The coalition Government will cut income taxes for the average worker by $832 a year by adjusting tax brackets upwards by 11.5% and creating some targeted tax credits.
This policy aligns with what was promised in National’s election campaign and is paid for by cutting spending elsewhere and raising some targeted tax revenue.
Finance Minister Nicola Willis said working age New Zealanders would save an average of $832 a year, or $16 a week.
Households with children fare better and are in line for an average tax reduction of $2028 per year or $39 per week.
These cuts aim to tackle fiscal drag but only correct tax brackets for the inflation that has occurred in the past couple of years. The current tax rates were set in 2011.
Treasury said tax policy changes did not affect headline fiscal indicators due to spending offsets. The plan is fiscally neutral on average, although the timing may matter.
One economist said tax cuts could be a short-term risk to inflation, as they arrive all in one go, but it would be a temporary shock the Reserve Bank ought to look through anyway.
On the other hand, the central bank is most worried about the short-term inflation outlook and has a high level of confidence inflation will be under control soon.
The tax policy costs an average of $3.7 billion per year and makes up a significant chunk of a wider $9 billion rearrangement of Crown finances.
Willis has opted for lower annual operating allowances than some expected. She will add $3.2 billion of new spending this budget and $2.4 billion in each of the next three.
In addition to the $3.2 billion operating allowance, she has found $3.8 billion in savings and raised anther $2.1 billion from new taxes and other funding.
This means she had a total of $9.1 billion to spread around in the Budget. After tax cuts, health got the biggest boost with $2 billion in new funding to cover cost pressures.
Education including tertiary received a $1 billion increase in its budget, law & order got $460 million, and the social sector got $370 million.
Willis said the budget was targeted at restoring spending discipline and rebuilding the New Zealand economy.
“Lower allowances will result in about $5.5 billion improvement in OBEGAL over the forecast period, when compared with the allowances set by the previous Government,” she said.
However, Treasury warned that her future allowances of just $2.4 billion would likely fall short of the cost pressures required to maintain the current level of services.
“The high-level analysis indicates that the future budget allowances are unlikely to be sufficient to cover future cost pressures on existing services,” it said.
This means the cost saving exercises and public sector cuts that occurred this year will have to be repeated in each budget to fund new initiatives.
Other policies
New Zealand First secured its coalition commitment for a $1.2 billion Regional Infrastructure Fund which will be overseen by Shane Jones.
The money will be spread over the next three years and will initially focus on flood resilience infrastructure. In the coming years, it will also focus on enabling infrastructure that supports better economic outcomes in the regions.
The $1.2 billion is made up of $900 million capital funding and $300 million operating.
Another NZ First policy has helped to fund the income tax cuts by switching the year of free university from the first year to the last.
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