Budget 2012 reactions: What people think about Budget 2012, Treasury's projections, policy changes

Economists, accountants and politicians react to Budget 2012:

Ernst and Young's Jo Doolan:

Budget 2012 is premised on New Zealander’s stumping up with a lot more tax without any clear growth agenda. 

Yes there is some investment in areas such as infrastructure, skills, innovation, and research, that aims to demonstrate confidence and help grow the economy.  The burning question is what sort of growth platform the Government is creating beyond a hope-and-see strategy. 

As Finance Minister Bill English said; “Sustainable jobs are created only when businesses have the confidence to invest and grow, and make the decision to employ people.” 

We are so over the excuses of the global financial crisis, the Canterbury earthquakes and the ongoing financial insecurity. These are realities we live with. 

The Budget projections are very dependent on an increased tax take and this simply will not happen without growth. 

One growth tactic might be to stop anyone earning more than $70,000 from joining the 1000 New Zealanders a month who leave for Australia every month. 

Even with the drop in the top personal tax rate from 39% to 33%, the 13% of individual taxpayers earning more than $70,000 a year pay 51% of the individual taxes.   

For the 2012/13 tax year, this group is expected to increase to 15% and will contribute 54% of the individual taxes or an increase of $1.2 billion a year. 

The percentage of tax paid by the higher income earners would be even more dramatic if the income redistribution figures for social assistance like working for families was netted off the personal tax take from the lower income earners.   During the 2012 $2.111 billion is forecasted to be redistributed as working for families tax credits, even with the measures to tighten up those who qualify the figures for 2013 will still be $2.113 billion. 

While it would be sensible to ensure these taxpayers are treated as cherished citizens, the pre-Budget announcements once again saw them targeted as villains who rort the tax system. 

Mooted changes, described pre-Budget by Finance Minister Bill English as patching some holes to stop high income earners using entities that lower their tax, did not eventuate in the Budget detail.   

In fact the Minister clearly stated the tax figures forecast in the Budget are based only on already-announced measures, as the IRD’s systems cannot cope with any major tax changes for the next few years.   

This is not necessarily good news. It may mean Inland Revenue will continue with its heavy-handed approach of using the anti-avoidance rules to override any perceived or real use of the existing tax legislation to save tax.   

The changes to mixed use assets are expected to see those using their holiday home tax losses to offset against their taxes paying more tax.  Despite this the projections show the tax saved from these measures will only bring in $109 million over the next four years. 

Removing the three tax credits, for those earning under $9,880, the childcare and housekeeper tax credit and the tax credit for young children is also only expected to save $117 million over the next four years. 

Farmers who have proved to the heart of New Zealand are not exempt from the tax attack; the changes to the livestock valuation rules to prevent them changing the way they value their livestock will save $184 million over four years. 

Winston Churchill once said a company trying to tax itself into prosperity was like someone standing in a bucket of water and trying to lift themselves up by the handle. The tax measures adopted to make the tax system fairer can be likened to the Government trying to squeeze the last of the toothpaste from a dangerously empty tube. 

Once again we see the Inland Revenue getting more money to target taxpayers, a change of focus to provide positive rewards for compliant taxpayers would have been a positive message however this was lacking and we still have the veiled threats to enforce voluntary compliance. 

Corporate taxes are also expected to increase by just over $1 billion and GST by another $200m over the next year.   Individuals contribute $25.9b in tax, Corporates pay $9b and GST contributes $15.7b.   

The reduced spending is clearly hitting the GST take and despite the fact GST has gone up to 15% GST the GST take has not increased by a corresponding 2.5%. 

What is sobering is without an increase in exports, leading to increased growth and increased wages we will continue to struggle and the next year will simply see us listening to reasons why we have not achieved what the Government hoped we would.  Despite this the focus on helping our exporters is sadly lacking.   

Our existing tax system now provides tax incentives for those who set up active businesses offshore.  This group are able to earn income offshore without paying any New Zealand tax and to bring this income back into their New Zealand company tax free.  Meanwhile those who export directly from New Zealand and create New Zealand employment are rewarded by having to pay the full amount of corporate tax in New Zealand. 

The expected increase in excise taxes on tobacco at 10% is high and is as we all know designed to stop people smoking.  Despite this the revenue contribution from excise taxes is critically important to the Government’s coffers. 

