2011 Budget Analysis by Business NZ

The New Zealand Retailers Association are members of Business New Zealand’s Associated Industries Group.  Our membership provides an avenue for us to feed retail sector views directly to this cross business-sector lobby group, but additionally allows us to draw on their many resources – including economic analysis.  The following is a detailed summary of the 2011 Budget announcements prepared by Business New Zealand, with which we concur.  We would welcome your views on these observations and outlook.

Background

The Budget was delivered against a back-drop of continued international uncertainty and building inflationary pressures on the back of rising oil and commodity prices. This is a two-edged sword as far as NZ is concerned. Rising commodity prices have been good news for the agricultural sector in particular with higher returns being reflected in reductions in debt levels of late. On the other hand, input prices have increased and underlying inflationary pressures continue to rise which will put added pressure on the Reserve Bank to increase interest rates.

As is generally well known, the generally slow growth experienced of late, along with the “one-off” costs associated with the aftermath of the Christchurch earthquake has impacted not only on the expenditure side of the equation, but also significantly on the revenue side in respect of reduced taxation. This exacerbates the difficulty for the government in managing its accounts over the medium term (3-5 years).

The Government’s accounts continue to give cause for concern. However, despite a continued projected increase in projected Government debt in NZ, our debt levels are minuscule compared to those of many developed countries, including Japan and the US. This gives the NZ Government a significant amount of wriggle room compared to many of our trading partners, but action must be taken to address key expenditure areas if NZ is to have a credible fiscal policy which will take us back into surplus within an acceptable time frame.

Those who thought the Budget 2011 would contain election year bribes or “big bang” reforms will be disappointed. Major tax reforms were part of last year’s budget, while thorny areas of expenditure reform were largely put to one side as “next terms’ issue. Rather, the Budget reflected both the domestic and economic situation New Zealand is currently in, with a careful approach from Government towards ensuring that both businesses and households get through as unscathed as possible. It was certainty not a slash and burn budget but nevertheless some policies reflected the significant deterioration in the Government’s accounts over the last year or so.

Steady as she goes was the order of the day, which New Zealanders have tended to come to expect from John Key’s Government, with any major expenditure reforms likely to be implemented after the election. The jury is likely to be out as to whether this is the best approach or whether a more decisive reform package was required in light of New Zealand’s need to significantly improve its economic growth rates.

Budget 2010 – The Economic Outlook

Key Points

• Economic activity is expected to increase relatively strongly to reach 4.0% by 2013 on the back of relatively high commodity prices (favourable terms of trade) and the Christchurch rebuild.
• Inflationary pressures are expected to track lower to reach 2.4% by 2013 and remain at relatively similar levels out to 2015.
• Employment growth is expected to recover relatively strongly with growth of 2.5% expected by 2013 and then trend lower to 1.3% by 2015.
• Unemployment is expected to trend down from 6.6% to reach 4.8% by 2013 and 4.6% by 2015.
• Wages pressures are forecast to increase on the back of a relatively tight labour market with nominal wage growth forecast at 4.1% by 2013 and remaining at this level through to 2015.
• The exchange rate (as measured by the Trade-weighted Index – TWI) is expected to decline to around 64.5 (down from around 68 currently) by 2013 and then full away further to 56.0 by 2015.
• Interest rates (90-day bank bills) are projected to rise steadily (currently 3%) to reach 3.9% by 2013 and rise further to 5.0% by 2015

BusinessNZ Thoughts and Reactions

While most of the projections would appear reasonable (given current information), the potential for higher inflationary pressures than those forecast in the Budget looks likely for a number of reasons. First, high commodity prices and uncertainty over oil supplies will continue to put pressures on the New Zealand economy. Second, while the “one-off” associated with GST and other Government initiatives last year will fall out of the system, the potential for greater inflationary pressures would seem obvious as a result of labour and supply issues associated with the rebuild of Christchurch. Thirdly, any significant reduction in the TWI (as forecast in the Budget) will further exacerbate “imported” inflation.

