Do we need to borrow more to pay for tax cuts? - Budget 2024

Finance Minister Nicola Willis talking about her Budget Policy Statement, which highlights how the Government is expected to receive less tax revenue to pay for its promises, including tax cuts. Photo / Mark Mitchell

Finance Minister Nicola Willis is digging in her heels, arguing the Government’s promised income tax cuts won’t be debt-funded.

Her call comes despite Labour’s Barbara Edmonds and the Greens’ Chlöe Swarbrick challenging this notion, the books likely remaining in deficit over the next few years, and bank economists expecting the Treasury to issue up to 13 per cent more debt over four years than it planned to issue only four months ago.

So, who is right? Will tax cuts be debt-funded or not?

The crux of the disagreement hinges on whether it’s fair to ring-fence one type of spending - ie, on tax cuts - and say any savings or new types of revenue are used specifically to cover that cost, all the while other types of new spending are at least partially debt-funded.

Independent economist Cameron Bagrie believes this argument doesn’t stack up.

Bagrie said that as long as new spending occurs when the books are in deficit, that spending is in fact debt-funded.

Treasury Secretary Caralee McLiesh tried to stay out of the semantics of the political debate, telling the Herald: “Borrowing will depend on a range of factors - both the new spending and the offsets, the reprioritisations. It’s difficult to attribute total borrowing to any one specific factor.”

The debate arose from questions Edmonds and Swarbrick put to Willis during a Finance and Expenditure Committee meeting this morning, aimed at discussing the Budget Policy Statement. The statement, which was released a couple of weeks ago, previews the May 30 Budget.

“You would accept that tax cuts and government spending come out of the same pot?” Swarbrick asked Willis.

“If you were not to be pursuing this line of tax cuts... then you would not potentially be borrowing at the rate that you are.”

Willis responded by leaning on the sluggish economy, and therefore a lower-than-expected tax take, as the reason for the likely higher debt issuance.

The Treasury believes that both nominal gross domestic product (GDP) and core Crown tax revenue will come in about 2 per cent lower in the five years to 2027-28 than it forecast in December.

Willis made the point that while the Government sets tax rates, it can’t control exactly how much revenue is collected, as this depends on how the broader economy performs.

Coming back to Edmonds, she asked, “If you don’t need to borrow for tax cuts, what are you borrowing for then?”

Willis responded, saying the books are in “structural deficit.

“If we were to try to remove that structural deficit in one Budget, that would involve extensive changes to the funding that we provide public services for New Zealanders. We are not prepared to do that.”

Income tax brackets haven’t been adjusted since 2010, despite wage inflation pushing people up into higher tax brackets. Consequently, the portion of an average wage earner’s income that’s going towards tax is rising.

While Willis repeated her desire to not go down the track of austerity, she underlined her commitment to reducing debt as a percentage of GDP.

She said, in her Budget Policy Statement, the Government aimed to put net core Crown debt on a “downward trajectory” towards 40 per cent of GDP over the next four years.

In 2022-23, net core Crown debt was worth 39 per cent of GDP. In December, the Treasury forecast it rising to a peak of 44 per cent of GDP in 2023-24.

Longer term, Willis said her goal was to ensure net core Crown debt sat between 20 and 40 per cent of GDP.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.