Budget 2024: Tax relief for the ‘squeezed middle’ - but how much?

Thursday, 30 May 2024

Rolling coverage of today’s Budget will kick off at 2pm with must-read analysis and commentary from our political and economics editor Luke Malpass, and National affairs editor Andrea Vance. Senior business journalist Tom Pullar-Strecker will cast forward on what it means for the economy, while political journalist Anna Whyte will bring you the latest on tax cuts, and public service fallout, joined by senior writer Kevin Norquay, for his unique take on a long standing budget tradition. We’ll also have rolling commentary from business, economic and political experts throughout the afternoon.

ANALYSIS: After 14 years, the budget Nicola Willis hands down today will deliver New Zealanders long awaited personal income tax relief. But the big question is - how much?

National campaigned on tax relief for “the squeezed middle” , promising that a family with children, on the average income of $120,000, would be up to $250 a fortnight better off including extra childcare assistance - while an average-income child-free household would be up to $100 a fortnight better off.

But with the state of the books worse than expected, and inflationary pressures keeping interest rates high, there have been mounting calls for the tax cuts to be halted or scaled back.

The precise form and scale of tax relief will be revealed at 2pm today, when the finance minister hands down her first Budget at Parliament.

You have to go back all the way to 2010 for the last round of personal income tax cuts - that’s when the current tax rates were introduced.In 2020, then finance minister Grant Robertson actually raised taxes - reintroducing a top tax rate of 39% for any income earned over $180,000. Labour also boosted incomes at the bottom end through transfers like Working for Families.

The relief outlined today will likely be a mixture of handouts and bracket changes. So-called ‘’bracket creep“ has seen lower paid workers pushed into higher tax brackets because they have not been adjusted for rising wages.

The Government’s challenge is how to deliver tax relief without fuelling inflation; to do that it needs to fit it in the current spending track - in other words there will have to be equal or greater savings from what has been forecast in order to fit in the tax cuts in a non-inflationary manner.

Some cuts have already been made; interest deductibility for landlords with mortgages was reinstated at an expected cost of $2.9b over the coming four years.

The political risk for Willis is that the Government will be accused of borrowing for tax cuts. It is true. But the same argument could be made for any areas of Government spending.

The politics of the tax relief will be complicated. First, from all the public comments by Nicola Willis it will not be a genuine tax cut. A real tax cut is only delivered when Government takes in less tax because it has cut spending - anything else is just shuffling around who pays what share of tax and which generation shoulders the burden.

At present, the burden of New Zealand’s current spending is going to fall onto future taxpayers.

Second, making the case for tax cuts in the middle of a fiscal crunch can be a difficult sell. The success or otherwise will depend on the rest of the Budget and the skill of the Opposition’s response to what is unveiled at 2pm.

Third, will middle New Zealand view the tax relief as a sufficient first dividend of electing this Government; will it be big enough to have the desired political impact?

The bigger question that the Budget will have to answer is the path back to surplus and how many years it will take to get there. Running surpluses matters because it is the point at which debt can begin to be meaningfully repaid.

To give a sense of the spending challenge faced by the Government, going back to 2018 and looking through the years is instructive. What it shows is that both core crown expenses (basically salaries, welfare payments, finance costs and depreciation) and total crown expenses (core crown expense plus crown entities and state-owned enterprises) rose through Covid and then continued to rise afterwards as a new normal of spending was locked in.

In 2018, core crown spending was a bit over $80.5 billion. In 2020 and 2021 that jumped to $108b and then came back slight to $107b. But in 2022 and 2023 the upwards trajectory resumed, climbing to $125b and $127b.

At the same time total crown expenses grew from $104b to $138b and $133b over 2020 and 2021, before also climbing to $150b and $161b.

Over the same period, net core Crown debt has risen from $57b to $155b - from about 21% of GDP to 39% of GDP. It is currently forecast to peak at just shy of 44% of GDP.

Fuelled by reasonable headline growth, both strong corporate tax receipts, favourable terms of trade and latterly inflation, the strong tax take kept the Robertson deficits under $10 billion and under 3% of total size of the economy (with the exception of 2020 when massive borrowing was used for the initial Covid-19 response).

Just how credible the path back to surplus is will be closely watched by the international ratings agencies - Standard and Poor’s, Moody’s and Fitch - while the Reserve Bank of New Zealand will be keeping an eye on any stimulatory qualities the Budget has. The central bank flagged last week that one of the things it will be considering is the quantum and timing of any extra money in people’s pockets, as well as the timing and depth of any savings made.

Also of interest will be how the Government balances its ambition to get infrastructure going and how much money is put aside for it.

So as always, today’s budget will come down to the politics against the fiscal reality.

It is also a Budget that has had to balance the competing interests -at times aligned and times at odds - of the National Party, the ACT Party and NZ First. It will have to include enough wins to satiate the two smaller party leaders, while delivering a reasonably coherent whole.

It will also reveal a lot about Prime Minister Christopher Luxon’s Coalition management and whether the Government’s rhetoric is backed by reality.

It will be a Budget that tries to combat what the Reserve Bank Governor calls “the evil of inflation” and wrestle books into some credible path of future spending. But it will continue to spend more.

And where will future growth come from? That is a question for after 2pm today.