The drop in ACC levies that leaves an extra $600 million in the pockets of New Zealanders and around $250 million in the pockets of businesses is a welcomed boast much more is needed to create that level of confidence to translate this into businesses adopting growth strategies that enable them to increase wages and employ additional staff. 

Westpac's Dominick Stephens and Michael Gordon:

This is a slightly more generous Budget than we had assumed, choosing to accommodate the softer outlook by running larger deficits and just scraping into surplus by the goal of 2014/15. In particular, the 'zero' aspect of the Budget was contained to this year's policy initiatives, with allowances for new spending in future Budgets left untouched. On its own, this is an upside risk to our GDP forecasts. However, we feel that the economic forecasts underpinning the Budget are on the optimistic side, and with almost no room for error on the 2014/15 surplus, there is a very high risk of slippage and more belt-tightening measures in the near future.

Overview 
The 2012 Budget stuck more literally to the 'zero Budget' concept than it did last year, with $4.4bn of new spending over the next four years offset by $3bn of cost savings and $1.4bn of new sources of revenue. Aside from shuffling around of the timing of some spending, the overall profile of the operating balance is lower than in the Pre-Election Economic and Fiscal Update (PREFU) in October, and the first projected surplus – in the 2014/15 year, as promised – is just $197m or 0.1% of GDP. 

The deficit for the current year was revised down to $8.4bn, from $10.8bn in the PREFU. This is mostly due to delayed spending - including over $1bn of earthquake-related spending that is yet to be allocated - which has been shunted into next year (where the projected deficit has increased from $4.4bn to $7.9bn). Accordingly, the contractionary effect on the economy has been softened a little, and the transition from this year to next has been smoothed out. 

The new spending initiatives are weighted towards health (an extra $1.5bn over four years) and education ($512m). An extra $334m on social development, including increased welfare spending to support people into work, is expected to translate into $1bn of savings over the next four years. 

The other key savings are to come from tertiary education ($517m from faster student loan repayments and tightening acess to student allowances) and education (including savings from larger class sizes). The bulk of the new revenue comes from further large hikes in tobacco excise ($528m) and pursuing greater tax compliance ($424m). 

Notably, the allowance for new spending plans in future Budgets was left untouched, with room for $800m per year of new spending in the 2013 Budget and $1.2bn per year in the 2014 and 2015 Budgets. We thought this was one area that could be sacrificed (and has been in past Budgets) in order to get back into surplus. As a result, the overall fiscal position is less contractionary than we were bracing for. 

The economic forecasts underpinning the fiscal accounts are similar to ours on the face of it, with GDP growth of 2.6% in the March 2013 year and 3.4% in March 2014. However, they are significantly more upbeat than us on domestic demand (partly offset by a larger import component). A swift pickup in inflation (2.6% in March 2013) gives an additional up-front boost to nominal GDP forecasts, which in turn helps the tax take over the forecast horizon. 

We view these economic assumptions as on the high side (see below). The Budget document includes two alternate scenarios, with the downside impact more severe than the upside one - which seems appropriate - but the implication is that the two are equally likely. With almost no room for error on the 2014/15 surplus, we think there's a high risk that further belt-tightening measures will need to be considered before long. 

The bond programme was increased by $1.5bn for this year and next year, but Treasury bills outstanding will be run down by $4bn over next year. The bond programme was reduced by $2bn for 2016. 

Market implications 
No substantial surprises for financial markets.  Our impression was that the slightly looser than expected Budget could be mildly market-positive, although the response to date has been a slightly softer NZ dollar and no change in interest rates. 

The changes to the bond programme should be slightly positive for bond yields. While the government's total borrowing requirement was reduced, the shift towards more long-term borrowing may require a higher risk premium to attract investors. 

We suspect that the Budget was also less contractionary than the RBNZ was anticipating. That said, there are substantial downside risks to the economic outlook - and as the Finance Minister said, the burden will be on the RBNZ to provide stimulus if the economic situation deteriorates. 

PriceWaterhouseCoopers:

The forecast turnaround in the state of the nation’s accounts is highly dependent on bullish growth forecasts between now and 2016 say PwC. The other major contributor is rigorous control over crown spending.

