Treasury’s fiscal update shows eliminating budget deficits will be hard work, but Willis stays wedded to tax relief promise
Four fiscally focused press statements flowed from the office if the Minister of Finance this morning as Nicola Willis released her government’s “mini-Budget” alongside the Treasury’s Half Year Economic and Fiscal Update (HYEFU).
The aim – obviously – was to persuade us the government’s financial management is in better hands than it was before the election and Willis will be doing her darndest to pave the way to cut taxes.
Mind you, it looks like property owners and beneficiaries are the only groups assured of something certain. Others must wait for Budget 2024.
The headlines on the press statements highlight the minister’s intent to repair economic mischief done by the previous government along with a commitment to strengthen Fiscal Responsibility Rules
More to the point of citizens’ personal economic well-being, Willis has given a steer to tax and benefit changes together with a commitment to delivering further income tax relief in Budget 2024.
The mini-Budget delivers nearly $7.5 billion of savings, but the Treasury warns of slower-than-expected economic growth, with adverse implications for the government’s revenue expectations and for its prospects of producing a Budget surplus.
Willis acknowledged that National’s pre-election promise of a return to surplus in 2027 has shrunk from $2.1 billion to “a wafer-thin $140 million”.
Deeper deficits necessitate the fifth consecutive increase to the Government borrowing programme, up by $7 billion more over the forecast period.
Moreover, the HYEFU records a greater number of fiscal risks compared with the pre-election update. These include cost blow-outs in government infrastructure projects, unfunded commitments and policy programmes for which time-limited funding is set to expire.
But who will be the immediate beneficiaries of Willis’ repair work?
Property owners and beneficiaries, at first blush.
Willis said the mini-budget confirms time-critical changes to adjust benefits in line with inflation, to bring the bright-line time-period test for rental properties back to two years from 1 July 2024, and remove commercial building depreciation deductions. It also confirms an intention to increase interest deductibility for rental properties from April 2024 and restates a commitment to responsibly deliver income relief measures in next year’s Budget.
An immediate decision has been made to bring the brightline test for residential property back to two years, effective from 1 July 2024.
Properties sold after that date will be subject to the rule if owned for less than two years.
Willis also confirmed the Government’s commitment to fully restoring interest deductibility for rental properties. Details of the phasing of this commitment will be be announced in the New Year.
And those tax cuts?
The Government is working on “meaningful income tax reduction in next year’s Budget”, Willis said This includes “considering” design and implementation advice for the delivery of the government’s proposed Family Boost childcare tax rebate, and for delivering income relief to workers and their families.
The next bit of the minister’s statement is somewhat cryptic:
“Work is continuing to uphold the commitment in the ACT-National Coalition Agreement to consider the concepts of ACT’s income tax policy as a pathway to delivering National’s promised tax relief, subject to no earner being worse off than they would have been under National’s plan.
“The advice we have received so far gives the Government confidence that we can responsibly deliver the tax relief New Zealanders deserve.“
Much more clearly, the government has announced its decision to index main benefits to CPI inflation from 1 April 2024.
“This early decision is expected to mean that main benefits will be higher next year than they would have been if we had retained the current index to wage growth.
The mini-Budget also sets out the coalition Government’s plans to amend the Public Finance Act, to provide “better oversight of major spending projects and ensure better outcomes for Government spending”.
Can legislation do that?
Let’s see what results from Treasury being directed to progress work to improve the Public Finance Act. Proposed new requirements include:
The headlines on the press statements highlight the minister’s intent to repair economic mischief done by the previous government along with a commitment to strengthen Fiscal Responsibility Rules
More to the point of citizens’ personal economic well-being, Willis has given a steer to tax and benefit changes together with a commitment to delivering further income tax relief in Budget 2024.
The mini-Budget delivers nearly $7.5 billion of savings, but the Treasury warns of slower-than-expected economic growth, with adverse implications for the government’s revenue expectations and for its prospects of producing a Budget surplus.
