Budget 2017 has brought something for everyone, with wide-ranging spending for families and infrastructure two areas that are seeing the most investment.
“Minister of Finance Steven Joyce’s first budget finally reaps the rewards of the Government’s fiscal patience. Strong economic performance with good growth, modest inflation and shrinking unemployment, gives the Government options that it did not have before. And the response has been to provide something for almost everyone,” said PwC Partner and Budget Leader Richard Forgan.
There are welcome shifts to tax thresholds, long held at their current levels. Together with Working for Families, these will give the typical earning household between $1,000 and $2,000 more per year in disposable income. And those benefits will be most felt by low earners.
Infrastructure and house-building get a huge boost, most of it in Auckland; the innovation system gets more funding; the health sector is given some $4 billion more; defence, law and order, prisons, school building and vulnerable children all benefit.
Underneath the headlines, the general thrust is the more of the same from previous years – economic growth supported by investment in trade relationships, infrastructure building and innovation funding; more social services targeted at the most vulnerable parts of society; investment in core public functions such as the health, education, the tax system, ACC, defence and the justice system.
So who gets left out?
“Small businesses and the regions are mentioned in passing (particularly for tourism), but pale into insignificance against the investment in Auckland’s powerhouse,” says Mr Forgan.
“But the underlying themes show a high degree of continuity, with the Government investing in recovering from the Kaikoura earthquake and replenishing EQC’s funding model to prepare for any future shocks.”
Freight and commuters are the two biggest beneficiaries from the Government’s announced infrastructure spending in Budget 2017.
Out of $4 billion the Government will invest in infrastructure this year, nearly $1 billion will be to rail programmes, with $450 million going to KiwiRail’s network, $436 million as the first tranche of the Government’s commitment to Auckland’s City Rail Link and $98 million in improvements to Wellington’s commuter rail network. Beyond rail, $812 million will go to rebuilding State Highway One North and South of Kaikoura.
“Public transport has long been a pain point to keeping our cities moving,” Mr Forgan says.
“This investment will allow the capital and our largest city to keep up with population growth and demands on its road and rail networks.”
Besides road and rail, education is benefitting from increased investment, with a large portion going towards population growth in Auckland. The Government will fund the construction of six new schools and 305 new classrooms nationwide. Auckland alone will see four of these six new schools, and 170 more classrooms.
“Investment in schools is a positive sign that the Government is continuing to invest in fast-growing communities. This investment is vital for meeting the country’s projected population growth,” says Mr Forgan.
Fiscal headroom from material surpluses
Deloitte CEO Thomas Pippos says that Budget 2017 looks to cement the current Government even more firmly across middle and lower New Zealand.
Mr Pippos says that the fiscal headroom provided by material and growing surpluses has afforded the Government an opportunity to provide something for everyone in Minister Joyce’s first Budget.
“Compared to many other countries, most notably the United Kingdom, Australia and the United States, New Zealand is in an enviable position able to invest its initiatives around its Family Income Package, Infrastructure, Social Investment, Public Services, Growing Economy package, while reducing debt as a percentage of GDP,” he says.
“Today’s Budget is a marker in a journey rather than a destination in itself. The new team of English and Joyce has used it to start to re-set the agenda in a predicable way. Before Kiwis go to the polls in September, they have a further opportunity to restate the destination which they will inevitably take.”
Mr Pippos saw the Budget as about crowding out others, looking to provide material cash and services dividends to the masses, with equally material social cohesion and economic resilience dividends to businesses and those further up the food chain.
“It’s about standing back and looking at the total picture. At a simplistic level, business nirvana may include lower corporate tax rates that mirror global trends, but social cohesion and resilience was the dividend they were offered today,” he says.
“There is no doubt however, that with the passage of time and assuming we don’t face future shocks, that all tax rates will be heading down under the current Government. It’s just maths” he says.
The books look good
EY's tax partner Aaron Quintal says all the economic indicators are pointing in the right direction. The Treasury expects GDP growth to average 3.1% a year over the next five years, with the country working flat out” says David Snell, EY Tax Director.
