Prime Minister Christopher Luxon at an Auckland Early Childhood Education centre during the election campaign last year

Faced with a barrage of criticism over the promised tax cuts from usually supportive commentators, Finance Minister Nicola Willis yesterday reaffirmed her intention to include them in this year’s Budget.

The Government is up against it over the cuts just about every way it turns.

Commentators like Fran O’Sullivan, Matthew Hooton, and Liam Dann have all argued that the cuts should be at least be postponed or moderated, if not scrapped altogether.

At the same time,  the CTU economist and former economic advisor to Grant Robertson, Craig Renney, is saying the fiscal hole created by the cuts is growing.

Meanwhile, the Prime Minister has said he agrees with the International Monetary Fund that New Zealand is facing a structural fiscal deficit that will open up within the next few years.

His comment at his weekly press conference yesterday then begged the question of whether, given the IMF’s comments last week, it would not be wise to broaden the tax base.

But Willis was not for turning.

“The Treasury, have held that view for some time, as have the IMF, “said Finance Minister Nicola Willis.

“We campaigned on delivering personal income tax relief, and we’re delivering on our campaign commitments.”

Willis maintained that the cuts would be fiscally neutral, which the IMF said was the only way to avoid being inflationary.

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“We are delivering our tax relief in a way that’s fiscally neutral,” she said.

“If we weren’t giving that money back to parents and to the bank accounts, that money would be being spent by the Government elsewhere.

“The judgment we are making is that money can do more good in the bank accounts of working families than it can in a government agency at this time, and so that is a priority.”

The first signs of that tax relief came yesterday with an early childhood education tax rebate of $75 a week.

From 1 July, parents and caregivers of young children will be able to get a partial reimbursement of their Early Childhood Education fees. Under the scheme, parents can get back up to 25 per cent of their weekly fees, to a maximum of $75 per week.

Willis quickly linked it to National’s campaign promise of tax cuts.

“FamilyBoost was a campaign commitment and forms part of our overall tax plan. I am delighted we are delivering on our promise today with support for those who need it,” Nicola Willis says.

The payment will be means tested.

All families earning up to $180,000 with childcare costs are eligible. However, the maximum repayment will gradually be reduced for families earning more than $140,000.

Household income will be calculated by Inland Revenue (IR) using the past three months’ worth of actual reported income to determine eligibility.

And parents will have to submit their childcare invoices to claim the credit.

Inland Revenue’s Regulatory Impact Statement indicated the Department was lukewarm about the proposal, in part because it previously had no need for detailed knowledge of childcare economics and in part because the Government wanted its analysis rushed before it had that information.

“Part of the Government’s outlined policy parameters was for Inland Revenue to be the administrator of the payment,” the statement said.

“This further limited the scope of policy options that were considered to those that only Inland Revenue could implement.

In addition to policy design constraints, the lack of comprehensive Early Childhood Fee data from any government agency has required Inland Revenue to make assumptions about the severity of the policy problem, the factors causing it, and the impact of different options.

“This makes it difficult for any government agency to provide advice on how effective existing or new interventions are on the overall affordability of ECE.

“The lack of fee data also impacts the practicability of a tax credit linked to childcare expenditure.”The Government is obviously pushing hard on government agencies to cut costs to pay for the childcare credit and tax cuts, with growing reports in Wellington of some of the smaller agencies beginning to lay off staff alongside the big redundancies already reported by the bigger agencies.

There is plenty of scope for that.

Public Service Numbers2017201820192020202120222023Since 17
Information Professionals543757776491747883648469942673.4%
Legal, HR and Finance Professionals219022952420263630923144335753.3%
Managers533357306147660071357645805951.1%
Policy Analyst263327372940310035423632394950.0%
Clerical and Administrative Workers394642034702518455145467572645.1%
Other Professionals not elsewhere included226523092572281532483162312037.8%
ICT Professionals and Technicians177218821940207823522129238834.7%
Social, Health and Education Workers8568892193781011211059106741087326.9%
Contact Centre Workers42405014505453974827449346088.7%
Inspectors and Regulatory Officers104681048510550113161149711176112577.5%
Other Occupations399378434432467390355-11.0%
4725251748546475916963118624036514037.9%

Prime Minister Christopher Luxon’s often expressed complaint that the blowout in public service numbers is born out by Public Service Commission figures, which show an overall increase in numbers of public servants of nearly 18000 or 38 per cent since 2017.

Of that increase, 9197 are managers, information professionals, legal staff, human resources people, finance professionals or policy analysts; the backroom staff, he says, should be the ones to go.

Despite that, Combined Trade Unions economist and former Robertson advisor Craig Renney has produced more figures to suggest that the fiscal hole is growing.

Renney is also the vice chair of Labour’s Policy Council.

“Our analysis, using the latest data available from IRD and the Treasury, indicates that the cost of the income taxation changes is now half a billion dollars more than National indicated in its pre-election fiscal plan,” said Renney.

“All up, the modelling undertaken by the CTU shows that the cost of indexation is now likely to be $9.5 billion over the next four years – against the $9 billion budgeted by National.

It is clear there are problems within the Beehive trying to make the numbers add up.

“We’ve been clear that the coalition agreements we’ve made with coalition partners have changed the shape of the policies that National campaigned on,” Willis said yesterday.

And the Prime Minister was saying more or less the same thing.

“We’re interested in the outcomes of what we’ve got to do and deliver at the back of this budget, and the means may shift slightly, in light of the economic circumstances, but also in light of coalition agreements, that the commitments that we’re making in terms of moving the country forward around frontline services being protected, making sure we have tax relief, making sure we grow, those are the thematics that we are very focused on,” he said.

What is clear is that a slowing economy and a number of hiccups with the fiscal savings National had assured the electorate it could make,  will make delivering a fiscally neutral budget and tax cuts simultaneously a major challenge.

More information may be available on Wednesday when Willis publishes the Budget Policy Statement.

However, these usually contain only global figures such as the annual budget total operating and capital allowances.

The Half-Yearly Economic and Fiscal Update set an operating allowance of $3.5 billion for this year, which is money for new spending.

The so-called fiscal hole, the gap between the savings and new revenue streams and the cost of the cuts, will be funded from the operating allowance.

New Zealand First leader Winston Peters has suggested that the gap could be as big as $5.6 billion; Renney suggests it is approaching $3 billion.

“Overall, the tax plan is now likely to be billions of dollars short of its overall revenue target,” he said.

“The only way left to fill the gap is through even deeper cuts to public services and public investment.”

Because of the gap, it will be difficult to make the cuts fiscally neutral. The consequence could be that they could well be inflationary and thus force the Reserve Bank to prolong higher interest rates.

That is why the commentators (and quite possibly, Winston Peters) are calling for second thoughts, but on the evidence of yesterday, the Government is determined to cut taxes and damn the torpedos.