Nicola Willis touts a Budget for tough times, but will the tax cuts be enough?

Friday, 31 May 2024

Nicola Willis has delivered a Budget for tough times yet kept her sacred vow to voters: tax cuts for working families.

But in doing so the National-coalition Government has set itself the difficult task of cutting government spending as it shells out $11 billion more than before, providing $14b in tax cuts as it tries to talk down interest rates, all the while hoping to staunch the flow of rising prices.

Has the right balance been struck? The masters of the Government’s economic fortune — the spending public, Reserve Bank, and the ratings agencies — will have to decide.

Having delivered a “very targeted” Budget on Thursday, Willis and Prime Minister Christopher Luxon will this morning begin selling their tax package to the public. Luxon will speak at a breakfast event at Eden Park, and Willis at an ANZ business lunch in Wellington.

Already the battle lines are clear: where Willis has touted needed tax relief and tightly managed books amid tough economic conditions, Labour leader Chris Hipkins has condemned the borrowing of billions for tax cuts that benefit landlords, while those on the minimum wage and pensioners receive marginal benefit.

Willis dismissed suggestion that tax cuts would only benefit the “well-off”, as she spoke to her Budget in the House on Thursday afternoon.

“That is not true of this tax package,” she said.

Through a patchwork of lifting long-entrenched tax thresholds, expanding the eligibility and increasing existing tax credits, and offering to partially refund early education fees, the Government is offering a varying amount of tax “relief” dependent on circumstance.

For parents earning $62,500 each, with two school-aged children, the result is $102 a fortnight.

A couple earning the minimum wage each, with two children not in early childcare, would receive $60 a fortnight.

For young families paying childcare costs, the cumulative total is greater. For a couple earning $75,000 each and spending $400 a fortnight for childcare for one child, the total tax cut is $173.

But, for those not part of the “squeezed middle”, the tax cut is lesser. A single person on the minimum wage, $48,152 a year, would receive $25 a fortnight. For couples on superannuation, the tax cut is $8.62 a fortnight, or $4.30 per pensioner.

“That's less than a packet of chewing gum. I am astounded Winston Peters agreed to that,” Hipkins said.

Comparatively few will receive the “up to” $250 a fortnight promised during the election campaign — which Hipkins claimed was a promise the Government had failed to deliver on.

The requirements to receive the full tax cut entitlement are not the majority: parents with four children, two in early education, earning $140,000 together and spending $600 on childcare; or parents with two children in early education, earning $125,000 together and spending $600 on childcare.

“These have always been ‘up to’ examples. People's individual and family circumstances differ widely,” Willis said.

“On average, households will benefit by $60 a fortnight, and households with children by $78 a fortnight.”

The tax package may be received with “relief”, as the Government hopes, but the fortnightly cash will struggle to measure up to the cumulative price rises of recent years.

Though the inflation rate — the cost of consumer goods including food and household expenses — has dropped from the high of 7.2% seen in June 2022, prices continue to rise at an annualised rate of 4%, according to April figures.

Already rising council rates are also going to hike further. Local Government New Zealand warned in March that home owners across the country were facing an average rates rises of 15%, which could average out at $16 or more a fortnight per household.

On Wednesday, the Commerce Commission said it would lift the revenue limit for Transpower and lines companies, meaning an average increase of $15 a month for power bills from April 2025.

Add this to already high interest rates for mortgage holders, which the Reserve Bank may maintain if required to sufficiently cool the economy, and lower inflation.

Possibly in an effort to draw out an interest rate drop from the Reserve Bank, the Government has given itself very little head room in the years to come, demonstrating a willingness to rein in overall spending as a proportion of GDP.

An operating allowance, or new spending, of $3.8b in this Budget, will decrease to $2.8b for each of the three years afterwards — unless Willis goes against this commitment, as her predecessor Grant Robertson did.

Despite $1.5b per year in cost cutting and savings laid out in the Budget, the “fiscal impulse” — or how much the Government contributes to aggregate demand — remains in the positive for the coming two years, as a lower than forecast tax take has the Government borrowing billions more to afford the tax cuts, its new spending in health, education, law and order, roads, and a $1.2b regional development fund for NZ First.

Hipkins said the Government was doing the opposite of helping the Reserve Bank bring down inflation, by fuelling rising prices with tax cuts.

“The tax cuts that have been delivered won't keep up with the increasing cost of living, and the changes made in this Budget will see Kiwis paying more. New Zealanders will be worse off.”

In a note published after the Budget’s release, Kiwibank economists said the Reserve Bank “may not be happy” with the fiscal impulse. Westpac senior economist Darren Gibbs said the Reserve Bank was likely to regard the fiscal impulse as “unhelpful”.

Martin Foo, an analyst at rating agency S&P, said discipline on spending would be crucial to stabilise the country’s debt.

Consultancy firm KPMG said the Budget amounted to “dancing on the head of a pin”.

Willis said the task to come would be “challenging”.

“The solution is clear. Revenue and expenses must be brought back into balance. Debt must come down.”

But it hasn’t, quite yet.