There’s clearly been some surprise among both business figures and lobby groups that the Government has chosen to focus particularly on child poverty.
Lobby group the Taxpayers’ Union is calling the Budget something that would be expected from Labour and the Greens.
The very good news is that despite what it terms the “slight slippage” in the budget, ratings agency S&P, sees no change to our ratings as a result, while fellow ratings agency Moody’s appears even more chuffed, saying the budget shows “a continuing positive trend” in the Government’s finances.
Here’s a selection of some of the comments that have been issued by various parties on the Budget:
Standard & Poor’s
MELBOURNE (Standard & Poor’s) May 21, 2015–Standard & Poor’s Ratings Services said today that the New Zealand government’s proposed budget for the fiscal year ending June 30, 2016, will have no immediate effect on the ratings and outlook on New Zealand (Crown; foreign currency rating AA/Stable/A-1+; local currency rating AA+/Stable/A-1+).
The Crown’s latest budget projections are broadly in line with our expectations. While the budget contains some write-downs to revenue growth over the four years to June 2019–due mainly to a weaker outlook for inflation and wages growth–the impact on government fiscal deficits is relatively modest. We still expect fiscal deficits to gradually narrow over the next few years, although rather than achieving a broadly balanced budget in fiscal 2017, the government now appears likely to achieve this a year or so later. We continue to expect the country’s general government net debt to remain low.
Our ratings on New Zealand reflect the country’s economic resilience, fiscal and monetary policy flexibility, mature and stable public policy settings, and sound financial sector. Moderating these strengths are New Zealand’s very high external imbalances.
Moody’s Investors Service
New York, May 20, 2015 — Moody’s Investors Service says that the New Zealand (Aaa, stable) government budget presented on May 21 shows a continuing positive trend in the government’s finances, reflecting the relatively good underlying economic fundamentals. The budget supports the country’s Aaa rating and stable outlook, in that debt ratios will continue to decline over the medium term if the budget projections are realized.
The budget estimates that the operating balance will have recorded a small deficit of 0.3% of GDP for the 2014-15 fiscal year, ending June 30. Despite the government not meeting its original goal of a small surplus, the small size of the deficit nonetheless allows the ratio of gross government debt to GDP to remain unchanged at 35.0% in June 2015 from its level at the end of the last fiscal year. Going forward, the budget projects a return to surplus in the coming year and a gradual increase to 1.3% of GDP in fiscal 2018-19. This trend will support a drop in the debt ratio, which, according to the government’s projections, will drop to 29.3% of GDP by 2019.
Although Moody’s looks at the gross debt numbers as the starting point of its analysis, the government’s main policy target is net debt, which takes into account the assets of New Zealand Superannuation as well as of the Reserve Bank. On this front, the figure is estimated in the budget as 26.3% of GDP at the end of this fiscal year, falling to 22.9% by the end of fiscal 2018-19. The stated goal of the government is to have this ratio at or below 20% of GDP in the early 2020s.
According to Moody’s, New Zealand’s government debt is low in comparison to other Aaa-rated sovereigns, and the further declines in debt ratios as presented in the budget indicate that its relative position is likely to improve.
New policy initiatives on the spending side were few in this budget, although increases in health and education expenditures continue the trend of recent years. There are no significant new revenue measures, in keeping with the government’s policy of not increasing taxes. Control of expenditures remains the focus of fiscal policy in New Zealand.
Underpinning the improvement in the budget balances is the economic outlook, which, in comparison to other Aaa-rated sovereigns remains healthy. After real GDP growth of around 3% recently, the government expects the rise to average 2.8% annually in the coming four years. GDP growth is supported by a relatively low interest rate environment at present, continued investment in housing in particular, and positive net immigration. Risks are related mainly to the global economic and fiscal conditions, particularly growth in China and Australia, which are New Zealand’s main trading partners.
Ernst & Young – tax partner Aaron Quintal
The focus on child poverty in the Budget came as a surprise, particularly in light of Bill English’s comments in advance of the Budget to try to pour cold water on speculation about significant changes in this area. The government is taking a longer-term “social investment” approach; acknowledging that kids from the most deprived upbringing continue to cost the country over the rest of their lives as they disproportionately leave school without qualifications, end up on benefits and end up in prison. Money spent now not only improves social outcomes, it saves money in the future.
