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Budget 2017 Home Page Budget Economic and Fiscal Update 2017

Economic and fiscal impacts of the Family Incomes Package

The Family Incomes Package comprises changes to tax and transfer settings that aim to improve work incentives, improve incomes for those in financial hardship, and start to simplify the tax and transfer system.

From 1 April 2018, the Family Incomes Package:

  • provides a tax reduction by increasing the $14,000 income tax threshold to $22,000, and the $48,000 threshold to $52,000
  • discontinues the Independent Earner Tax Credit
  • aligns the Family Tax Credit rates for children under 16 with those for children aged 16 to 18, increases the abatement rate to 25% and reduces the abatement threshold to $35,000
  • increases the Accommodation Supplement maxima to reflect 2016 rents, while re-allocating locations into different Accommodation Supplement areas to reflect rental costs, and
  • increases the Accommodation Benefit maximum payment by up to $20 per week.

The tax changes are expected to support long-run economic performance. The package as a whole is expected to benefit around 1.3 million families in New Zealand by, on average, $26 per week,[2] and lift around 20,000 families above the threshold of severe housing stress.[3]

Overall, the Family Incomes Package is estimated to have a modest positive long-run impact on GDP. The labour supply impact of the tax threshold changes is expected to be positive. However, this is offset by reduced labour supply induced by increases to the Accommodation Supplement and Family Tax Credit. Overall, the labour supply impact of the Family Incomes Package is expected to be broadly neutral.

Economic impacts

The impact of the Family Incomes Package on the economy is primarily through the consumption channel. Households are assumed to spend the majority of the tax reduction, reflecting a mixture of spending versus saving behaviours across the income spectrum. With households assumed to respond gradually to the changes and with tighter monetary policy (see below), around 60% of the additional income is expected to be spent within the forecast period. Estimates of the impact on labour supply are broadly neutral, given offsetting factors from tax reductions and increased assistance payments. However, stronger aggregate demand has a positive impact on the demand side of the labour market, which increases employment growth and lowers the unemployment rate by around 0.1 percentage points.

The stimulatory nature of the Family Incomes Package is forecast to result in a modest increase in inflationary pressures over the later years of the forecast period which leads to monetary policy tightening earlier than otherwise. There are some offsets to economic growth from higher imports, as consumption of goods and services increases. Investment growth is also a little weaker due to higher interest rates. Overall, the Family Incomes Package results in a cumulative $3.0 billion increase in nominal GDP across the five years to June 2021.

Fiscal impacts

The package costs $6.5 billion in total over the next four years. The components of the package are set out in Table 1.2. Over the years from 2018/19 to 2020/21, the average annual cost of the Family Incomes Package is $2.0 billion.

The tax component of the package costs around $1.9 billion per year. This is partially offset by reduced expenditure on main benefits. While payments to beneficiaries are unaffected, the amount of tax payable reduces and total benefit expenditure declines. This offset is included as a consequential impact. Working for Families tax credits and accommodation subsidies comprise most of the remaining cost.

The other main consequential change to expenditure is an increase in New Zealand Superannuation. Payment rates are linked to the after-tax average wage, which rises as a result of the tax changes.

The largest offsetting consequential impact is the increase to tax revenues from the economic impact of the Family Incomes Package. The Family Incomes Package is expected to increase consumption, so GST revenues are higher than would have otherwise been the case. Similarly, business profits are expected to increase due to higher spending by households, increasing corporate tax revenues. The increased number of people in employment also increases PAYE tax revenues. Finally, higher interest rates increase RWT revenues.

Table 1.2 - Cost by component of Family Incomes Package
($millions) 2017/18 2018/19 2019/20 2020/21
Reduction in tax revenue including IETC 486 1,896 1,895 1,976
Working for Families 97 373 318 310
Accommodation Supplement 87.6 361.6 380.3 399.7
Accommodation Benefit 6.3 19.5 19.5 19.8
Transitional Fund 1.1 0.5 0.4 0.3
Consequential impacts (74.3) (575.2) (760.9) (693.7)
Operating balance impact 603.6 2,075.3 1,852.3 2,012.0

Notes

  • [2]These figures exclude families who earn any New Zealand Superannuation or families made up of independent students.
  • [3]The Ministry of Social Development defines severe housing stress as where equivalised after housing costs income is less than $180 per week (adjusted to September 2016 figures using CPI index).
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