“We are surprised at the 29% increase in tax and GST forecast over the next four years” say PwC Chairman Mr John Shewan. “This is highly dependent on growth projections averaging 3% over this period.”

Clearly, the Christchurch rebuild will have a significant impact on growth. It is sobering to note though that New Zealand has not managed average annual growth rates at these levels since the early 2000s, when the domestic and global economic climates were radically different.

“The tax changes to limit the extent of deductions allowable against income from renting holiday homes does not go as far as expected,” says Mr Shewan. “It would have been reasonable to limit deductions to the actual days a property is rented but the Government has chosen not to go this far.”

The Budget reflects impressive constraint on Government spending over the next four years. This constraint is in both core spending on departments and on transfer payments such as unemployment and domestic purpose benefits.

The stand-out exception to the constraint framework is superannuation. Superannuation payments are forecast to increase by 29% over the next four years relative to an increase of just 1% in other areas.

“The forecast hike in superannuation costs demonstrates the impact of the aging population,” adds Mr Shewan. “This is an elephant that will have to be addressed if we are to avoid inevitable hikes in taxes in the next few years.”

Labour Party leader David Shearer:

National has delivered a Budget that will have more New Zealanders heading for airport departure lounges as they look for opportunities and a brighter future offshore, says Labour Leader David Shearer.

“This truly is a zero Budget. It has zero growth and zero aspiration for New Zealanders. It offers zero hope that it will grow our economy now or in the years ahead. It fails to make the tough choices.

“John Key and Bill English claim this Budget is about giving Kiwis ‘confidence in uncertain times’. That’s just a slogan from a couple of confidence tricksters who keep making promises that they don’t deliver on.

“National keeps promising growth without doing anything to encourage it – the political equivalent of putting a seed on a windowsill and wishing it into a forest. Last year, they promised 4% growth. Today they’ve cut it to 2.6%.

“They’ve promised year after year that there will be more jobs. Last year, the figure was 170,000 more over four years. Now it’s 16,000 fewer than that.

“Just two days ago, John Key promised that exports were rising under National. Today, new figures show exports in fact fell $799 million or 17% compared to April last year.

“National promised a brighter future. They keep saying the good times are just around the corner. But they never arrive. 

“What we’ve got instead is the worst growth in 50 years, more than 50,000 Kiwis fleeing to Australia and a 50% increase in unemployment.

“Kiwis are tired of National’s excuses. The government blames earthquakes, global financial woes and even other politicians for its failure to deliver. No one should make promises they can’t keep. It’s time to take responsibility.

“Reaching surplus is important. Labour is committed to doing that. But it can’t be the only focus. We need to grow our country for the benefit of all Kiwis.

“Labour will support our exporters and help Kiwis get the education and skills they need to seize the job opportunities of a 21^st century economy. We will invest in science and innovation to create more high-wage businesses and make it easier for Kiwis to save for their retirement.

“Labour will provide the strong economic leadership needed to give hard-working Kiwis the future they deserve and a reason to stay,” said David Shearer.

Business New Zealand

Despite being presented as a ‘zero’ Budget, this year’s spending has been well focused on areas helpful for future growth, says BusinessNZ.

With all new discretionary spending having to be matched by savings or tax revenues from elsewhere, Budget 2012 has nevertheless managed to reprioritise spending in a responsible manner, said BusinessNZ Chief Executive Phil O’Reilly.

“Science and innovation have received significant funding this Budget, with big ticket items like the Advanced Technology Institute and the Performance Based Research Fund looking set to improve outcomes in commercial science and innovation. 

“New Zealand business increasingly finds competitiveness is dependent on innovation, and funding announced today for science and innovation initiatives will be well received by the business community.  More funding for science and engineering tertiary courses also fits well with this.

“The investment approach to welfare reform displayed in today’s Budget is highly positive, given the critical need for a more engaged, highly skilled working population.

“Ongoing improvements in the tax system are also positive, although business would have liked to see more fundamental tax reductions to increase New Zealand’s international competitiveness.

“The overall aim of getting the books back in the black is responsible and will be widely supported by the New Zealand community, although many would like to see a faster programme of reform in areas such as superannuation eligibility and interest free student loan expenditure.

“It is to be hoped that a mandate for the decisions needed to grow the economy will emerge from the foundation of Budget 2012.”

