KiwiSaver cut, Best Start means-tested, $6.6b for business. Nicola Willis’ Budget aims for growth but warns of slow wages and high unemployment. Video / Mark Mitchell
The Government released its 2025 Budget, which centred on a $6.6 billion tax change to stimulate economic growth.
The Budget included several cuts, totalling more than $21b over four years.
Budget papers reveal the changes will lead to an effective marginal tax rate rise for 180,000 families, although they will still be better off thanks to other tax credit changes.
About 180,000 families will face a 0.5% increase to their effective marginal tax rate, Budget-night papers reveal.
Although these families will still be better off thanks to other tax credit changes, the higher effective marginal tax rate will act as a disincentive to work, officialsthink.
The papers also show that officials considered cutting the corporate tax rate by 5 percentage points to 23% but decided against it, thinking the 20% expensing scheme unveiled today is better.
They also said the Government’s cuts to KiwiSaver subsidies risked undermining the “growth agenda”.
As Parliament enters its traditional Budget-night urgent session, officials tabled papers on policies included in the Budget, revealing what they think about the Government’s plans.
Working for families
One of the cost-of-living initiatives the Government unveiled in the Budget was a $205 million change to Working for Families tax credits (WFF).
Working for families gives low-income families who work a tax credit, increasing their incomes. However, those tax credits get withdrawn when the family begins earning a certain amount.
The Government has lifted that threshold, known as an abatement threshold, allowing families to keep more tax credit as their incomes rise with inflation. Officials reckon 142,000 families (85% of whom have incomes below $100,000) will receive an average increase of $14 a fortnight.
However the Government also upped the rate at which it takes some of this money back, known as the abatement rate, which was lifted from 27% to 27.5%.
The Regulatory Impact Statement (RIS) does not make clear the extent to which these change.
The rate is the amount of money the Government takes off a person’s tax credit when they earn above the threshold. It acts like an extra rate of tax - which is how officials describe it.
IRD officials said changes act like a 0.5 percentage point increase to the marginal tax rate of 180,000 families.
Officials said lifting the abatement rate had a “negative impact on income adequacy and debt mitigation as entitlements abate at a quicker rate”.
Officials also said the change would discourage work.
“A higher abatement rate also results in a higher effective marginal tax rate, which might have a disincentivises on work incentives”.
Officials quantified this saying there were about 180,000 families earning above the threshold who would face an effective marginal tax rate of 0.5%, resulting in a small negative impact on work incentives.
The abatement rate was set at just 20% in 2007, meaning for every extra dollar earned, the family would lose 20 cents. Under the current system, a family would lose 27.5 cents for every extra dollar earned, which officials think disincentivises work.
Finance Minister Nicola Willis reading her Budget speech. Photo / Mark Mitchell
Other options
The Government looked at an enormous 40% super abatement threshold for families earning over $100,000 or $120,000.
They also looked at enormous $5000 or $20,000 increases to the abatement threshold, which would have allowed families to keep far more of their tax credits. The Government opted against these options citing cost.
The regulatory impact statement also said the Government had begun a broader review of the WFF system, with a view to making it more sustainable over the long term.
Best start means testing
The Government is means testing the $73 a week Best Start payment, which is currently universal in the first year.
Officials said that doing this might have a negative impact on some families getting the tax credit support they’re entitled to because they would no longer be automatically enrolled in the scheme.
“[F]ewer families may apply due to increased compliance costs in the application process, resulting in fewer families being identified as eligible for other Working for Families tax credits,” officials said.
‘Higher wages, employment’ - Officials like Investment Boost, considered 5 percentage point tax cut for businesses
One of the major announcements of Budget 2025 is the Investment Boost.
It’s a tax incentive that allows a business to immediately deduct 20% of the cost of a new assets – on top of depreciation – leading to a lower tax bill.
The Regulatory Impact Statement reveals officials considered that incentive against a company tax rate reduction. Ultimately, it preferred the expensing regime, with the Investment Boost aligning with that recommendation.
The analysis looked at reducing the company tax rate by 5 percentage points from 28% to 23%.
This was considered as having the equivalent impact on the cost of capital and therefore GDP as the 20% expensing regime.
However, it was found to be considerably more expensive.
The expensing regime would cost $6.6b over the forecast period, compared to $10.8b by reducing the company tax rate.
Officials also said that partial expensing was targeted towards new capital investment, whereas a company tax cut benefited both new and sunk investments.
“This targeted approach means fiscal resources are used efficiently to stimulate new investments, rather than providing windfall gains to existing investments,” the analysis said.
“This targeting is the key driver for why [partial expensing] has large macroeconomic impacts for a given fiscal cost than a cut in the company tax rate.”
Another impact discussed by officials was equity.
The analysis found the majority of the increase in national income from partial expensing would flow to workers.
“This increase would come from a combination of higher wages and higher employment. We therefore expect that the benefits of partial expensing will be spread broadly across a wide range of New Zealanders,” they said.
Officials warned the Government halving its contribution to people’s KiwiSaver accounts risked undermining its “growth agenda” by imposing greater costs on businesses.
From July, the Government will reduce by half its annual contribution to $260 and stop giving it to people earning more than $180,000, saving about $3b over four years.
In further changes, the Government contribution would be extended to 16 and 17 year olds while also increasing employer and employee contributions up to 4% by April, 2028.
Finance Minister Nicola Willis promoted the changes as shoring up the retirement savings of a population that lives longer.
However, Inland Revenue officials warned it was “unclear” the benefits of imposing higher contribution rates on employers would outweigh the costs.
In its regulatory impact statement concerning the changes, Inland Revenue had recommended deferring the decision, given it would likely increase short-term labour costs for employers.
This increase would reduce profitability for many businesses, potentially diverting funds that could otherwise be used to support capital investment.
“This could risk undermining elements of the Government’s growth agenda,” the officials said.
Economic growth was so central to the Government’s priorities, Willis had named Budget 2025, the Growth Budget.
Labour appeared to support the Government’s moves to increase employer contributions, leader Chris Hipkins saying his party was broadly in favour of upping contributions to boost savings.
However, Hipkins has railed against halving the Government’s contributions. Inland Revenue’s analysis found this change would be beneficial.
It noted the payment was untargeted and as such, was collected by people on higher incomes. About 52% of the Government’s contributions went to people on more than $70,000 per year.
About 8% of people who received it under the current scheme earned more than $180,000.
