Home > Updates > Budget 2024: Summary of Key Announcements
Minister of Finance, Hon Nicola Willis, has delivered her inaugural budget, with a significant focus on “getting back to surplus”.
This ‘no frills’ budget encompasses tax relief as its central platform, along with significant cuts to the public sector. There is a focus on boosting funding for the ‘front line’ and reducing cost in the ‘back office’ of Government. Health, Education, Law and Order, Defence and Infrastructure have been targeted with specific funding boosts.
In what was a budget targeted at ‘working New Zealanders’, Willis claimed the average New Zealand household is set to benefit from tax cuts and increased social credits by $60 a fortnight, whilst the average household with children will benefit $78 a fortnight.
As anticipated in the lead up to the budget, tax relief has been extended to individuals via an adjustment to the lower tax brackets. This adjustment is the first in some 14 years and will reduce the top marginal tax rate of a median worker back to 30%:
As these new thresholds are set to kick in mid-way through the tax year, the effective tax rate for individuals across the year will end up as a composite of the two sets of thresholds.
The Independent Earner’s Tax Credit’s maximum threshold has increased from the current $48,000 to $70,000. This now means those earning between earning $24,000 – $70,000 will be entitled to up to $520 of IETC tax credits. It’s estimated an additional 420,000 individuals are now eligible for the credit.
There has been an increase in the In–Work Tax Credit of $50 per fortnight. A concession was also made to slightly increase the Minimum Family Tax Credit to allow those families to benefit from the changes to personal tax brackets.
Family boost was introduced as a new initiative aimed at providing assistance with the escalating cost of early childhood education for low-to-middle-income families.
This scheme will entitle eligible families up to $150 per fortnight. This 25% reimbursement ‘Boost’ is available for ECE fees after the 20 hours of ECE and MSD Childcare subsidies are considered. These reimbursements will be paid on a quarterly basis and is eligible for families earning up to $180,000 pa, however the payments start to reduce after $140,000 of household income.
While it’s good news for earners that the tax cuts can be delivered immediately, a change to rates at the start of the income year is generally preferred from a compliance perspective. The flow-on impacts to taxes connected to personal tax rates such as FBT, RWT, ESCT and PIE/PIR taxes will need to be dealt with carefully. We’re expecting a blended set of thresholds for the 2024/25 tax year, to address the mid-year adjustment, before the rates above kick in properly from 1 April 2025.
The extension of the IETC offers some additional unexpected tax relief, however the problems with this scheme remain, namely a disincentive for taxpayers to work additional hours that may push them over the maximum threshold. The proposed abatement from $66,000 onwards should help to reduce the impact of this.
Overall, the tax breaks offered in this year’s budget are well considered and deliver additional funds back into the hands of most working New Zealanders and families at a time when many are struggling to make ends meet. The bracket creep over the past 14 years has led to an estimated increase in the average effective tax rate of more than 5% over this period.
It does not appear National’s original plan to index brackets to inflation and review them every three years will go ahead under the Coalition Agreement, so we may see these new thresholds remain in place for the foreseeable future.
The Government has also confirmed the cuts are fiscally and economically neutral, as they are offset by spending cutbacks and new revenue streams, and the changes will not create upward inflationary pressure at a time when the Reserve Bank is working hard to bring inflation under control.
It is likely the tax savings received will be put towards rising council rates, interest costs and insurance by most. This is important as any changes to Government spending, or stimulus in private spending, was not included in the RBNZ’s projections around a reduction in the Official Cash Rate late this year / early next year.
Superannuitants appear to have missed out on any meaningful additional support with the cost of living crisis. While they also benefit from the changes to tax brackets, National’s original plan was to also increase the superannuation payment for inflation. This has been omitted from the budget this year. We will be watching with interest as the Government grapples with the ageing population and rising cost of the superannuation programme year on year.
As the impact of higher interest rates continues to bite, it’s unlikely a recovery in the business sector will increase the Government’s tax revenue any time soon, and therefore the government has had to get creative in order to deliver a fiscally responsible budget, which still delivers on their promised tax cuts.
The Government remains committed to getting net debt as a proportion of GDP down to below 40% over time, and putting in place a credible path to surplus by the 2027/28 fiscal year.
The pathway to surplus has become more challenging for the Government with a weakened economic outlook and a reduced overall tax take. New borrowing will need to continue in the short term as the Government moves back towards surplus.
As a result, savings and reprioritisations of Government spending are a key focus and will continue to be for the foreseeable future. We summarise the key initiatives announced below:
In order to achieve fiscal neutrality for this budget, the Government has had to consider new revenue streams to mitigate the reduced tax take from personal tax cuts and the worsening economy.
Additional revenue is expected from the new offshore gambling duty, the removal of depreciation on commercial buildings, and a $29m per annum increase in investment in Inland Revenue’s investigations team, to reduce non-compliance around existing tax types.
Other initiatives have been announced which reduce outgoings or increase revenue:
There has been no comment on the IMF and our own Treasury’s recent recommendations around a broad-based low rate Capital Gains Tax, nor was any meaningful announcement or firm commitment made around the Digital Services Tax proposed by Labour and re-tabled by the current Government.
While it is not surprising Capital Gains Tax was not discussed, we can expect the Digital Services Tax to be raised in the near future given this was intended to come into play in January 2025 (unless the OECD makes meaningful progress with their multilateral solution before this.
In addition, the real increase to funding of frontline education, health and law and order do not appear to be more than recent inflation figures. So, whether the proposed funding and revenue increases are enough to actually improve front line service levels and reach is yet to be seen, and will likely depend on the ability to bring inflation under control over the next 6 months.
The Operating Allowance is small, reducing down to more than half of the Operating Allowance under the previous Government for the 2026 and 2027 years. In post-release interviews, Willis has indicated the Government will need to continue to identify cost savings and reprioritisations in order to achieve this; a 2028 surplus will depend on keeping to these figures.
The increase in funding for Inland Revenue compliance is not surprising, as generally any additional spend in this area generates very good returns for the Government.
While it is clear much of the focus of the budget is in providing immediate relief around the cost of living, and better aligning Government spend with revenue, there were some future-focussed announcements included in the lolly scramble.
There is a sizable investment in the education sector which is seen as key by the Government in lifting New Zealand’s productivity levels.
Notably excluded from the budget are any new measures to address climate change risk, as well as New Zealand’s international commitments around Greenhouse Gas emissions.
While there is a general boost to infrastructure spend, also absent is any targeted funding to resolve some of the more significant operational challenges the country faces including our ageing infrastructure (in particular water assets), and the Cook Strait Ferry.
There are always winners and losers in every budget, and the Government has had some very tough decisions to make, balancing tax relief with the need to not inject any additional stimulus into the economy.
Overall, the changes proposed seem considered and are almost entirely in line with National’s campaign platform, varied only slightly by the Coalition Agreement. The only real surprises were the increase to the top threshold for the Independent Earner Tax Credit and the lack of any changes to superannuation payment levels as campaigned on.
We will need to wait and see what, if any, impact these changes have on inflation and in terms of actually easing the cost of living for hard working New Zealanders.
If any of these announcements will impact on your plans for the coming year, please contact your trusted Nexia advisor to discuss this in more detail. Or, if you are looking for specialist tax advice, please contact us to explore how we can help.
Nexia is one of New Zealand’s best accounting and business advisory consultancy firms with offices in the Christchurch CBD, Albany and Newmarket in Auckland, and Hastings in the Hawke’s Bay.
See the Budget 2024 website for full details.
