Budget 2023 increases spending and borrowing but provides no tax relief
19 May 2023
Budget 2023 announced increased spending and borrowing compared to that expected six months ago. There are measures to address the cost-of-living crisis, cyclone recovery, infrastructure improvement, climate change, and investment in science and technology, but no tax relief. In fact, the Budget includes a tax increase for some taxpayers.
Cost of living support
To assist households to cope with the increasing cost of living, the Government announced several measures. These include:
Dropping the eligibility age for the 20 hours free early childhood education scheme from three years old to two years and older.
Removing the $5 prescription co-payment fee to make obtaining medication cheaper.
Making public transport free for those under 13 years of age and half price fares for those under 25.
Expanding the Warmer Kiwi Homes Programme to help kiwis insulate their homes and reduce their energy bills.
The Government had previously announced $889 million in funding to assist with recovery from the effects of Cyclone Gabrielle. The Budget provides an additional $1 billion for reinstating roads, railways, and buildings; providing support to affected communities and businesses; and for future flood resilience measures.
A total of $77 billion has been set aside for what the Government has called ‘Building for Tomorrow’. This includes $71 billion over the next five years for new and existing infrastructure investment which is in addition to funding already budgeted for projects in the planning stage.
The remaining $6 billion is for the National Resilience Plan which will initially focus on restoring infrastructure damaged by recent adverse weather events.
About $550 million is earmarked for policies intended to address climate change. These include:
Funding for electric vehicle charging infrastructure.
Accelerating private investment in lower emissions technology.
Improving data on the impacts of climate change.
Supporting communities with energy resilience.
Science and technology
A key announcement in science and technology is the introduction of a 20% rebate on every dollar spent for video game developers. This is a response to similar schemes on offer in Australia and the perceived threat the Australian schemes pose to the growing New Zealand gaming industry.
There is also $400 million to create three multi-institution scientific research hubs, and funding to address skill shortages in the tech sector, improve use of technology in the horticulture sector, and provide better career opportunities and working conditions in the tourism and hospitality sectors.
There was nothing in the Budget to provide tax relief for New Zealanders and in fact the Government did the opposite by increasing the trustee tax rate (currently 33%) to align it with the top personal tax rate of 39% from 1 April 2024. This is expected to raise around $350 million of additional revenue each year.
The Government also signalled that it is looking at measures to ensure that multi-national corporations are paying their fair share of tax and that it is prepared to act unilaterally on the issue if multi-national efforts co-ordinated by the OECD do not progress.
Finally, the Government intends to introduce a Tax Principles Bill to legislate a reporting framework that will require Inland Revenue to provide data and assess the performance of the tax system against a set of high-level principles.
The current budget deficit is forecast to be $1.8 billion, and the Budget is forecast to remain in deficit until a modest forecasted surplus of $0.1 billion in 2026. This represents a deterioration from last year’s Budget in which a return to surplus was forecast to occur in 2024. Economic growth is expected to drop to 1% in 2024, before recovering to 2.1% in 2025. In last year’s Budget, growth in 2025 had been forecast to be 2.5%, so again there is a deterioration from what was expected a year ago.
On the positive side, inflation is considered to have peaked and is forecast to be on a downward trajectory, although remaining high for the next few years. Inflation is projected to be 6.2% for the current year and gradually decline to reach 2.1% by 2027. However, the decline in inflation is forecast to be accompanied by increasing unemployment with unemployment forecast to increase from its current level of 3.7% to peak at 5.3% in 2025 before declining to below 5% in 2026 or 2027.
The Government is forecasting tax revenue to increase from $115.3 billion to $147.5 billion in 2027. However, Government expenditure is forecast to increase faster than tax revenue increasing from $128.2 billion to $152.8 billion in 2027. As a result, Crown debt is forecast to continue increasing from its current level of $71 billion to more than $91 billion in 2024.
Overall, Treasury considers that the increased economic activity that will result from the flooding and cyclone events that affected the upper North Island at the start of the year, along with a rebound in tourism, will mean New Zealand will avoid a recession.