Yesterday was Budget Day and, as expected, the Government offered up some shiny trinkets in the form of large increases to health spending and a modest package to address the cost of living squeeze. However, make no mistakes, yesterday’s budget was not the budget New Zealand needed. A big increase in spending in a highly inflationary environment is a head-scratching move. This Government refuses to acknowledge its part in inflation and instead continues to entirely blame inflation on issues and events abroad.
Reigning in inflation seems to have been abandoned as a goal by the Government but controlling inflation is at the very core of the Reserve Bank’s mandate. Therefore, if the Reserve Bank mandate is not changed, then the Reserve Bank will continue with large increases to interest rates and at some point, those rising interest rates will tip the country into recession. Of course, those rising interest costs are going to add to the squeeze on households too.
If New Zealanders feel they are being squeezed by rising prices now, they are in for one hell of a shock. Treasury are forecasting inflation to remain at a similar level through the rest of this year and into next year, before dropping to around 5% in 2024. Treasury’s own projections don’t have inflation returning to within Reserve Bank mandated acceptable levels until 2025. Inflation works like compounding interest, so by the end of this projected inflation cycle, prices will have risen about 25% compared to the middle of 2021. Wages are forecast to rise steeply too, but those forecasts seem very unlikely to come to fruition given the impact that significant interest increases will have on businesses and the economy.
Cost of living payments
The only specific tax announcement in the budget was a 2-month extension to the 25cent cut in fuel excise tax. However, there was a tax related announcement, the Cost of Living Payment. This is a payment to people aged over 18 who are earned less than $70,001 in the 1 April 2021 to 31 March 2022 tax year and are not eligible for the Winter Energy Payment.
The Cost of Living Payment is a whopping $350 which will be paid in 3 monthly instalments of $116.67 beginning 1 August 2022. The scheme will be administered by Inland Revenue.
IRD has already announced that they will make the payments automatically to those who are eligible. This of course relies on IRD having the taxpayer’s correct bank account details and IRD knowing their incomes.
At this stage, it is unclear how this will work in situations where a person has fluctuating income (other than salary and wages) and therefore have to file tax returns. Some taxpayers are not due to file their 31 March 2022 tax returns until 31 March 2023. We would assume that the Cost of Living Payment would be paid after the returns are filed. This is the kind of detail that IRD will need to work through in due course.
The Cost of Living Payments will be exempt from income tax.