KEY FACTS
- The Government did not announce additional cost-of-living relief in the Budget beyond an already announced $50 a week increase to Working for Families.
- Finance Minister Nicola Willis presented numbers showing an earlier return to surplus.
- The Budget included $2.4b in cuts to departmental baselines.
Every Finance Minister complains about a lack of options.
No matter which party they’re from, Finance Ministers are squeezed by voters’ desire for more and better public services and their limited appetite to pay higher taxes for them.
Nicola Willis has endured more of this squeeze thanmost. Taking office in 2023, she inherited a large forecast deficit – one that got worse after Treasury published its first post-election forecasts and a hefty post-Covid debt burden.
Some of the squeeze was not of Willis’ making. In the 2020 to 2023 Budgets, when the books were in deficit, Labour expanded discretionary spending significantly: main benefits were increased, the school lunch programme was expanded, and $5 prescriptions were made free.
But in other areas, Willis was the author of her own constraints. In Opposition, National didn’t make the case for significantly paring back spending Labour hadn’t found permanent funding for. All of the increase in discretionary spending post-2020 was arguably “borrowed”, but Willis didn’t campaign on reversing much of it. National campaigned on scrapping the prescription policy and reducing the rate at which benefits increased, but the rest was left unchanged.
Some of the squeeze is the fault of… well… me .
In 2022, National’s then-finance spokesman Simon Bridges drew up a tax proposal (not a policy) for the 2022 Budget, based on his long-held view that tax brackets should be adjusted for inflation.
The fact National hadn’t committed to taking this policy to the election – and that Willis may want to draw up her own tax policy rather than rely on Bridges’ – was lost on many.
When the Herald reported in August 2022 about National MPs confirming Bridges’ tax package was an idea and not a campaign promise, the reaction from voters was so severe that within hours of the story being published the party announced its election tax plan would deliver at least as much tax relief to people as Bridges’ 2022 proposal. The final policy, announced a year later, was almost identical to what Bridges announced in early 2022.
That means the biggest part of the tax policy that was implemented in the economic winter of 2024 was actually costed during the bloom of the faux post-Covid bounceback in 2022.
Willis and National made a judgment that walking from the tax plan would undermine their credibility to make promises and stick to them (it would also mean some minimum wage workers being pushed into the 30% tax bracket – a problem Labour never grappled with).
That judgment is probably correct, but sticking to the plan has made Willis’ life difficult in Government. Were National to have its time again, there would have been a push in 2022 to hold the line on tax, throw out Bridges’ policy and right-size the promise for the 2023 campaign.
It’s also made it harder to argue all the Government’s fiscal problems were inherited. On balance, most of them were (and not just from Labour – the ballooning cost of superannuation is also the fault of several previous Governments), but the decision taken in Opposition not to more aggressively target Labour’s unfunded spending and not to right-size its 2024 tax package have clearly made things worse.
These decisions, her own and by those who came before her, have constrained Willis’ time in Government. Budget 2026 showed her resetting the board and giving herself some room.
Finally, she has some good news on the fiscal front: a surplus, by one measure, by 2028/29. She’s baked in public sector cuts out to the end of the decade, giving her additional headroom of $2.4 billion. She’s clearly looking at revenue measures, such as bank taxes.
All of this gives her some breathing space before the election. The forecasts assume operating allowances of $2.4b in the next three Budgets – low by the standards of the last Labour Government, but fairly generous for Willis. That allows her to promise a bit more spending on the campaign trail, or trim the allowances if she wants to bring the fiscal consolidation forward slightly.
There are a couple of big wrinkles. The first, is that the view from the economics community is Treasury might have been over-optimistic in its forecasting of the consequences of the Iran war.
In fairness, Treasury wrapped up its economic forecasts on April 24, a fortnight after a ceasefire was announced and when many still believed the Strait of Hormuz would be opened. The strait remains closed and it appears the crisis may have a longer, gloomier tale than Treasury expected.
The problem for Willis isn’t so much the “what?” of this issue, it’s the “when?”. The next time Treasury will deliver a verdict on the forecasts will be at the pre-election update, weeks out from polling day. If there’s a downgrade to the outlook, as appears very possible, then it will occur in the midst of the campaign – terrible timing for a Government elected on a mandate to fix the economy.
The other wrinkle is, of course, that few believe the Government will achieve its heroic public sector cuts. Despite being agreed by the coalition Cabinet, NZ First has clearly decided it will oppose at least some of them and, if re-elected, may reverse them. That puts Willis back in the fiscal pickle she’s trying to avoid. But this wrinkle is less serious, as it’ll only be a problem if the coalition wins the election, by which time the serious work will have been done.
The political world is now braced for Labour to make its move and start announcing some policy. Part of the Government’s bullishness about this unusually beige election-year Budget is the way it constrains the Opposition.
The public sector cuts, despite probably being undeliverable, are arguably more of a challenge for Labour than they are for National. Labour clearly disagrees with them, but it hasn’t committed to overturning them, because it clearly can’t find the money.
Apart from last year’s $6.8b Investment Boost policy, which seems destined for the chopping block under Labour, there’s no obvious line of existing spending the party can scrap in order to promise new things. Labour’s fiscals are weighed down by its $12.8b promise to reverse last year’s cuts to pay equity and its disinclination to promise new taxes means the party is in a sticky spot. It’s got a host of unenviable and risky decisions ahead of it in the next few months.
A fudge and partial backdown on pay equity seems inevitable. Labour leader Chris Hipkins has been attacking the Treasury costings of the pay equity cuts for months. Labour seems destined to come up with its own, smaller, costing, and put it to the electorate. It’ll be interesting to see how that compromise will play. Voters for whom pay equity is a motivating issue aren’t going to switch to the coalition, but some may decamp Labour for the Greens – making life more difficult for a Labour Party keen to win over marginal National voters.
The next big decision is what to do about reinstating interest deductibility. Having attacked the coalition’s decision to bring back full deductions as a tax cut for landlords, Labour seems nervous about the policy returning, at least in its original form. The policy made more sense when it was introduced in 2021 in lieu of a proper capital gains tax. Having a CGT and the interest deduction ban seems a bit gratuitous, but Labour has attacked the “landlord tax cut” so vociferously that it has argued itself into a position in which it has to do something.
Hipkins has publicly mused about capping deductions at 50%, an idea floated by former revenue spokesman David Parker in an interview with the Herald. This week, on Ryan Bridge TODAY he floated weakening the promise again, noting the concerns of people who own one home but cannot live in it because they have moved for work.
Under the old policy, people in this situation could have seen their tax liabilities increase by thousands of dollars a year. It’s little wonder Labour is thinking about carving them out from the refreshed policy – but people in this situation can still be hit by the CGT.
Perhaps a bigger issue is what the changes would do to house prices. The negative gearing changes announced in the Australian Budget, which are similar to banning interest deductions, were estimated by the Australian Treasury to shave two percentage points from house price growth. There’s a political and policy problem here.
Treasury has already trimmed house price growth forecasts to a little over 4% a year out to 2030. Politically, it’s doubtful the nation’s homeowning majority will volunteer to vote for a policy to lower this growth even further.
Practically, Labour’s capital gains tax policy relies on 3% house price growth a year on average. If the interest deduction ban dents the current growth trajectory, then there’s a risk Labour has one tax policy that eats another, with interest deductibility devouring revenue from the CGT.
Labour’s initial reaction to the Budget was one of puzzlement and relief at the fact Willis included no obvious cost-of-living relief. But beneath the surface is dread and the knowledge that as the campaign nears, Willis’ squeeze becomes their own.
