Kiwiblog

Stuff has a Budget Quiz. I got 13.15 after correctly guessing Bill English’s tie colour.

No words are needed.

Mark Hansen has put together a nice wee site called “Where are my taxes“. Click on a pie graph to bring up a vote, and it then also gives you the breakdown per capita of spending in that vote. Did you know we spend $4 per person on weather forecasting?

Mark blogs about his site here. It’s a great wee resource.

UPDATE: Also check out a really cool visulation by Keith Ng at Public Address. It shows trends and all.

On the fiscal side the news is pretty good. The Government almost returns to surplus in 2013/14 (a modest $700m deficit) and from 2014/15 onwards surpluses are projected. This is a huge turnaround from the fiscal outlook Treasury revealed in December 2008 which was for at least a decade of deficits – in fact for deficits to continue beyond 2023.

This is probably the first time in 70 years that a Government has actually cut spending in election year. They were planning to spend an extra $4 billion or so over the next three years, and instead will be spending around $1 billion less.

The Government is putting $5.5b into a Canterbury Earthquake Recovery Fund, and over the next three years has reduced spending in other areas by $5.6b. The key difference is the spending savings are not one off, but will remain (if the Government does not change).

The Earthquake Fund is in addition to the $3.3 billion EQC is expected to pay out, bringing the total Government contribution to $8.8b. This will go on repairing local and national infrastructure in Canterbury plus welfare support  and a contingency for AMI Insurance.

The changes to KiwiSaver are three-fold.

1. Employees will get $10 a week instead of $20
2. The minimum employee contribution rate will increase in 2013 from 2% to 3%
3. The employer contribution will also rise to 3% in 2013, and from 2012 any employers contributions will be subject to tax at the employees PAYE rate

KiwiSaver funds are projected to still reach $60b in 10 years time.  And someone on the minimum wage who joins KiwiSaver at 18 will have $195,000 when they retire which would provide an additional pension of $11,500.

The changes to WFF are minor – reducing the cost from $2.8b/year to $2.6b a year. Over seven years to 2018, the abatement rate will increase from 20% to 25% for those earning over $35,000 a year. This will produce higher effective marginal tax rates for those on WFF.

I asked the Minister if he was concerned that it lifts the effective marginal tax rate for those of WFF to 58%. He responded that it was a trade off, and that as there have been tax cuts in past years, most WFF recipients will still have a lower EMTR, but acknowledges some may be higher.

I also asked if the savings from the WFF changes were worthwhile, especially as they streatch out to 2018 for full implementation. His reply was that over time they add up to making the scheme more sustainable.

The abatement rates will increase at the same time as WFF payments are inflation adjusted so a family on $40,000 will still get an increase in nominal terms. A solo parent on $90,000 a year with two kids will have his WFF reduced from $19/week to $7/week.  A two income family on $61,000 with two kids will go from $116 a week to $112 a week in April 2012.

Labour says the wealthy are not paying enough, but those deemed “rich pricks” by Labour in its last term of Government (earning over $60,000) are still forecast to pay 61% of gross income tax next financial year. I estimate that probably represents 85% to 90% of net personal income tax.

Part-sales of four SOEs expected to free up to $7b of capital , which will go towards acquiring $35b of new assets in the next five years. This will be a great boost to capital markets.

This budget reminds me of the 2009 budget – both were shaped primarily by external forces. There isn’t a lot you would sensibly do different. The 2010 budget remains for me the bold budget where some risks were taken and big changes made.

The budget is politically astute – it gets NZ back into surplus earlier and minimises the impact on most people. But it has not dealt with many of the issues raised by the Savings Working Group, such as the excellent idea to tax people only on their real returns from investments, not their nominal returns. The Minister said the idea is not yet ruled out, but is complex. Hopefully they might be saving that for their election manifesto.

Johm Armstrong writes in the Herald:

A case of jumping the Budget gun only to shoot yourself in the foot? David Cunliffe, Labour’s finance spokesman, found himself a laughing stock in Parliament yesterday after a poll asking families whether they were better off or worse off as a result of the Budget appeared on his website.

