Zero Budget scores 8 out of 10
By Phil Barlow - 24 May 2012
Our Score for the 2012 Budget: 8/10. No surprises, (as all the good stuff was leaked prior to the budget) and it delivers a combination of growth initiatives and austerity. What were some of the highlights and what, in our opinion, was missing?
Although tax cuts are the highlight for most (and in our opinion
a great thing for business), the underlying objective of the
current Government is to drive an increase in productivity and a
more competitive economy, as well as fairer more equitable tax
This year the Government is taking a number of steps to tighten
the tax system by closing loopholes and updating the tax credit
system, which in theory should generate hundreds of millions of
dollars of extra revenue over the next four years. Finance Minister
Bill English "no surprises" Budget also focused on investing in New
Zealand's future and implementing the Government's plan to build
opportunities for all New Zealanders. The end game is to return to
a state of surplus by 2014/15.
The 2012 Budget
Focus on Innovation good for Business
The World Economic Forum (WEF) identified innovation as an
important driver of incomes. New Zealand is only able to sustain
higher incomes and the associated standard of living if our
businesses are able to compete by offering new and advantaged
products and services. Therefore it's good to see the Government
stepping up and backing innovation.
Ultimately this should increase the market value or reduce the cost
of the products and services used domestically or exported.
Taxing the boat and the
Within the Budget mixed use assets, such as
boats and baches (something we Kiwis love) have been targeted. The
issue arises when people partly use those assets themselves but
also lease them to others and then unfairly claim deductions for
expenses. Aligning the expenses claimed with the actual use of the
asset by third parties and ensuring that the owner does not, in
effect, claim a tax deduction for the full expense always caused
some consternation because previously the rules were not clear
around the interpretation of "availability." The new rules will
require mixed-use asset owners to apportion their deductions based
on the actual income earned and private use of the asset. For
example, owners who rent out their holiday home for 30 days in a
year and use it themselves for 30 days in a year will be able to
claim a deduction for 50 percent of their general costs, rather
than the 90 percent they can claim now.
Removing the childcare and housekeeper
The decision has been made to remove a range of tax credits
including the childcare and housekeeper tax credits, the under
$9,880 tax credit as well as the tax credit for the active income
of children. The argument is that these credits are no longer seen
as fit for purpose due to other initiatives such as working for
families and the 20hrs per week childcare subsidy - and the removal
will ultimately save $117m over the next 4 years. But surely
removing these rebates provides less incentive for parents to
re-enter the workforce and will ultimately impact economy in the
long run? This move also potentially contradicts the Government's
aim of shifting New Zealanders out of welfare and into work.
Smokers luck out
Good call by the Government to continue to increase tobacco
excise by 10 per cent over and above inflation each year for the
next four years. This should see marked improvement in the health
of New Zealanders and more reduce the long-term burden on our
already strained health system. A good step to enhancing New
Zealand's trademark "clean and green" image -an image that is
gaining increasing popularity overseas, particularly in Asia. The
first increase will occur on 1 January 2013, followed by annual
increases on 1 January in each of the following three years. Maybe
Nicorette could be a good long-term investment share option after
The changing face of KiwiSaver
The minimum employee and employer contribution rates will
increase from 2% to 3% from 1 April 2013. Whilst there is arguably
no direct impact on businesses for the time being, we may see some
pressure from the labour force - particularly if the labour market
tightens - for employers to pick up the shortfall. This, coupled
with the Working for Families allowance cuts, will undoubtedly add
to the cost base for small businesses and it may be difficult to
pass this cost on.
What do we think about this year's
Overall a very conservative "no surprises" Budget. While it was
good to see "innovation" in the spotlight many people believe there
was a missed opportunity to make further changes to the tax system,
particularly in relation to capital gains tax (CGT). On the face of
it, a capital gains tax has some merit on the basis that it might
assist the redirection of capital from the housing market to more
productive assets such as the investment share market, thereby
helping to improve the overall economy. The economists seem to
believe this strategy will work on the simple premise that it has
in Australia. But is this really the case? It is dangerous to
compare New Zealand and Australia in this particular matter, as our
economies are based on very different fundamentals. With no
monetary return until 2018, our guess is that they finally realised
the initiative was based on unsound principles. On balance - we
believe it is a good call to stay away from CGT.
