Treasury’s’ full advice to Finance Minister Nicola Willis has now been released. Photo / Mark Mitchell
Treasury’s’ full advice to Finance Minister Nicola Willis has now been released. Photo / Mark Mitchell
For nearly a year, an economic battle raged between politicians and economists on the left and right over whether the National Party’s tax package would lead to more inflation and higher interest rates.
Finance Minister Nicola Willis revealed in early May Treasury’s opinion was href="https://www.nzherald.co.nz/nz/politics/watch-live-nicola-willis-delivers-pre-budget-speech/A62WWYENYFA7PMOSFK7QCSJJIY/" target="_blank">" fiscally neutral tax relief – financed through reduced Government consumption - reduces inflationary pressure and nominal interest rates”.
In other words, if the Coalition did what it promised and cut spending or raised charges by the same amount it cut taxes, Treasury said there would be a net negative impact on inflation.
Treasury’s’ full advice to Willis has now been released.
The advice showed Treasury ran several different scenarios on National’s proposed tax package. These scenarios looked at what would happen if: 1) the Government cut spending without cutting taxes; 2) the Government cut spending and cut taxes at the same time; 3) the Government funded tax cuts with debt; 4) the Government funded the tax cuts through debt and additional taxes.
It then modelled two scenarios based on whether the tax cuts were fully spent by households or partly spent and partly saved (Treasury assumed 30% of the package would be saved in the saving scenario).
The verdict is the tax package would not have had much of an impact on inflation either way. However, importantly for Willis and the Government, the package was found to have had a net negative contribution to inflation.
If the Government funded the tax cuts by cutting spending, then inflation was estimated to fall by -0.01 points by the end of the year if people spent the entirety of their cuts. If 30% of the cuts were saved, inflation would have reduced by -0.04 points.
Treasury's tax advice to the Government. Table / Treasury
That compares favourably with funding the package with debt, which would have increased inflation by 0.5 points by the middle of 2028 if the cuts were spent or 0.02 points if the cuts were partly saved.
Treasury also modelled what the tax package would do to interest rates. if households fully spent the tax cuts, interest rates were assumed to reduce by -0.03 points by September 2026, if they were partly saved and partly spent they were assumed to reduce interest rates by -0.13 points.
This again compared favourably with debt-funding the cuts, which would have increased inflation by 0.16 points by June 2028 or 0.5 points by the same month if the cuts were partly saved.
Treasury gave a less detailed version of this in the Befu forecasts released with the Budget, which said “[t]aking the tax package, savings initiatives and new allowances into account, the net impact of the budget package is on balance slightly disinflationary”.
“The tax changes will boost aggregate demand via household spending, but lower Government spending provides an offsetting reduction to overall demand.”
The debate is moot now. A fortnight after the tax cuts took effect, the Reserve Bank cut the Official Cash Rate by 0.25 and signalled further cuts to come, meaning that even if the cuts were inflationary they were not inflationary enough to stop the Bank from easing monetary policy.
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.