The poll was an embarrassment for Cunliffe for two reasons. First, the Budget has yet to be delivered. Second – and worse from Labour’s point of view – nearly 90 per cent of those responding said they were better off.

Those respondents must have known something about the Budget that the rest of us won’t until this afternoon.

More likely, National supporters organised enough votes to skew the findings in their party’s favour.

Actually it was fairly spontaneous. I blogged yesterday on Cunliffe’s premature poll, and I think blog readers just decided to have some fun.

Having ensured the poll was taken down from Cunliffe’s website, Labour was insisting the survey was one that appeared on the site after last year’s Budget. A computer glitch had resulted in the poll reappearing.

A computer glitch? Sometimes I have things *not* appear due to a glitch, but I’ve never had something appear by itself with no human involvement.

What was amusing in the House was thet the Speaker was at first reluctant to allow the website poll to be tabled, as he discourages tabling of stuff already in the public domain. However when it was pointed out Labour had removed the poll from the website, that meant it was then okay to table it.

Labour Finance Spokesperson David Cunliffe has a poll on his website asking “How did the National-Act Budget affect your family?”. 86% of respondents have already said they will be worse off.

Quite remarkable to do a poll on how the Budget has affected your family prior to the details of the Budget being known.

My nzherald.co.nz column this week is called “A battered budget“

John key’s speech is here. Key points:

• WFF, interest free loans and KiwiSaver costing $5b a year, and why we now have a structural deficit, and all has to be borrowed from overseas
• All changes will take place after election, so there is a mandate for them
• KiwiSaver will be changed so that over time employees and employers contribute more, and the Government less
• KS changes will lead to an improvement in the rate of national savings and reduce foreign debt by 2% of GDP over the decade
• Will reduce amount spent on WFF, but target a greater proportion at the most vulnerable families
• For every $100 of student loans, taxpayers get only $55 back
• Half of the overdue student debt is students living overseas – will make sure they live up to their responsibilities

The exact details will be in the budget. To me it looks like a good step in the right direction.

Some wonderful quotes from Hansard. First we have the General Debate of 24 Feb 1988:

From 1 April 1988 the rate of company tax will decrease from 48 percent to 28 percent, and that will create an environment in which enterprises can succeed—both New Zealand enterprises and those that are attracted from overseas. That, too, is the path to future sustainable growth.

So cutting the company tax rate to 28% in 1988 was the path to future sustainable growth, yet something he condemns today.

Then we have the Appropriation Bill (No 3) second reading on 10 November 1988:

Let us consider the Government’s track record. It has introduced a new taxation system that is closing off the loopholes that in the past made paying tax a voluntary exercise for many companies and some individuals. The top marginal tax rate was 66c in the dollar when the Government took office, but it is now half that level—33c in the dollar.

And reducing the top tax rate to 33% and closing off loopholes was also laudable according to Phil.

And finally the second reading of the Appropriation Bill (No 2) on 18 August 1988:

Taxation has gone from 48c and 30c in the dollar to 33c and 24c in the dollar. That reduction allows New Zealanders to keep more of their own money.

And an endorsement of dropping the top tax rate to 33% so NZers get to keep more of their own money.

Now to some degree all politicians will have made statements earlier in their careers, which they later change their mind on. However they tend to be fairly minor issues, not something as core as whether reducing the top tax rates is laudable or deplorable.  And these are not statements from when Phil was a Young Labour member, but as a Minister of the Crown.

Now in the budget debate the PM had a great time pointing out the massive hypocrisy in having the Opposition Leader condemn almost everything he had previously praised. And this is quite legitimate – it is not some sort of personal attack – it is highlighting changed policy positions. He then went on to talk about the budget itself.

Now Phil himself, and Annette, took Key’s speech in pretty good humour and were smiling at parts of it. They know that is what it is about. However the same can’t be said of some of the delicate wee flowers in his caucus who within seconds were whining on Twitter.

First Clare Curran complains:

Key starts his speech with a cheap shot. So Prime Ministerial!

That was in response to Key’s opening line that Shane Jones was really happy with Phil’s speech. Good God.