The proposals around mixed use assets are necessary to sort out
a messy area of the law which was open to wide interpretation and
hence confusion, rather than abuse. With approximately 15,000
holiday homes rented out and only $50 million in deductions at
stake (with most of them probably being absolutely fine) it is good
to see the new rules are clean, simple and therefore easy for the
average New Zealander to understand.
In a nutshell, Tax
Simplification. Arguably it was never going to happen in this
Budget, but we would like to see it on the agenda for the next one.
The more we can reduce compliance cost and direct the investment
towards business growth the better.
Our Score - 8/10. No surprises, (as all the good stuff was
leaked prior to the budget) and it delivers a combination of growth
initiatives and austerity. Now let's get on with the
Below is a more detailed overview of the 2012 Budget.
Under the 2012 Budget the Government's priorities are to:
- Build a more productive and competitive economy
- Deliver better public services
- Rebuild Christchurch and the surrounding areas.
So what has the Government committed to?
Better Financial Management
- Today net government debt stands at $50 billion and is forecast
to reach more than $70 billion before we return to surplus and
start paying-down debt. The Government chose to run larger deficits
and absorb much of the impact of these shocks on its own balance
sheet to protect vulnerable New Zealanders and enable the economy
to get back on track.
- New Zealand is on track to return to fiscal surplus in 2014/15
and then to start reducing debt. The forecast fiscal surplus in
2014/15 is $197 million. This surplus is forecast to grow to $2.1
billion in 2015/16 and $4.4 billion in 2016/17.
- To reach these targets the Government is running a zero Budget.
Any new spending over the four-year forecast period is matched by a
combination of savings and revenue initiatives.
Improving the Tax System
- The Budget continues the Government's focus on broadening the
tax base, closing tax loopholes, and improving the fairness of the
tax system. Together, the changes below will save about $410
million over the next four years.
- The Inland Revenue Department will receive an extra $78.4
million to further improve its tax auditing and compliance
functions. (Estimated net positive impact on the operating balance
of $345.4 million over the four years to 2015/16).
- The tax base is to be broadened by:
- Tightening the rules around the deductibility of costs relating
to mixed-use assets - those that are both used by their owners and
rented out for income, such as holiday homes, boats and
- Putting recent changes to livestock valuation rules into law
through Budget legislation (with further detail to follow later in
- Repealing two tax credits: the income under $9,880 tax credit
and the childcare and housekeeper tax credit.
- Replacing the tax credit for the active income of children with
a limited exemption for children.
- Removing the student loan voluntary repayment bonus from 1
- Providing an extra $78.4 million to Inland Revenue over the
next four years for tax compliance activities.
- Increasing the student loan repayment rate for all New
Zealand-based borrowers earning over the repayment threshold to 12
cents in the dollar from 1 April 2013.
- Broadening the definition of income for student loan repayment
purposes to include a wider range of income types from 1 April
- Implementing an information match between Inland Revenue and
the New Zealand Customs Service to identify Student Loan borrowers
in serious default.
New Zealand Superannuation
When the Budget is in sufficient surplus, the Government is
committed to resuming contributions to the New Zealand
Superannuation Fund. On current forecasts, this is expected to
happen in 2017/18.
Investment in Innovation
The 2012 Budget contains $385 million of new investment over
four years into research, science, and innovation.
Over the next four years, Budget 2012 investments include:
- $166 million to redevelop an Advanced Technology Institute,
which will help New Zealand's high-tech firms grow, increase
exports, and ramp up productivity
- $60 million to support a series of National Science Challenges,
which will seek innovative solutions to specific questions of
- $100 million additional funding for the Performance-Based
Research Fund to support world-class research in New Zealand's
- $59 million to boost funding for science and engineering
courses. Funding rates for engineering degrees will be increased by
8.8 per cent and for science degrees by 2 per cent.
Future Investment Fund
The Budget establishes the Future Investment Fund. This fund
will receive all proceeds from the Government's sale of up to 49
per cent of shares in four SOEs and Air New Zealand. This is
expected to be between $5 billion and $7 billion.
The Future Investment Fund will reinvest these proceeds in other
public assets, e.g. modernise schools (earmarked $1billion) and
hospitals, over the next few Budgets. The Government will do this
without having to borrow to pay for those new assets.
As part of the Budget, the Future Investment Fund is allocating
its first $559 million. This includes:
- The first $34 million of funding for 21st Century Schools.
- $250 million towards KiwiRail's Turnaround Plan.
