Budget 2014 - Key Issues and
The Budget 2014 (entitled Managing
a Growing Economy) continues the focus on the main elements of the Government?s
Business Growth Agenda (BGA):
Responsibly manage the Government?s finances
Build a more productive and competitive economy
Deliver better public services
The Budget reflects
both New Zealand?s current domestic and international economic realities,
avoiding an election year spend up. As
budget forecasts indicated, the domestic economy is improving but the global environment
is still relatively subdued.
While there has
been some loosening of the purse strings (not unexpected with a general
election coming up), generally speaking the Budget adopts a careful and
measured approach. Expenditure is
focused on areas most in need and in particular those able to enter the paid
workforce are encouraged to do so.
have improved reasonably rapidly and the Minister of Finance announced that a
small surplus ($372 million) will be achieved for the 2014/15 year. In the context of the Christchurch disaster,
achieving a surplus is reasonably impressive.
Future surpluses are forecast which will give the Government some room
to reduce debt, look at future tax cuts and/or provide room for further
improving financial situation, some issues are still in the too hard basket but will need to be
addressed in the foreseeable future. How
to deal with an ageing population is of particular concern as is the cost associated
of NZ Superannuation and an expanding health Budget.
Given the nature of the political process, large scale
reforms are probably a thing of the past.
The Government is trying hard to take the public with it through
targeted initiatives although with a gradualist approach the danger is that the
world will move on before substantial reforms can be implemented. Consequently, the Government is always in danger
of being in catch-up mode.
2013 - The Economic Outlook
- Economic activity
is expected to be modest over the forecast period out to 2018. After peaking at 4% for 2014/15 it is
expected slip to around 3% by 2016 and decline further to just over 2% in
2017 and 2018.
- Inflationary pressures are rising but forecast inflation is expected to remain close to
the mid-point of the Reserve Bank?s Target band of 1 ? 3% over the
forecast period although likely to peak at around 2.5% in 2016. But interest rates are forecast to
increase over the next couple of years, largely in line with market
- Employment growth
should grow relatively strongly (3% for 2014/15) before moderating in the
out years to around 1.5%.
- Unemployment is
expected to continue to trend downwards (currently 6%) to reach 4.4% by
- Nominal wage pressures are forecast to grow slightly over the forecast period in line
with continued improvements in labour market conditions. Wage growth (as measured by the
Quarterly Employment Survey ? average hourly ordinary time earnings) is
likely to increase from just over 2% currently, reaching 3.5% per annum by
- The exchange rate (as measured by the Trade-weighted Index ? TWI)
is expected to trend slightly downwards from its current high over the
forecast period. The TWI currently sits at around 80, forecast to slip to
around 77 by 2017 and 73 by 2018.
- Interest rates (90-day bank bills) are forecast to continue rising (currently
3%) to reach 5.3% by 2018.
While most Budget forecasts appear reasonable and are generally
very positive, forecasting over such a long period means that risks abound in
the out-years and what is forecast needs to be taken with a grain of salt.
Future exchange rates are a minefield to predict with any
degree of certainty given some countries? changing approach to monetary policy
However, while the key indicators underpinning economic
health, such as overall economic growth and employment creation are forecast to
head in the right direction, some concerns remain. Economic growth forecasts are relatively
subdued in the out-years, which seems unduly pessimistic, while unemployment is
forecast to go down to 4.4% which seems a little optimistic. In economist speak,
4.4% is generally considered to be full employment.
Budget 2012 - Fiscal Position
- The Government?s Operating Balance before gains and losses (OBEGAL) is expected
to register a very small surplus of $400 million in 2014/15 (0.2% of GDP). After several years of running significant
deficits (largely related to earthquake costs), a small surplus is quite an
- Core Crown expenses are forecast to decrease from 31% of
GDP (current) to just under 30% by 2018.
- Core Crown tax revenue is forecast to increase relatively
slowly from 27.5% to reach 28.5% by 2018.
An increased tax take largely reflects a growing economy.
- Net core Crown debt is forecast to peak at 26.4% of GDP
in 2015 before declining slowly to reach 23.8% by 2018.
2013 - Breakdown of Main Budget Areas for Business
The following areas, not necessarily
in any particular order of importance, are likely to be of particular interest
to the business community. Where
relevant, we have included our own thoughts/reactions.
On current estimates, the Government?s
contribution to the rebuild is expected to be $15.4 billion, of which $7.3
billion will be incurred by the Earthquake Commission, net of reinsurance
Budget 2014 includes:
million over two years to support the work of the Canterbury Earthquake
million extra for the Canterbury Social Support Fund, including counselling,
temporary accommodation and support services.
million from the Future Investment Fund for Canterbury housing development.
million in 2014/15 to offer up to 1,000 beneficiaries in other regions a
one-off payment of $3,000 each if they have a full-time job offer in
2. Retirement Savings
Super Funds Contributions
will be resuming Super Fund contributions in 2020/21 provided net debt is no
higher than 20% of GDP - two years later than projected in the most recent Half
Year Update but what was anticipated when contributions were initially
suspended in Budget 2009.
be argued that resuming contributions to the Super Fund makes little sense,
given that the Government still has significant levels of debt.
