Budget 2011: reaction
Read what business leaders and influential organisations think of today's budget.
Read what business leaders and influential organisations think of today's budget.
Austere but sensible
PwC chairman John Shewan say "Budget 2011 delivers an austere but sensible reform package that, as expected, includes changes to KiwiSaver, Working for Families and student loans."
It also sets up a $5.5 billion Canterbury Earthquake Recovery Fund to help rebuild Christchurch.
John Shewan says "One surprise in the Budget is the axing of the tax-free status of employer contributions to KiwiSaver from 1 April 2012."
The Government subsidy for KiwiSavers (called the Member Tax Credit) will fall from a maximum of $20 per week to $10 per week. Minimum member and employer contributions will increase from the current 2% to 3% from 1 April 2013. The Government's $1,000 kick-start payment for each new KiwiSaver is retained. The changes to KiwiSaver will save the Government $2.6 billion over four years.
High income families will see their entitlements to Working for Families assistance diminish. The Government will adjust the abatement thresholds and abatement rates to achieve this objective. The changes will take place in four steps, starting 1 April 2012. The changes will save the Government $448 million over the next four years.
The Government has decided to reduce the fiscal cost of the student loan scheme by tightening criteria for student loans such as limiting lending to people aged over 55 or with bad debts. This will save about $277 million over five years.
Also announced were changes to the thin capitalisation rules, and reviews of livestock valuation election rules, the taxation of high value assets used for mixed business and private use, and certain aspects of the tax and social assistance treatment of non-cash benefits.
Some of the key reforms will be included in legislation to be introduced later today and passed under urgency.
KiwiSaver compliance costs mount
The compliance costs for businesses of administering KiwiSaver contributions continue to mount with each change to the scheme, says Deloitte tax partner Greg Haddon.
Changes to KiwiSaver announced in the Budget today include removing the tax exemption for employer contributions, halving the Member Tax Credit and upping minimum contribution rates from 2% to 3%, which will save the Government $2.6 billion over the next four years.
Mr Haddon says there have now effectively been so many different versions of KiwiSaver since the scheme was introduced and it risks becoming the political football that gets a kick-around every election year Budget.
“The continual tinkering will make it more and more confusing for both employers and employees, and potentially act as a disincentive to join the scheme,” he says.
While the changes are unavoidable from an economic perspective, with nearly half of all KiwiSaver funds currently coming from the Government through subsidies and tax breaks, businesses need to have some certainly about the future of the scheme.
“The Government’s predicament is that by borrowing to fund KiwiSaver, there is no real increase in national savings – the Government’s debt acquired as a result of borrowing the funds cancels out the impact of savings through KiwiSaver.”
The Government’s hand was forced partly because of the scheme’s success. KiwiSaver now has nearly 1.7 million members, and is gaining about 20,000 new members a month – far more than expected when the scheme was introduced. The enrolment rates may be further bolstered with the Government to consider whether a one-off enrolment exercise should be undertaken by employers.
“Behind the political rhetoric though, KiwiSaver needs to evolve into becoming a key part of New Zealand’s personal savings pool and not simply a deferral mechanism akin to the New Zealand Superannuation Fund.
“As an economy we must increase our levels of savings in New Zealand’s productive sector, and we simply can’t expect that the vast majority of this should come from central Government.”
“So long live KiwiSaver. Perhaps we might see some bold politics in the future that will see it as a compulsory part of New Zealanders’ lives.”
Part-privatisation plans a step in the right direction
Plans to partially privatise state-owned electricity generators and mining company Solid Energy have been welcomed by Deloitte energy and infrastructure leader Paul Callow.
Finance Minister Bill English today announced a three- to five-year programme from 2012 to sell off minority shares in Mighty River Power, Meridian, Genesis and Solid Energy, and to scale back the existing shareholding in Air New Zealand.
Mr Callow says the initiatives have at last provided greater clarity about the Government’s economic priorities and its desire to create an environment to help lift the performance of the assets it owns.
The plan has a threefold benefit of reducing Government debt, encouraging the companies to perform better in the future, and providing a local and attractive new investment destination for savings funds, he says.
“This model has worked well in the past and Air New Zealand is an example of what can be achieved when a company part-owned by the Government is subject to market disciplines,” Mr Callow says.
“Privately owned companies are subject to pressure from shareholders demanding market rates of return and pressure from customers to deliver the services they need creating strong incentives to raise performance.”
The mixed ownership model proposed for the SOEs does raise questions of whether the Government needs to own the majority of the companies it is partially floating, or if it can afford to have that amount of capital tied up in assets which could be 100% investor owned.
“The need for capital elsewhere is pressing and whatever is left tied up in SOEs reduces the amount available for investment in much-needed infrastructure projects.
