Finance Minister Nicola Willis has suggested the Treasury may have to downgrade its gross domestic product (GDP) forecasts. Photo/Michael Craig
Finance Minister Nicola Willis has suggested the Treasury may have to downgrade its gross domestic product (GDP) forecasts. Photo/Michael Craig
Finance Minister Nicola Willis has firmed up her Government’s commitment to delivering income tax cuts, despite the underperforming economy.
“We will stick to our commitments to lower personal incomes tax,” she said at an Auckland Business Chamber event this afternoon.
Willis didn’t provide more detail, but told theHerald she would deliver relief consistent with National’s coalition commitments.
National and Act agreed to ensuring “the concepts of Act’s income tax policy are considered as a pathway to delivering National’s promised tax relief, subject to no earner being worse off than they would be under National’s plan”.
Under National’s tax plan, income tax brackets would be adjusted to the extent a minimum wage worker would receive an extra $112 a year, someone on the median wage would receive $800, and someone who earned $100,000 a year would receive an extra $1,043.
National campaigned on ensuring these changes would take effect from July 1.
Act ultimately wants to see the income tax system flatter, so there are three, rather than the current five, tax brackets.
It wants to introduce a new tax credit for low to middle-income earners, who would otherwise be left out of pocket if Act got its way and lifted the bottom income tax rate from 10.5 to 17.5 per cent.
Willis didn’t elaborate on how she might incorporate Act’s approach into her revamp of the income tax system.
She recognised people might question her commitment to tax relief, with the economy more sluggish than expected.
She suggested Treasury might have to downgrade its gross domestic product (GDP) forecasts when it releases its Budget Economic and Fiscal Update alongside the Budget on May 30.
“Treasury is now warning me that growth over the next few years is likely to be significantly slower than it had previously thought,” she said, recognising productivity in New Zealand has slowed.
According to the latest Crown accounts for the seven months to January, core Crown tax revenue came in 1.1 per cent below forecast by the Treasury in its December half-year update.
Overall, the tax take for the period was still 7 per cent higher than the same period the previous year - the labour market was strong and high inflation meant people paid more GST buying fewer, but more expensive, goods and services.
However, the stress was evident with the corporate tax take falling by 11 per cent.
In her speech, Willis said the Government would invest in infrastructure, drive more value from government spending and cut red tape.
She asked those in the business community to do their bit to help drive growth.
“The three parties of our coalition are resolutely pro-growth, pro-development and anti-red-tape,” Willis said.
“Now, more than ever, we must double down on the drive for real economic growth.”
ANZ economists expect new GDP figures out on Thursday to show the economy grew by 0.1 per cent both between the September and December 2023 quarters, and the December 2022 and December 2023 quarters.
If it turns out GDP growth in the quarter was negative, New Zealand would technically have suffered two recessions last year.
While some growth (but not too much to the extent this suggests high interest rates aren’t taming inflation) will be welcome, economists note the numbers are being propped up by record-high immigration.
GDP growth per person remains a cause for concern.
“New Zealand’s productivity growth has slowed,” Willis said. “This, in turn, has caused the Treasury’s forecasters to reassess future productivity and economic growth.”
Willis didn’t mention National’s pre-election goal of getting the Government’s books back in surplus by 2026-27, having walked this promise back in recent weeks.
In December, when Treasury’s view of the economy was likely rosier than it is now, it only forecast a wafer-thin $100 million surplus by this date (an improvement from the $9.4 billion deficit in the year to June 2023).
Finance Minister Nicola Willis arriving with Treasury Secretary Dr Caralee McLiesh and officials for the Half-Year Economic and Fiscal Update lock-up at Parliament in December 2023. Photo / Mark Mitchell
Willis said it would be an overreaction for the Government to drastically cut back on investment, give up on “overdue tax reduction”, and “hunker down to weather the storm”.
Equally, she was mindful of ensuring growth and Government spending doesn’t fuel inflation.
Willis will have more to say about how much she will increase the Government’s operational and capital expenditure by in the Budget when she releases her Budget Policy Statement on March 27.
She will also update the Government’s “fiscal goals”.
Willis faces the same inflation-related cost pressure as her predecessor Grant Robertson.
The impacts of this are notable in the infrastructure space, with the New Zealand Transport Agency Waka Kotahi estimating the cost of the transport projects National campaigned on pre-election could end up being double that which the party accounted for.
Restoring the ability of residential property to deduct mortgage interest as an expense is also expected to cost more than National anticipated.
Meanwhile, Inland Revenue believes that closing tax loopholes enjoyed by online gambling platforms won’t generate as much revenue as National banked on.
Absorbing cost overruns is much easier when the tax take surpasses expectation.
But as Willis foreshadowed in her speech, the forecasts Treasury will deliver at the Budget “won’t make happy reading”.
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.