New Zealand Bankers' Association

Prudent management of the public purse is essential to keeping down the cost of credit said the New Zealand Bankers’ Association today in response to Budget 2012.

The Association supported moves to ensure borrowing costs for the government, householders and business owners do not increase unnecessarily. Initiatives that kept the NZ dollar at a realistic value were also important. A lower dollar made New Zealand more globally competitive and supported exports, including the important agricultural sector.

“Balancing the books and moving back to surplus will help our sovereign credit rating, which in turn will keep interest rates down for New Zealand households,” said New Zealand Bankers’ Association chief executive Kirk Hope.

“The credit rating agencies are paying close attention to us. If our credit rating goes down, our interest rates go up. A credit rating downgrade makes us look like a riskier bet to the funders, so it costs us more to source funds.

“The government is in line with households who are paying down their debt. It’s about living within our means. This responsible approach will keep us in good stead with the credit rating agencies.”

The Association was disappointed the Budget did not include more initiatives to lift New Zealand savings.

“We need some good policy thinking around how to improve our savings levels. This is important as it will reduce our reliance on foreign borrowing and provide us with a wider range of options and opportunities for future economic growth,” said Hope.

Green Party

Budget 2012 fails to deliver any fundamental changes to the structural problems facing the New Zealand economy while ramping up the burden on lower and middle-income New Zealanders, the Green Party said today.

“The budget is a failure for the economy and a failure for our people. The average Kiwi will pay more to cover the Government’s economic mismanagement,” said Green Party Co-leader Russel Norman.

“If there is a burden to be shared, then it should be shared fairly. This Budget does not do that.

“This budget is full of cuts that will hit middle New Zealand in the pocket. Many Kiwis will be much worse off as a result of this budget.

“Budget 2012, with its mix of increased user pays charges, student allowance cuts, bigger state school class sizes and increased costs for early childhood education has simply made life a little more expensive for those least able to afford it.

“National has failed to rebalance the economy as it promised. It is focused on managing the finances but offers nothing by way of a plan to actually grow our economy and offer New Zealanders some hope.

“The National Government is more focused on political management than economic management. Budget decisions like spending on new motorways and subsiding pollution are politically motivated rather than economically motivated.

“Auto-enrolment in KiwiSaver has been delayed for political reasons in order to achieve a wafer thin surplus. A Government focused on acting in our economic interests would have done more to promote savings,” said Dr Norman.

The Green Party has previously released two reports that show that i) the Government has had to borrow an additional $2 billion to fund the tax cuts that went mainly to those on higher incomes and ii) that ordinary working families are more than $11,000 worse off this year due to cumulative Budget changes since National took office, while high income earners are much better off.

“Bill English once saw economic rebalancing as his number one priority. Today’s updated forecasts show the current account deficit worsening to 6.7 percent of GDP in 2016,” said Dr Norman.

“Borrowing to pay for tax cuts for the wealthy was fiscally reckless. Now asset sales will leave the Government accounts permanently worse off.

“The Green Party has a positive alternative – a smart green economy that protects our natural capital, enhances our quality of life, and shares our prosperity fairly.”

Link to the Green Party Co-leader Russel Norman’s 2012 Budget Speech

http://www.greens.org.nz/speeches/budget-2012-time-smart-green-economy

Link to the Green Party’s alternative 2012 Budget:

http://www.greens.org.nz/features/budget-2012-sharing-austerity-more-fairly

KPMG:

The Zero Budget Overview – Ross Buckley

The return to surplus by 2014 – 15  is on target but very tight. Down from $1.3 billion to $197 million. Negligible new net spending. Health and Education  are the winners overall,  but smokers will pay more with excise tax rising by 10% over the rate of inflation for the next four years.

ON THE LEVEL

Agribusiness Analysis – Ian Proudfoot

The Government is waiting on the private sector to kick-start projects such as Canterbury irrigation, and appears to have left open the door to use SOE sale proceeds to fund future agribusiness innovation.

AGRIBUSINESS

The Christchurch Rebuild – Paul Kiesanowski and Alex Skinner

The rebuild is expected to contribute 1% of the economy’s 3% growth between 2012 and 2016 highlighting the importance of Christchurch to our economic recovery. However, no additional funding to the $5.5 billion set aside last year for the rebuild.