Then Clare complains further:

He’s a comedian. Does he take this country seriously! It’s embarrassing

So the PM is monstering you in the House pointing out (with considerable humour) that everything Phil Goff said is contradicted by what Phil previously said and your response is to complain he is being too funny.

But not just Clare. Iain Lees-Galloway joined in:

John Key thinks he’s on stage. What an embarrasment of a Prime Minister!

Personally I would be embarrassed to be tweeting such whines.

The trifecta was completed by Jacinda Ardern complaining:

hard to tell if this is a budget speech the PM is giving or a pep rally/stand up routine. yet to mention the actual budget.

I’m sorry guys, but it is such a bad look to be whining that your opponent’s leader is doing too good a job of winding his own troops up. Especially when your own leader’s speech was somewhere between awful and really awful (Goff generally has been much better in the house this year but his budget speech was just all over the place).

Finally Clare Curran declares:

Worst budget speech ever

People can watch the video and decide for themselves.

Vernon Small critically looks at Labour’s claims on inflation:

Labour’s Phil Goff and his inner circle had settled on attacking over the forecast spike in inflation, figuring there was a ready market for suggestions the tax cuts would be swallowed by rising prices.

But the case Labour has tried to make risks backfiring, because frankly, the evidence looks a bit fishy.

I had planned to write along these lines, but glad Vernon has done it for me.

The Treasury forecasts that inflation will surge to 5.9 per cent next year before falling back and staying at 2.4 per cent for three years; well within the Reserve Bank’s 1 per cent to 3 per cent band. It also notes that “underlying” inflation would remain relatively subdued and have a limited impact on interest rates

Next year’s spike includes 2 per cent from the rise in GST, which is compensated for by tax cuts and increases in superannuation, benefits and support for others on state-supported incomes.

More than compensated for.

It also includes a contribution of 0.5 per cent from the rise in tobacco excise (that Labour enthusiastically supported in Parliament)

Which will only affect smokers, and for those whom quit smoking will save them money.

and another 0.4 per cent from the fuel and power prices associated with the Emissions Trading Scheme, which Labour would implement with bells on, pushing inflation much higher. (In any case, the inflationary impact of the ETS was already included in the December half-yearly update.)

Now this is crucial. Quite a few people are unhappy at the impact of the modified ETS scheme, which adds 0.4% on 1 July to overall costs through higher petrol and power charges, but what Labour have not mentioned is their unmodified ETS would add 0.8% to inflation. They had passed a law which would have doubled the price increase due to the ETS.

Take those and the impact of GST away, and underlying inflation next year would be about 3 per cent, close to the top of the Reserve Bank’s 1 to 3 per cent band, but not so unusual.

The other thing Labour has not mentioned is they have constantly called for more government spending. This would mean a higher deficit and more borrowing, which would be inflationary. So their crocodile tears over inflation are less than convincing – their stated policy is to spend more, and to have an ETS which doubles the impact on power and fuel prices at 1 July.

On the other side of the ledger, as the economy improves, the Treasury expects wages to increase by 2.6 per cent next year (the year Labour chooses, because of the unflattering comparison with the 5.9 per cent inflation spike) and then rise by 3.5 per cent, 3.7 per cent and 3.9 per cent in subsequent years, while inflation is tipped to stay at 2.4 per cent.

These are just forecasts, and should be taken with the usual shaker of salt. But if you take one year into account you should be prepared to take them all.

On that basis, wages could well outstrip inflation in the next four years, and beat underlying inflation by even more.

As is generally the case.

Does Labour really want to argue that, as well as compensating for any GST rise, the Government should offset all the effects of inflation? That was above 3 per cent in 2001, 2006 and 2008 – when Labour was in power – and there was no similar call then.

Personally I would be delighted if Labour adopted a policy of giving people tax cuts every year to compensate for inflation. But somehow I don’t think they intend to.

