Tax cuts – or any type of government spending for that matter – are more affordable now than they were only five months ago when the Treasury released its biannual set of economic forecasts alongside the Budget.
In May, the Treasury forecast a budget deficit of $19 billion in the year to June 2022, and a return to surplus by the year to June 2025.
On Wednesday we learned the Government's tax take was higher than expected, partly thanks to high inflation and low unemployment.
Core Crown tax revenue was worth 30.2 per cent of gross domestic product (GDP) – the highest amount proportionately since 2007.
So, with a deficit of $10b, the books were half as in the red as previously forecast.
While this is a large sum of money, it's only equivalent to 2.7 per cent of GDP. Our budget deficits following the Canterbury earthquakes and Global Financial Crisis were proportionately larger at 8.9 per cent in 2011 and 4.3 per cent in 2012.
The situation isn't dire, all things considered, and the country is further along the road to surplus than expected in May.
But (and this is a very big but), the economic outlook is now worse than it was in May.
Globally, inflation is proving more persistent. Domestically, the labour market remains very tight. Property and share portfolio owners are still enjoying the boost loose monetary conditions gave to their asset values (and borrowing capacity) in recent years.
So, central banks are lifting interest rates increasingly aggressively. The harder they hit the brakes, the more economic growth will slow, and asset values will fall.
What's more, Russia is still pushing on with its barbaric invasion of Ukraine, and China is continuing to impose strict Covid restrictions. Besides the heartbreaking human toll, both these situations are disrupting the flow of labour, energy and goods around the world, further pushing up prices.
The economic environment is so uncertain, the Treasury's May forecast of this year's budget deficit was off by a massive $9b.
There can only be a low level of certainty around what the economy will look like by mid-2024 – the earliest the government elected in the 2023 election will likely be able to implement a tax change.
Most of us are sick of the term "unprecedented". But the situation we're in is anything but ordinary.
The rapid lowering of interest rates in New Zealand was so significant, it helped the value of the country's housing stock grow by 48 per cent, to $1.8 trillion, in the two years to December 2021.
That sum is worth nearly five times our GDP.
The value of our housing stock then fell by 2 per cent, or $40b, in the first three months of 2022, as interest rates started rising.
New Zealand is particularly sensitive to interest rate changes because we have so much money invested in housing and our land supply is relatively inflexible.
Adding to the uncertainty, there's division between Reserve Bank observers over how much the central bank should lift rates by. Some say it's nearly done enough, hiking the OCR from 0.25 per cent to 3.5 per cent in a year. Others say it ultimately needs to take the rate to 4.75 per cent.
Because it takes a year or two for interest rate changes to fully take effect, there's a bit of calculated guesswork involved in hitting the sweet spot.
In July, the average interest rate paid across the country's stock of mortgage lending was only 3.68 per cent. This is well below the 6 per cent mark mortgages are currently being sold at, showing the pinch is yet to be felt.
So, let's circle back to the initial question of whether we can afford tax cuts.
Government spending on large initiatives, like tax cuts, are more affordable now than they were in May, but the economic outlook is uncertain with risks skewed to the downside.
Politicians would be wise to let the dust settle before borrowing to inject more large sums of money into an economy grappling with inflation. Unless very targeted, this would exacerbate the problem.
That's not to say we shouldn't explore ways to make our tax system fairer, more fit for purpose, and supportive of productivity.
But any tax changes should be revenue neutral. In other words, the cost of tax cuts should be offset by savings elsewhere (which could mean tax hikes for some) – for now at least.
This is a concept most New Zealanders will likely agree with.
The contentious parts are, A. Agreeing on the problem that needs solving. B. Deciding how the costs and benefits are spread across society – who pays, and who gets what.
Much of New Zealand's pre-election debate is likely to centre on these important issues.