He says real GDP growth per capita is less rosy, forecast at 0.9 percent for 2017, rising to 1.4 percent in 2018. "That’s OK by New Zealand standards but it has been higher in the past – in 2013, 2012 and 2007 for example. Even so, the Government is well placed to rebuild our fiscal resilience. In a risky world, we find that reassuring.”
Comparison with Australia
“English and Joyce pride themselves on our sound public finances, targeting net debt to fall below 20% of GDP. Meanwhile Australia’s net debt is expected to rise to the highest point in that country’s history. Even so, Australia’s peak debt is projected to peak at 19.8%. Australia’s problem meets our definition of success," Mr Quintal says.
Family income package
“The combination of family tax credit changes, a boost to the accommodation supplement and modest increases to lower thresholds is a package smartly targeted at middle earners. But anyone earning even the average wage of $58,900 will be entitled to ask “Where’s my share?”” says Mr Snell. On personal tax cuts he says you have to ask if the Budget does enough to deliver to all New Zealanders. An increase of $4,000 in the 30% tax rate threshold barely delivers for the average earner, he says. The average full time wage is now $58,900. Someone on that average full time wage will from 1 April 2018 pay an average tax rate of 16.4%. The average earner in 2010 paid 16.7%.
Mr Snell says, “Joyce has targeted his cuts towards middle New Zealander with surgical accuracy. At a cost of $2 billion per annum he’s delivering $20 per week for anyone earning $52,000 or more.”
Working for Families tax credits
We were expecting more action. Recipients with older children will see their family tax credit cut. They’ll be barely compensated by the modest cuts in income tax. We’ll be left with a more sharply targeted scheme that will help those most in need and reduce accusations of middle-class welfare.” says Mr Snell.
“There is a real need for more effective help for low income families who struggle with increases in rental costs or even with housing availability” says Mr Quintal.
Rents have moved on considerably since the accommodation supplement was last adjusted 10 years ago. All the main centres have had capacity problems. Mean private sector rentals in Auckland, at $531 for a three-bedroomed house, are 58 per cent higher than in 2005.
“Accommodation Supplement has been a cornerstone of housing assistance since the 1990s but there has never been a full review of its effectiveness” says Mr Snell. “At a cost of $1.2 billion each year, even before today’s changes which will cost an extra $400 million, perhaps such a review should be the Government’s next step.”
Aaron Quintal notes “If the forecasts can be relied on the New Zealand economy will grow by an extra $23.9 billion over the next five years compared with what was expected just six months ago in the government’s Half Year Update. Without the unexpected GDP growth, this would likely have been a Budget of funding families or funding infrastructure, but probably not both.”
“Like the rest of us, the government can only spend each dollar once. Given the ambitious new target of getting crown debt down to 10% to 15% of GDP by 2025, the government has only limited capacity to invest in the things that voters want.”
Prudent Budget supports growing economy
The government’s prudent financial management provides a solid grounding for the New Zealand economy, households and businesses, says the New Zealand Bankers’ Association today in response to Budget 2017.
“There were no major surprises in today’s Budget. It builds on the government’s prudent approach to managing its finances and meeting our needs in a growing economy,” says association chief executive Karen Scott-Howman.
The forecast economic growth and government surpluses are good news for New Zealand households and businesses.
“The projected surpluses will give the government more options and improve our overall resilience.
“Targeting relief for low to middle income households through changes to the tax thresholds, family tax credits and accommodation supplements makes sense, and will support economic growth.
“We’re also pleased to see increased investment in infrastructure and public services in areas of need.
“Of particular interest is the $10.2m being provided to improve young New Zealanders’ financial capability.
“The funding will allow the Commission for Financial Capability to scale up its Sorted Schools programme and its community-based programmes.
“We strongly support any initiatives to improve financial capability and knowledge in New Zealand. Financially capable people know how to manage their money and make better financial decisions. That ultimately improves personal, family and community well-being," she says.
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