Budget 2011 - The Government’s Fiscal Position

•  The Government’s operating balance as a percentage of GDP is expected to improve from -8.4% of GDP in the year to March 2011 to around -1.8% by 2013 and returning to a slight surplus of 0.5% by 2015.
•  Core Crown expenses are forecast to decline from 36.4% of GDP (current) to around 31.3% by 2015. Expenditure over the period is expected to increase from $ 72.8 billion to $77.1 billion by 2015.
•  Core Crown revenue is forecast to increase from 28.5% (current) to around 31% by 2015.

BusinessNZ Thoughts and Reactions

The Government has sought to trim some of the excesses associated with a number of “middle class” welfare programmes as outlined below, while subtly addressing public service efficiencies through requiring departments in future to bear the costs associated with Kiwi-saver and other retirement schemes out of base-line budget rather than being funded separately via Government. This will put greater discipline and flexibility Government Departmental CEOs to address these issues.

On the revenue side, improved revenue flows in the out-years reflects the expectation of relatively strong economic growth.

Budget 2011 - Breakdown of Main Budget Areas for Business

The following areas are likely to be of particular interest to the business community:

1. TAX & EXPENDITURE

Overall Result: Mixed

Expenditure Reform

KiwiSaver

As indicated to the public prior to the public, the Government has introduced the following changes to KiwiSaver:

• From July 2011, the Member Tax Credit will be halved from around $20 a week to $10 a week.
• From 1 April 2012, the tax free status of employer contributions to KiwiSaver and other complying superannuation funds will end. All employer contributions will be subject to Employer Superannuation Contribution Tax (ESCT) paid at the employee’s marginal tax rate.
• The minimum employee contribution rate will rise from 2% to 3% from 1 April 2013.
• The compulsory employer contribution rate will rise from 2% to 3% from 1 April 2013.

Overall, the changes to KiwiSaver are expected to generate savings for the Government of $2.5 billion over four years.

BusinessNZ Thoughts & Reactions

While KiwiSaver has been far more successful than original estimates of take-up had predicted, this has also meant a significant fiscal cost to the Government. The changes outlined in the Budget will help towards the long term viability of KiwiSaver, with a greater share of contributions coming from the employers and employees.

While the compulsory employer contribution rate will increase one percentage point, this change will not come into effect until April 2013. Therefore, this gives employers time to plan their labour cost estimates looking out for the next couple of years.

There was no mention of further tax reform, apart from possible tax changes for savings. This may indicate that as far as the current Government is concerned, major tax reform is over for the time being. We would disagree, as there needs to be a continual examination of tax rates to ensure competitiveness with other countries.

Working for Families (WFF)

The following changes have been announced by the Government:

• A slightly lower abatement threshold of $35,000, compared with the current $36,827.
• A slightly higher abatement rate of 25c in the dollar, compared to the current 20 cents in the dollar, and
• An alignment between the Family Tax Credit (FTC) payments for children aged 16 years and over and the FTC payments for those aged 13-15.

Overall, the changes to WFF will reduce its total cost from $2.8 billion in 2011/12 to $2.6 billion in 2014/15.

BusinessNZ Thoughts & Reactions

While these changes are at least a step in the right direction, they still do not adequately address WFF as a policy. While assistance should be made available for those families most in need, WFF remains an extensive welfare payment for a vast number of families in New Zealand, which after the changes still remains a high fiscal cost.

Student Loans

The following changes have been announced by the Government:

• Restricting student loan eligibility for those with an overdue student loan repayment obligation of $500 or more who are in default for more than one year.
• Restricting borrowing for people aged 55 and over to tuition fees only.
• Removing the entitlement for part-time full year students to borrow for course-related costs.
• Suspending inflation adjustments to the student loan repayment threshold until 1 April 2015.
• Shortening the repayment holiday for overseas based borrowers from three years to one year, and requiring borrowers to apply for the repayment holiday and provide a New Zealand based contact person before they go overseas.

