NZCPR Newsletter: Budget Review

The Budget is done and dusted and on the face of it, National successfully delivered on its election promise to provide tax relief to New Zealanders by lowering tax thresholds.

The current tax thresholds were established in 2010 by John Key’s National Government. The bottom rate was set at 10.5 percent for income up to $14,000, 17.5 percent from $14,001 to $48,000, 30 percent from $48,001 to $70,000, and 33 percent from $70,001.

In 2021 the Ardern Labour Government introduced a new top tax rate of 39 percent for those earning over $180,000. This continued the 30-year trend of using the top tax rate as a political football: the Lange Labour Government lowered the top rate from 66 percent to 48 percent then 33 percent in 1989; the Clark Labour Government raised it to 39 percent in 2000; the Key National Government dropped it to 38 percent then 33 percent in 2010.

None of our governments have indexed tax brackets to inflation. As a result, over the years there’s been a significant increase in the tax-take by stealth as wage and salary earners are pushed into higher tax brackets through pay rises and inflation.

This week’s NZCPR Guest Commentator Dr Eric Crampton, Chief Economist at the New Zealand Initiative, explains the significant impact that this has had on working New Zealanders:

“Thanks to the effects of inflation, between 2011 and 2023, failure to index the income tax thresholds pulled about a million wage and salary earners from the bottom 10.5% tax bracket into the 17.5% range and another eight hundred thousand from the 17.5% range into the 30% tax bracket.

“It is hard to say how much the state has profited from the bipartisan refusal to automatically index the income tax thresholds. If you plug adjusted thresholds into Treasury’s tax calculator, you get a warning that the results are unreliable because the changes are too big.

“But with that caveat, the calculator tells you it’s in the order of $6.5 billion per year - compared to a world in which the bottom tax bracket continued to catch only the bottom 29% of earners, as it did in 2011, and in which the 33% bracket did not catch anyone in the bottom 86%.

“When National says that people are due for tax relief, they’re absolutely correct.”

The new tax threshold for the bottom 10.5 percent tax rate has now been lifted to $15,600. The 17.5 percent rate will apply to income from $15,601 to $53,500, 30 percent from $53,501 to $78,100, 33 percent from $78,101 to $180,000, and the top 39 percent rate from $180,001 is unchanged.

The Bill setting those new tax thresholds has now been passed into law and will take effect from 31 July 2024. Normally new tax rates apply from the beginning of a tax year, but in order to provide tax relief this year to reduce cost of living pressures, transitional rates are being applied that will take into account the higher rates before the law change.

National provided further tax relief in the Budget through a number of other measures including more support for working families with children through in-work tax credits and Working for Families payments.

Altogether, the tax relief package will cost almost $3.7 billion dollars this year, with a total of $14.8 billion over the three-year Budget period.

The lion’s share of the funding for tax cuts came from a line-by-line review of the Public Service to eliminate poor quality spending. Over the budgeted period “baseline savings not reprioritised to frontline agencies” amounted to almost $5 billion, with a further $3 billion coming from “closing Labour programmes”.

Since tax relief has been funded from a reduction in government spending, it has no impact on inflation. Budget forecasts show inflation continuing to decline from a height of 7.3 percent in 2022, to 4 percent at the start of this year, to below 3 percent in the September quarter. With inflation pressure easing, interest rates are predicted to fall from late 2024.

The combination of lower interest rates and lower taxes is expected to revive the economy, which is forecast to grow, albeit slowly, increasing 1.7 percent in the second half of 2024 and averaging 2.9 percent over the next three years.

The budget balancing act between the stimulus of tax cuts and the need to address critical issues in front-line service delivery, has seen substantial borrowing to rebuild health, education, law and order, and infrastructure. This has resulted in an increase in net core Crown debt to over 43 percent of GDP, with the cost of borrowing rising to $8.9 billion in the current financial year.

The Government’s short-term goal of reducing net core Crown debt to below 40 percent of GDP is not expected to be achieved during this forecast period. Their longer-term plan is to reduce it below 20 percent - the level it was before Covid – and to lower Labour’s debt ceiling from 50 percent of GDP back to its historic 40 percent target level.

While Budget operating allowances in the decade before Covid averaged $1.4 billion a year, post-Covid it exploded to an unsustainable $4.5 billion a year. Under Labour, core Crown expenses increased 84 percent, while revenue grew only 66 percent, creating an operating deficit that only returns to surplus in 2028.

When former Finance Minister Bill English was managing our economy out of the Global Financial Crisis, his long-term goal was to reduce government spending to 25 percent of GDP, to maximise economic growth and lift living standards.

What the Budget shows us is that while Labour inherited an economy that was in good shape in 2017, with government spending around 27 percent of GDP, within five years it had blown out to almost 35 percent, crowding out private enterprise and creating a recession.

In comparison, in the economic powerhouse of Singapore, government spending is well below 20 percent of GDP.

There are, of course, many differences between our similar-sized nations, but the main one is that Singapore’s individualised savings-based superannuation fund that provides health care and retirement annuities, is now worth over $500 billion dollars, and as a result, the amount the government needs to spend in these key areas is minimal.

