Officials urged Government to cut cost of tax scheme and delay to October; Treasury looked at $18b Act plan for tax cuts

Officials advising the Government on the Budget advised ministers to tweak the Government’s tax policy to save cost, and said it should commence from October 1, rather than July 31.

The advice also warned that 9000 of New Zealand’s poorest households could actually lose money from the plan because of the way some benefits are calculated for people who work part of the year. The amount these people will lose is about $1 a week on average.

A joint regulatory impact assessment of the scheme proposed a raft of changes to save costs. It also showed how seriously the Government looked at implementing the Act Party’s tax changes.

The centrepiece of the Budget this year was a plan to adjust tax brackets by 11.5 per cent to account for inflation.

Officials concluded the plan was broadly affordable, but advised trimming the cost nonetheless in the interest of sustainability.

“The Treasury has advised the Government to reduce the cost of Budget 2024, and where possible to support a return to surplus,” officials said.

“Whilst all the plans would therefore be viewed as fiscally sustainable in theory, there was a difference in cost, which may impact the feasibility of funding some of the plans.”

One option to save costs would have reduced the bracket changes by 10 per cent for each threshold, essentially reducing people’s tax cuts. The other one would have reduced the change to the 30 per cent threshold, by 50 per cent. This was estimated to cost about $8b-9b, significantly less than what the Government announced on Thursday which was over $14b.

Officials also advised delaying the tax cuts to October 1 “to reduce fiscal cost” and to “minimise administrative demands for IRD and to ensure all taxpayers receive the benefit of the tax changes on time”.

That advice suggests the Government may struggle to get the technological architecture in place for the tax cuts to flow on July 31 as promised. The officials noted the last time tax changes were adopted, October 1 was chosen to allow time for the changes to be implemented.

They also advised scrapping an expansion of the $10 a week independent earner tax credit scheme, arguing it was a disincentive to work.

This scheme does some heavy lifting behind the tax package, boosting the overall amount received by people on middle incomes. This credit change will flow to 481,000 households, so it is unsurprising the Government decided to ignore that advice.

The advice showed the wealthiest 20 per cent of households would gain the most, getting $39 a week on average. The median 20 per cent would get $32 a week, while the poorest 20 per cent of households would get $13 a week.

The advice also cast doubt on the reach of the FamilyBoost tax credit, saying it will boost the incomes of just 4 per cent of households and only 10 per cent of households with children.

Officials sided with the Government that adjusting tax brackets was a worthy endeavour.

“The increase in annual tax liability from fiscal drag is uneven across income levels, with the greatest impact occurring as the $48,000 income threshold is crossed. Full-time minimum wage earners will therefore be heavily affected in coming years,” they said.

The coalition agreement saw National agree to consider Act’s plan for a flatter tax system provided changes could be made so that no one was worse off than under National’s plan.

Act’s plan lifted the bottom tax rate from 10.5 per cent to 17.5 per cent so people on lower incomes paid more tax, however this increase was compensated for by tax credits.

It flattened the 33 per cent rate into the 30 per cent rate and reduced the 39 per cent top rate to 33 per cent, triggering at income over $180,000.

Treasury looked at a phased version of this, but dropped the removal of the 39 per cent rate.

One version of the plans considered by Treasury cost $15b over the four-year forecast period. Other plans cost less; about $10b-$11b and one version cost as low as $8b-$9b.

The advice showed that the threshold changes under two versions of Act’s plan would have cost between $11b and $18.3b over the forecast period depending on what policy options were chosen. The lion’s share of the cost came from flattening the tax brackets, but a significant amount also came from tweaks to ensure no earner was “worse off” by the changes.

Treasury sided with Nicola Willis in her belief that tax cuts, funded by a reduction in spending, would ultimately have a downward effect on inflation.

“[I]f tax relief is funded through an equivalent decrease in government spending, then the overall effect is a slight decrease in modelled interest rates. This is because the ‘fiscal multiplier’ for tax relief is assumed to be lower than for government spending, meaning the decrease in government spending more than offsets the increase in spending by recipients of tax relief.” Treasury said.

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.