PM Christopher Luxon reacts to Budget for the 'squeezed middle'

Author: Thomas Coughlan,
Publish Date: Fri, 31 May 2024, 8:00am

Christopher Luxon has spoken to media a day after Finance Minister Nicola Willis delivered her first Budget to the nation.

The Prime Minister, speaking at the post-Budget breakfast in Auckland, used a speech format he’s used in the past, describing the world a child born today would live in in 2040.

He said it was the Government’s responsibility to define the conditions of the country that would be left for future generations.

Those conditions included creating a more productive economy that encouraged Kiwis to stay in the country, public services provided through a social investment lens and a comprehensive response to climate change.

“It’s early days but there’s a lot more to do.”

Luxon hoped the crowd recognised yesterday’s Budget was “responsible, careful and for the squeezed middle”.

He described it as “the tightest Budget by any reasonable measure in the last five years” and had no intention to reflect the “blowout Budgets” he felt had been delivered by the previous Labour Government.

Acknowledging the tough economic circumstances in which this Budget was launched, Luxon said there were signs of improvement with inflation “coming down quite fast” and higher business confidence.

“I have to tell you, it will pass,” Luxon said of the tough economic times, noting the Budget showed inflation falling below three per cent this year.

He reflected Finance Minister Nicola Willis’ comments yesterday about continuing the Government’s drive to limit public spending following this Budget, best exhibited by government departments being called to reduce expenditure by up to 7.5 per cent. He said the shift to this approach would “remain permanent and daily practice” through governing with a “hard head and soft heart”.

“I am incredibly proud to say we have met that commitment,” Luxon said of National’s promise to deliver tax cuts.

He said the tax cut package had been “fully funded”, without borrowing, by cuts to the public service and other revenue measures, which meant it wouldn’t be inflationary.

Labour leader Chris Hipkins contested this yesterday, claiming the Government had indeed borrowed to afford the cuts.

Yesterday, Willis stared down detractors in delivering $14.7 billion worth of tax relief in her first Budget.

The tax changes are almost identical to what National campaigned on at the election: tax brackets will be lifted by about 11.5 per cent and the eligibility for the Independent Earner Tax Credit will be extended, meaning many middle-income workers who don’t receive other benefits will get $10 a week extra.

But delivering tax cuts and keeping Crown spending in check at the same time has come at a cost. Willis’ operating allowances in 2025 and 2026, which measure the new day-to-day spending in a budget, have been slashed to below what even National promised on the campaign trail, to just $2.4b.

That means while Budget 2024 was a bit of a spend-up by comparison to other centre-right budgets, the next two will see some painful belt-tightening.

Treasury is worried that these future allowances, which were relatively tiny when adjusted for inflation, will be about $100 million short of what is needed to “maintain the existing level of services”. That will be a massive headache for the coalition next year, and in its election year Budget. Willis has promised that, unlike her predecessor, she will keep to these self-imposed spending limits.

The biggest winners in the Budget are people with children in early childhood education (ECE), who can claim up to $75 a week in early childhood costs back in tax credits; and residential landlords, who will enjoy the reinstatement of full interest deductibility. The only change is that the cuts will take effect on July 31, instead of July 1.

Just what you will receive from the tax cuts differs vastly by your circumstance. Someone on the minimum wage will get $12.50 a week

A working couple whose combined income is $150,000 will be better off by $40 a week and a single adult earning $55,000 a year will be better off by about $25.50 a week.

The package was stacked towards those with young children in ECE. A family with one parent earning $80,000, and another earning $60,000 with four children, two of whom are in ECE, will get $135 a week.

Willis said the changes were “light at the end of the tunnel for a prolonged economic downturn”.

Labour’s Finance spokeswoman Barbara Edmonds took aim at the level of borrowing saying, “This Government is borrowing for tax cuts.

“Nicola Willis says this Budget is fiscally neutral. We know she never read our Budgets, but it looks like she has not read her own,” Edmonds said.

Finance Minister Nicola Willis delivered the promised tax cuts. Photo / Mark Mitchell

Treasury’s Budget Economic and Fiscal Update, released with the Budget, showed the cuts were “neutral” in the sense that their cost was paid for with cuts and new revenue. However, it said the “impact on aggregate demand, and hence inflation, is similar to the previous year”.

In other words, this Budget is no better or worse at fighting inflation than the last one. Treasury’s inflation forecasts have been revised downwards, showing Treasury is more confident than before that the end of the cost of living crisis is in sight, with CPI inflation falling below 3 per cent by the end of the year.

Auckland gets some big transport spending, with $159m for the city’s Rail Network Rebuild Programme. The Government says it is “critical to ready the network for the opening of City Rail Link”.

Auckland gets a share of an additional $107m to “avoid critical network failure risk” which it must share with Wellington.

Transport Minister Simeon Brown said the funding will “improve the reliability and safety of services in our major cities. In recent years, we have seen a disturbing number of speed reductions and delays on the lines in Auckland and Wellington”.

The Budget might disappoint everyone equally.

Core Crown spending will still increase by $5.6b this year - half the increase in spending between Budgets 2022 and 2023 - but it will shrink, ever so slightly, as a percentage of GDP.

Against all expectations, and despite revisions to economic forecasts, Willis has been able to forecast a tiny surplus in 2028 of $1.5b. That is a small miracle, given that in the last six months, Treasury has revised its tax forecasts to show tax revenue dropping by a cumulative $28b over that period. About a third of that is attributable to the Government’s tax cuts, but the other two-thirds are symptoms of New Zealand’s growing economic malaise resulting in slowing economic growth and “significantly lower” tax payments by businesses.

If you are feeling poorer, it is probably because you are. Six months ago, Treasury thought real GDP per capita would contract by 0.7 per cent in the year to the end of June. Treasury now thinks the contraction is far larger at 2.8 per cent.

House prices will also take far longer to recover. Treasury reckoned they would rise by just 2.5 per cent this year, 1.6 per cent next year, and 2.1 per cent the year after. This means a later recovery than the December forecasts.

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.

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