Archive | Budget

Published 20 May 2011

Main points in the Budget Finance Minister Bill English delivered yesterday:

Net debt to stay below 30% of gdpReturn to surplus in 2015Government to resume NZ Super contribution 2016$5.5 billion Canterbury recovery fund$5.2 billion public operating savings identified$4 billion redirected to new social initiativesGovernment to reduce ownership in 4 SOEs & Air NZSell-off worth $5-7 billion – alternative was to borrow

Finance Minister Bill English said of his third Budget, in his executive summary: “Budget 2011 marks the next step in this government’s programme to tilt the economy towards exports, savings & investment and away from borrowing & consumption. It continues the responsible approach we took in the last 2 Budgets to build a platform for faster growth, more jobs & higher incomes.”

Mr English said the aim was to lift national savings by returning to surplus sooner, increasing private savings in KiwiSaver and providing quality investment opportunities for New Zealanders: “These measures reduce the need for government borrowing and support jobs & growth by reducing pressure on interest rates. They will also put the public finances in a stronger position to cope with future shocks.

“With growth forecast to reach 4% next year and the economy forecast to create 170,000 new jobs over the next 4 years, it is appropriate to accelerate the Government’s return to surplus. The Budget achieves this while continuing to protect the most vulnerable New Zealanders, increasing investment in health & education and establishing a $5.5 billion recovery fund to help pay for rebuilding Christchurch.

Despite the additional costs of the Canterbury earthquakes, he said net debt would remain below 30% of gross domestic product and the national books would return to surplus in 2014-15, one year earlier than previously projected.

Mr English said the Government would resume contributions to the NZ Superannuation Fund in 2016-17, 2 years earlier than expected.

“To achieve this we have focused on getting better value from public spending. Budget 2011 identifies operating savings of $5.2 billion over 5 years. These savings are drawn from across the board. They include efficiency savings expected of most government agencies. They also include changes to KiwiSaver, Working for Families and student loans to make them financially sustainable & better targeted.

“Almost $4 billion of these savings is redirected to new initiatives – with most of it tightly focused on frontline services in health & education. The remaining savings will reduce the deficit.

“Budget 2011 continues to make better use of Crown capital. It contains significant infrastructure investment, including in ultra-fast broadband & KiwiRail. The Government will look to extend the mixed ownership model to 4 state-owned energy companies and reduce its majority shareholding in Air New Zealand.

“The proceeds are likely to be $5-7 billion, which will fund about a third of the Crown’s investment in social infrastructure over 4 years. The alternative would have been to borrow the funds.”

Link: Budget 2011

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Attribution: Budget, story written by Bob Dey for the Bob Dey Property Report.

Published 21 May 2010

Finance Minister Bill English & Revenue Minister Peter Dunne said in the Budget that changes to the tax treatment of investment property would increase fairness and help rebalance the economy towards productive investment.

Property tax measures include:

denying depreciation deductions for buildings, such as rental housing & office buildings, with an estimated useful life of 50 years or more. This takes effect for all such buildings from the start of the 2011-12 income yearchanges to the tax rules for qualifying companies (QCs) & loss-attributing qualifying companies (LAQCs), taking effect from income years starting on or after 1 April 2011preventing property investors from using rental losses to inflate Working for Families eligibility & payments, from 1 April 2011funding over the next 4 years for Inland Revenue to target property speculators who have been avoiding paying tax on their trading gainscutting the top personal tax rate from 38% to 33%, reducing the value of losses higher-income earners can claim on property investments.

Mr English said: "These changes will make the tax system fairer by ensuring the treatment of property is consistent with other forms of investment. This will reduce the incentive for people to buy property purely for tax reasons and will help tilt the economy towards saving, productive investment & exports.

"Closing loopholes that allow well-off families to use investment losses to inflate their eligibility for Working for Families payments will remove another incentive to invest in property.

"These changes will generate at least $2.48 billion additional revenue over the next 4 years, which can be returned to all New Zealand taxpayers as part of our package of across-the-board tax cuts."