There is less of a long-term approach to investment in business. The economy is expected to continue to do well; 2.8% GDP growth on average over the next four years with inflation continuing to remain low and unemployment falling. The government has taken the view that the best it can hope to do is get out of the road and let business get on with it. It that is the plan, there is still plenty of room to move around reducing red-tape and compliance costs for business, whether it is tax administration, employment law or the Resource Management Act.
Increased focus on tax compliance
There were no announcements on new taxes in the Budget and no further detail on the previously announced “bright-line” test that any gain on an investment property held for less than two years would be taxable. However, the government has announced that Inland Revenue will receive an extra $73 million over the next five years to spend on increased enforcement of tax laws. The money has been earmarked by the government for specific projects:
- Property compliance – $29 million, with an anticipated return through increased tax revenue of $202 million
- Complex financing transactions (including hybrid instruments) – $19.5 million with an expected $313 million return
- The “hidden economy” (which covers everything from the proceeds of crime to cash jobs by tradesmen) – $25 million to bring in an expected $126 million.
This is a sizeable amount of money and points to the Revenue significantly stepping up their enforcement operations. It also marks an interesting move where the Minister is starting to step into the Commissioner of Inland Revenue’s turf. It is up to the Commissioner to enforce the law and determine which taxpayers should be investigated and in relation to which tax matters. There is an argument the Minister should not be specifying, with quite this degree of detail, how the Commissioner deploys her resources.
New Zealand Bankers’ Association
Budget 2015 continues the government’s responsible economic direction the New Zealand Bankers’ Association said today.
“The Budget shows that the New Zealand economy remains on a sound track with a clear path to surplus forecast,” said New Zealand Bankers’ Association chief executive Kirk Hope.
“Despite lower than forecast tax revenue, meaning that a surplus will not be reached this year as predicted, the important thing is that a small surplus is expected in 2015/16, rising to a $3.6 billion surplus in 2018/19.
“Budget 2015 shows that the overall fiscal trajectory remains positive, and that’s a sign the New Zealand economy is in good shape. We welcome this and the framework that the Budget puts in place to support this steady growth.
“It’s pleasing to see that the reduction in crown debt remains on-track and that unemployment is forecast to fall below five per cent by 2016/17, while economic growth is set to average 2.8 per cent over the next four years. These are all signs that the economy is heading in the right direction.
“The priority placed on reducing income taxes from 2017 is also commendable.
“That said, the missed surplus for 2014/15, and reduced tax revenue, shows the relatively fragile nature of New Zealand’s economic growth story.
“That’s why it’s important that cautious, careful government spending is maintained. The government needs to remain prudent in its expenditure and continue to exercise restraint.
The Budget also confirmed a number of housing-related steps aimed at addressing challenges on both the demand and supply side of the equation.
“These are constructive steps and will aid housing supply and affordability especially in Auckland. It’s good to see the government moving to strengthen tax rules on residential property and bolstering IRD’s resources in this area.
“However, the key to addressing housing affordability remains freeing up supply. We welcome the initiative in Budget 2015 establishing a $52.2 million capital contingency fund to facilitate housing development on crown-owned land in Auckland.
“This move will help to boost the supply of affordable housing in the Auckland region.
Budget 2015 also removes the $1000 kick-start payment for people enrolling in KiwiSaver.
“While this move is understandable from a cost perspective, it’s important the government does not step away from a firm focus on incentivising savings.
“We’d encourage the government to now consider making a strong commitment to auto-enrolment in KiwiSaver,” Hope said.
PWC’s overall impressions
“Budget 2015 delivers few surprises, and sticks to the approach we have come to expect from the Minister of Finance,” says PwC Chief Executive Office Bruce Hassall.
The economy is forecast to grow at around 2.8% per annum over the next four years, and to be steadier over this period than previously feared. Inflation is low, employment growing, unemployment coming down and apart from Auckland housing and construction, capacity pressures in the economy are not threatening.
Government expenditure – making a virtue of predictability
The themes from previous budgets come through again: supporting people into work, greater welfare support for those most in need, some R&D and infrastructure spending, and the normal increases to meet pressures in core services in health, education and law & order.
“The deficit is larger than had been signalled, and the surplus next year is back to rounding error levels. So with little financial room to manoeuvre, the sums involved are not large. But the underlying approach of focussing on long-term performance and tackling the more challenging parts of society continues.