A very astute analysis by NZPA Political Editor Peter Wilson:

Wellington, May 23 NZPA – Post-budget best case scenario for the Government: Most people react responsibly, saving or investing their tax cuts. Inflation rises but far less than Treasury’s forecast. Reserve Bank raises interest rate by a quarter of one percentage point, says it’s because the economy is growing and has nothing to do with the budget. Families realise they really are better off, Labour fails to find anyone who says they are worse off. Petrol and power price rises caused by the introduction of the emissions trading scheme are accepted as necessary to deal with climate change. New Zealand First slips to less than 1 percent in the polls. Solo mum says “I’m voting National”. All Blacks win World Cup.

Post-budget worst case scenario for the Government: Most people spend their tax cuts, saying they don’t have a choice because GST at 15 percent is hurting. Inflation rises above 6 percent. Reserve Bank announces vicious interest rate rise and blames the budget. Families realise they aren’t better off, Labour finds hundreds who say they’re worse off. Opposition to emissions trading scheme becomes a serious problem. NZ First reaches 7 percent in the polls. Wealthy property owner says “I’m voting for Winston Peters”. All Blacks lose to France in quarter-final.

I think it will be obvious in a couple of months which scenario emerges.

The $1.1 billion cap on new spending has almost all gone ($800m) on health, education and science. Most agencies have a nil increase. Over four years DHBs get an extra $1.4b.

A stronger economy (economic growth is so vital) means we are predicted to return to surplus by 2015/16 and net debt peaks at 27.4% in 2014/15. That is welcome but only will happen if fiscal discipline is maintained. Also if we have a recession every ten years or so (which tends to happen) then that only gives us a couple of years of paying off debt before we may face similar problems again. The reality is that there may not be significant extra funding for anything until around 2017.

While this is better than the disaster inherited by the Government (net debt projected to never peak), the reality is that net debt is still going to increase from $27b this year to $63b in 2014. On average that is still an increase in net debt of $175 million a week!

GPD is now forecast to grow 3.2% in the year to March, up from 2.4%

The operating deficit for this year is projected to be $8.6 billion. Now does someone want to try telling me that the Government should be spending even more money? It is clear we need less spending, not more.

In what is overall a very good budget, this is the weak part. The deficit is still too high, and another fiscal shock could still stuff up us badly. It would be nice for the Government to set a target (as a % of GDP) to which they want to get spending under. I think 30% is a good target to aim for.

Treasury have given some examples of overall change in net income for various persons or couples. You can see which one may be closest to you. In order they are:

1. Foreign owned company has NZ subsidiary earning $8 million and interest expenses of $5.6m and net profit of $400k due to thin capitalization rules. Under new rules taxable net profit increased to $1.52m, so firm is $313K worse off.
2. Professional landlord with 25 properties earning $112,000 and depreciation of $52,000. $15k a year worse off as now pays tax on $112,000 of income not $60K
3. Business owner which makes $120,000 profit but pays salary of $48,000. Has spouse and two children. $8k a year worse off as no longer eligible for WFF.
4. Couple each earning $150K owning 10 properties costing $4m and now worth $6.5m. No tax paid on rental income of around $35K a year due to depreciation. Overall $5,600 a year worse off.
5. Unemployed person on dole pays $100/week rent and gets $36 accom supp. $53 better off.
6. DPB beneficiary with three children paying $300/week rent, $130 better off.
7. Student on student allowance and $100/week rent and $40/week accom supplement. Earns $9K part-time. $140 better off.
8. 19 year old on minimum wage pays $100/week rent. $330 a week better off
9. Retired couple own home, no mortgage or investments. $560 better off
10. Single superannuitant in own home with $10K a year investment income. $620 better off.
11. Sole earner earning $50K and $120/week rent. $830 better off.
12. Couple with two children, earning $80K and $40K with one investment property which generates $2,700 profit and $3,000 depreciation. Property has doubled in value from $300K to $600K. $1,225 better off.
13. Couple earning $50K and $26K with two kids and $300/week mortgage. $1,285 better off.
14. Couple saving for first home both earning $60K, $1,000 a year interest, $250/week rent. $2,100 better off.
15. Couple earning $100K and $40K with three children. $600 a week mortgage. $3,170 better off.