This is in stark contrast to the situation we face in New Zealand, where the cost of healthcare and pensions in Budget 2024, accounts for almost 40 percent of all government spending.

Sir Roger Douglas outlined a solution to the systemic problems associated with the escalating costs of an aging population in his two-part alternative Budget series HERE and HERE. His vision to introduce a personalised superannuation savings scheme funded through tax reductions, would transform New Zealand’s economic future.

With no political parties offering viable solutions, if you are interested in joining our Reform Project, please make sure you have signed up HERE.

All in all, to overcome the financial shambles the Coalition inherited from Labour, they are adopting a disciplined approach: “The Government’s strategy for managing spending is to embed a culture of responsible spending, restore fiscal discipline, right-size the government’s footprint, and improve the efficiency and productivity of spending. The Government will make savings and reprioritisation a business-as-usual activity.”

The importance of this cannot be over-emphasised. Ministers need to be held to account for a continuing crack down on waste and on reducing the bloated public service. A closer look at Budget documents identifies a wide range of non-essential programmes designed to fulfil the former Labour Government’s agenda that should never have been undertaken.

In response to the Budget delivering tax cuts and increasing spending on core services, the Coalition Government has faced criticism from both left and right.

Some say the Budget did not go far enough in reducing wasteful spending and rebalancing the economy. They say government spending should have been cut, not increased.

Opponents were quick to say the Coalition should have spent more and not cut taxes.

Predictably, some of the strongest criticism was from separatists who claimed the Budget had nothing in it for Maori.

That, of course, is a lie - as is much of their rhetoric.

For a Government that pledged in their coalition agreements “to improve outcomes for all New Zealanders, and not advance policies that seek to ascribe different rights and responsibilities to New Zealanders on the basis of their race or ancestry”, far too many race-based initiatives are still being funded in Budget 2024.

The Coalition has given Te Matatini, which received $34 million over two years from Labour’s 2023 Budget for a regional kapa haka programme, a further $48.7 million over three years from 2025.

Their funding for Matariki events amounts to $3 million a year.

The Bilingual Towns and Cities Programme has been given $400,000 a year for anyone interested in adopting bilingual or te reo signage.

The $1.2 billion Regional Infrastructure Fund to invest in infrastructure with a focus on economic and climate resilience over the next three years is expected to benefit iwi throughout the regions.

The Maori Development Portfolio has received more than half a billion dollars in funding. That includes over $142 million to promote Maori language and culture, $64 million for Maori wellbeing, $56 million to improve Maori housing, $48 million to assist Maori to meet their aspirations, and $10 million to support Maori Tourism.

Whanau Ora - the quasi-government agency developed with iwi leaders to operate outside of the system of government accountability so the Auditor General is unable to monitor the spending of public money by Commissioning Agencies - received just over $182.3 million, up from $181.7 million last year.

The Office of Maori Crown Relations, Te Arawhiti, another agency set up with iwi leaders - to drive He Puapua and indoctrinate the Public and private sectors with a ‘Maori World View’ - will receive $42 million, only slightly down on last year’s $46 million.

This agency, which is also responsible for managing the Marine and Coastal Area Act claims process, hit the news last month for failing to administer claimant funding within budget. Each of the 585 applicants who have lodged customary title claims for New Zealand’s coastline are entitled to taxpayer funding of up to $458,000 for their cases. With so many opportunistic claimants and their armies of lawyers, it’s not surprising that the budget has been fully consumed. One upcoming hearing has so many participants it is expected to cost more than $16 million alone!

To sort out the financial mess, the Government has provided a one-off Budget appropriation of $17 million to pay outstanding bills. Going forward, the annual appropriation for funding all costs associated with the claims process has been capped at $12 million.

Does that sound like a Budget that had nothing in it for Maori?

In fact, the Budget bent over backwards accommodating Maori. A fair criticism is that it has done too much. For example, why should taxpayers be paying the legal fees of tribal groups who are claiming title to our coast, when the financial rewards for successful claims are massive?

And why aren’t the iwi who have become mega rich on the back of taxpayer paid settlements doing more to fund initiatives to help “their people” - or is it a matter of them keeping their hands in their pockets so taxpayers will keep on paying?

What is clear from Budget 2024 is that it is a fine line between stimulating the economy through tax cuts and rebuilding core front-line services through borrowing - and that’s what critics from the left and right have failed to recognise. This Government believes it can achieve both objectives and is not prepared to address one at the expense of the other.

The Coalition’s task of rebalancing the economy onto achievement, progress, and wealth creation has only just begun. They’ll need to keep a laser focus on eliminating wasteful spending and reducing the size of the State sector if the New Zealand economy is to really take off and deliver the prosperous future to which we all aspire.

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Dr Muriel Newman established the New Zealand Centre for Political Research as a public policy think tank in 2005 after nine years as a Member of Parliament. The NZCPR website is HERE. We also run this Breaking Views Blog and our NZCPR Facebook Group HERE.