By Hayes Knight – 19 May 2011

A record budget deficit of $16.7 billion was revealed this today by Finance Minister Bill English, which will place pressure on our local economy in that the Government has chosen to continue to borrow from offshore to fund this shortfall.

Unlike the 2010 Budget, there are fewer significant tax changes. However, in light of the recent earthquakes the focus has understandably shifted and consequently there is a need for the Government to better manage expenditure going forward. 

The good news is that the return to surplus is expected to occur a year earlier than expected, and we should be back in the black by the 2014/15 financial year. The Government aims to increase State sector efficiency achieving savings in the order of $980m over the next three years. 

Within the Budget, student loans and Working for Families (WFF) have been targeted to ensure only those most in need will be eligible. As was flagged prior to the Budget announcement, changes will be made to KiwiSaver, whereby the burden of contribution falls more heavily on the employer and employee; instead of the Government. 

Overall, business owners can be relatively comfortable with this Budget in that the bulk of the spending cuts and savings are coming from the public sector, with a drive towards efficiency for most Government agencies. This will be welcome news for business owners, and in our opinion it simply makes sense.

How will the Budget 2011 impact New Zealand business?

Key initiatives that may have an impact on the SME business owner include:

Halving the tax credits on Kiwisaver

Whilst there is arguably no direct impact on businesses, we may see some pressure from the labour force – particularly if the labour market tightens as forecast – for employers to pick up the shortfall. This, coupled with the changes to Working for Families, will undoubtedly add to the cost base for small businesses and it may be difficult to pass this cost on.

  • From 1 July 2012 the Government will contribute 50 cents for each dollar contributed by KiwiSaver members. This is the equivalent to $10 per week.
  • From 1 April 2012 all employer contributions to employee KiwiSaver accounts will be subject to Employee Superannuation Contribution Tax (ESCT) applied at the individual’s marginal tax rate. This will therefore have a bigger impact on those on higher marginal tax rates i.e. those with higher incomes.
  • From 1 April 2013 compulsory employer contributions will rise from 2% to 3%.
  • The abatement threshold will reduce to $35,000, down from $36,827 and the abatement rate will increase to 25 cents up from 20 cents. These changes will gradually be introduced and ensure WFF is better placed to help those families most in need.

From practical perspective; businesses will need incorporate these changes into future forecasting, as well as update payroll systems when the changes come in to play.

Infrastructure

It is encouraging to see that Broadband and transport remain top priorities for about $1.2 billion of further infrastructure spending. A growing population is the driving force behind the continued investment in transport infrastructure; particularly as rail and road fuel the success of sectors earmarked to drive economic growth – dairy, forestry and tourism.

  • Government has provided a further $250m to fund KiwiRail’s 10-year turnaround plan and spending continues on ‘Roads of National Significance’ initiative.
  • Ultra-Fast Broadband and Rural Broadband initiatives will receive $942m

Government’s overall aim is to eliminate obstacles hindering the future growth of the economy and work harder to facilitate partnerships with communities and the private sector to drive investment in New Zealand. For that they must be commended. However, the big question is how quickly, and when, will businesses start reaping the fruits of these labours.

Mixed Ownership Model

On the face of it this is another asset sale, but if we consider the implications and drivers of the decision they are actually sound. In our opinion, if managed correctly, it makes sense to divest a stake in the four state-owned energy companies and Air New Zealand and free up that capital to invest in new core social assets.

A Focus on Driving Exports

The budget talks about real export growth having declined from 5.4% over the previous 15 years to just under 1.4% now, and states that it must turn this around and get back to previous levels. We agree with this comment, however cannot actually see how they plan to do this.

Health and Education

Health and education get the attention they need, so businesses supporting this sector of the economy should be looking to capitalise on funds made available to improve those sectors. Heath has an additional $1.7 billion in operating budget and $40 million in capital funding and Education receives $1.3 billion in operating budget and $109 million in capital funding.

Mixed Use Private Assets

Undoubtedly this will have a few people scurrying around reviewing their tax positions! The proposal seems to be targeting people who derive tax subsidised benefits of owning expensive assets. An example is the person who purchases an expensive yacht and makes it available for charter and thus turns non-deductible expenditure into deductible expenditure. This has been an area of interest for the IRD over recent times already, and signals a definite move to crack down on these schemes. We urge people to seek appropriate advice if this announcement affects you.

Overall

A responsible Budget, no increase in taxes, cuts in Government department spending which were well overdue, partial sale of commercial assets to fund social assets, return to surplus earlier than predicted and therefore commencement of debt reduction.

Our verdict for the SME business community – 7/10. A good budget, but could have gone more aggressively on spending cuts based on Treasury forecasts of strong economic growth next year, and put some more meat into the export led growth statements.

Matthew Bellingham
CEO, Business Improvement Director
matthew.bellingham@hayesknight.co.nz
T +64 9 379 7013