Willis acknowledged that National’s pre-election promise of a return to surplus in 2027 has shrunk from $2.1 billion to “a wafer-thin $140 million”.
Deeper deficits necessitate the fifth consecutive increase to the Government borrowing programme, up by $7 billion more over the forecast period.
Moreover, the HYEFU records a greater number of fiscal risks compared with the pre-election update. These include cost blow-outs in government infrastructure projects, unfunded commitments and policy programmes for which time-limited funding is set to expire.
But who will be the immediate beneficiaries of Willis’ repair work?
Property owners and beneficiaries, at first blush.
Willis said the mini-budget confirms time-critical changes to adjust benefits in line with inflation, to bring the bright-line time-period test for rental properties back to two years from 1 July 2024, and remove commercial building depreciation deductions. It also confirms an intention to increase interest deductibility for rental properties from April 2024 and restates a commitment to responsibly deliver income relief measures in next year’s Budget.
An immediate decision has been made to bring the brightline test for residential property back to two years, effective from 1 July 2024.
Properties sold after that date will be subject to the rule if owned for less than two years.
Willis also confirmed the Government’s commitment to fully restoring interest deductibility for rental properties. Details of the phasing of this commitment will be be announced in the New Year.
And those tax cuts?
The Government is working on “meaningful income tax reduction in next year’s Budget”, Willis said This includes “considering” design and implementation advice for the delivery of the government’s proposed Family Boost childcare tax rebate, and for delivering income relief to workers and their families.
The next bit of the minister’s statement is somewhat cryptic:
“Work is continuing to uphold the commitment in the ACT-National Coalition Agreement to consider the concepts of ACT’s income tax policy as a pathway to delivering National’s promised tax relief, subject to no earner being worse off than they would have been under National’s plan.
“The advice we have received so far gives the Government confidence that we can responsibly deliver the tax relief New Zealanders deserve.“
Much more clearly, the government has announced its decision to index main benefits to CPI inflation from 1 April 2024.
“This early decision is expected to mean that main benefits will be higher next year than they would have been if we had retained the current index to wage growth.
The mini-Budget also sets out the coalition Government’s plans to amend the Public Finance Act, to provide “better oversight of major spending projects and ensure better outcomes for Government spending”.
Can legislation do that?
Let’s see what results from Treasury being directed to progress work to improve the Public Finance Act. Proposed new requirements include:
- Greater disclosure of the quantum of specific fiscal risks including considering grouping the total value of risks, where factors such as commercial sensitivity might prevent individual risks being specified.
- Regular public reporting on the progress of all significant capital investments that have had or require Cabinet consideration.
- Providing greater advice on the overall impact a large number of specific fiscal risks could pose to the fiscal forecasts.
- A specified list of all time-limited funded programmes to be provided in future updates, together with an explanation of the Government’s reasoning for funding being time-limited.
Some decisions remove significant fiscal risks from the Government books, such as the potential $15 billion liability for Auckland Light Rail, up to $16 billion associated with building a pumped hydro scheme at Lake Onslow, and the risk of further Crown funding being required in future to balance the cost of Clean Car Discount rebates with the level of fee revenue received from high-emissions vehicles.
The $2.047 billion of forecast cash proceeds from the Emissions Trading Scheme can be used as a ‘climate dividend’ to support income tax reduction, including by closing the Government Investment in Decarbonising Industry Fund (GIDI), which has been subsidising profitable businesses to reduce emissions.
The first step in the government’s Fiscal Sustainability Programme (to embed “a culture of responsible spending across Government”) is an Initial Baseline Exercise for government agencies to find around $1.5 billion a year in savings.
This exercise brings together the $500 million per annum baseline savings exercise initiated – but not completed – by the outgoing government, along with the Luxon government’s previously pledged commitments to reduce consultancy and departmental spending.
Latest from the Beehive
20 DECEMBER 2023
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Point of Order is a blog focused on politics and the economy run by veteran newspaper reporters Bob Edlin and Ian Templeton
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