Finance Minister Nicola Willis says she is still working with Treasury on how to fund the income and property tax cuts her party promised to deliver in the May budget.
During the election campaign, the National party pitched its tax policy as being self-funded from a combination of spending cuts and new sources of revenue.
However, its proposal to allow foreign investors to buy residential property and tax them 15% did not survive the coalition negotiations.
The coalition Government has stuck to its commitment to make the tax package fiscally neutral but has not said how it will fill the gap left by the foreign buyers tax.
Willis said she was seeking advice from officials on tax changes for the May budget, in answer to a Parliamentary question on Thursday.
“The details of any specific revenue measures the Government may choose to pursue are yet to be finalised,” she said.
Grant Robertson, Labour’s finance spokesperson, has claimed the National Party does not know how to fund its tax cuts without borrowing money or cutting essential public services.
Willis said the tax reduction package, as promised by the Government in its recent Speech from the Throne, would be self-funding — but couldn’t say exactly how it would be done.
The new Finance Minister will present a “mini-mini-budget” on December 20th, alongside the Treasury's Half-Year Economic and Fiscal Update.
It is expected to include the 6.5% cuts from the public sector baseline funding and any spending in the 100-day plan that cannot wait for the May budget.
More tweaks
Miles Workman, an economist at ANZ, said the mini-budget would be more of a “policy statement than a budget”.
“While there will be a few small tweaks here and there to fiscal settings over the next few months, the big change to fiscal settings will occur from the next fiscal year onwards”.
A full budget process was a “goliath task” and there would not have been enough time to do substantial work since the coalition agreements were signed a couple of weeks ago.
The mini-budget would likely outline the path for fiscal policy and the list of regulatory reforms included in the coalition Government’s 100-day plan.
Workman said the Government will want to forecast an operating surplus for the 2026/27 fiscal year and will adjust policy settings to achieve that target.
“As we’ve noted previously, seven consecutive years in deficit following the pandemic is not appropriate for the economic conditions. Sovereign credit ratings agencies are watching closely, and there is very little room for slippage”.
From S&P Global Ratings New Zealand has a AAA local currency rating and a AA+ foreign currency rating, both with stable outlooks. It has Aaa foreign and local currency ratings from Moody's Investors Service, also with stable outlooks, and AA+ foreign and local currency ratings from Fitch Ratings, again with stable outlooks.
The domestic currency ratings assess the country's capacity to meet obligations denominated in the NZ dollar, which almost all government debt - via government bonds - is issued and repaid in. All these ratings are either the highest, or second highest, credit ratings the ratings agencies have.
Nic Guesnon, an economist at UBS, said he expected to see $11 billion in government spending cuts, but only a $1 billion improvement in the annual operating balance in the next four years.
“While we expect expense projections may be trimmed, revenue is also likely to be lower compared to National's pre-election plan, given the foreign buyer tax is no longer going ahead and interest deductibility changes have been marginally pulled forward”.
National’s fiscal plan said the $10.6 billion of tax relief over the four years to 2027 would be offset by just $2.5 billion of new revenue without the proposed foreign buyer tax.
“So, while the new Government may find ways to raise revenue, we judge it is unlikely they will be able to raise another ~$8 billion in revenue to fully offset their proposed tax relief over the 4 years to 26/27”.
UBS expects core Crown spending will decline from 33.5% of GDP this year, to about 30% in 2027 or 2028.
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