So of the 15 examples, four are worse off. The foreign owned company, the two professional landlords and the company owner who was claiming WFF despite their high income.

The student and the two beneficiaries are marginally better off by $1 to $3 a week. This reflects of course they are not generally (yet) contributing to the economy, but are a net cost on other taxpayers.

A 19 year old on the minimum wage is around $7 a week better off, and those on the pension around $10/week better off.

A sole earner on the average FT wage is $15/week better off.

And those who pay the most tax currently, are of course even better off. They get to keep more of their earnings.

The Government has done a very nice job of not repeating their mistake at the beginning of the year when they over-egged expectations and under-delivered – which had Phil Goff reading out in the House my “B” grade to the PM’s beginning of year statement.

The tax cuts in this budget go well beyond what media had been predicting with a huge drop in the second lowest tax rate, and also a welcome drop in the corporate tax rate from 30% to 28% at 1 April 2011. This will help attract investment to NZ and matches Australia. The tax package gets an A- from me.

The tax rate changes from 1 October 2010 are:

• Up to $14K – tax rate goes from 12.5% to 10.5%
  $14K to $48K – tax rate goes from 21.0% to 17.5%
  $48K to $70K – tax rate goes from 33.0% to 30.0%
  $70K+ – tax rate goes from 38.0% to 33.0%

Workers earning around the average full-time wage ($40K to $48k) will, over 18 months, have had their top marginal tax rate go from 33% to 17.5% – almost halved.

Two thirds of the “cost” of tax cuts goes to reducing bottom two rates and 73% of income earners will have a top tax rate of 17.5%. You keep 82.5% of every extra hour you work.

The table above shows the change in income tax for the various tax brackets. They’ve done a very good job of having the reductions fairly smooth across the board as a percentage of existing income tax paid. Those under $70,000 get the largest percentage decrease.

Note the table includes the IETC for non WFF recipients (80% of people). If you exclude that it does not change the absolute savings but the % savings at $30K is 16.4% and $40K is 16.5%.

This table shows the net savings after impact of GST (calculated at 2% CPI increase). As one can see, people at every income level are left no worse off which was the objective.

However the above table only covers income tax and GST. There are also increases in superannuation, benefit adjustments, the changes to depreciation rules and the crack down on LACQs etc. Treasury has estimated the overall impact of tax changes as a percentage of the average disposable income. They estimate:

1 Households earning under $40K will be 0.7% better off
2 Households earning $40K to $85K will be 0.4% better off
3 Households earning over $85K will be 0.7% better off

Some of the other tax changes are:

• No depreciation claims on buildings with an estimated useful life of greater than 50 years
• LAQCs can not deduct losses at the marginal tax rate and pay tax on profits at lower company rate
• Changes to thin capitalization rules to limit foreign multinationals reducing NZ tax liability
• WFF eligibility to exclude investment and rental losses
• Remove the 20% accelerated depreciation loading for new plant and equipment

The property changes will see crown revenue increase by $2.5 billion over four years or an average $600 million a year.

$119 million of funding to IRD for increased audit and compliance is estimated to bring in $745m over four years or $200m a year.

Almost all of that extra $800m will come from higher wealth households.

This is why overall high income households are forecast to, on average, have only a 0.7% increase in disposable income – the same as low income households. One has to not just look at the income tax and GST changes, but the overall package.

And overall one has to conclude it has met the twin aims of both being fair and being good for economic growth.

The Herald reports:

If Labour were writing today’s Budget, it would spend more than National to ensure the recovery from recession remained on track, says finance spokesman David Cunliffe.

The Government spending more does not “ensure” the recovery remains on track. It merely ensures that taxes will have to increase in the future to pay back all the debt.

Labour leader Phil Goff has already sparred with Finance Minister Bill English over the tax changes expected today, with Mr English saying last week that Labour’s policies were a recipe for more debt and higher taxes.

How mean of Bill English to say that, just because it is true.

However, Mr Cunliffe told the Herald that his party, as “very prudent managers” of the Crown’s finances, would keep a tight rein on spending at present.

This would have more credibility if Labour had not called for billions of dollars of extra spending and borrowing.

