Finance Minister Nicola Willis discusses her first Budget. Video / Marty Melville
The Government has revealed a Budget with $14 billion of tax cuts ranging from $4 - $40 a fortnight for all workers on more than $14,000.
One of the key points was the Working for Families in-work tax credit, which is set to increase, giving 160,000 low and middle-income families with children up to $50 a fortnight.
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Income-earning Kiwis will get a tax cut from a $14.7 billion tax package in this year’s Budget.
Willis had been under pressure to scrap the scheme, but she held her ground, delivering the promised tax cuts, paired with a big increase to the health budget, all the while delivering the smallest net increase to spending since the Budgets of her National predecessor Steven Joyce. Contrary to expectation, a surplus is forecast for 2028.
The tax package is a combination of adjusting tax thresholds by about 11.5 per cent to account for inflation, expanding eligibility to a $10 a week tax credit, and the new childcare tax credit that was announced prior to the Budget.
What this means means differs by someone’s circumstance:
A minimum wage earner will be better off by about $12.50 a week
A working couple whose combined income is $150,000 will be better off by $40 a week
A single adult earning $55,000 a year will be better off by about $25.50 a week
A sole parent with two teenage children will be better off by about $45 a week
And a retired couple receiving superannuation will get $4.50 a week, rising to $13 a week, although part of this calculation depends in forecast superannuation increases.
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“It is a Budget for Kiwis who have been experiencing a prolonged cost-of-living crisis,” Willis said, adding the Budget showed “light at the end of the tunnel for a prolonged economic downturn”.
What light Willis is referring to is unclear. Forecasts released with the Budget show weak productivity, economic growth even slower than prior to the election leaving the economy $10b worse off by 2028, far higher borrowing, peaking at $207 billion in 2027 – well higher than the peak of $194b forecast last December
The really big handouts in today’s Budget are to families with children in Early Childhood Education (ECE), who qualify for FamilyBoost.
A couple with one parent earning $80,000, and another earning $60,000 with four children, two of whom are in ECE will get $135 a week.
A couple earning $62,500 each, and spending $600 a fortnight on childcare will get $126 a fortnight.
The biggest change to the package is that it will now commence one month later than scheduled on July 31 – rather than July 1.
Other changes were dropped during the coalition agreement, like an adjustment to Working for Families tax credits that will leave some of New Zealand’s poorest families $38 worse off by the 2028 than had that change been kept, saving the Government close to $1b.
The costliest part of the package is the adjustment to all income earners’ tax brackets and expanding the eligibility of the $10 a week independent earner tax credit which comes in at $10.2b. The already-announced changes to property taxes, a Working for families tax-credit adjustment, and FamilyBoost tax credit make up the rest.
Almost all of that funding increase comes from the Government matching the former Labour Government’s pledge to fund cost pressures in the health system – that means finding about $1.4b this year just to keep the hospital lights on. It means hospital funding will increase significantly each year this term.
Interestingly, the coalition has decided to increase health and disability funding just slightly above what the former government planned. Last year’s Half-Year Economic and Fiscal Update forecast spending $27.7b in core health and disability services this Budget. This could be a result of funding new initiatives.
The current Budget lifts that to $28.4b – a difference of $700m on the former Government’s track. By 2027, the end of the last Budget this term, health spending will be $31.1b, compared to $30.38b under the former Government’s track.
Despite the spending increase, the Government failed to fund 13 new cancer drugs, which it had promised on the election campaign, paid for in part by returning the $5 prescription fees Labour scrapped.
“We regret that it hasn’t been possible in this Budget,” Willis said, saying the funding of specific pledges represented a challenge to Pharmac’s operating model.
National should have known this on the campaign – the operating model was established by National in the 1990s.
The disability sector got a $1.1b increase in funding as promised prior to the Budget.
Finance Minister Nicola Willis delivers her first Budget to Parliament. Photo / Mark Mitchell
Education spending
Education is also in line for a significant change. As signalled in National and NZ First’s coalition agreement. Labour’s first-year fees free policy, which NZ First supported in Labour’s 2017 mini-Budget, will be scrapped and replaced with a final-year fees free policy saving $879m over the forecast period.
