The government must find $1.5 billion more to pay for tax cuts

A Newsroom Analysis of National Party’s tax plan has found that it is now $1.5 billion short of breaking even as promised during the election.

Prime Minister Christopher Luxon will no longer commit to delivering the $9 billion in income tax cuts for New Zealanders that he campaigned on, as a Newsroom Analysis shows his tax package needs an extra $1.5 billion to break even.

The central promise of National’s campaign in last year’s election was that it would cut $9 billion in income taxes as part of a complex, revenue-neutral package.

Fiscal gap of $1.5 billion

The Policy would not be inflationary and would not add to government debt because its costs would be offset by cutting spending and raising revenue from other sources, such as foreign home buyers and offshore online gambling.

Since the campaign, some of those revenue-gathering policies have been axed in coalition negotiations, and officials have found that others will raise less money than National had planned. Combined with increased costs from an acceleration of special tax cuts for landlords, this leaves National facing a $1.5 billion fiscal gap.

In order to make up the difference, the government needs to raise more money from some new tax measure, cut public spending more deeply than it had planned or reduce the scale of its planned tax cuts.

On Monday (March 18), Luxon was clear that the government would deliver some form of tax relief for Kiwis this year but said that the public would need to wait until the Budget in May to find out if it was as much as promised at the election.

Newsroom’s Analysis included the impact of the cancellation of the Foreign Buyer Tax by New Zealand First in coalition negotiations, the addition of extra tobacco excise revenue from the abolition of the Smokefree reforms and a range of updated costings provided by officials since the election.

In a statement to Newsroom, (Finance Minister Nicola) Willis declined to comment on the specific figures produced by the Analysis.

“It is important to note that the government’s tax and fiscal plans reflect coalition negotiations which resulted in a number of amendments to the proposals National and other parties campaigned on. As noted, there have been adjustments, both up and down, in both the estimated cost of proposed coalition commitments and the likely savings that will be generated by proposed revenue and reprioritisation measures. I will not discuss individual figures ahead of the Budget, as many of these remain subject to final forecasts and decisions by the Cabinet. The government remains confident it will deliver Personal Income Tax reduction in a way that is responsible and affordable.”

Fiscal challenges warning

Infometrics Principal and Chief Executive Brad Olsen told Newsroom that the government had been warning about the fiscal challenges it was facing for several months.

“No political party ever expects to publish a Budget exactly as laid out in an election manifesto – there are always changes and adjustments. But these more difficult economic conditions, coalition compromises, and higher costs/lower revenue for some policies make it a tricky balancing act,” he said.

“Overall, the government faces more difficult choices in Budget 2024, with a much larger number of trade-offs to consider, and less room to manoeuvre over time. A number of recent announcements have changed the levels of expected revenue and costs for the Government compared to election fiscal plans, and announcing those decisions ahead of Budget provides a bit of a rod for the Government’s back,” Olsen said.

The government has four options to strike the right balancing act, Olsen said.

The balancing act

These were to raise revenue, cut spending, adjust some of its commitments or borrow more. More taxation through raising GST or a Capital Gains Tax could do the trick but seemed unlikely given National campaigned specifically on tax relief, he said.

Further spending cuts were viable, as was compromising on coalition commitments.

“The government might need to consider changes to how and when it delivers its commitments, perhaps including deferring some changes or delaying/staggering some proposals including tax relief,” he said.

“Constructing Budget 2024 was always going to be an extremely complex puzzle, and weaker economic expectations means that there are fewer puzzle pieces to play with. These earlier fiscal decisions also mean that there are not as many places to put the remaining puzzle pieces where everything will fit together seamlessly. That means a fairly limited Budget 2024 is likely on the cards, and it is likely that a combination of greater savings, more revenue from some policies where possible, and some compromise on Coalition commitments will all feature,” Olsen said.

Interest deductibility changes

Though National campaigned on allowing landlords to deduct the interest that they pay on the mortgages of their rental properties as a business expense, the new government has accelerated the timeline for implementing this policy as part of the coalition agreement with the Act Party.

That, along with the impact of higher interest rates, means that the government will miss out on more tax revenue than previously expected – a $2.9 billion loss rather than the $2.1 billion expected at the election.

Working for Families changes

National campaigned on the same changes to the Working for Families Tax Credit as Labour: Increasing the value of the tax credit by $25 a week and from 2026 adjusting the abatement threshold upwards. As part of its coalition agreements, National scrapped the threshold adjustment, which will save the Government $555 million but halve the tax relief a family on the lowest income would have received.

App tax reversal

The previous government’s plan to require multinational tech companies such as Uber and Airbnb to pay GST on their services was meant to be scrapped by National. Instead, it will stay, netting the Government $206 million in additional revenue over the next four years.

Brightline adjustment

The reduction of the brightline test from ten years to two years will cost slightly less than expected before the election, with last year’s Mini-Budget revealing savings of about $20 million for the government.

Revenue from the Emissions Trading Scheme is currently earmarked to pay for cutting climate pollution and helping adapt to climate impacts as part of the Climate Emergency Response Fund. National campaigned on scrapping the fund and redirecting that cash to the tax package as part of a so-called climate dividend, though experts say this isn’t what that term actually means.

For a variety of reasons, the government is now slated to earn less than it had expected in future Emissions Trading Scheme auctions, reducing expected revenue from the scheme by about $300 million. In addition, the Climate Change Commission warned the government last week not to rely on the scheme as a steady revenue source, though this message was not incorporated into Newsroom’s Analysis as it is not quantifiable.

Close Labour Programmes

At the Mini-Budget last year, Willis revealed the government would save $500 million more than expected by stopping a range of policies from the previous government, including $1.2 billion from reversing the policy to make 20 hours of early childhood education free for two-year-olds and $265 million from scrapping free public transport for young people.

Foreign Buyer Tax

The Foreign Buyer Tax was the centrepiece of National’s revenue-raising plans, with $3 billion in tax expected over the first four years. The cancellation of this policy as part of the coalition deal with NZ First has been the biggest headache for making the tax package add up.

Both Labour and National campaigned on ending the ability of commercial building owners to claim depreciation on their assets as part of their tax filings. This measure was reintroduced during Covid-19 to support businesses. Treasury figures unveiled at the Mini-Budget show that it will bring in $200 million more in tax revenue than expected before the election.

The latest blow to the tax package came when IRD officials last week advised the government that its plan to tax online, offshore-based gambling operators would raise $500 million less than it had planned before the election.

It also remains to be seen how the government will enforce the tax, with Willis suggesting last year that an official government internet filter would be set up to censor web traffic. Only one such filter currently exists, for child exploitation material, and it is voluntary.

Smokefree Changes

Though this wasn’t included in National’s pre-election tax package and was not campaigned on by the Party, a move to repeal Labour’s most recent set of Smokefree reforms helps to partially offset the impact of canning the Foreign Buyer Tax. Over four years, the policy is expected to raise $1.5 billion for the government as more people take up smoking than would have otherwise.

Some of the policies proposed by National before the election have not received updated costings or remain the same as originally promised. Newsroom’s Analysis assumed no change in the cost of the income tax cuts, National’s FamilyBoost policy or the adjustment to the independent earner tax credit and no change in the revenue or savings from public service cuts, capping consultant spending by the public sector and increasing immigration levies.

Marc Daalder is a Senior Political Reporter at Newsroom based in Wellington. He covers Climate Change, Health, Energy and Violent Extremism. The above article, which appeared on the website of Newsroom on March 20, 2024, has been reproduced under a Special Agreement.