“Right now, the country’s coming out of recession and well into recovery, and with growth rates forecast between 2.5 and 3.5 per cent of GDP this year and higher next year, this would not be the time that we would want to increase the amount of fiscal stimulus in the economy.”

I actually agree with that statement. We’ve just had the biggest fall in unemployment since records began. The economy does not need a fiscal stimulus.

Having said that, Mr Cunliffe believed an argument could be made that the $1.1 billion earmarked for new spending in the Budget “is quite contractionary given that around half of that will be chewed up by the automatic cost increase of health alone”.

It isn’t contractionary – it is disciplined. If one returns to the fiscal settings Labour had, then the deficit was projected to widen and widen, and debt to indefinitely grow until we have Greece like levels of debt.

“Bill English is behaving like an old-fashioned Treasury vote analyst pinching a few pennies here and there. Well that won’t solve the problem,” said Mr Cunliffe.

Increased savings, investment and exports were the keys to improving economic performance and those would be areas of focus for a Labour government.

So in one paragraph Labour argues they will be “very prudent” managers who will keep a “tight rein” on spending and then they dismiss said tight rein as  mean penny pinching.

I agree increased savings and investment is important – which is why I support increasing GST and reducing personal income taxes. Sadly Labour does not – they ran an axe the tax campaign against GST.

KiwiSaver, “a spectacular success” under the previous government whose growth had levelled off under National, would probably receive a tune-up.

More than $750 million. God no.

“We would say to the public service you need to be innovative, there’s no point in flooding Labour with the Budget bids that National turned down.”

Well at least there is a glimmer of hope.

As usual, I will be in the budget lockup today from 10 am. I expect to have posts appearing from very shortly after 2 pm.

I will also be on Radio NZ from 4 pm to 5 pm as one of the two panelists with Jim Mora. We will be discussing the budget for some of that time.

As is usual, Sir Roger has done what is effectively an alternative budget. Here are some of the details:

• Cutting $3.1 billion of “wasteful” spending
• Increase GST to 15% ($1.9b)
• Reduce depreciation claims ($1.2b)
• Tax cuts of $4.2b
• Deficit reduced by $1.4b

The tax cuts package would be:

• 21% tax rate drops to 18%
• 33% and 38% rate drops to 24%
• Company rate drops to 24%

Now that would lead to investment!!

Sir Roger also proposes replacing WFF with a tax free threshold,which would be $41,600 for one child, $49,400 for two children up to $81,000 for six children. If a parent earn under the threshold they get a tax credit equal to the difference between their old WFF subsidy and this regime.

A key issue is whether there is $3.1 billion of waste to be chopped. Sir Roger has listed around 200 programmes he would chop ranging from the fibre to the home rollout to some of the research and science fund. The major ones are:

• $30m from public broadcasting
• $82m from energy efficiency
• $248m from broadband
• $53m from school staffing
• $100m from social services NGOs
• $330m from abolishing MED
• $470m from the ETS
• $530m from interest free loans

Now the Government got elected on the basis of keeping interest free loans, an ETS and a fibre to the home broadband package. If it abandoned those promises, I suspect Phil Goff would be Prime Minister next year.

However that does not mean the direction Sir Roger pushes is wrong. If we can at least slow the rate of increase in spending (I support Sir Roger’s idea of a capping it on a real per capita basis), then over time we would have the ability to get tax rates down to a level where economic growth will be bullish.

The Herald wants a decisive budget:

Seldom has a Budget been as crucial to the economy as the one that Finance Minister Bill English will deliver this week. It is immediately crucial to the housing market, where activity has been practically frozen while prospective buyers and sellers wait to see what tax will do to property investment.

And it is crucial to the country’s productivity that something is done to divert investment from housing and consumption to industry and exports.

After years and years of complaints about the property boom, and the impact that has had on inflation and interest rates let alone the banking crisis, finally a Government is taking some steps towards fixing this. They don’t go as far as Bernard Hickey would want, but they should be a good start.