CHRISTCHURCH GATHERING PACE

The Public Sector – Adrian Wimmers

Increased funding for Health and Education but the approach is preventative - spending money to save money, as evidenced by an additional $287 million of spending on Welfare reform to deliver wider savings in this area.

IMPLICATIONS FOR ECONOMIC GROWTH                            GOVERNMENT EFFICIENCIES

Tax and Social Welfare – Paul Dunne

No tax surprises. The focus is on plugging holes in the tax base. Changes to tax rules will affect those with holiday homes and boats. Tightening rules around live stock valuations and the removal of some tax credits are the other changes signalled.

The IRD to get $78 million of new funding but expected to deliver over $4 for every dollar spent.

TAX                                                        SOCIAL POLICY

Deloitte

Tax measures barely caused a ripple in the 2012 Budget with two of the three key measures already well foreshadowed, Deloitte CEO Thomas Pippos says.

The third measure, relating to tax credits, deals with anachronisms in those rules and tries to bring some coherency to rules that have largely been superseded by other measures.

“The surplus is within reach but only time will tell how quickly we move to surplus. It certainly seems reasonably imminent albeit fragile,” Mr Pippos says.

“In terms of stimulus and growth the Christchurch rebuild stands out as a material contributor at around 1% of the estimated growth numbers which will likely also mean that growth is skewed to that area and reasonably anaemic elsewhere.”

Some difficult questions remain unanswered and will have to eventually be addressed, such as New Zealand’s ageing population and its right to superannuation, the level of private sector savings, the student loan mountain, and the inequities that arise from some social assistance measures.

“In many respects the lack of tax surprise was a relief. History has shown that substantive Budget tax surprises carry a considerable risk of collateral damage, such as the exclusion of depreciation from all buildings in 2010 that created an inequity for industrial property let alone a material financial reporting anomaly.”

In terms of the tax mix, the status quo prevails, noting the corporate rate is competitive, the reduced highest marginal tax rate sets the right signal, and GST continues to be by far the most efficient way to gather revenue – particularly when the economy starts to expand and consumption improves.

“Seen through the eyes of Europe, and bearing in mind the lingering effects of the GFC on the New Zealand economy, and the impact of the Canterbury earthquakes, Budget 2012 is sensible, unexciting and provides a sense of relief to be able to visualise a surplus.”

ASB:

Fiscal outlook

Budget 2012 follows the general pattern of the preceding three Budgets of the National-led Government. While no net new discretionary spending is included, there is a large amount of churn; $3bn of ‘savings’ are included (over the five-year forecast period), while $4.4bn of new spending is added. The difference is made up by about $1.35bn of extra revenue-raising measures.

This is a fair amount of reprioritisation, with the Government shifting what it deems to be low-value spending to areas in which it will be more valuable. As in recent Budgets, the areas to benefit the most are Health, where spending increases by $1.5bn over the next four years, Education, and Research and Development. Other areas include new initiatives that have been offset by savings from within the same area – for example in tertiary education where $240.3m of new spending is offset by changes to the student loan scheme, most notably the increase to the repayment rate.

The overall profile of operating balance deficits/surpluses is slightly better than we expected. The deficit in the current 2011/12 year, at $8.4bn, is actually smaller than previous forecasts (the most recent, in February’s Budget Policy Statement, was $12bn). As expected, the difference is largely explained by a shifting of about $2bn of earthquake-related costs from this year into the next.  The overall reprioritisation efforts are also weighted across the forecast period in such a way that there is a net decrease in spending in the current year. As expected, deficits decrease across the next two fiscal years (although next year’s is boosted by the aforementioned earthquake costs) on the way to a projected surplus of $197m in the 2014/15 year. This is certainly a wafer-thin surplus that could be eroded by minor changes to revenue forecasts, but the Government has reserved some ammunition by maintaining its new spending allowances of $800m p.a. in next year’s Budget and $1.2bn p.a. in the following ones.

Policy initiatives

Within a framework of no increase in discretionary spending, the Government has used a mixture of cost savings and additional revenue generators to enable increases in spending in other areas.

