By Frank Newman on 21st May 2018
A strong and growing economy is the real story behind the Coalition Government’s 2018 Budget. This is very evident from the Time Series of Fiscal and Economic Indicators which projects Gross Domestic Product (GDP) to grow $17 billion in the year ended 30 June 2018, from $274 billion to $291 billion. About 30% of GDP ends up in government coffers in the form of tax, so a $17 billion increase in GDP yields the government about $5 billion in additional spending money.
It’s a pretty simple equation: Stronger economy, more tax revenue, more to spend – that’s what underpins Budget 2018.
In the four years to June 2021,Treasury is projecting GDP growth an average $35 billion more than National had projected in last year’s budget. It’s the additional tax revenue from the GDP growth that Labour is able to splash around, without having to increase the benchmark spending and debt levels when expressed as a percentage of GDP.
The main spending areas are:
- Health $18.1 (last year $17.1b) – 22% of all government spending
- Education $14.1 ($14b) – 18%
- NZ Super $14.5b ($13.7b) – 17%
- Welfare $14.4 ($12.7b) – 17%
- Core govt services $5b ($4.8b) – 6%
- Law and order $4.4 ($4.1b) – 5%
Crown revenue for the 2019 year is projected to be $86 billion. The main sources are:
- Individual income tax $32.7b (32%)
- GST $20b (19%)
- Company tax $14.5b (14%)
- Other indirect tax $7b (7%)
Of the $32.7 billion collected in income tax:
- The 19% of taxpayers earning over $70k pay 64% of all income tax.
- The 11% of taxpayers earning over $90k pay 49% of the income tax.
- The 3% of taxpayers earning more than $150k pay 25% of all income tax. They pay 8 times the proportionate share that they would pay if the tax rate was flat.
The health sector gets the major share of new spending with $2.9 billion of new money over five years. $2.2 billion of that will go to District Health Boards.
To address the housing crisis, the Government will build 6,400 new state houses over the next four years at a cost of $4 billion, of which $2.9 billion will be funded by Housing NZ borrowing from the private sector. Other initiatives include:
- $69m to build 200 new emergency homes within the next year. A further $101m has been allocated over four years.
- The homeowners’ insulation grants scheme gets a $142m boost over the next four years to help lower-income owner-occupied households insulate their homes. Landlords do not qualify and to make matters worse, the Warm Up New Zealand scheme which applied to rental properties ends 30 June 2018.
One of the larger ticket items was a billion dollars allocated to a research and development tax incentives. Treasury says, “This will provide a stable mechanism to incentivise increased business expenditure on R&D. This funding also provides for implementation and will cover the costs associated with the implementation of the tax credit.”
Other business and tax initiatives include:
- $784m to be collected from businesses via the Emissions Trading in the 2019 year.
- Over the next five years an additional $26.5m has been allocated to the IRD for tax audits, which are expected to yield $183m in additional tax revenue.
- $80m a year is expected from the collection of GST on low value goods bought from overseas.
- The ring fencing of losses on rental properties is expected to cost landlords approx $150m a year, following its introduction 1 April 2019.
Farming is a big loser. Agriculture has had net funding of $102m removed from the Budget over the next five years. $68m has been taken away from rural irrigation schemes, and $80m from funding for the Primary Growth Partnership, which was a joint venture between government and industry set up to invest in long-term innovation programmes to increase the market success of the primary industries.
On the economic front, Treasury expects national house prices to rise 7% in the year ended June 2018, then decline to annual rates of 2.8%, 2%, 3.4%, and 3.7% in four years to 2022. They estimate net migration to fall from 68,000 in the year to March 2018 to 25,000 in 2022.
While the economic forecasts are positive, the prospects for property investors two or three years out are less rosy. They show a slow down in property values, higher interest rates, and lower immigration numbers.