Mr English said Treasury estimated the impact on rents would be slight, with rents rising about 1.4% more than they otherwise would have over the next 3-5 years.

Mr Dunne said the new rules would enhance consistency across the tax system: "Ending depreciation tax breaks on buildings makes sense. On average, New Zealand buildings actually increase, rather than decrease, in value over time.

"Changes to LAQCs and QCs to make them flow-through entities for tax purposes will reduce the opportunities for tax structuring.

"An extra $26.6 million funding over 4 years will enable Inland Revenue to continue its successful programme of increased property transaction audits & compliance activity. This will ensure people who trade in property comply with the law and pay tax on their trading gains."

Links:

Budget 2010 Budget feature links Budget tax guide

Related story:

Budget aims for faster growth

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Attribution: Government release, story written by Bob Dey for the Bob Dey Property Report.

Published 21 May 2010

Finance Minister Bill English said yesterday his 2010 Budget focuses squarely on faster growth, helping families get ahead and setting a credible path for getting back to surplus sooner. But even on this plan, a surplus is a long way off.

He said it also delivered the biggest reform of the New Zealand tax system in 25 years – much of it targeting property investment.

"Across-the-board personal tax cuts and a package of other tax changes will help boost economic growth, make the tax rules fairer and help hard-working Kiwis get ahead under their own steam. This tax package will leave someone on the average wage about $15/week better off and an average family about $25/week better off."

He said the Budget built on New Zealand’s economic recovery and tilted the economy “so faster growth & new jobs come from the right places. For too long, New Zealand has relied on investment property speculation, rising debt and increases in Government spending we could not afford.

"This budget takes action that will encourage investment in the productive parts of the economy such as exporting, and it gives the vast bulk of New Zealanders extra cash in their pockets so they have more choices."

The Budget also continued the Government’s multi-billion dollar investment in infrastructure such as ultra-fast broadband, roads, rail, schools & prisons, and made a substantial investment in research, science & technology.

Mr English said the Budget steps would return the Government to surplus 3 years sooner than forecast last year: "A year ago, forecasts showed we faced 9 years of deficits. This budget forecasts we will return to surplus in 2016. That’s good progress, but we will continue to work hard to get back into surplus more quickly.

"We still expect to borrow an average $240 million/week every week until 2013, before this amount falls away as we move closer to budget surplus. It’s important we continue to make considered decisions now so we can grow the economy faster and avoid having to make harsh decisions later.

"We expect to run an operating deficit of $8.6 billion in the coming year, and further deficits are forecast until 2016, when we return to surplus. As a result, net debt is forecast to rise sharply from 14.1% of gdp in the current year to a peak of 27.4% of gdp in 2015, and then falling."

Tax reform, investing in engines of growth

Those decisions include:

Personal taxes will be cut across the board from 1 October, gst will rise to 15% and NZ Superannuation, Working for Families & benefit payments will all increase.

Companies will be taxed at a rate of 28%, down from 30%, from the start of their financial year in 2011.

Tax rules will be tightened for investment property “to make the system fairer and to encourage productive investment & exports”.

The Budget 2010 provides $321 million over 4 years for new initiatives in research, science & technology.

Links:

Budget 2010 Budget feature links Budget tax guide

Related story:

The property tax changes

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Attribution: Government release, story written by Bob Dey for the Bob Dey Property Report.

Published 29 May 2009

New Zealand Institute researcher Chye-Ching Huang said last night the Budget wouldn’t be enough to springboard New Zealand out of the recession.

“Going into this Budget, New Zealand was not just facing a possible ratings downgrade due to the spectre of a Government debt explosion. Even before being hit by the global economic crisis, New Zealand was chronically underperforming in growth: New Zealand’s growth trajectory has been backward relative to other countries and, in 2008, Australia’s gdp/head was over 40% higher than New Zealand’s.

“The NZ Institute therefore called for the Government to use the Budget to do 2 things: get the public debt under control and start to invest behind growth. But the Budget went only halfway: primarily announcing across-the-board cost-cutting without fundamentally altering its priorities to invest behind growth.