Revenue/savings measures of $4.39bn include:

• Additional revenue measures, such as:
  • $532mn from raising the tobacco excise 10% per annum
  • Additional resourcing for the IRD of $78mn, expected to generate $345mn in tax revenue over 4 years
  • tighter tax deductions for mixed use assets (baches, boats), $109mn over 4 years
  • $235mn from raising the petrol excise 2 cent/litre on August 1
• Saving $516mn over 4 years from reduced student support (including higher repayment rates for student loans, and added restrictions on allowance eligibility)
• Delaying auto-enrolment of workers into KiwiSaver

Additional spending initiatives of $4.42bn, with the major ones announced prior to the Budget:

• Health ($1.5bn over 4 years)
• Education ($512mn)
• Tertiary education ($240mn)
• Welfare ($287.5mn, of which $81.5mn is fresh spending and the rest reallocation within Welfare)
• $170mn for science and innovation
• $155mn of additional funding for Canterbury Earthquake Recovery Authority

(figures refer to the 4-year total spending 2013 to 2016 fiscal years)

Government debt

Net core crown debt is expected to peak at 28.7% of GDP in the 2014 year, a slightly lower peak than the 29% peak in 2015 in the PREFU forecasts.  Gross debt peaks at 40.1% of GDP, less than half the Eurozone average.

The overall debt figures are assisted by the inclusion of sales proceeds from the Mixed Ownership Model.

Total bond issuance lowered

The Treasury has front-loaded its intended borrowing programme into the 2012 and 2013 years, increasing planned issuance in each those years by $1.5bn.  Issuance in the 2016 year has been trimmed by $2bn.  The added bond issuance in the near term is helping to substantially reduce the use of short-dated Treasury bills by $4bn in the 2013 year.  Overall debt issuance (bonds and bills) is forecasts to be $3bn lower than in the PREFU over the 2012 – 2016 period.  The Debt Management Office will issue up to $2bn a year of inflation-indexed bonds in the 2013 and 2014 fiscal years.

Economic commentary

Treasury’s GDP growth forecasts are relatively similar to our own, although the Treasury expects growth to be stronger in the March 2013 year due to stronger forecasts for residential investment growth.  We see capacity constraints being a key factor limiting the ability for reconstruction activity to ramp up in Canterbury.

The Treasury has slightly softer export growth forecasts than our own, noting the challenging conditions from the high NZD and expecting dairy production to ease (as conditions return to more normal levels following the excellent growing season this past year).

The Treasury also has fairly conservative consumer spending growth forecasts in the near term, expecting the household savings rate to continue to rise.  The Treasury notes “ongoing household caution is reflected in the subdued outlook for house price inflation.”  While detailed forecasts are not published, the Treasury comments it expects house price inflation of 1.5% per annum, which is much lower than our own expectations.  The Treasury expects rapid growth in housing supply to contain house prices.  We see risks around this view.

The economic forecasts were finalised prior to the release of Q1 employment data, which saw the unemployment rate turn out much higher than expected.  Without incorporating this development, the Treasury projects the unemployment rate to fall much faster than our own projections over 2013 and 2014 March years.

Treasury’s inflation forecasts are higher than our own in the year to March 2013.  Treasury’s stronger growth projections, sharper exchange rate depreciation and the new tobacco excise taxes likely account for much of the difference.  Treasury then expects inflation pressures will moderate over 2014.  However, we expect to see inflation pressures accelerating at this point (particularly given the inflation generated by the Canterbury rebuild).

The Treasury’s interest rates forecasts are similar to our own, with a gradual lift in the 10-year bond yield from current levels.  The 90-day bill rate projection also implies a similar OCR view to our own (the OCR rising gradually from March 2013).

Implications

The Budget forecasts contain slightly smaller deficits than we had expected over the 2012 and 2014 fiscal years than expected, though the signalled 2015 surplus is, at $200mn, very small.  The surplus builds up more substantially in 2016.  We do se some downside risks to these forecasts, with our growth forecast over the March 2013 year on the weak side of the Treasury’s 2.6% forecasts.  Europe does pose a downside threat to the economic outlook if the region fails to contain the escalating crisis sparked by the recent Greek election.  Nonetheless, the fiscal forecasts affectively have more financial fat in them than the PREFU ones, with forecast debt issuance over the 2012-2016 period actually trimmed by $3bn.

Standard and Poor’s stated shortly after the Budget release that there were no immediate implications for the country’s foreign currency credit rating, which was downgraded to AA last September.

Financial market reaction has been minimal.