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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 system.

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 highlights:

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 bach

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 rebate

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 all!

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 Budget?

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.

What's missing?

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 implementation.

Below is a more detailed overview of the 2012 Budget.

Under the 2012 Budget the Government's priorities are to:

1. Build a more productive and competitive economy
2. Deliver better public services
3. 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 aircraft.
  • Putting recent changes to livestock valuation rules into law through Budget legislation (with further detail to follow later in the year).
  • 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 April 2013.
  • 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 2014.
  • 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 national significance
• $100 million additional funding for the Performance-Based Research Fund to support world-class research in New Zealand's universities
• $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 hospital redevelopments.
• $76 million for the capital costs of the new Advanced Technology Institute.

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 years.
• 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.

Changes to KiwiSaver

• An increase in the minimum contribution from individuals and employers from 2 per cent to 3 percent, is to take effect from 1 April 2013.
• 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 for KiwiSaver.

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 efficiency.

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 years.

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 years
• 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 schools
  • $48 million to increase participation by vulnerable groups in early childhood education
  • $19 million to support Māori-medium early childhood education providers.

The Budget 2012 confirms a number of further student loan changes
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 purposes
• 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.

Improving Welfare

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.

Reducing Crime

• 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 housing sector.

Rebuilding Christchurch

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 priority

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