Bracket Creep: NZers Feeling Pinch as Tax Rates Rise

New Zealanders are feeling the pinch due to 'bracket creep', a phenomenon where rising incomes push people into higher tax rates, even if the increases are just keeping pace with inflation. This is according to Treasury's Pre-election Economic and Fiscal Update (PREFU) to be released on Tuesday.

Finance Minister Nicola Willis has expressed her desire to adjust tax brackets once the government's books are in better shape. National's spokesperson said she would have more to say about their tax plans after PREFU.

Tax expert Terry Baucher believes there should be regular threshold adjustments, citing that the current system is not transparent and leads to unintended consequences. He pointed out that countries like America and Britain adjust their tax thresholds for inflation every year or require an amendment if they are not increasing it by the rate of inflation.

Chief economist at Westpac Kelly Eckhold agreed that tackling fiscal drag would be desirable, but noted that the adjustment in tax brackets a couple of years ago was estimated to have reduced only a third of the accumulated bracket creep up to that point. Deloitte tax partner Robyn Walker highlighted that other parties, such as the Greens and New Zealand First, are also proposing personal tax rate and threshold changes.

However, principal economist at Infometrics Brad Olsen cautioned against moving tax brackets until the government can get out of deficit. He argued that reducing fiscal drag would add up to a lot in terms of the fiscal position and would mean future generations would have to pay more debt, which is not a reasonable position for any government to think about.