Tax cuts in 2017 will depend on the Government achieving a credible surplus next year.
That will now become the focus of the Government.
If it does then expect a big election year spend up on tax cuts.
Finance Minister Bill English argues that Government new spending of around $1 to $1.5 billion is the new norm for budgets.
The Budget Fiscal Strategy Report forecasts an increase in operating expenditure next year the same as this year ($1 billion) with a sudden blowout in election year to $2.5 billion.
This is to be backed up by surpluses of $176 million next year and $1.5 billion in 2016/17, which takes account of the proposed tax cuts.
But even Government insiders concede the maths is delicate and as this year showed, a projected surplus can easily turn into a deficit.
GOVERNMENT TO CONTROL SPENDING EVEN MORE TIGHTLY
Nevertheless it must be assumed that from now on the Government will be screwing every cost it can down with the intention of delivering tax cuts aimed at its middle class electorate to take effect in 2018.
In other words, vote National in 2017, and you’ll get the tax cut the following year.
Mr English argued today that the Better Public Services social investment approach would assist reaching the surplus targets because they would yield substantial spending savings down the track.
“The best we can do to underpin the (2016) surplus is to reduce the demand for Government services and our focus on results and social investment, the package around hardship and the work requirements are all going to have some impact,” he told the Budget lockup.
There is however some nervousness about the package announced today.
Sources close to the Budget process say though that the biggest worry is about the political impact of the work requirements which will demand that beneficiaries with children aged three and above be available for 20 hours work a week.
And there is already some criticism of the fine print in the announcement.
MICHAEL CULLEN SAYS THE CHANGE IN BENEFITS IS DECEPTIVE
Former Finance Minister, Michael Cullen, who introduced Working for Families said: “You can either increase the base rate or load all increases into the supplementary payments for children.
“The difference is that if you do the former you claw it back more quickly if there is any additional payments/income.
What matters is what is the increase in the hand and in that respect today’s announcement is much less than Working for Families.
“Nobody in the media seems so far seems to have understood this.”
And Professor Jonathan Boston, one of the authors of “Child Poverty in New Zealand”, a book which Mr English has referred to positively in the past said the measures would still mean families dependent on a welfare benefit were very likely to fall further behind those who secure their income from paid employment or New Zealand Superannuation.
“The gap is already very large,” he said.
“The child hardship package will reduce this gap only fractionally and probably only on a temporary basis.”
THE GAP BETWEEN BENEFITS AND SUPER WILL STILL WIDEN AGAIN
This is the issue the Prime Minister talked about on Sunday — the indexing of benefits to the consumer price index whereas New Zealand Superannuation is indexed to average wages.
Since 2008 (when the Government was elected) the average wage has increased by 25% whilst inflation has increased by only 14%. Thus over the period of this Government, benefits have increased at only half the rate of superannuation.
The question now of course is how long before a one off increase in benefits is overtaken by increases in average wages.
But the Government has left itself with very little room to move to accommodate this, particularly if it wants to pay tax cuts in 2017.
On the other side of the equation there are also worries that the increase in benefits may place pressure on the minimum wage.
It would not be surprising to hear some more from the Government on this.