The $500m in ACC cuts come in over the next two years, but travellers will now pay a charge on entry and exit from the country.
The Auckland housing market remains the most toxic risk to the economy. Measures to damp down demand are welcome (the Reserve Bank’s LVR moves and strengthening the tax regime around property profits) and are joined by more initiatives on the supply side, especially bringing more Crown land into the market for development. But the latter operates on a timescale of years, and underlying population growth continues in the meantime.
Children in hardship
The centre-piece is a linked package of measures increasing benefits and Working for Families tax credits for families on the lowest incomes, supported by increased subsidies for childcare and extension of early childhood education.
A creditable record
All-in-all, Budget 15 continues Bill English’s creditable record of bringing the country out of the depths of the GFC, without the pain of austerity and public spending cuts, and while still driving improved performance in the public sector. He didn’t blink at the massive hit to public finances from the Canterbury earthquakes, so he’s hardly likely to do so over missing the surplus this year.
“The cupboard is looking pretty bare for next year (“$1 billion allowances are the new normal”), so we can expect more of the same in Budget 2016. But an allowance of $2.5 billion has been left for Budget 2017 (pre-election), so any hope for material moves on tax or expenditure will have to wait until then,” concludes Mr Hassall.
The Taxpayers’ Union
Action group the Taxpayers’ Union is awarding Bill English’s seventh budget a “2 out of 10” describing it as what voters would have expected from a Labour-Green Government.
Jordan Williams, Executive Director of the Taxpayers’ Union, says:
“This is without a doubt Bill English’s most left-wing Budget. Voters elected a National-led Government to get the books back into surplus and control government spending. Instead today’s Budget introduces a new tax on travel, fails to address wasteful government spending, and increases hand-outs.”
“Instead of fiscal discipline and a surplus, this is a big spending budget with a tiny surplus based on wishful thinking. The big winners are beneficiary families, bureaucrats and recipients of corporate welfare.”
“The Budget splashes out on even more corporate welfare, and widens the gap between those in work, paying taxes, and those on benefits.”
“Paying more for beneficiaries to have children isn’t a step forward in terms of ensuring more children aren’t brought into the poverty cycle. The Government would be far better to spend the money getting people back into work.”
“The Government’s adjustments to welfare go further than anything Helen Clark did. They reduce the incentive for beneficiaries to get off welfare and into work.”
“This Budget will shock those who voted for National to fend off a big spending Labour-Green government. National appear to have taken ‘see a problem, throw some money at it’ approach.”
“From a taxpayer perspective, this is Mr English’s worst Budget.”
KPMG’s overall impressions
KPMG Executive Chairman, Ross Buckley welcomes Budget 2015 as a pragmatic balance of priorities. “Government has recognised that action is required on low income families and on housing. At the same time, it is important for the prosperity of economy as a whole, that financial markets have comfort that the debt track and fiscal position is sound and robust.”
“The return to surplus is an important signal, and although delayed one year remains wafer thin at under $200 million. The Government has foregone greater headroom in the surplus projections by spending some of that now on low income families and vulnerable children” said Buckley. “That shows the Government is addressing the social challenges but balancing these within tight fiscal restraint.”
Businesses will welcome the stability and strategic focus the Business Growth Agenda presents. KPMG believes these challenging but strategically important targets are a useful framework for managing the economic direction of the country. “Budget 2015 in New Zealand starkly contrasts with that in Australia” says Buckley.”New Zealand is in a robust fiscal position, with clear frameworks and targets. Australia has real challenges, and has needed to put a substantial stimulus package towards its SME businesses.”
KPMG National Managing Partner for Private Enterprise, Paul McPadden is pleased that increased R&D grant funding has been confirmed for entrepreneurial businesses. He also notes the ACC levy reductions when confirmed will release cashflow for businesses and will be welcome. “KPMG would like to have seen more in the Budget for the regions” says McPadden. “The New Zealand economy rests on the performance of our small businesses, and many of these operate outside the major metropolitan hubs. Our entrepreneurs provide valuable jobs, experience and opportunity for the workforce in the regions.”
Specifically addressing the challenges for regional business is limited to funding $25 million over three years for new privately led Regional Research Institutes.
“It will be important that Government Agencies look to regional businesses within their core baseline activities” says McPadden.