“The Budget focused on austerity measures, including the (welcome) indefinite postponement of individual income tax cuts, that would have done little either to promote growth or deliver relief to families facing the most hardship. Note, however, that the Budget claims considerable but questionable ‘cost savings’ by promising to reduce operating spend increases in future years, but without providing detail as to how those savings will be achieved. Overall, the Budget’s cost-control measures will likely be enough to avoid an immediate downgrade to New Zealand’s credit rating.

“But like just one chopstick without its mate, avoiding a ratings downgrade was necessary – & welcome – but insufficient. To fuel New Zealand’s economic growth and make it stronger coming out of the recession than before, the Budget also needed to take bold measures to address New Zealand’s poor growth performance.

“But disappointingly, the flagship new ‘investments’ announced in the Budget – such as more money for roads & prisons and the home insulation scheme – will do little to attract to New Zealand the mobile businesses & talent that will be seeking new engines of growth when the world economy starts to recover.

“Why is the lack of a real growth strategy in this Budget so disappointing? Why can’t the Government wait until after the recession to address New Zealand’s underlying growth problem? There are 4 key reasons:

1.      Perhaps most importantly, the global recession is a small window of opportunity: bold steps now to improve New Zealand’s lacklustre growth performance could be particularly effective. The recession is a disruption in the established growth paths of countries, and disruptions like this create opportunities for laggards.  It is vital that New Zealand takes advantage of the world economic crash by investing behind areas of growth & infrastructure, in order to come out of it ahead of other countries. New Zealand has just 2 years to make those investments in order to be a magnet for mobile talent & business opportunities when the world economy is expected to be in recovery in 2011

2.      Saying “’later’ to improving growth easily becomes ‘never’. 18 years ago, a New Zealand trade & development report called for urgent action to lift New Zealand’s gdp/head to 10th in the OECD by 2010, by growing exports & international engagement. With just one year left to meet that target, New Zealand is ranked 22nd and slipping backwards

3.      Crises are not a good reason to procrastinate on improving growth. There will always be crises.  And the longer New Zealand continues along a limp growth path, the more susceptible it will be to economic shocks and the more frequent those shocks will become

4.      Doing across-the-board public-sector cost-cutting in the absence of any long-term growth strategy could harm growth prospects. Costs must be contained but, without the Government providing & leading a long-term growth strategy, departments may cut investments that are essential to New Zealand’s future economic growth prospects instead of cutting costs that are not.

“It is still possible for the Government to drive a growth strategy without waiting until the next Budget.  There is scope to use existing Government resources more effectively to support key objectives, such as a more strategic approach to supporting the innovation & international engagement of New Zealand businesses. But these measures need to be signalled & implemented urgently, as the ability for New Zealand to use the global recession as a springboard to emerge stronger than before is quickly slipping away.”

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Attribution: NZ Institute release, story written by Bob Dey for the Bob Dey Property Report.

Australia superficially better, but Cullen says to look at detail

Australia’s Federal Treasurer, Peter Costello, dropped the rate of corporate tax from 33% to 30% this week, which naturally prompted corporates here to believe New Zealand’s government should do the same thing.

ASB Bank noted in its market report, however, that government revenue accounts for 37.7% of Australian gross domestic product while its spending accounts for 37%, having risen significantly in recent years. Should we follow?

The NZ Budget executive summary shows that gross debt is forecast to rise by about $5 billion to just over $40 billion over the forecast period to June 2005, but as a percentage of gdp it has fallen over the past three years, should be about 33% in the next year and should then hold around 30%.

In his pre-Budget media conference today, Mr Cullen was asked the “follow-them” question and acknowledged there would be disappointment that there isn’t a corporate tax-rate cut.

But, he added, “We probably had the biggest tax cut of any OECD country in 1988, from 48% to 33%, and I wouldn’t say our economic performance over the next 3-4 years was a shining example.”

He suggested advocates for a tax-rate change wait for the Taxation Review Committee to finish its deliberations, and see some more work done on the subject before calling for New Zealand to rush into a cut.

