonstrates some wins for both NZ First and the ACT Party. For NZ First, there is a regional fund and both the Ministry of Foreign Affairs and Defence have largely escaped the Budget scythe. This is also a win for Judith Collins. It is important for what it says about the geo-stratgic environment in which New Zealand now exists. Both diplomacy and defence funding needs don’t go away just because the Beehive has new occupants.

There is also more money for infrastructure, following on from new licks of money dished out by the previous government. A new $1.2 billion Regional Infrastructure Fund - Shane Jones’ pet project - gets the nod, while another $4.1 billion is being tipped into the National Land Transport Fund to priority roading projects.

Health gets more money and a guaranteed extra $5.5 billion per year for the health system already pre-committed to the next two Budgets in 2025 and 2026.

ACT will be less pleased and probably a bit underwhelmed by the whole thing, but David Seymour managed to make almost $500 million in annual savings from the mega Ministry of Business, Innovation and Enterprise, sometimes colloquially known as ‘the deathstar’.

On the charges side, free prescriptions - which was introduced at last year’s Budget - will be scrapped and made free for under-14s and others such as community services card holders. There will also be an increase in the waste levy charges, as well as the heavily criticised online gamblers tax.

Overall, the Budget does what the Government said it would on the tin.

The vibe in the room was very different from the previous government. The only real mentions of climate change were in the context of climate resilience, child poverty wasn’t mentioned (although there was a report updating progress).

There were also no big bang reforms or restructures announced, compared to the previous few years and the gyrations brought by Covid-19. It is very reflective of the personalities and approach of those involved: Willis and Luxon.

It has created few losers, a lot of very modest winners and what cuts there are have been are not front-facing.

The immediate political test will be whether the public deems the July 31 tax cuts sufficient for the temper of the times.