Overall, the changes are expected to result in operating savings of $277 million over five years, and capital savings totaling $170 million.

Business NZ Thoughts and Reactions:

Like Working for Families, these changes are welcome but do not go anywhere near what we would want to see. Given the large fiscal cost of interest-free student loans, we still believe some sort of interest charge on loans need to be re-introduced to remove cost and get back to a situation of normal lending conditions.

2. EDUCATION & INDUSTRY TRAINING

Overall Result: Mixed

Schools and early childhood education will receive an extra $1.4 billion in operating and capital funding out to 2014/15, with total education spending rising to $12.2 billion in 2011/12. This includes:

• $66.5 million to increase the number of Trades Academies and Service Academies, to keep 16 and 17 year olds engaged in education and training as part of the wider Youth Guarantee.
• $51.5 million for the school network upgrade project – part of the ultra-fast broadband support for schools.
• In the tertiary education space, up to 750 additional places in high performing private training establishments, $17.5 million for English courses for refugees and migrants, reallocating youth training funding for additional Youth Guarantee places, and a 2% increase in funding for all degree and post-graduate courses.
• In the social development space, there will be an increase of $55.2 million over four years to support young people into jobs and $15 million more for other employment assistance programmes.

BusinessNZ Initial Thoughts and Reactions:

Education has been benefited from savings from changes to the Student Loan scheme, Kiwi Saver, and Working for Families. Given the importance of skills development to productivity improvements we remain concerned that there is no coherent or coordinated plan for skills development across the economic cycle.

The focus on raising the achievement of young people is commendable, but more needs to be done to increase the clarity of pathways through the education and skills system. While it is good to see some additional funding for ESOL courses for migrants and refugees, it is disappointing that the Government is still not addressing the urgent need to raise the literacy, language and numeracy skills of the workforce.

3. INFRASTRUCTURE/NATURAL RESOURCES

Overall Result: Mixed

Extending the Mixed Ownership Model

• The Government will extend the mixed ownership model to four state-owned energy companies and reduce its majority shareholding in Air New Zealand. The details include:
• This would happen in a 3-5 year programme starting in 2012, with the Government retaining a majority stake in all 5 companies and kiwi investors being first in line to purchase.
• It is estimated that the new model will free up $5-7 billion

BusinessNZ Thoughts and Reactions

A good start given the politics involved. Will free up funds for other social assets e.g. schools while reducing borrowing costs.

Water and Irrigation

The Government announced pre-Budget an Irrigation Acceleration Fund of $35 million to support the development of irrigation infrastructure proposals while the Government will also consider in a future Budget investing up to $400 million of equity in water infrastructure schemes.

4. OTHER

Christchurch Earthquake Recovery
The Government is establishing a Canterbury Earthquake Recovery Fund to account for its share of the estimated recovery costs.

The fund will initially be $5.5 billion, which will cover central government’s costs.

BusinessNZ Thoughts and Reactions

While in some respects the need for a specific fund could be questioned, the fund will have a number of benefits in that it should ensure that the Government’s contribution will be effectively “capped” and should encourage transparency.

Government contributions to NZ Superannuation Fund to resume in 2016/17
The Government proposes to resume contributions to the NZ Superannuation Fund in 2016/17, two years earlier than expected.

BusinessNZ Thoughts and Reactions

There is debate as to whether partially pre-funding the costs associated with an ageing population is a good idea given NZ’s current net debt position. It makes little sense borrowing money on the one hand to invest in a superannuation fund on the other. The other more fundamental issue is the fiscal issues associated with an ageing population in general which the government has again effectively ignored in this budget. Tighter targeting of NZ Superannuation is required.

 Regulatory Reform

The Government has highlighted its support for both the Regulatory Standards Bill and the Spending Cap (Peoples Veto) Bill, insofar giving it careful consideration after submissions have been received.

BusinessNZ Thoughts and Reactions

Given regulatory reform is a key way in which to both reduce costs and improve growth, the Government’s lukewarm response to these two Bills is somewhat disappointing.