- $88 million for health sector initiatives, in particular
- $76 million for the capital costs of the new Advanced
In addition to this:
- The Government is investing around $12 billion in improving
state highways over the next 10 years. They are investing more than
$500 million a year in improving and maintaining local roads and
completing the $2.1 billion upgrade of the metro rail systems in
Auckland and Wellington
- Through Transpower, the Government is investing $4.6 billion in
upgrading the national electricity grid over the next 10
- Government is investing up to $1.35 billion in the roll-out of
Ultra-Fast Broadband and an extra $300 million in the Rural
Broadband Initiative, currently under way.
- An increase in the minimum contribution from individuals and
employers from 2 per cent to 3 percent, is to take effect from 1
- New disclosure rules, to take effect from April 2013, will
allow people in KiwiSaver to evaluate and compare the performance
of different funds.
- Fund managers will be required to report their performance and
returns, fees and costs, assets and portfolio holdings, and
liquidity and liabilities.
- The Government is also deferring its auto-enrolment exercise
A More Efficient Public Sector
A better-performing public sector is central to the Government's
plans over the next three years. The Government wants to see better
results and improved services, as well as reduced costs and more
To assist those changes, the State Sector Act, the Public
Finance Act, and the Crown Entities Act will be amended, as
recommended by the Better Public Services Advisory Group.
A Boost for Health Services
Over the next four years, the Government is committing almost
$1.5 billion extra to Vote Health, partly funded by $129 million of
savings identified in 2011/12. This will:
- Deliver 4,000 more elective operations a year
- Provide better service for cardiac and cancer patients
- Provide $12 million to reduce rheumatic fever
- Invest $133 million in disability support services.
In addition to this:
- The Government will provide $60 million in capital for new
buildings and hospitals
- Pharmaceutical co-payments will be increased from $3 to $5, up
to a maximum of 20 prescription items per family per year, after
which items are free
- Prescriptions for children under six will remain free
- The Government will also continue to increase tobacco excise by
10 per cent over and above inflation each year for the next four
years. The first increase will occur on 1 January 2013, followed by
annual increases on 1 January in each of the following three
Quality of Education
- Over the next four years, the Government will commit $512
million towards new frontline education initiatives. This takes the
Government's total investment in early childhood education and
schooling to $9.6 billion in 2012/13
- The Government is committing an extra $60 million to lift the
quality of teaching in our schools. This is in addition to the $304
million being spent on professional learning and development for
teachers in primary and secondary education over the next four
- The Government will provide extra parenting programmes and
relationship education in secondary schools at a cost of $4 million
over four years
- An extra $17 million will be available over four years to
support a variety of youth mental health initiatives
- It provides an additional free 3,000 tertiary-based Youth
Guarantee places at the cost of $37.7 million over four years
- Budget 2012 also sets aside further funding to support priority
learners. This includes:
- $83 million in school operating grants
- $51 million to continue the roll-out of ultra-fast broadband in
- $48 million to increase participation by vulnerable groups in
early childhood education
- $19 million to support Māori-medium early childhood education
The Budget 2012 confirms a number of further student loan
from 1 April 2013, including:
- Increasing student loan repayments from 10 cents in every
dollar earned over the income threshold to 12 cents
- Widening the definition of income for student loan repayment
- For student allowances, continuing the freeze on parental
income thresholds until 31 March 2016
- Targeting allowances to first degrees only, and removing
exemptions for long programmes such as postgraduate training,
taking effect from 1 January 2013.
The Government has embarked on reforms focused on supporting New
Zealanders out of welfare and into work. The Budget invests $287.5
million over four years in the first phase of this programme.
- The Department of Corrections aims to reduce reoffending by 25
percent by 2017
- To help achieve this, the Government will invest $145 million
of reprioritised money from prison closures and cost reductions out
to 2019/20 in rehabilitation programmes
- Modernising court services will ensure that people can access
services faster and more conveniently
More Affordable Housing
Working with non-government providers, the Government is
committed to improving housing affordability and providing
assistance to households in need. The Budget 2012 provides funding
of $104 million for this over three years. This will be used to
trial greater innovation, diversity, and scale in the social
The Government remains committed to supporting the rebuilding of
Christchurch, of which the total cost of the damage is estimated at
more than $20 billion.
- The Government is providing considerable resources for the
Canterbury rebuild ($5.5 billion in Budget 2011)
- The Government is determined that residents can rebuild and
move into their new or repaired homes as soon as possible
- Finalising the remaining residential land zoning decisions and
the settlement of outstanding insurance claims is therefore a