Cost of landlord tax break increased by $800m to $2.9b

The cost of reinstating full interest deductions for residential property will be $2.9 billion over the four-year forecast period, according to data from the Government.

That is an increase of $800 million on the four-year cost signalled in National’s pre-election fiscal and tax plans, which costed the policy at $2.1b. The additional cost will come mainly from the fact that National has had to speed up the rate at which the policy has been phased in as a result of coalition negotiations with Act.

Labour had removed the ability for residential investment property owners to deduct interest costs from their tax bills, which has the effect of increasing the amount of tax investors pay. The three parties of Government campaigned on reversing the policy, which will have the opposite effect and reduce the tax paid by landlords.

The National-Act coalition agreement confirmed landlords would get a 60 per cent deduction in 2023/24, rising to 80 per cent in 2024/25 and 100 per cent in 2025/26.

This is an accelerated version of what National campaigned on, which was to keep interest deductions at 50 per cent in the 2024/25 tax year and increase deductions to 75 per cent in 2025/26, with deductions fully restored in 2026/27.

Since the agreement was published last year, the governing parties have dropped the plan to backdate deductions in the 2023/24 year, but kept the accelerated pace.

Prime Minister Christopher Luxon could not give a cost of the policy during his post-Cabinet press conference on Monday, saying he had not seen an updated cost for it.

“I haven’t, but our ministers [have]” Luxon said.

Luxon was not clear on the questions of whether National had offered concessions to Act to get the party to agree to alter the coalition agreement commitment.

“We don’t operate that way. We’re a very mature coalition Government that actually works out what the challenges are and the economic environment that we’re operating within, we may have all compromised but we have all ended up with a very good policy,” Luxon said.

When asked what drove the compromise, he said it was an acknowledgement of the fiscal situation the Government inherited. Finance Minister Nicola Willis has repeatedly warned the deteriorating economic and fiscal situation could mean the Government’s goal of returning to surplus could be tough to meet.

Act leader David Seymour has consistently defended the policy, noting that other businesses are able to deduct their costs from their revenue when it came to assessing how much tax they should pay.

All the parties that make up the Government maintain that the policy should put downward pressure on rents by reducing landlords’ costs. Labour and the Opposition think otherwise. Opinion from the economics world is mixed and tends to factor in whether New Zealand has a competitive rental market, something the Government is keen to encourage, but which governments have historically struggled to create.

“Landlords have been hit with a double whammy of rising mortgage interest rates and increasing interest deductibility limitations during a cost-of-living crisis. These costs are inevitably passed on to tenants, one of the reasons New Zealand has all-time high rental costs,” Seymour said.

Labour’s finance spokeswoman Barbara Edmonds noted that the blowout in cost from the interest deductability policy came very close to workings by CTU economist and Labour’s Policy Council member Craig Renney, who has become something of a fiscal bête noire for the Government.

Renney calculated in November that changes made in the coalition agreement would see the cost of the policy rise to $3b.

Edmonds noted that the $3b cost of deductions over the next four years is roughly equivalent to the estimated cost of the Interislander ferry replacement project and associated terminal upgrades.

“It shows where [the Government’s] priorities are. Their priorities are to providing tax deductions to mega landlords, not investing in infrastructure like the ferry project,” Edmonds said.

She said the new figures showed the Government’s “numbers never added up”.

“It showed they hadn’t accounted for going backwards in their coalition agreement,” she said.

The $800m blowout is roughly equivalent to the $650m needed over the next three years for the free school lunches policy, or the $669.52m savings the Government will book from changing the way benefits are indexed, a change that will cost someone on a disability benefit $2300 a year. by 2028.

“I can’t say how disappointed I am and it is concerning,” Edmonds said.

Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.