It’s been since 2010 since tax brackets were last adjusted and how much CPI inflation has happened over the past 12 years compared to LCI wage cost inflation?
Tricky question but Statistics NZ data tells no lies and in June 2022 Stats said, “wage increases have typically exceeded consumer price increases over the past yen years”.
There’s been about three spikes in CPI inflation over the the past decade where temporarily CPI Inflation got a gap on LCI wage cost inflation for about a year – but sure enough CPI Inflation declined and things middled out back into that target zone ( between 1% and 3% ) while LCI wage costs dominated.
So what can we say about tax bracket creep if wages have mostly kept up with consumer prices?
I think that the argument for a tax bracket adjustment – which is an attempt to keep things constant is strongest when CPI inflation is outpacing wage cost inflation.
Well honest Bill English was all good about not adjusting tax brackets in 2013, 2014, 2015, 2016 but when he was the PM in 2017 in an election year – honest Bill decided to make an adjustment .
The 2017 Budget created by “honest” Bill English included a plan to increase the bottom three tax brackets but Bill’s cunning plan was reversed and reallocated to the families package by the Coalition Government.
Poor Honest Bill – Winston had foiled his plans and National set about being as obstructive as possible in Opposition because they were filthy sore losers.
Honest Bill wasn’t feeling it anymore and decided to cry off into oblivion – mentoring any possible future Ruth Richardson clones, which allowed “glorious loyder” Simon Bridges the opportunity to conduct a sausage roll limo tour that resulted in the biggest Jami Lee train wreck New Zealand had ever seen.
But Simon Bridges had a thick skin and although he had no fresh original ideas – he sure knew how to reheat crappy ones.
On 30 January 2019, Simon Bridges ( sly little bear ) reheated honest Bill’s tax bracket shift idea – and Bridges pledged to index tax thresholds to inflation to prevent wage and salary earners from being pushed into higher tax brackets by inflation.
Something a wage increase will do anyway.
Well Simon Bridges was the toast of the sleepy NZ media town at the time – standing ovations as the media praised this bold “new initiative” from National and mostly skipped over the way such a policy might work when CPI inflation is in decline after one of those spikes or wages cost inflation is beating CPI inflation.
National’s idea to deal with CPI Inflation spikes on the decline included getting Treasury to provide advice to the government in the year after each election and to include a veto clause so the government did not have to act in the “rare circumstances” that there was good reason not to.
That’s the background – then entered Christopher Luxon after the dark days of Jude the Ripper.
Luxon stepped out of the shade and announced on March 6 2022 :
“One of the hidden costs of inflation is bracket creep, where earners are paying more tax solely because of inflation. Someone on the average wage now has a marginal tax rate of 33 per cent. That’s not right.”
The 33% threshold is at $70,000 so Luxon is talking about those on $72,000 ( the 2021 average wage – not median wage ) and how a small part of earnings ( $2 K ) is taxed at 33%.
Then Luxon said …
“At the upcoming budget the Finance Minister should adjust the bottom three income thresholds to account for inflation we’ve seen in the last four years under Labour.”
There is something political and arbitrary about that selected four years “under Labour” when tax brackets have not been adjusted for twelve years.
During the past four years – wage inflation outpaced CPI inflation for three of them – and any adjustment should ideally be calculated using the “difference between wage inflation and price inflation ” over 12 years.
As we previously noted …”wage increases have typically exceeded consumer price increases over the past yen years”.
Despite these matters National proposed an increase in tax thresholds of 10.25% across the lower three brackets.
This meant someone earning $45,000 would save $2 a week.
Someone earning $55,000 would save $15 a week.
And someone earning $78,000 would save $18 a week.
A perverse outcome that gave the least to those who needed support the most and the most to those who required it the least.
There was no comparisons to the price of a block of cheese made by media – like media did when Labour proposed a $27 a week temporary payment.
Incredibly media objected to Labour’s solution being not enough – when it was thirteen times more than Nationals for someone on $45,000 during the peak of the inflationary spike.
National’s proposed changes would have cost $1.7 Billion from Budget 2022 but once these changes were made – there would be no adjusting the tax brackets back down again in subsequent Budgets as CPI inflation returned back down to between 1% and 3%.
Every year in the future – the missing $1.7 Billion would accrue meaning there was billions less to spend on public services, less for wage increases for nurses, doctors, police, teachers etc.
Programmes of work would have to be slashed. Perhaps these would be climate change action projects, reforming the health system so we got better outcomes for Maori and optimised workforces across regions, or just kicking the can down the road about long overdue water infrastructure reform?
The hidden future damage and aspects that made National’s proposal unfit for purpose were largely brushed off while nobody actually estimated that real gap between CPI inflation and LCI inflation since 2010.
It’s that accumulated gap over the past twelves years that should have been the basis for any real adjustment to tax brackets.
Generally the gap appears to be in favour of wage growth apart from spikes in CPI in 2008, 2011 and 2021/2022.
On August 2022, TVNZ 1 News reported :
“Average hourly earnings have increased by 6.4% Stats NZ said today. People working in manufacturing are the big winners, with average wage growth up 8.2% to over 35. Health care and social assistance was up 6.7% “
The average earnings increase of 6.4% is only 0.9% behind the June quarter CPI Inflation of 7.3%.
The small gap of only -0.9% represents how much on average kiwis are going backwards over the last year.
The 12 year figure is likely not even a negative gap.
Did this type of small gap of -0.9% between wages and prices – really justify a 10.25% tax bracket adjustment as proposed by National given all the downstream impacts for public services and the fact that the outcomes were completely arse about face?
Not likely – and suddenly the “shite hit the fan” yesterday when National stopped campaigning on this proposal, nearly three months after Budget 2022.
Ongoing communications from National about the proposal should have emphasised straight after Budget 2022 that this was just a proposal made for Budget 2022 – when inflation was on the rise in early 2022 and how it would permanently effect all Budgets for years to come.
But National did not communicate these facts at all after Budget 2022 and when they suddenly ditched the settings used ( 10.5% based on CPI inflation over the last four years under Labour ) it seemed like National were caught out – sneaking about – shifting the sales spin…hand in the cookie jar.
Unable to easily explain – National went into a scramble – and bought time yesterday morning from friends in the media as – they scrambled to deflect the facts about this blaming Labour for National’s bad communications and swore they would keep tax bracket shifts in future – perhaps even larger shifts than 10.5% – in case the polls were being impacted by their incompetence.
Labour poked fun at National’s stupidity and Chris Bishop looked like a demented outraged barn owl as he made pathetic childish noises which were pure deflection.
New Zealanders were not impressed with TVNZ 1 News for cobbling together a “they are all naughty boys” story instead of digging into some of the background I have detailed here.
Now inflation is said to be past its peak in New Zealand and National’s tax bracket shift proposal will look increasingly weak, unfit for purpose and like a really bad idea looking for a shallow grave to fall into.
The spike in inflation is temporary not permanent.
Proposing a permanent fix to a temporary problem is stupid.
Proposing a solution that was arse about face was stupid.
Yet National have mocked Labour’s right sized temporary solution for a temporary problem and mocked the much more effective support that $27 a week gives than $2 a week to those who need it more.
National’s position about this has now all changed and new positions arise and fall away with the rise and fall of CPI inflation.
The public are confused and bamboozled just like media as National Party clowns rush up and down making new – ever changing announcements in a polling period.
The parade of the Nat Clowns shows us all on some level that National’s previous proposal – was really like undertaking invasive permanent surgery that would leave us all crippled for life – when a bandaid over the temporary inflation wound would do just nicely thanks.
National bench their 10.25% tax bracket shift proposal.