IMF Divisional Director Harald Finger -- now is not the time to cut taxes

The International Monetary Fund warned yesterday that now was not the time for New Zealand to reduce taxes.

That is a direct challenge to National and its economic credibility.

The party is proposing to move income tax thresholds up so that higher tax rates would cut in at higher incomes — an effective tax cut.

Ironically the IMF statement comes only three months after National Leader Christopher Luxon himself also said now was not the time to decrease taxes.

But on March 6, the party changed its tax policy so that the bottom three thresholds would move up.

Luxon argued that the change could be afforded by the Government dropping the extra $6 billion in spending it was proposing for the next budget.

That might accommodate the cuts for a budget year, but the bigger problem is in the years to come.

In September last year, Treasury set out the country’s long term fiscal statement.

This is a purely technical document from Treasury that takes no account of political promises.

 At the heart of the deficit’s growth beyond 2030 is growing healthcare expenditure caused by an ageing population.

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“Health expenditure is projected to grow to over 10% of GDP by 2061, up from about 7% today,” said Treasury last September.

“This reflects both demographic change and the fact that health expenditure tends to grow more quickly than income over time in most economies.”

Similarly, an ageing population will grow New Zealand Superannuation expenditure from  5% of GDP in 2020/21 to 7.7% of GDP by 2060/61.

Treasury says the NZ Super Fund will not fully fund this increase but increasing the age of eligibility to 67 and increasing payments with inflation rather than wages would help reduce the expenditure.

In the LTFS, Treasury suggests two possible solutions; either start increasing income rates by one per cent in 2025 or simply do not touch the thresholds through to 2030 and let inflation move everyone into higher tax brackets.

Treasury repeated this argument in a highlighted section in its 2022 Investment Statement released three days ago.

“If the key trends are unaddressed, the gap between government revenue and expenditure will grow significantly,” it said.

“If this continues, net debt will start increasing exponentially.

“Increases in debt to higher levels will make achieving fiscal sustainability more challenging as higher debt levels put upward pressure on interest rates and subsequently debt-financing costs.”

It was a theme picked up by the IMF.

In its Concluding Statement, released yesterday, it said that the Government should set a “medium-term fiscal anchor.”

A “fiscal anchor” is adopting guidelines or limits on a fiscal metric or series of metrics to ensure the sustainability of the Government’s fiscal position.

New Zealand usually does this by setting net debt targets.

Treasury recommended prior to Covid a prudent upper limit for net debt limit of 50% to 60% of GDP. That included a 20 per cent buffer for sudden shocks such as earthquakes — or another pandemic.

“As the pandemic-related uncertainty subsides, the authorities should set a medium-term fiscal anchor that would replace the suspended pre-pandemic debt target range,” the IMF said.

Their report did not set a figure.

But IMF Division Director, Harald Finger, told a media briefing yesterday that there was no silver bullet.

“Over time, policies can and will adjust,” he said.

“That does include options on the level of spending and benefits that will accrue to people, but also small adjustments to revenue over time that will accrue over the longer term to make up for these spending pressures.”

So what room does that leave for tax cuts?

“We’re not really recommending any reduction in the overall level of taxation at the moment,” he said.

“Given New Zealand’s cyclical position and very tight labour market, we do think fiscal consolidation should be pursued more.

“So there is less of a case for revenue decline at the moment, but rather over the longer term as population aging after 2030 more like after 2040 or so when these things begin to really have an impact on the fiscal picture, then one can look into ways to adjust and raise revenue and or adjust the benefit levels or adjust other public spending.”

That is the stark choice; short term, don’t cut tax.

Longer-term – — as Treasury pointed out last September — make a small upwards tax adjustment or cut spending, particularly on New Zealand Super.

Finance Minister Grant Robertson, in a statement sent to POLITIK, said:

“Treasury’s projections in the Long Term Fiscal Position shows us what might happen if these pressures on expenses from an ageing population followed one potential path over a long timeframe, and if future Governments decided to do nothing about it in the meantime.

“We’ve consistently said that New Zealand needs a balanced approach to carefully manage our fiscal position while dealing with long-standing issues. That also applies in this case, which is an issue most developed nations are grappling with.

“It is likely that New Zealand is going to have to deal with increasing health expenditure over time.

“However, the Health and Disability health reforms we announced last year are aimed at addressing some of the drivers of rising health costs, including improving efficiencies across the entire system and focusing on preventative and primary care.

“If we do see cost pressures of this sort, future Governments will, of course have to consider how we balance the level of taxation with the level of public services that we provide.”

Shortly after he became National Leader last December, that appeared to be pretty much the position of Christopher Luxon.

“At this point in time, I would tell you that we would love to lower tax,” he told Q+A last December.

“I can tell you it’s way too high.

“But the reality at the moment says, for us, it’s about making sure we’ve got no wasteful spending that we’ve got debt lower.

“So we’ve got to repay it back.”

But 12 weeks after that interview, Luxon reversed his position.

In his State of the Nation address, he promised to reverse the Auckland regional fuel tax;  the brightline test on house sales; the ending of interest rate tax deductibility on investment properties; proposals for value capture on the Auckland light rail route and the top rate of tax being increased to 39 per cent.

And he repeated National’s opposition to the proposed unemployment insurance scheme.

“We should be encouraging work – not taxing it more and paying people to take six months off,” he said.

“It’s classic Labour – spend, spend, spend, and then they tax you to pay for it.

“Now is not the time to be adding costs on individuals and businesses. We should be letting people keep their hard-earned money, not forcing them to hand over more and more to Grant Robertson to spend.

“So here’s my commitment to you. When I become PM, I’ll reverse Labour’s tax grab.

“National will repeal each of these tax increases implemented by Labour.”

And he also announced that National would raise the tax thresholds.

“I’m calling on the Prime Minister and Grant Robertson to give Kiwis a break and return the extra tax they are grabbing through inflation,” he said.

National has not costed the totality of these promises — nor has it explained what impact they would have on Treasury’s projections.

But Luxon is going to find that the IMF are hard people to argue against, and their warning that now is not the time to cut taxes is a potential blow to his party’s economic credibility.

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