National leader Christopher Luxon emerged from his PREFU press conference yesterday, casting doubt on its fiscal projections but maintaining National would still cut taxes.
ACT Leader David Seymour was more circumspect, saying his Caucus would hold a meeting next week to consider whether to continue to offer tax cuts.
But at the same time, both Seymour and Luxon were careful to stress that after “discussions” on Monday and yesterday, they were convinced they could share power in a coalition without having to resort to Seymour’s weekend promise to topple the government if he didn’t agree with its Budget.
Somehow, they must now (amicably) resolve their differences on tax.
Luxon is up against big pressure to forego the tax cuts.
Even the Taxpayers Union yesterday argued they should not go ahead at the moment. Its CEO, Jordan Williams, tweeted: “No one wants tax cuts like the Taxpayers’ Union, but until serious decisions are taken on spending, they are simply not credible. Today’s opening of the books demonstrates the fiscal crisis the next Minister of Finance will face. Unfunded promises (and assurances about continuing unaffordable entitlements) is not treating the electorate with due respect and will make the future pain even worse.”
The opening of the books, this year’s Pre-Election Economic and Fiscal Update (PREFU), was a tale of two sets of numbers; it forecast continuing economic growth, which meant the country would not go into recession.
But it also reported lower Crown revenue from both taxes and the State Owned Enterprises and higher Crown expenses driven by inflation and higher borrowing costs.
The result of that squeeze will be to push the return to surplus out a year to 2027, which is why both Seymour and the Taxpayers Union are saying now is not the time for tax cuts.
All of this was a sideshow, though, as far as Finance Minister Grant Robertson was concerned.
He unveiled a PREFU, which showed we had dodged a recession next year.
Over at the National Party Leader Christopher Luxon wasn’t entirely up to speed.
He claimed that we were the only country in the Asia-Pacific region in a recession.
But Robertson’s PREFU forecast 3.1 per cent GDP growth this year and 1.3 per cent next year, almost on a par with Australia, which is forecast to grow at 1.4 per cent; hardly a recession in either country.
Challenged by reporters on this, Luxon moderated his claim by saying that we had “very low flat growth,” but despite the Australian figure, he persisted with his claim that the growth next year would make us one of the slowest growing countries in the world.
Luxon did have Westpac on his side. Its chief economist, Kelly Eckhold, said he thought Treasury’s forecasts for economic growth, and hence both the tax take and projected return to surplus, were on the optimistic side.
It is immigration — not exports — that is powering the growth, with the Treasury forecasting that immigration for the 12 months ended September 30 will be 98,670, up 32,734 or nearly 50 per cent, on its forecast as recently as in the Budget back in May.
Treasury expects that annual rate to halve by the end of next year.
But in the meantime, immigration will increase demand across the economy and be a factor in house prices slowly starting to rise next year.
However, though the economy is improving, the government’s finances are not.
Things have deteriorated since the Budget.
Crown revenue for this year is forecast to be $1.6 billion less than forecast at the Budget while expenses are up $2.4 billion. The next financial year sees a $2.1 billion increase In spending and a $700 million reduction in forecast revenue.
For the next two years, Robertson has provided $3.5 billion each year for new spending, the so-called operating allowance.
Already, $1.37 billion of that has been committed to meet health sector cost pressures.
Treasury is plainly worried that there may not be enough left to cover new spending initiatives.
“Based on past analysis, the remaining Budget operating allowances should be broadly sufficient to meet remaining critical cost pressures not already funded; however, significant trade-offs will be required,” the PREFU said.
And here comes the potential downside of immigration.
“There could also be additional demand (e.g., population changes) that could add extra pressure to future Budget allowances.
This is particularly the case for Budget 2024, given the level of pre-commitments.
“In recent times, government’s final allocations have exceeded the signalled Budget allowance.
“If this trend was to continue and there was no corresponding offset from either an increase in revenue or a reduction in expenses, there would be an adverse impact on the fiscal outlook.”
National has estimated that its tax cuts will cost $3.1 billion in their first year (2024/25) and gradually increase out from that.
they have set out a rangeof measures to make them “self funding.”
Central to thsoe are a foreign house buyers tax.
But a line of tax experts has told them that may not even work; even if it does, it is highly unlikely to bring in the $715 million they are forecasting.
It claims that it can get $1.1 billion by closing some Labour programmes and clamping down on the bureaucracy.
Otherwise, it would get $602 million from the ETS fund. But the PREFU says forward income forecasts for the ETS assume that all units put up at each auction sell.
This year, two auctions have taken place when none sold.
“Currently, secondary market prices are close to the regulated auction reserve price for 2024, meaning there is also a risk that auctions in future years may not clear.” The PREFU said.
“Fewer units being sold than assumed in the forecasts would result in lower cash proceeds and higher net debt.”,
And there are potential cost blowouts, such as the cost of the cyclone recovery programmes.
“While current estimates of the cost and phasing of the Government’s response and recovery measures have been incorporated in the fiscal forecasts, there is considerable uncertainty around those estimates, and there is a risk that actual cost and phasing differ from those forecast,” the PREFU said.
Willis and Luxon were unwilling yesterday to answer questions about how the PREFU might change their funding of their proposed cuts and what level of operating allowance they would set, arguing that they had only seen the PREFU yesterday morning.
Luxon promised that details would be in their Fiscal Plan, which would be released before Advance Voting opened.
However, he was adamant he would not change or cancel the cuts.
“Absolutely not. When we announced our tax plan, we said it would be fully funded and that it would stand alone. It can do that because we’ve reprioritissed items,” Luxon said.
But his potential coalition partner ACT leader David Seymour was not so adamant. ACT MPs are planning next week to meet to prepare an Alternative Budget.
“We are going to have to make sure that we can put forward a responsible alternative plan, and that may involve changing the tax cuts we previously promoted,” he said.
“And it also means finding areas of wasteful spending that can be reduced. That’s the key here.”
But what was also clear was that Seymour was winding back his rhetoric about confronting National.
“Ultimately, we accept that we’ve got to work together and pass budgets and so on,” he said.
Both Seymour and Luxon confirmed that they had spoken within the past two days.
POLITIK has learned that there were also complaints about his hardline at the weekend from ACT members.
But it was obvious he was trying to bury the whole issue.
“What has actually happened in the last few days is that we acknowledged that we want to work together, and I think that’s very positive,” he said.
Maybe the whole election and the economic policies were all summed up at the Treasury briefing when Robertson abandoned his Finance Minister’s hat and spoke passionately as a Labour Minister.
“I know that people are tired and that people are worried and that people are anxious about what’s happened over recent times,” he said.
“And I recognisse that what that can sometimes people want is just things to be different.
“But a change of government doesn’t guarantee that.
“A change of government would actually mean that many of those people would be worse off because they wouldn’t be getting free prescriptions; they wouldn’t be getting 20 hours free early childhood education for their three-year-old; they wouldn’t be getting the investment that we’re making into skills or into infrastructure.
“And so just because somebody wants change doesn’t mean that the change being offered by the opposition is actually going to deliver them better outcomes.
“This has been a really tough period for households.
“We’ve supported people through that, be it Covid or be it the cost of spikes.
“And we’ve got a plan going forward to get us through the next challenge and get us through that period tomorrow.
“So, yep, I get it. I get that people will still be feeling it. But this(PREFU) actually does show a pathway to a turning of the corner and a better economic future continuing.”
And that was as close as you will get to a manifesto for Labour this election campaign.