New Zealand’s 2023 “no-frills” Budget lived up to government billing with cost-of-living support taking centre stage.
But economists and tax specialists who contributed to this special FINSIA report suggest it’s a tricky balancing act as the government tries to tame inflation.
As-promised no-frills budget
FINSIA National Council member Associate Professor Claire Matthews F FIN, Director, Academic Quality, Massey Business School, said: “It was an as-promised budget with no frills, and focused on the cost-of-living issues.
“It’s reasonably accurate to see it as a typical pre-election budget and the best thing that the government can do is help out the average person.”
Increases to infrastructure spending in the aftermath of the Auckland floods and Cyclone Gabrielle were highlighted as one of the measures that will stave off recession and return the budget to a surplus.
“What I see on the other side of that is an impact on homeowners. Interest rates will stay higher and those people are likely to see some pain,” said Claire.
“Treasury has forecast higher interest rates for longer with a corresponding further fall in house prices, so this will have an impact on homeowners that is likely to more than offset the gains from other parts of the budget,” said Claire.
“While the past increases in house prices have been problematic, a further fall as a result of the budget has the potential to create other issues, particularly for those with limited equity in their homes.”
Talking about the increase to Trust tax rates from 33% to 39%, Associate Professor Matthews acknowledged that was one of a few surprises.
“It was unexpected. But it does go along with the fact that people shouldn’t have trusts to avoid paying tax. Aligning Trust tax rates with other tax rates makes sense to me, speaking personally.”
Trust tax hike not entirely unsuspected
BDO Tax Partner Alan Scott said that the ‘no frills’ Budget without any major tax surprises did not “seem quite correct” with the announcement of “a change to the tax rate applying to income retained by trustees of a trust from 33% to 39% to align with the top personal marginal tax rate.
“Budget documents note that this change is a response to the Inland Revenue’s High Wealth Individuals research work, and is being made to improve the fairness of the tax system and to reduce opportunities for high income earner taxpayers to circumvent the top personal tax rate,” he writes in the BDO Budget response.
The rate increase is expected to raise approximately $350 million per year in tax revenue.
“While it’s somewhat surprising that this change was introduced in Budget 2023, the change itself is not entirely unexpected,” he added.
“It has been mooted since the change to the top personal tax rate from 33% to 39%.
“It does, however, highlight other (current) anomalies in the tax system that enable high income taxpayers to invest through a Portfolio Investment Entity (“PIE”) which provides a top tax rate of 28% (rather than the 39% rate that might otherwise apply).
“One tax policy matter which is already causing some debate and was briefly referred to in Budget 2023 is the question of ‘fairness’ following the release of Inland Revenue’s report on High-Wealth Individuals (“HWI”), which concluded that the median effective tax rates (“ETRs”) for the HWIs surveyed was 8.9% compared to 20.2% paid by middle wealth individuals.
“Although the ETR results were not too surprising, given that unrealised/untaxed capital gains, which are generally not taxed under current law, were included as income.
“The HWI report also seems to have recently motivated a group of 96 wealthy New Zealanders to write an open letter to the Government saying they want to pay more tax.
“We can expect more debate on tax policy in the lead-up to the general election. It will be key for policymakers to take a longer-term view rather than a shorter parliamentary term focus.”
Access the full BDO report here NZ Budget 2023 | Tax & Economy | BDO NZ
Will cost-of-living support counteract efforts to bring inflation under control?
Liza Van Der Merwee, Deloitte Access Manager, said it remained to be seen if the cost-of-living support risks in the Budget would counteract efforts to bring inflation under control.
While the “bread-and-butter” Budget brought some support, the scale of recent interest rate rises and the economic downturn may have been underestimated, she said.
“Given the scale of interest rate increases over the past year, it is conceivable that the economic downturn could be underestimated.
“The effect on household expenditure is uncertain – as many households have no prior experience living through a period of high inflation and high-interest rates.
“It remains to be seen whether the cost-of-living support risks counteracting efforts to bring inflation under control.”
There are also headwinds against an economic recovery, the economist noted.
“The job market continues to deteriorate. Unemployment is forecast to increase from 3.7% to 5.0% in 2023-24, and 5.3% in 2024-25. While there has been improvement in net migration for the past three quarters that provides some relief to labour market needs, workforce shortages remain acute in some sectors.
“For example, limited spare capacity in the construction sector, particularly in the regions affected by Cyclone Gabrielle, may constrain the pace of the rebuild – a key focus of the 2023 Budget.
“Given the current economic climate, it is important for the Budget to be mindful of additional spending. Although net core debt is 22%, total Crown borrowings is forecast to sit at 59% of the economy in 2024-25 (slightly up from the previous estimate of 58.3% made in December 2022). New Zealand is, however, still in a good position relative to other advanced economies.
Overall, the context of the “bread-and butter” Budget 2023 necessitated the Government to make decisions around trade-offs. There is a need to navigate the competing priorities of addressing the cost-of-living crisis and mitigating impacts of climate change, while also reprioritising the infrastructure investment pipeline to reflect new priorities.
Stronger near-term growth means continued inflationary pressure
Despite a weaker starting point, Treasury has produced a rosier economic outlook, according to Kiwibank Senior Economist Mary Jo Vergara
Noting Treasury commentary around the fact that the Kiwi economy is no longer forecast to record a recession in 2023 and the unemployment rate peaks lower, she highlighted: “The downside – high inflation persists.”
Summing up the Budget as a having a soft starting point, an optimistic outlook and a delayed return to surplus, Mary Jo added: “Despite clear signs of economic activity already slowing, Treasury has today released a relatively stronger set of economic forecasts.
“And it all boils down to steep upward revisions to net migration projections.
“A bigger population means more aggregate demand, which means more economic activity. The cyclone rebuild effort will also support growth in the near-term.
“As a result, Treasury no longer expects the Kiwi economy to enter a recession in 2023. And with stronger economic activity, a lower peak in unemployment is now forecast.
“Forecasts of stronger near-term growth, however, will maintain inflationary pressure.”
Peak, yet persistently high, inflation means it’s not until late 2024 that inflation is back within the RBNZ’s 1-3% target band, she noted.
“Treasury assumes interest rates will stay higher for longer in order to see a rebalancing of the economy,” she said.