By Frank Newman on 18th May 2014
For the first time in six years the government’s books are forecast to return to surplus (albeit by a thin margin).
The main policy changes are:
- Returning the books to black, with $372 million surplus.
- Welfare spending is $1b lower than was forecast in 2010. The government says, “The welfare bill is going down and going down faster than we expected. That’s why we’ve got a surplus – because of policy change and a little bit because of faster economic growth but not much.”
- The average annual wage is expected to rise by $7600 to $62,300 by 2018.
- Business research and development is getting a boost in tax breaks worth $57m over the next four years, but they were highly targeted.
- The auto-enrolment for KiwiSaver has been delayed until the government is “confident that such a step poses no significant risk to an operating surplus and the debt track”.
- Reduced ACC levies, including a likely $130 per year drop on private cars from July 2015.
- The immediate removal of duties and tariffs on about 90 per cent of the materials used for residential buildings, reducing the cost of building a new home by about $3500.
- Cheque duty to be abolished from 1 July.
- An additional $132 million over the next five years will be added to fund further ‘tax compliance, chase up unfiled returns and write down the additional tax identified that is unlikely to be collected’. Of this, $48.6 million is cash for Inland Revenue to undertake these activities…This funding is expected to generate a gross increase in Crown revenue of almost $300 million over five years.’ Business owners beware – the IRD will have more compliance officers investigating compliance issues.
- Compared to the December quarter of 2013, Budget forecasts show an additional 170,000 people in work by mid-2018, and the unemployment rate is expected to fall to 4.4 per cent.
- The average full-time wage is forecast to rise to almost $62,300 by mid-2018, which would be $7,600 more than it was in December 2013.
- A $375 million interest free loan to the New Zealand Transport Agency to kick-start $815 million of Auckland Transport projects.
- $83m over four years for tuition subsidies in science, agriculture and health sciences.
- $69m more over four years for New Zealand Trade and Enterprise.
- $20m over two years for 6000 extra places for apprentices.
- $53m over four years to set up another three centres of research.
- Extension of paid parental leave to 18 weeks, from April 2016 and an increase in the parental tax credit to $220 a week, plus an increase in entitlement to 10 weeks, from April 2015.
- $90m for free GP visits and prescriptions for under-13s, from 1 July 2015.
- $858m of new money for education and $199m investment in tertiary education.
- $1.8b extra health funding over four years.
- $100m to get more people off benefits and into work.
A key objective is to reduce net core Crown debt to 20%of GDP (Gross Domestic Product) by 2020. (GDP is the value of all goods and services produced in New Zealand.) Beyond 2020, the Government intends to maintain net debt within a range of around 10% to 20% of GDP, which will provide a buffer from economic shocks or natural disasters like the Christchurch earthquakes. By way of comparison Australia has debt of 23% this year, rising to 25% over the next two years before reducing.
The second key objective is to reduce government spending to less than 30% of GDP (against spending of around 35% just a few years ago). Based on Budget forecasts government spending is expected to drop to around 28% within the next few years.
Future surpluses will see ‘modest’ increases in government spending, debt repayment, and tax cuts.
NZ vs Australia
Our recovery budget is in contrast to the Australian budget delivered just two days earlier.
To return to surplus by 2019 the Australian government is planning to cut government spending by $36 billion over four years, and stimulate activity by lowering the company tax rate. The main changes are:
- Higher education funding will be cut by 20%. Graduates will be required to pay back their student loans sooner and the interest rate will rise.
- Foreign aid will be cut.
- Petrol tax will increase by 4 cents.
- High income earners (+$180k) will pay a 2% surcharge ‘budget repair levy’.
- The health budget will be cut by $10b.
- Welfare benefits will be frozen.
- The age at which people can claim superannuation will progressively rise from 65 to 70 and the eligibility test will become tougher.
- 16,500 jobs will go in the public service.
- The company tax rate will be cut by 1.5% to 28.5% (28% in NZ). However big businesses will be required to pay a 1.5% levy to fund the government’s paid parental leave scheme.
- The unemployment rate is expected to rise to 6.25% (in New Zealand it is expected to 4.4%).
Immigration effects and housing
The bottom line is New Zealand has come out of its adjustment cycle, while Australia has just entered it. The turnaround is likely to have a significant impact on immigration and therefore demand for housing. Fewer New Zealanders are now leaving for Australia and more New Zealanders are returning home and that pattern is likely to last five years.
The NZ Treasury is forecasting positive migration flows into New Zealand of 38,000 in the year ahead (up from 32,000 currently) and that may be as high as 42,000. Assuming two people per residence, that represents an additional 20,000 new homes. It’s going to take the building industry some time to build enough homes to meet the currently shortfall in housing, let alone cope with increased demand.