Finance Minister Nicola Willis (right) is putting together a mini-Budget. Photo / Michael Craig
ANALYSIS:
National has made billions of dollars worth of changes to its spending plans as part of its coalition deals with Act and NZ First. The cost of those changes forced the party to u-turn on some of its election promises to pay for the concessions.
One particularly painful move will see some low-income families miss out on up to $37.90 a week that the party had promised under a policy designed to ease the “impact of the cost of living” which was “especially significant for families raising children”, according to a policy document.
Ahead of the election, National’s tax policy promised $14.6 billion worth of tax cuts funded by $14.7b worth of spending cuts and tax increases.
This is called a fiscally neutral change. It means that the cost of the tax cuts is cancelled out by the cost of the spending cuts and tax hikes (it was actually $100 million fiscally positive). Fiscal neutrality was key to the promise. If the tax cuts were worth more than the policies used to pay for them, then the difference would need to be made up with borrowing, weakening the Crown’s fiscal position and adding to inflation.
That fiscally neutral promise is now under pressure from a handful of expensive concessions made during coalition talks. As part of its deal with NZ First, National agreed to kill plans for a foreign buyers’ tax, forgoing an estimated $3b in revenue. As part of the deal with Act, it pledged to speed up a policy to reinstate full interest deductions for residential landlords.
Council of Trade Unions economist Craig Renney, formerly an advisor to Labour’s finance spokesman Grant Robertson, reckoned that change would cost “many hundreds of millions” over and above the $2.1b National had set aside for its more modest version of the policy.
National’s version starts off slowly, forgoing the ratcheting up of interest deductions next April at a cost of just $41m. The policy is slow to reinstate full interest deductions, which only commence in 2026. The new policy allows 60 per cent of mortgage costs to be deducted in the current tax year, backdated to April 1 2023. This ratchets up to 80 per cent from April 1 next year, and 100 per cent by 2025, one year earlier than National.
There are a handful of big policy changes in the agreements that will improve the Government’s fiscal position. The first is to overturn the Labour Government’s Smokefree Aotearoa 2025 policy.
In the Pre-election Economic and Fiscal Update (Prefu), Treasury estimated the Smokefree policy changes would cost the Crown $100m in lost tobacco excise revenue next year, rising to $400m the year after and $500m the year after that - $1b in total over the forecast period.
Prefu uses a forecast period that is one year shorter than election fiscal plans (the extra forecast year is added at the Half-Year Economic and Fiscal Update), so to make an apples and apples comparison with National’s fiscal plan, you need to add an additional year to that forecast - a generous estimate might be $700m, taking the total fiscal savings from increased smoking to an estimated $1.7b.
Treasury also thinks the Crown will lose $600m over the next four years from tobacco excise thanks to people stopping smoking for reasons unrelated to the Smokefree policy, including the already high price of cigarettes and the popularity of vaping. Finance Minister Nicola Willis has said she wants to keep prior smoking policies in place, so would be fair to assume for now that this money will stay with ex-smokers and not flow to the Crown.
The other big change is switching out Labour’s policy of first-year fees-free education for a final year of free tertiary education. Willis has said that this policy would have a positive impact on the books because fewer people complete their final year of study than begin their first year.
The Government currently spends about $330m on the fees-free policy. The current “completion rate” for tertiary education is 58 per cent. If we assume that just 58 per cent of the people who claimed the first-year of free tertiary education stuck around to get a free final year this cost would drop to $191m, assuming no change in completion rates, saving the Government $138.6m a year.
The earliest the change could be implemented would be the 2025 fiscal year, although the coalition agreement does not make it clear whether this is the fiscal year or the calendar year (which more closely correlates to the academic year).
Assume it begins as soon as possible - in the 2025 calendar year. That would save about $69.3m in 2024/25 and $138.5m in the years after that - a total of $484.5m over the forecast period.
Tax policy changes
Both coalition agreements say that Act and NZ First will back National’s fiscal plan, tax plan, 100 day plan and 100 point economic plan (minus any coalition concessions) - but as Willis and Luxon revealed soon after the agreements were signed, there are two quite significant policies that will not be followed through on: pledges 18 and 25 of its economic plan, boosting a Working for Families setting, and scrapping an “app tax”.
The new Government will keep the so-called “app tax” National had pledged to remove. The “app tax” removes an exemption on people selling services via the likes of Uber and Airbnb which meant that services sold through those apps were charging a lower amount of GST than they would have been if Uber and Airbnb had structured themselves as actual taxi or hotel companies.
Keeping the “app tax” will allow National to book the $206m in revenue the tax is forecast to raise over the next four years, which it would have had to forgo if it had killed the tax.
The policy that will hit families the hardest is a plan to freeze the Working for Families abatement threshold at $42,700, where it has been set since 2018.
Working for Families tax credits support about 345,300 beneficiary and low-income families with the cost of raising children. When families earn higher incomes, the Government withdraws or “abates” the tax credits until a person earns enough that their tax credits disappear entirely.
In 2018, the Government set the abatement threshold at $42,700. This means that when a household earns more than $42,700 their tax credits abate at 27 cents for every additional dollar earned.
The threshold is not adjusted for inflation, which means that over time, families begin to see their tax credits abate much quicker, despite them being no better off in real terms. To prevent this, a Government must decide to lift the threshold to allow families to keep their tax credits at higher income levels.
On the campaign trail, first Labour, followed by National, pledged to fix the problem by shifting the abatement rate to $50,000 in 2026. This policy is fairly conservative. If the current threshold were adjusted for inflation since 2018, it would already be $52,000 - it would need to be adjusted even further to account for inflation that will occur between now and 2026.
Lifting the threshold means families earning between $42,700 and $50,000 would keep their full entitlement until they earned $50,000. Keeping the threshold as is means the credits are reduced for every dollar earned above $42,700.
Anyone earning over $50,000 will lose out on about $37 a week by keeping the threshold as it is - equivalent to about 3.8 per cent of their total pre-tax income. Anyone earning the minimum wage fulltime will see some of their credits abated.
National is also delaying by two months the date at which a $25 a week increase to the In-Work Tax Credit will take effect, saving $50m.
Writing in The Daily Blog, Child Poverty Action Group spokeswoman Susan St John called these changes “visionless”. She suggested it might be better to scrap the In-Work Tax credit change in favour of lifting the abatement threshold to $47,626. That change would give up to $25 a week in additional income to low-income families who earn up to that threshold and beyond. She wrote there are “serious questions” about Prime Minister Christopher Luxon’s ability to hit his child poverty targets.
An analysis by the Herald has found that the post-election changes to National’s fiscal plan will raise additional revenue of about $3b - enough to cover the cost of dumping the foreign buyers’ ban, but not enough to cover whatever the cost of accelerating interest deductions might be.
This analysis excludes other costly changes like the new $1.2b regional infrastructure fund that National agreed to as part of talks with NZ First.
The real sum of this bleak arithmetic is an impossible choice between more borrowing, more tax, or more broken promises.
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.
Māori continue to be over-represented in use-of-force incidents.