Returning some of the income that was stolen from beneficiaries in National’s welfare cuts in 1991 is not an adequate way to address poverty or reduce inequality says FIRST Union General Secretary Robert Reid.
“The government’s decision to lift benefit levels for families receiving state support will mean nothing without stronger action on the housing crisis. Many families will see their extra support eaten up by rising rents”.
“Releasing public land for private development in Auckland may help cool the market. But without a corresponding commitment to more social housing and state housing the budget remains an empty one for struggling families”.
“Many working people are also struggling with astronomical housing costs. But even if the market cools, house prices are already too high. Workers need a pay rise to help catch up”.
“Last year Bill English was talking up average wage growth of 3.4 percent between 2014 and 2017. Yet this budget will do very little to meet that target or to reverse the inequality that the previous National government cemented with brutal benefit cuts and the Employment Contracts Act in 1991” says Reid.
Chartered Accountants ANZ
Today’s Budget means vulnerable families will get the support they need and most Kiwis’ back pockets will benefit from ACC levy reductions.
“What is missing from the Budget are signals about how the Government plans to tackle the long term challenges of an ageing population and a tax base that may not be fit for the future” says Lee White, CEO, Chartered Accountants Australia and New Zealand.
The $790 million child hardship package should achieve its objective of reducing poverty across 110,000 beneficiary families and 200,000 lower income working families – a vital outcome for New Zealand’s future.
Likely ACC levy cuts totalling $500 million over two years will be well received – by businesses, employees and car owners.
The removal of the $1,000 kick start subsidy is projected to save the Government $500 million over four years. With 2.5 million Kiwis already in the scheme the Government suggests the change will have little effect on enrolments but it seems unfair to those who were planning to join up when they started work or when they could afford to save.
“The changes to tackle Child Support debt are sensible. Most of the debt is penalties and many liable parents struggle to, or don’t, meet their obligations before penalties are imposed. Forgiving $1.7 billion of penalties over four years won’t affect the Government’s books much as it already recognises that most of the debt is uncollectable. The broader tax debt ‘book’ warrants a similar pragmatic response,” according to Peter Vial, Tax New Zealand Leader at Chartered Accountants ANZ.
The property tax measures will help improve compliance with the current rules but are not a panacea for the challenges facing the Auckland housing market. The broader package – including the Reserve Bank’s LVR restrictions; an additional $29 million over 5 years for Inland Revenue to bolster its property compliance activities; and a withholding tax for non-residents selling residential property – should help address housing demand.
The beefed up information rules are more important than the new two year bright line test”, says Vial.
Buyers and sellers of property will have to provide their IRD numbers and, in the case of non-residents, their overseas tax ID numbers and proof of a New Zealand bank account. This will help Inland Revenue identify and assess property speculators and traders. It will also mean IR will have far more accurate information about participation in the property market, which should assist the Government design its longer term housing strategy.
On the housing supply side the Government will fund housing development on Crown-owned land in Auckland. Again not a panacea but a step in the right direction. The key will be to get the development underway quickly.
What is missing?
“The Budget does not signal how the Government will address the long term sustainability of the tax base. New Zealand’s tax base is heavily reliant on revenue from income tax, GST and company tax. There are other options to explore – capital gains tax, land tax, pollution taxes etc. The Budget confirms that 11 percent of adults pay 50 percent of the income tax with 2 percent of adults paying a whopping 21 percent of the total income tax – and that is before the effect of Working for Families assistance. This just isn’t sustainable” says Vial.
Unsurprisingly no changes to the age of entitlement for National Superannuation are contemplated. An ageing population and significant national superannuation and health costs suggest a long term view is needed.
Tax simplification measures for small business are also missing. The Australian Budget provides SMEs with an immediate write-off for assets acquired for less than A$20,000. While this is only a short term measure and is made in a very different economic context it does make NZ’s $500 asset write-off threshold look stingy. The threshold has been the same for a decade and it is time it was reviewed. Increasing it to a more meaningful level would not break the Government’s bank.
“Overall the Budget is predictably responsible but doesn’t signal how long term challenges will be tackled. With the return to surplus delayed by a year the need to focus on fiscal prudence and net Crown debt reduction is acknowledged. However, there is still room for bolder measures to start to address the long term challenge,” says White.