“New Zealand is well behind the play in its infrastructure development and needs to step up several gears and pedal hard to make up the ground we have lost to other developed economies over the past 10 or 20 years.”
Budget cautious and safe
BusinessNZ has characterised Budget 2011 as cautious and safe, with most announcements generally pointing in the right direction of reducing government expenditure and debt.
However BusinessNZ chief executive Phil O’Reilly said the Budget lacked signposts towards future reforms and other than the extensions to the mixed ownership model, more could have been done to produce structural change.
“The Budget is heavily dependent on the Treasury’s predictions for growth being realised.
“Efficiencies in the public service are to be welcomed and will help address the imbalance between the public and private sector contributions to the economy. But only a third of the announced $980 million savings will come from efficiency improvements, with the bulk of the savings being generated by the removal of central funding for KiwiSaver and other government superannuation schemes.
“KiwiSaver’s reduced tax credits, larger member and employer contribution and an end to the tax free status of employer contributions will represent greater costs to employers; however employers are likely to recognise that the moves will help secure KiwiSaver’s viability. They will have a reasonable amount of time before introduction to take account and plan accordingly. Saving government expenditure of $2.5 billion over four years will be a reasonable payoff from the changes.
“Slightly better targeting of Working for Families, reducing outgoings by about four percent, is a move in the right direction, although given its current role in diminishing incentives to work and produce, more reductions and more targeting would have been desirable.
“Student loans, the other major area of expenditure where significant change is called for, brought disappointment. Reversing the interest free status of student loans would have brought a much larger shift to financial health and would have helped bring better incentives in study choices and completion rates.
“Increased funding for training and employment assistance are positive but not game-breaking. Given the importance of skills development to productivity improvements there is concern that the Budget has produced no coordinated plan for skills development. More needs to be done to increase the clarity of pathways through the education and skills system and to respond to the urgent need to raise the literacy, language and numeracy skills of the workforce.”
"Boring" fiscal conservatism takes a front seat
Today’s budget has mirrored the “new normal” in terms of global trends – relatively “boring fiscal conservatism” – but that’s not such a bad thing, according to Deloitte managing tax partner Thomas Pippos.
Mr Pippos says the Government should be commended for not opting for short-term election measures, and taking a moderate, fiscally responsible approach that starts to wean us away from Government dependency.
“Finance Minister Bill English avoided the temptation of an election year lolly scramble, delivering a fiscally austere and pragmatic Budget 2011 and the partial privatisation of certain SOEs could easily be an opportunity for many ordinary New Zealanders to benefit from equity participation in the future,” Mr Pippos says.
“It was boring but that’s good in the current climate. If you look at some of our competitors elsewhere, this approach is clearly in line with a worldwide trend towards conservative fiscal management.
“And we’ve been fortunate to have escaped some of the harsh measures that countries such as the UK have had to introduce.”
The series of cost-cutting measures have been designed to start correcting the country’s debt path, and bring the Government’s books back into surplus by 2015, but actually it’s a lot better than that. The last big deficit is projected for 2013 at $4.1b, before moving to a $700m deficit in 2014 and a $1.3b surplus by 2015. Australia’s last big deficit is 2012, so we only stagger behind a year, he says.
In saying that, in the near term, 2012 remains pretty anaemic with the substantive growth to commence in 2013, so to a large extent “it is about believing the forecasts” when so may variables remain.
“The Government has however started delivering the country a reality check, saying that there is no silver bullet; we simply can’t continue to live beyond our means. It has started to wean taxpayers from welfare as those at the top end of Working for Families say adios to their welfare handout – a long time coming.
“What’s also a little surprising is that dinosaurs are making a comeback,” Mr Pippos says. “While 30% of personal income tax is still anticipated to come in 2012 from 5% of the population, there are anticipated to be 23,000 more taxpayers earning over $100,000 from 2011 – those that do the heaviest lifting from a personal tax perspective.
“The jury is out till the forecasts hold but it could have been a considerably bleaker day than what it actually was.”
Devil in the detail
“There’s a little tax devil in the detail of Budget 2011 around future policy reform targeted at mixed use assets – read as planes, boats and holiday homes,” says Thomas Pippos, managing tax partner at Deloitte.
“The current rules that apportion certain activities as between their private and business components could be the subject of a major rethink,” Pippos says.
Rightly or wrongly, this is only going to end one way for impacted taxpayers: they are going to end up paying more tax as the review won’t be looking to make such assets fall more easily into the tax base, he says.
The Budget provides scant detail on the actual initiative and certainly nothing in terms of the substance of any reforms, but taxpayers need to be aware that current practice could easily be short-lived if officials develop the type of rules that could find favour with the legislators.
“An interesting consultative document will eventually find its way into the public arena on this topic.”