The minister has made no secret of this objective. For many months he has been travelling and speaking with charts to illustrate his concern that New Zealand was in an export recession long before the domestic sector’s housing bubble burst in 2007 and it was struck by the recession of 2008.

While household and Government spending had been happily rising year by year, export activity had slumped in 2005 and has not recovered.

Quite incredible that the tradeables sector had in fact been in recession for Labour’s entire last term of office.

The Press looks at how the UK Government may learn from us:

The spectacle of the United Kingdom looking to New Zealand for constitutional guidance, during the formation of its coalition Government, is rare and perhaps unprecedented. …

The recent general election there may well have inaugurated a long-term weakening of the political parties. The increasing social mobility of the population and disenchantment with the behaviour of MPs is lessening the tribal affiliations to Labour and the Conservatives. The result is an increasing willingness among the electorate to switch from party to party according to the prevailing political climate.

This could well be the case. In the past conventional wisdom was National had core support of 35%, Labour had 35% and 30% were swinging.

But we have seen National’s support drop to 21% in an election and Labour drop to 14% in polls in 1996. There are very few core supporters left now.

Whatever the scenario, New Zealand has lessons for the British. We wrote the rule book for coalitions in a Westminster system of government, and it was that which helped the British through their recent experience of putting together a Government from competing parties. That the process was so smooth and rapid can be significantly attributed to the processes formulated in Wellington.

Of course with Winston we learnt the hard way!

The Dominion Post asks Phil Goff to explain:

Labour leader Phil Goff would like the Reserve Bank to aim at more targets. The almost certain result of this is that it will miss them all.

Absolutely. Goff is trying to retreat from every good policy that his party has previously supported.

New Zealand has, by and large, been well served by the Reserve Bank Act, with its single-minded focus on the inflation rate. The tools available to the governor to achieve that may be blunt, and his task made more difficult by New Zealanders’ determination to pump every spare dollar – and every dollar that can possibly be borrowed – into property, but at least he or she has only one goal to chase, and it has been relatively successful in keeping the lid on inflation.

You can achieve one target well, or you can not achieve multiple targets. Plus it is also an attempt for a future Labour Government to blame the Reserve Bank Governor when unemployment is high, rather than the elected Government.

There is also a need for caution on democratic grounds. Economic changes that can drastically affect people’s lives should be made by those whom the people can hold to account at the ballot box, not appointed officials. An expanded role for the bank makes it all too easy to muddy the lines of responsibility, and to use the bank as a scapegoat for economic failure – the same trick has been used to duck responsibility for health, where failures become the property of area health boards while successes are claimed by the minister.

The same point I made above before I carried on reading.

It is still a good while until the next election, but Mr Goff is still a good way away from delivering a coherent economic policy that offers alternatives rather than a parcel of vagaries.

So far the policies are not at all future looking, but attempts to revisit debates from 20 years ago.

Treasury have just sent the conditions of the budget lockup. I loved this one:

In the unlikely event that the building has to be evacuated because of a fire alarm or some other emergency prior to 2.00pm, the embargo will be lifted immediately.  However please note that in such a situation it would be expected that you evacuate without delay for your own safety, rather than attempting to file from within the building.

I’ve got a wonderful visual image of media and analysts fleeing a burning Beehive while trying to file their stories.

The Dominion Post appears to have a front page jihad against the Government. On Friday their front page boomed that it was the slash and burn budget, with holocaust fire type illustrations on their billboards.

Yes the budget that (despite the global recession) protected every existing social entitlement, boosted health, education and justice spending, and cancelled future tax cuts was headlined “slash and burn” as if it was the 1991 Mother of all Budgets. It has been years since I saw such a misleading front page. There are many criticisms you can make of the budget – but calling it slash and burn is not one of them. Disgraceful.

Then on Saturday the Dominion Post cries out “Who will pay for our super?“, saying there will be a $37 billion gap in the Super Fund in 2030, making future superannuation unaffordable.

This is economic illiteracy on two fronts, and I will detail both. The first is ignoring that borrowing to contribute to the Super Fund will equally make future superannuation unaffordable, and the second is what proportion of future superannuation is funded by the Fund.

