We were highly critical of the additional spending in Budget 2023 in a time of high inflation and were pessimistic of Treasury’s 2023 forecast that NZ would not enter a recession. Treasury were, of course, wrong and NZ is in recession as high interest rates continue to pile the hurt on households and businesses. One can’t help but to look back at the 2022 and 2023 Budgets as a lost opportunity for the former government to show leadership and restraint – and this comment is not with the value of hindsight – we and plenty others were saying it at the time. Ultimately, the government needed to play its part in reigning in inflation and it didn’t, and now New Zealand has entered the very undesirable stagflation club. That is, we are in recession but have high inflation. This is not a place that any economy wants to be in.
Of course, now there is a new government and a new finance minister, Nicola Willis. So, all eyes were on the Finance minister as she delivered her first budget to see if she could be more fiscally responsible than her predecessor. And it seems like a good start. One thing is obvious – this was not a Grant Robertson budget. A key theme for Budget 2024 is disciplined spending within the government/public service.
Budget 2024 has plenty of new spending on the usual big-ticket items like health, education, and police. However, much of the new spending is coming from cutting costs elsewhere, especially spending reprioritisations and spending discipline within the public service. The government is still borrowing and the forecast return to surplus has been delayed.
Impact on interest rates
While much of the discussion around Budget 2024 will centre on the tax cuts. Realistically the more important matter is whether Budget 2024 paves the way for interest rates to start coming down earlier than the present Reserve Bank forecasts? The most recent Reserve Bank forecasts have interest rates reductions commencing in early 2025. Interest rates have been increased to do the crucially important job of getting inflation under control, but they are also causing the recession we are currently in and will cause an increase in unemployment over the coming year.
As discussed below, Treasury thinks Budget 2024 will bring forward interest cuts, but the question is, does the Reserve Bank Monetary policy committee agree? Let’s hope they do.
State of the economy
Part of Budget Day is the opening up of the government’s books by Treasury. And as expected, Treasury’s numbers are not telling a rosy story. That being said, the forecast path of the economy is not quite as bad as many would have anticipated.
Treasury has concluded that Budget 2024 is “slightly disinflationary” and Treasury is now forecasting inflation to fall enough to just squeeze into the Reserve Bank’s target range of 1-3% in the September quarter of this year, clearing the way for interest deductions before the end of the year. This is a big improvement on the previous forecasts.
The recession is forecast to end/growth return in the second half of the year and continue into 2025. All things considered, the Treasury forecasts are painting a surprisingly decent outlook in the coming year or two. We can only hope these forecasts hold up.
Tax cuts
Per National’s election promise, personal tax cuts have been announced. These cuts take the form of adjusting the tax rate thresholds as set out below:
| Current Rates | New Rates |
| For each dollar of income | Tax rate | For each dollar of income | Tax rate |
| Up to $14,000 | 10.50% | Up to $15,600 | 10.50% |
| Over $14,000 and up to $48,000 | 17.50% | Over $15,600 and up to $53,000 | 17.50% |
| Over $48,000 and up to $70,000 | 30% | Over $53,300 and up to $78,100 | 30% |
| Over $70,000 and up to $180,000 | 33% | Over $78,100 and up to $180,000 | 33% |
| Over $180,000 | 39% | Over $180,000 | 39% |
The only change from National’s election policy is that the tax cuts have been pushed out a month to from 1 July to 31 July to give payroll providers more time to make changes.
Every person earning more than $14,000 per annum will get a tax cut. A tax calculator for anyone wanting to check how much of a tax cut they will get can be found here.There are no tax rate changes for companies or trusts.
The fact that the tax cuts were coming was well known so there has already been plenty of criticism from the opposition about the tax cuts. However, this criticism conveniently ignores the fact that (other than the tax increase with introduction of the 39% tax rate for high-income earners) this is the first change to personal tax rates/thresholds since 2010/2011. Incomes have increased dramatically since 2010/2011 and this has created “bracket creep” meaning that lower income earners are now paying a higher average rate of tax than they did in 2011. Most importantly, the average earner has been pushed from the 17.5% threshold up to the 33% threshold. Today’s changes do not come close to inflation adjusting the 2011 thresholds to the present day.
The independent earner tax credit threshold is also increasing. Like with tax rates, this threshold had not changed for a long time, in fact since it was introduced in 2009. This credit of $10 a week was aimed at middle-income earners who do not receive any assistance from the government (working for families). Under the old threshold this applied to people earning between $24,000 and $48,000. Now, the threshold will be from $24,000 to $70,000 restoring the target to middle-income earners.
At the end of the day, these tax cuts are peanuts compared to the inflation that has occurred by leaving tax rates unchanged since 2010, but at least these cuts are a step in the right direction. Fiscally, larger tax cuts would not be feasible or responsible with the current state of affairs.
More information on the tax changes can be found here.
Removal of first home grants
A pre-budget announcement was made a week or so ago that the first home grants were being removed effective immediately for new applications. Politically, this move was incredibly risky, if not unwise, but it forecast to save something in the order of $245m over the next four years, with the $140m savings being recycled into new social housing.
Family Boost
As we discussed in a recent blog here, a pre-budget announcement was made back in early April for a new credit to be administered by the Inland Revenue that rebates part of the cost of early child education/care for eligible parents/caregivers.
Working for families increases
Another well signalled change are increases to Working for Families tax credits. The in-work tax credit component of Working for Families will increase by up to $50 per fortnight.
Like with the tax cuts, these changes apply from 31 July.