Election 2023: Is National planning $2b of spending cuts, tax hikes - or a mix of both?

National finance spokeswoman Nicola Willis Photo / Mark Mitchell

ANALYSIS:

National’s Nicola Willis has revealed a key detail of her party’s tax plan - a massive change in how it will be funded, or rather how it will not be funded.

In 2022, National announced an idea to shift the tax brackets upwards, adjusting for inflation, which would have meant a tax cut for all income earners.

The party presented the policy as an idea Labour should take up in the 2022 Budget, suggesting Finance Minister Grant Robertson should fund the plan by dipping into the new additional spending he had announced for that Budget, known as the “operating allowance”.

National costed the policy at $1.7 billion in 2022, but it will likely cost closer to $2b by the time National gets to implement it.

This week, National’s finance spokeswoman Nicola Willis dropped an interesting nugget about how the party would afford this, and it was not by dipping into the operating allowance, which National will need to fund election promises.

She told the Herald the party’s tax policy would stand on its own two feet.

“Our tax plan will be fully funded. That is to say, it will not require funding from future operating allowances nor will it require debt funding,” Willis said.

So no funding from operating allowances, the way the first policy was funded.

The change is significant.

Funding a policy from operating allowances is fairly pain-free. Operating allowances are “new” net spending. Funding something with operating allowances means you do not have to cut spending elsewhere to pay for it.

Willis’ remarks mean National is looking to pay for its tax plans by cutting existing spending, or raising revenue elsewhere to pay for the cuts.

Willis confirmed this reading of her remarks, but would not comment further, saying all will be revealed when the party publishes its tax policy, which it has pledged to release before the Prefu forecasts are published on September 12.

National leader Christopher Luxon and deputy leader Nicola Willis. Photo / Mark Mitchell

National has already hinted it cannot afford to roll out its full tax policy in one year, suggesting it would be implemented over a three-year term.

The party is committed to three planks: Likely to be the first cab off the rank is the income tax changes, which will cost about $2b a year, next, come two property tax changes, reinstating the deductability of interest for residential landlords and taking the bright-line test back to two years, collectively costing about $700m a year.

Core Crown expenses are forecast to be $141b in 2024/25, the year of the first National Budget if it wins the election, rising to $147.6b in 2026.

Willis confirmed this week the party was still committed to those three changes.

The bracket indexation changes alone would comprise cuts of about 1.4 per cent of existing spending.

Finance Minister Grant Robertson undertook his own savings exercise this year, finding $1b of savings each year over the four-year forecast period.

That is evidence that savings can be found - but it also shows how hard it is to get to $2b worth, and Robertson has already banked those $1b of savings he found, so Willis is unable to use them for her tax plan.

There are no big-ticket items the party can bank either. It has said it will continue Super Fund contributions and Labour’s first-year tertiary fees-free policy; both would be obvious places for a centre-right party to look for money.

National has said it would raise the super age, but this would only begin in 2044, meaning it would not free up any cash immediately.

The party could use this policy to justify trimming Super Fund contributions, which would need less money if the retirement age were higher.

Contributions are calculated through a formula, which forecast them to be $1.4b in 2025, and $1.6b in 2026 (Willis would do well to pay attention to these forecasts - they cost Paul Goldsmith the finance portfolio in 2020).\

There is another part of this equation though: spending increases.

National likes to think of itself as the party of tax cuts, but it is not above hiking taxes itself.

John Key and Bill English hiked GST to pay for income tax cuts, reversing a position Key had taken on the campaign - a fact Labour MP Damien O’Connor has brought up nearly every week since the political debate shifted to tax a few months ago.

National could hike GST again, although with Labour promising to cut GST this would seem politically unpalatable, and would undercut National’s argument that it is alleviating the cost of living crisis through tax relief. You don’t make life better by making things more expensive.

National has another card up its sleeve, however.

Climate change spokesman Simon Watts told Newshub Nation last week he was supportive of the idea of a carbon dividend.

Simon Watts has said he backs a carbon dividend. Photo / Laura Smith

This uses money the Government earns from the Emissions Trading Scheme (ETS) to pay a “dividend” to households.

The ETS makes life slightly more expensive by charging polluters for the cost of their pollution. A carbon dividend alleviates some of the burden on households by giving them a “dividend” from that money to help them meet those costs.

“The concept of a carbon dividend is something we support,” Watts told the Newshub Nation.

“We’re supportive that elements of that ETS are distributed out to households.

“The reality is it is simple and pragmatic tax on polluters. We have a cost of living crisis. People are really struggling,” Watts said.

Those remarks mean National supports taking at least “elements” of that ETS revenue, which is about $2.5b and recycling it back to households.

The Government currently funnels ETS money directly into climate change projects, although this was not always the case. As recently as 2021, ETS money was treated as ordinary government revenue, spent on whatever the Government pleased.

National would have to change that if it wanted to channel ETS revenue into tax cuts, which would be possible but inelegant.

The money is currently spent on things like the GIDI fund, which funds industry decarbonisation, which National has said it would scrap. Lots of this money has been allocated so it is unclear how much money National could free up, but it is on the table.

National could also generate additional money by allowing the the price of NZUs to rise, making the ETS better at stopping pollution.

Labour has so far been cautious around this, and has in the past held off changes that would see the price rise too much. Modelling published by the Government showed that an increase of $10 per NZU - a single ETS unit, equivalent to emitting a tonne of carbon - sees average annual household costs by about $1.67 per week. For lower-income households, the increase is estimated at $0.88-0.95 per week.

However, a higher price would allow National greater revenue to distribute out to households, and it would give National greater climate credibility. The party currently has few climate policies.

The Herald has twice asked Watts to elaborate on the Carbon Dividend idea since it was mentioned on Newshub Nation. He has declined.

Willis has responded to questions about the tax policy by saying we would need to wait and see.

Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.