BUDGET PREVIEW: Glass ceilings wait to be shattered

Glass ceilings usually refer to unacknowledged obstacles, hindering the advancement of an individual or group. In the lead up to this year’s Budget, one has to wonder, is Finance Minister Bill English grappling with a glass ceiling of his own?

To keep the government books in good shape, and follow through on the promise of getting the country back to surplus before June 30, 2016, the Budget must execute well on two fronts:

• It must maintain its tax revenue base and continue to find ways to control.
• And wherever possible, reduce government expenditure.

This is not rocket science; every previous minister of finance has been faced with a similar challenge.

However, balancing this Budget is made more complex by an exchange rate that continues to strengthen and the noticeable lack of change and improvement in many aspects of the economy.

So what might the government have to do to break the glass ceiling on revenue collection? Consider the introduction of new taxes.

Sigh of relief

One could almost hear the collective sigh of relief after last year’s Budget announcement when the government confirmed a capital gains tax (CGT) was not on the agenda. However, there is nothing to say it won’t be put back on the table this year.

New Zealand is one of the few remaining jurisdictions in the world that does not have a CGT regime. Treasury officials are no doubt once again running their ruler across the costs and benefits associated with the introduction and maintenance costs of this type of tax.

The inescapable fact is that a CGT is up and running in Australia and, given the goal of a single economic market, the implementation here cannot be quickly dismissed.

However, when considering any new tax, the government needs to take great care to balance the costs of compliance with the revenue that will be generated.

As recently demonstrated with the demise of the proposals to impose fringe benefit tax on car parks in  Auckland and Wellington, there can be a strong push back when the margins on tax revenue are too small.

Meanwhile, Inland Revenue continues to press on with an expansion of residency requirements to potentially capture the million or so New Zealanders who choose to live outside the country for more than 183 days each year.

This suggests that even if the glass ceiling isn’t broken, its height may be lifted.

The government also has the option to revisit the tax on certain consumables. Items such as alcohol, tobacco and motor fuels have certainly been the go-to candidates to generate additional revenue in the past. Perhaps they’ll be up for grabs again?

Cost reductions

Last year, in a bid to reduce costs, government departments and state-owned enterprises were all instructed to do more with less.

While the jury is still out on whether that goal has been achieved, anecdotal evidence suggests this directive has been taken to heart and broadly followed.

It is highly likely that the rationalisation of existing enterprises will manifest itself again. The success of the Ministry of Business, Innovation and Employment is testimony that change can be implemented relatively quickly and cost savings generated shortly thereafter.

The Budget must also shed light on areas of waste and inefficiency, with information technology (IT) a certain area of focus. Cloud computing technology is fundamentally changing the IT landscape.

And with an IT spend still well in excess of $2.5 billion a year, it will be fascinating to see how much attention is given to this topic – particularly in the light of the Novopay crisis.

The mantra of “enter once (correctly) and render many times” should be aggressively pursued to promote efficiency and effectiveness across the entire public sector because it is a principle that works.

Quality of spending

Evaluating the probity of government spending – which still represents more than 40% of gross domestic product – in health, education or social welfare, should not solely fall into the domain of the Office of the Auditor-General.

Probity audits should be actively supported by management and governance bodies throughout the government sector.

Given the glass ceilings many departments claim they have, it will be interesting to see how much commentary on this, if any, will be included in the Budget.

Two years into the government’s second term, with encouraging results in political polls and a wish to remain in power, will the glass ceilings around revenue collection and controlling costs continue to be tolerated, worked around, or will they be shattered?

The latter is unlikely. As everyone was taught as a child; people in glasshouses shouldn’t throw stones. And as the global financial crisis has demonstrated, no government or economy is shatter proof.

However, it takes only a single stone to break a glass ceiling. It will be fascinating to see if the opposition can find one when this year’s Budget is announced.

Mark Hucklesby is national technical director, audit, at Grant Thornton New Zealand, chartered accountants and business advisers. Email mark.hucklesby@nz.gt.com