Projects & the Future Investment Fund
A Budget focus
is on targeted capital expenditure aimed at improving economic growth prospects,
including a $375 million loan to the New Zealand Transport Agency. The loan is to kick-start $815 million of
Auckland Transport projects to further reduce congestion I Auckland.
addition, the Government will allocate a further $1 billion of new capital from
the Future Investment Fund (FIF), including:
- $200 million for health sector projects
- $198 million for KiwiRail
- $172 million for school property expansion
- $40 million to invest in irrigation infrastructure.
leaves $1.7 billion to be allocated from the Fund in the 2015 and 2016 Budgets.
Skills & Training
The Budget signals new education
funding of $858 million over 2013/2014 and the next four years (taking total
early childhood and school spending to $10.1 billion in 2014/15). The new spending includes:
million to invest in educational success by strengthening leadership and
quality teaching across schools
further $85 million for schools? operational grants
million capital and $111.5 million of operating funding to support school
million to extend the Computers in Home programme for a year
million for teacher aide support for students with high health needs
million for the Reading Together Programme
Tertiary Education Sector
Tertiary education receives $199
million additional investment, including:
million for ICT training initiatives (including $11.8 million of contingencies)
to $20 million in 2013/14 and 2014/15 for a further 6,000 extra places created
as part of the apprenticeship reboot, taking the number of places to 20,000.
million additional funding for science, agriculture and health science.
million to establish three extra Centres of Research Excellence (CoRES) from
5. Science and Innovation
New science and innovation initiatives
- $57 million extra over four years
for contestable science funding
- $58 million in increased tax
deductions for R&D by start-up firms
- $69 million for New Zealand Trade
and Enterprise (NZTE) to expand New Zealand?s presence in China, South America
and the Middle East.
Further R7D spending is welcome,
especially the targeted increase in business R&D to 1 percent of GDP.
6. Other Issues
business innovation, loss-making start-up companies will be able to cash out
all or part of their tax losses from R&D expenditure. All businesses will be allowed tax
deductibility for R&D ?black hole? expenditure, currently neither
deductible nor able to be depreciated.
These two measures will return an estimated $58 million in tax to
addition, the Government announced some relatively minor changes to New
Zealand?s tax system, including:
- $132.3 million over the next five years for IRD to
bolster tax compliance (estimated to generate a gross increase of tax revenue
of $297.5 million).
- Cheque duty of five cents a cheque to be abolished
from 1 July 2014.
hints that future tax rate cuts are an option, given an operating surplus from
the 2015 Budget of $1.5 billion a year, growing at 2 percent a year thereafter,
were confirmed. Treasury has advised
that these will not materially affect interest rates.
While the tax changes outlined are
generally sound, and the signal of future tax rate relief is welcome, it would
have been good to see more meat on the bones ? a greater indication of likely tax
rate changes in 2-3 years? time. Would,
for example, a tax reduction affecting middle New Zealanders also be extended
to further reduce the company tax rate to boost New Zealand?s competitiveness.
expected, the Government will put an additional $172 million into extending
paid parental leave, providing:
- An additional four weeks? leave, starting with a
two-week extension from 1 April 2015 with a further two weeks from 1 April
- Extended eligibility to caregivers other than
parents and to extended parental leave payments to people in less-regular jobs
or who have recently changed jobs.
- $42 million to increase the parental tax credit from
$150 a week to $220 a week and increasing the payment period from eight to ten
weeks from 1 April 2015.
Government now agrees that in the near future there will be scope for
significant reductions in ACC levies, particularly in respect to the Motor
Vehicle Account, allowance has been made for levy reductions across all accounts
(subject to consultation) of around $480 million in 2015/16. This is in addition
to the nearly $1 billion fall in annual levies since 2011/12.
While motorists, businesses and
households will welcome ACC levy reductions, it will be important to analyse
the key drivers for reductions. It will be important to know whether the reductions
are sustainable (i.e. based on reduced cost and number of claims) or are largely
made possible by good investment returns.
Whatever the answer, the Budget announcement reinforces the fact that
premiums should be set independently of government to ensure they reflect
actual insurance principles, not political considerations.
Budget initiatives to build on progress
made in the area of welfare include:
funding of $100 million (on top of the $188.6 million in Budget 2013) to support
people off welfare and into work, including:
more employment and work-readiness places targeted to beneficiaries at risk of
long-term welfare dependency
new approaches for beneficiaries with complex needs
$8.6 million for Youth One-Stop Shops providing support to young people
million over the next four years to help newly-arrived refugees during their
first 12 months in New Zealand
Given the economic and social loss
associated with high levels of benefit dependency, it makes sense to ensure
resources are focused on doing whatever is needed, up-front, to get beneficiaries
A handful of mechanisms to ease
concerns around social and affordable housing are outlined, including:
- Temporarily removing tariffs and duties on
building materials, reducing construction costs by $3,500 for a standard home.
- A $30 million boost to the Social Housing Fund
from 2015/16 to help the community housing sector to provide homes for