Here’s some rare good news: The average household will save $30 per week starting Wednesday, thanks to the first income tax cut in almost 14 years.
The change to brackets will reduce the tax bill by 1.5% for minimum wage earners, 6.9% for median wage earners, 5.3% for average wage earners, and 4.4% for high wage earners.
Additional tax credits focus the total tax package on lower and median earners, especially those with children, who are the biggest beneficiaries of the changes.
Finance Minister Nicola Willis stated the average household would save about $30 per week, or $1560 annually, though the highest and lowest earners will get less.
This fulfils her key election promise to provide tax relief for New Zealand’s 'squeezed middle,' who have been absorbing small tax increases over the past 14 years.
A worker earning $70,000 in 2010, when tax brackets were last changed, paid an effective tax rate of 20%. Today, they would pay 24% if their salary had kept up with inflation.
Willis has legislated an 11.5% increase in the brackets, reducing our hypothetical worker’s effective tax rate to 22.5%, the rate they paid at the start of 2022.
This tax cut is intended to be the spoonful of sugar that makes the medicine go down; a bit of good news in a policy program otherwise dominated by cuts and “tough decisions”.
From an economic perspective, cutting taxes while the Crown is running a structural deficit defies logic — it simply isn’t the right thing to do.
However, Willis believes the public wouldn’t accept aggressive cost-cutting without some reward. She’s probably right.
But striking the right balance is challenging. Cutting taxes too much may prevent delivering a surplus, while not cutting enough might seem stingy to voters. Plus there are other promises to keep, such as funding cancer drugs and improving frontline services
Triple threat
National’s election pitch emphasised three key messages: cut wasteful spending, reduce taxes, and deliver better services. It must achieve all three.
It’s somewhat awkward that tax cuts come just after the Government announced cost-cutting in the health sector, which has restricted the very frontline it promised to bolster.
This is exactly the argument Labour has been trying to make: tax cuts aren’t worth the underfunding of core services they could cause.
Perhaps it’s unfair to lump the two together. Health NZ might be running inefficiently and need a management overhaul. But the timing is discordant.
The question for the Coalition is whether the tax cuts feel worth it? A Taxpayers’ Union poll in April showed a slim majority supporting lower taxes.
But support was polarised: over 70% of Coalition voters favoured lower taxes, compared to just one third of opposition voters. Overall, 53% supported and 29% opposed.
Front-liners
Perhaps those opposed want that money to go towards having fully staffed hospitals and more police fighting crime on the streets.
The Coalition increased core health funding by $1.4 billion in Budget 2024, which was what the pre-election fiscal update said would be needed to meet cost pressures.
However, Health NZ told Parliament that number had become outdated due to higher than expected inflation and population growth in the time since. Labour said this showed the Government had knowingly underfunded the health sector and had caused the budget blowout as an excuse to make further cuts.
This argument isn’t watertight, as Health NZ’s budget overrun began before the budget, and the Coalition increased funding more than either party’s fiscal plan. But it shows how tax cut money could’ve been spent on more nurses.
Health NZ’s chief executive, Margie Apa, said they hired too many nurses in the past six months, reducing the vacancy rate to 6% and causing the budget blowout.
Some voters might think reducing nursing shortages was the point of cutting wasteful spending in the first place. The tax cut money could cover Health NZ’s budget overrun twice.
Another example is the prolonged police pay negotiations, which the Government won through arbitration. The Police Association said arbitrators were swayed by the need to “adhere to the government's fiscal constraints”.
It implied uniformed officers might have been laid off if the higher pay offer was chosen — likely a bluff since the Coalition promised to hire 500 extra cops.
Whatever fiscal constraints exist, they could’ve been $3.7 billion less each year if the Government hadn’t cut taxes; more than the entire police budget.
That’s the trade-off. But ultimately, it’s not up to the Government; New Zealand voters chose to reduce taxes. The Coalition had a democratic obligation to deliver on that promise. The question is whether there will be any buyer’s remorse.
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