A closer look at National's tax cuts Prime Minister Jacinda Ardern fears will stop investment in health, education

An extra $800 a year is how much the typical earner in New Zealand could save under National's proposed tax cuts. 

In his first major speech as National leader on Sunday, Christopher Luxon promised to raise income tax thresholds to help Kiwis deal with the "cost of living crisis". 

The way income tax currently works is, each dollar you earn up to $14,000 is taxed at 10.5 percent, and then each dollar you earn between $14,000 and $48,000 is taxed at 17.5 percent. These are known as 'tax brackets'. 

The next bracket is $48,000-$70,000, taxed at 30 percent. The next is $70,000-$180,000, taxed at 33 percent. Each dollar earned above $180,000 is taxed at 39 percent - the final bracket introduced by Labour after the 2020 election

National would lift almost all of the brackets by just over 11.5 percent, to match the 11.5 percent increase in the cost of living over the last four years. For example, the 10.5 percent tax rate would be applied to each dollar earned up to $15,600, instead of $14,000. The top tax bracket would be scrapped. 

The most typical salary in New Zealand is about $55,000, according to the Average Salary Survey. Those earning $55,000 would save about $800 a year if National's tax changes were applied. But someone earning $45,000 would only get about $112. 

A closer look at National's tax cuts Prime Minister Jacinda Ardern fears will stop investment in health, education
Photo credit: Supplied
A closer look at National's tax cuts Prime Minister Jacinda Ardern fears will stop investment in health, education
Photo credit: Supplied

"The tax savings from this initial inflation adjustment won't make anyone rich, but they will be very significant for many families," Luxon said. 

It's not the first time National has proposed income tax cuts. Under the leadership of Judith Collins, National proposed 16-month tax cuts that, for someone earning $50,000, would have saved them $893 over that period.

Collins' proposal came with a $4.7 billion price tag. Luxon's isn't as steep, with it estimated to cost $1.6 billion. But it's $1.6 billion Prime Minister Jacinda Ardern says the country cannot afford right now. 

"What the Opposition has proposed cuts billions of dollars out of our revenue as a Government and the ability to spend on things like health, on education," she told AM on Monday. 

"There are two choices: they are either going to fund these billions of dollars worth of cuts by for instance cutting health or education or they're going to increase debt. They did not tell us how."

However, a significant portion of the Government's $6 billion in new money for Budget 2022 is expected to pay for the half-a-billion-dollar health system restructure - Labour's plan to amalgamate the 20 District Health Boards into the new centralised agency, Health NZ.

National has argued it's an unnecessary expense during a pandemic. 

Luxon also took aim at the Government's multibillion-dollar Three Waters proposal to centralise responsibility for drinking water, wastewater and stormwater - a proposal he described as "deeply unpopular". 

"These changes would not put further pressure on inflation or require spending cuts in areas like health and education," Luxon said. 

"They would be met from [Finance Minister] Grant Robertson's record $6 billion new spending allowance, and so would simply require Labour to be slightly less profligate with its new spending in Budget 2022."

Robertson argued the health and water restructures were vital. 

"Just as the previous National Government failed to address housing or mental health, this time around they are not prepared to back the work Labour is doing on the much-needed reset of our health system or to ensure New Zealanders have safe drinking water and decent waste and stormwater systems."

Is Labour's spending wasteful?

There's no denying the cost of living is tight. The price of goods and services in New Zealand is up a record 5.9 percent - the biggest jump since a 7.6 percent increase in 1990. Wages, by comparison, rose just 3.8 percent.

Fruit and vegetable prices were 15 percent higher in January this year than they were in January 2021 while the national median rent climbed 6 percent in 12 months to reach a record-breaking $570.

The average weekly rental cost has risen 84.3 percent since June 2007, outstripping household disposable income, which increased 67.6 percent over the same period. 

National blames the Government's big COVID-19 spending. About $60 billion was borrowed to pay for the response, about $18 billion of which subsidised wages during the lockdowns. 

Economists agree that stimulus-spurred consumer buying is a reason for inflation. But it's not that simple. COVID-19 has disrupted supply chains across the globe, and when too much money is available to purchase too few goods and services, demand outstrips supply, forcing prices up. 

There's also international factors the Government cannot do much about, such as Russia's invasion of Ukraine. Russia is a major energy supplier, and with it now cut off from much of the world via sanctions, demand is likely to soar, forcing prices up. 

Kiwis are already feeling it at the pump, as unleaded tops $3 per litre. 

Luxon has promised to cut taxes introduced by Labour - such as Auckland's 10 cents per litre Regional Fuel Tax and the proposed local tax to help pay for the $14 billion Auckland light rail project. 

There are also calls for the Government to reduce excise duty, or the tax on petrol. In June 2018, the Government announced three annual increases of 3.5 cents per litre to petrol tax, with equivalent increases to road user charges. 

The Government is already raking in a hefty amount of tax. The latest update from Treasury shows tax intake was $1.4 billion above forecast at $59.7 billion.

But Ardern says tax intake is needed to keep things moving. 

"It maintains our roads and it builds our transport projects so if you were to remove excise, which every government has used, you basically remove your ability to maintain roads and build new roading projects," she told AM. 

"We committed to no longer increasing excise over the course of this term so we have not been. What people are experiencing at the pump is a result of a range of international factors that are beyond our control. 

"We do recognise it's a challenge in terms of the cost of living, which is why we're doing things like increasing the minimum wage and increasing the Family Tax Credit to try and ease that here and now."

Ardern denied the Government's spending has been wasteful. 

"We have some of the lowest unemployment currently in the OECD - some of the lowest New Zealand has seen," she told AM. 

"We've kept people in work. That has made a huge difference to help us navigate this one-in-100 year crisis. On top of that, we have some of the lowest debt in the OECD. So, even though we've been in this crisis, we've managed to keep New Zealand's debt as low as possible given the circumstances. 

"Yes, these times are tough, we have seen the impact of inflation. But we have also seen that people predict we will be coming out of that through the course of this year and that things will start to get better and ease."