And Mr Cullen added: “They’ve also removed accelerated depreciation, which is probably a difference of 1-3c. Anybody thinking of moving to Australia on the basis of the headline tax rate would need to look at a bit of the detail.”

Other Budget stories:

“Enhancing transformation” theme for growth framework

Treasury’s home page, with links to all the Budget material

Treasury sees quick US recovery

Treasury estimates the economy has expanded by 2.3% in the March 2001 year and says gross domestic product growth in the next year should be 2.6%.

The forecast has been lowered since Treasury’s December update because of weaker world growth prospects. The consensus on trading partners’ growth has fallen from 3.7% last October to 2.4%, and Dr Cullen said prospects for Australia and the US had plummeted further than that basket..

However, the New Zealand Treasury’s view is that the US will work its way up again very quickly — by the end of the year.

Meanwhile, slower export volume and uncertainty over the world outlook should make New Zealand firms more cautious about employing more staff or undertaking new investment. That should make consumers more cautious too.

Despite the potential gloom, the Treasury outlook for New Zealand is generally positive.

It says near-term growth should be maintained by continuing moderate export growth and a reversal of the recent falls in residential investment and consumer spending — that’s the stimulation the interest-rate cuts have been aimed at.

Treasury says farm incomes should maintain their recent levels on the back of steady production levels and prices, and that wage growth should pick up to partially offset lower employment growth.

Treasury’s December update forecast that the official cash rate (OCR) should rise above 7% to offset rising inflationary pressures. Instead the OCR has been cut by 75 basis points this calendar year. “The OCR is expected to remain around current levels through to mid-2002.”

Employment levels should be unchanged for the next year, with modest growth when the economy strengthens.

Inflation should rise to the top of the Reserve Bank’s 0-3% target band this quarter, then track back to the middle of the band during the next year.

Treasury official Paul Rodway, addressing the Auckland lockup, said employment was around 5.6%, retail sales had picked up, and commodity prices had moved favourably for New Zealand exporters. “However, if you believe those consensus figures of world growth, things will slow down.”

Other Budget stories:

Treasury’s home page, with links to all the Budget material

Doing better with the big numbers

Even if the Budget’s not perfect, Finance Minister Michael Cullen wanted it to be seen as the work of mature people.

That’s extraordinary in itself. Mostly, in western government, the element of bribing the masses is paramount. Being seen as a prudent fiscal and economic manager would be way down the agenda.

But it’s not purely a matter of personal pride. Credit agencies see socialist governments as profligate spenders, which is likely to impact on your credit rating, so promoting a reputation for prudence has a bearing on the whole nation’s interest rate.

The 2000 Budget allowed $1.26 billion of new spending, this one allows $692 million and next year’s has provision for $815 million.

Benign mix of circumstances

Dr Cullen said the general outlook was for “a benign mix of circumstances — unemployment remaining low at around 5%, inflation under control and the current account deficit dropping steadily to 3.3% of gross domestic product by the end of March 2005.”

Like the creation of underlying inflation just when the inflation rate was moving beyond the set 2% border, the Government has created a new measure which Dr Cullen said was a more accurate guide to how well the Government was looking after the accounts.

This new measure is Oberac — the operating balance excluding revaluations and accounting changes.

The Treasury outlook shows surpluses rising from this year’s $641 million to $3.7 billion in the June 2005 year, but the picture is stronger under the Oberac measure, which shows a 2001 surplus of $1.7 billion, reflecting more tax revenue than expected and $140 million from sale of the spectrum licences.

Those factors were overwhelmed by a $1.1 billion increase in liabilities for the Accident Compensation Corp and Government Superannuation Fund. Oberac strips those revaluations out, on the grounds that they reflect technical assumptions rather than real money, and that they’re predominantly interest-rate driven so tend to balance out over time.

Under Oberac, forecast surpluses are $1.4 billion for 2002, $2.4 billion for 2003, $3 billion for 2004 and $3.7 billion for 2005. The surpluses are about $650 million lower on average than in Treasury’s December forecasts, reflecting lower projected tax revenue, mostly for the world economic slowdown and increased spending provisions.