The Government had to walk a knife edge in the preparation of this year’s Budget - demonstrating a credible path back to Budget surpluses to keep the ratings agencies at bay while not sinking the National Party’s chances of re-election.
The Budget will probably deliver on both these objectives. But there is little to lift New Zealand’s long-run economic performance or to stimulate economic innovation.
We will put out a separate Brief Counsel on the KiwiSaver changes later.
The Budget numbers
As signalled, the Crown’s balance sheet is forecast to come back into surplus by 2014-15, a year earlier than forecast in the Half Year Economic and Fiscal Update.
The Crown’s borrowing requirements are projected to fall by more than two thirds next year, to around $100 million.
This will allow net debt to remain (just) below the magical 30% of GDP over the forecast period, peaking at 29.6% of GDP in 2014-15. This should be enough to keep the ratings agencies happy – a key budget objective.
New spending in Budget 2011 amounts to almost $4 billion over the next five years, most of it in health and education. These costs will be more than off-set by savings of $5.2 billion over the same period. The savings have been culled primarily from the changes to KiwiSaver, and from forced economies in the public sector.
Total expenditure (including New Zealand Superannuation, welfare payments etc) is, however, projected to rise by $4.3 billion over the next four years – from $72.8 billion in 2011 to $77.1 billion in 2015.
Budgets in subsequent years are also projected to be tough. The new spending allowance has been cut back to just $800 million in 2013, 2014 and 2015 (compared with allowances of around $2 billion a year under Labour.)
These projections depend on the Treasury’s growth forecasts being realised. The Budget growth track, although reasonably bullish – 2.5%, 4%, 2.7% and 2.8% - is not out of line with market expectations.
An electable Budget?
Probably. The indications are that the public understands the need for austerity, and the Government has wisely held off most of the negatives until after the election (although public servants will feel the chill winds almost immediately, discussed below).
- The ‘cuts’ to Working for Families (WfF) will be phased in over four years from 1 April 2012 to 1 April 2018.
- The halving of the maximum KiwiSaver member tax credit will not be felt until after July 2012 and the tax free status of employer contributions will not be removed until 1 April 2012.
- The changes to the student loans scheme were well-telegraphed in advance and most will not take effect until next year.
But although most of the pain has been deferred, it will eventually be felt. The extent to which it burns into National’s support at that time will in large part depend on whether the private sector job and wage growth anticipated in the budget (170,000 net new jobs by 2015 and wage increases above the rate of inflation) are realised.
The public sector - the Budget whipping boy
Most of the ‘hit’ from the Budget will be absorbed by the public sector, which has been tasked with achieving $980 million in efficiency savings over the three years from 1 July 2012:
- $650 million of this will come from State sector employers funding the costs of their employer contributions for KiwiSaver and some of the State sector retirement schemes from their own budgets (currently these are centrally funded), and
- $330 million in ‘back office’ savings from 31 core government agencies.
The asset sales/acquisition programme
First on the block for partial privatisation are:
- Mighty River Power
- Solid Energy, and
- a slice of the Government’s shareholding in Air New Zealand.
The preferred sales method will be through share issues to the public. No decision has taken on how much of each company will be sold or when, but the Government will maintain at least a 51% stake in all of these assets.
The sales will be conducted through a three to five year programme from 2012 and is expected to free up capital of $5 billion to $7 billion. This money will be redirected toward investment in “social infrastructure” – schools, hospitals, broadband.
Not a big Budget for tax
After the major tax changes announced in last year’s Budget, the 2011 Budget is predictably light on tax. None of the tax measures suggested by the Savings Working Group for encouraging savings has been taken up. The Government has preferred to make savings on its own balance sheet, rather than trust the private sector to do so. Furthermore, the increase in the WfF abatement rate from 20 to 25 cents in the dollar is contrary to the view of both the Savings and the Tax Working Group, that high effective marginal tax rates are damaging to income growth.
What has been done in the tax area has the look of a Government searching behind the sofa for any loose change for the bus.
The two definite tax changes that have been announced are:
- removal of the tax exemption for employer contributions to KiwiSaver
- an increase in the amount of capital (as measured for tax purposes) which foreign-owned banks are required to hold, from 4% to 6% of their risk-weighted assets. The Government expects this to raise around $31 million per year. In the context of annual bank tax payments of well over $1 billion, this is a relatively modest amount.
The Government has used the Budget as an opportunity to announce targeted reviews of three tax issues:
- treatment of certain employee benefits, for social assistance targeting and for income tax purposes
- tax treatment of mixed use assets, such as holiday homes which are available for rent, or yachts used for both private and business purposes. This review has the potential to affect a large number of more affluent taxpayers, and
- manipulation of livestock valuation elections.
The first and third of these areas have been under consideration for some time. The second is an area of perennial practical concern, but sensible and acceptable changes to the legal status quo may be difficult even to frame, let alone implement.
Little to promote New Zealand’s economic performance
In his speech to Parliament today, the Finance Minister stated that the Budget will “strengthen the long-term performance of the economy”. And short term growth forecasts are certainly healthy. But, as the Budget itself acknowledges, the drivers of this growth are factors beyond our control - continued growth in our key trading partner economies, high export commodity prices, the receding effects of the global financial crisis and the stimulus from the Canterbury reconstruction.
When it comes to influencing our own destiny, there is little in this Budget that is new and which is directed at lifting our long-term economic performance, and in particular exports.
Instead, the focus is on reducing the risks in the national accounts and on cutting back the size of the state. These contributions should reduce the pressure on interest rates and the exchange rate and, the Government hopes, reallocate resources to and stimulate activity in the private sector.
But there is no new thinking on how we will tackle some of our longer term challenges, such as the long talked about evolution of our primary sector away from commodities to value-added products, or our aging population and the cost of superannuation.
The major items of infrastructure spending highlighted in the Budget are all a continuation of existing commitments, such as ultrafast broadband, KiwiRail and roads (or increases in “social infrastructure” in health, education, prisons and student loans).
Notably, there is nothing new for “science, innovation and trade”, despite this being one of the six elements of the Government’s “long term economic growth agenda”. Instead $30 million in savings is being sought from the Ministry for Foreign Affairs and Trade, and funding has been shuffled around existing budgets for science and innovation.
In the financial circumstances we find ourselves in, the short term focus is understandable. But the longer term issues are not going away. For the healthy growth forecasts to continue, the Government is counting on the private sector to step up to the plate with export earnings. And quickly.