From the end of this year, students will no longer be able to get their first year’s fees free.
There is some new spending in this portfolio, with spending on education forecast to be slightly higher this year than forecast prior to the election.
Overall, operational grants to schools, which are the main way schools are funded, do not keep up with inflation, meaning a real terms cut, although they get a $199m increase over the forecast period.
The Government is giving $400m to the school property portfolio to continue building classrooms in high-growth areas, it reckons this will provide for 8000 new places.
Schools in Christchurch get $143m to continue their rebuilds from the 2010 and 2011 earthquakes.
Free period products in schools will continue to be funded, avoiding a “fiscal cliff” in funding left by the last Government.
Increases to taxes and levies
The big surprise in the Budget was an increase to the international visitor levy, which is a tax that international visitors pay when they arrive in the country. It was introduced by Labour, against opposition from National, as a way to pay for the cost of providing critical infrastructure used by tourists.
The level of increase to the levy has not been determined, but Treasury estimates it could raise $261m by hiking the fee.
As promised on the campaign, the Government is changing the way visa and immigration services are paid for. Currently, these are subsidised by the taxpayer.
That looks set to change, with the Government upping fees to fully recover costs. This will net $533m over the forecast period.
Economy
The economic indicators show a mixed bag for the Government. New Zealand is in a deep GDP per capita recession. With real GDP per capita contracting by 2.8 per cent this year – a huge revision on the last set of forecasts in December which only showed a 0.7 per cent contraction.
That means on a per person basis, New Zealanders are getting poorer – and poorer faster. The revision is likely a result of immense net inward migration.
Treasury is also seeing a very sluggish recovery in house prices. Whether this is as a result of the new Government’s housing policy or thanks to very low GDP growth is unclear.
House prices are set to rise just 2.5 per cent this year, 1.6 per cent next year, and 2.1 per cent the year after. This means a later recovery than the December forecasts which showed house price rises of 5.3 per cent this year, 0.7 per cent net year and 1.7 per cent the year after that.
Treasury is optimistic on inflation, which is a win for the Government considering the fears that had been raised prior to Budget Day that the cuts would be inflationary.
Instead, CPI has been revised downwards, suggesting an end to the cost-of-living crisis. CPI inflation is set to be 3.4 per cent in the year to June, 2.2 per cent next June and 2 per cent in 2026.
In December, Treasury forecast CPI of 4.1 per cent in June this year, followed by 2.5 per cent and 2.2 per cent the following two years.
Slowing economic growth has hit the books hard. Treasury has revised its income forecasts in the last six months showing the Government will be $28b worse off than expected.
A third of that relates to the new Government’s tax policy, a third relates to slowing economic growth, and the final third relates to new data showing business tax payments have been “significantly lower than previously forecast”.
Tough times ahead
Willis’ big rabbit-out-of-a-hat moment was a significant reduction in the Government’s operating allowance, where she went even further than National had campaigned on – indicating future Budgets will be very restrained indeed.
The operating allowance is the amount of net new discretionary spending in each new Budget to be spent on new things and “cost pressures” of continuing to deliver existing services.
Labour had planned operating allowances of $3.5b this year, followed by $3.25b next year and $3b in each following year. National had promised to trim this to $3.2b before gradually dropping new allowances to $2.7b over the Parliament.
Instead, Willis has trimmed these allowances deeper and faster than forecast, saving over $5.5b in new spending over the next four years.
Next year’s allowance will be just $2.4b – it will stay this low for the next two Budgets. This low level of new spending helps Willis deliver a surplus against expectation in 2028. The multi-year capital allowance will get a $7b top-up.
The changes were made as sometime between the beginning of April and Budget day, suggesting a Cabinet scrap over the level of new spending. In March, Willis would only say the operating allowance was “less than” $3.5b.
Treasury is worried - a note in the Budget document warned that “departments’ baseline expenses could need to increase by around $2.5bin the 2025/26 year to maintain the existing level of services”.
In other words, the Government needs to find another $100m next Budget just to keep up with rising costs. The next few Budgets are guaranteed to be even more challenging than this one.
