Finance Minister Nicola Willis may need to find almost $1.6 billion across the budget forecast period to neutralise her tax package and avoid worsening New Zealand’s fiscal position.
National campaigned on lowering property and income taxes by $14.6 billion, while raising $6.3 billion in new revenue and cutting spending by $8.4 billion in Budget 2024.
However, the party miscalculated some of the costs and one key revenue stream, the foreign buyers tax, was ruled out during the coalition negotiations.
There have been some “unders and overs” but the net result is that the package would cost $1.6 billion if it were put forward without further adjustments.
Losing the foreign buyers tax cost almost $3 billion, the cost of restoring interest deductibility for landlords and closing a gambling tax loophole were overestimated by over $1.2 billion.
These costs have been partly offset by repealing SmokeFree laws which may result in the Government earning another $1.5 billion in taxes over the forecast period.
Some other offsets have also helped but not enough to make the package neutral.
Economists agree that cutting taxes without an equal reduction in spending would be a form of fiscal stimulus, according to a survey of the New Zealand Association of Economists.
However, they were split on whether tax reduction should be included in Budget 2024 regardless. About 28% supported lowering taxes, while 58% were opposed.
The survey was done in April and included 48 economists working across academia, the private sector, and government.
No new debt
Willis reiterated in her first pre-budget speech that she would deliver lower taxes without adding to net core Crown debt.
“Our tax relief will be funded from within the operating allowance through a mixture of savings, reprioritization, and additional revenue sources,” she said.
New revenue included items outlined in the National Party’s fiscal plan as well as empowering Inland Revenue to chase down those who hadn’t met their tax obligations.
She said Treasury had advised that fiscally-neutral tax relief would reduce inflationary pressure and nominal interest rates, as an individual was likely to save the additional cash.
Of course, the Government could also choose to save the proceeds of any spending cuts itself by reducing the deficit and paying down core Crown debt.
Willis also confirmed the public sector had met its target of finding $1.5 billion in annual savings, which is $6 billion across the forecast period.
However, it is not clear if all of this money can be counted against the tax cuts as it includes roughly $2 billion in savings started by Labour that were forecast as debt reduction.
This contributed to the pre-election books which showed Crown expenses falling from 33.4% of GDP to 31.4% in 2027/28.
If the Coalition Government were to redirect that money into tax cuts, they would be delaying a return to surplus and adding to net core Crown debt.
While calculating the $1.6 billion figure referenced above, Interest.co.nz has only counted $4 billion of those savings towards tax cuts.
Forget tax cuts, Treasury wants hikes
While preparing the 2023 Mini-Budget, Treasury warned Government finances would be under pressure this term and long into the future. Achieving fiscal sustainability would be difficult.
Creating fiscal headroom at this scale was best done over several years and should include both spending cuts and tax increases, it said.
“This represents a significant enough challenge that you should think of it as an ongoing goal to be pursued, rather than something which can be achieved through a single set of decisions”.
To fund the manifesto, Treasury suggested cutting agency budgets, spreading campaign promises across the term, and increasing taxes through fiscal drag or structural reform.
It also suggested considering “active balance sheet management” which is code for asset sales. This has been ruled out by the current Government, which owns $537 billion in assets.
Most advice related to income tax cuts was redacted in the mini-budget document release but Treasury did warn that fiscal drag had helped previous governments achieve their goals.
“If you wish to offset or end fiscal drag, through adjustment of personal income tax rates and thresholds, the fiscal headroom which needs to be created will further increase”.
Its “best advice” was to begin structural reform of the tax system focused on introducing a capital gains tax and a way to manage differences between personal and company taxes.
Treasury also pitched some alternative options such as increasing GST or establishing an inheritance tax. It said advice could be provided on smaller ad hoc taxes as well.
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