First of all, it is true that under the 11 year contributions holiday, the Super Fund in 2030 will be worth only $81 billion instead of $118 billion – a $37 billion difference.

But let us look at what the cost of those contributions would have been. Over the 11 years 2009 to 2020, there would be $19.5 billion of borrowing. Then the interest on the borrowing (calculated at 6.73% – the average cost of Govt bonds according to the Super Fund) would be $7.7 billion. So by 2030, the Crown would have an extra $29 billion of borrowing.  The difference between the extra debt and the fund’s level is estimated to be $8 billion – less than 1/4 of the $37 billion cited by the Dom Post.

An extra $29 billion of debt (costing $2 billion a year more in interest) makes future super almost as difficult to pay for, as having $37 billion less in the Super Fund.

And if we get a credit downgrade, leading to higher interest rates, you could end up with debt rising by far more than the shortfall in the Super Fund. Likewise of the Super Fund does not meet targets, you can end up with less money.

What the Dom Post failed to explain, is that what threatens future superannuation is not how much you invest in the Super Fund, but the level of economic growth New Zealand has. The $50 billion wiped off the economy is what has created the problem. You can not grow money – you need to earn it. The solution to future superannuation is increased economic growth – something worth remembering.

Treasury have done a useful report on the impact of the suspension of contributions. Now this only looks at the Fund, not at the overall crown accounts with the impact of an increase in gross debt. But even putting aside the debt issue, the viability of future superannuation is not greatly changed:

In 2050, without a contribution holiday, the withdrawal from the Fund would have paid for 24% of the increase in net NZS expenditure (to GDP) compared to 2009 (or 11% of nominal net NZS expenditure in that year).

This means that in 2050, the Fund would pay for 11% of superannuation, and current taxpayers pay for 89%.

In 2050, with an eleven‐year contribution holiday, the withdrawal from the Fund would pay for 18% of the increase in net NZS expenditure (to GDP) compared to 2009 (or 8% of nominal net NZS expenditure in that year).

And with the contributions holiday, it means that in 2050 current taxpayers will be paying for 92% of superannuation, as opposed to 89%.

So remember this. Even if you discount the reduction in debt and finance costs by suspending contributions (which you shouldn’t anyway), the long term impact is that future taxpayers have to pay for 92% of superannuation, instead of 89%.

So when the Dominion Post bleats on its front page, who will pay for our superannuation, the answer is future taxpayers – as always.

So again, for those who are really slow:

1. It is the lack of economic growth, not the decision to suspend Super Fund contributions, that most impacts the future affordability of superannuation.
2. The suspension of contributions will merely mean that the percentage of future superannuation not funded by the Fund will increase from 89% to 92%

Phil Goff’s (and the Dom Post’s) insistence on borrowing to save is bizarre. Think of the analogy if you are a household.

You earn $60,000 a year. However your living expenses comes to $70,000 a year. You have a $10,000 a year shortfall. Due to this shortfall you are not making any  repayments on your $200,000 mortgage. In fact you are having to borrow an extra $10,000 a year against your mortgage to cover your living costs. Now your house is worth only $350,000 so you know you can’t keep borrowing for much more than a decade before your credit runs out.

Phil Goff’s brillant policy is that you should borrow an additional $2,000 a year and invest it in overseas sharemarkets. That a household that already is borrowing $10,000 a year, is unable to make repayments on its mortgage, is being charged compounding interest – should borrow an extra $2.000 a year.

And Goff claims this will make your household more secure, as it will provide security for your retirement.

Now you might think – wait – we are going to lose our house if we don’t eventually start earning more than we spend. But Phil is saying no need to worry about that.

Now for those of you who agree with Phil Goff, I have good news for you. You as individuals can follow his advice. The Government has decided not to follow Goff’s advice – but you can.

So here is what you should do if you beleive Phil Goff. Head down to your bank manager. Show them your overdraft, your credit card debts and your mortgage. Explain to the bank manager that yes you are spending $10,000 a year more than you earn. Also explain to him or her that you want to increase spending even more, even though your income is unlikely to improve for some years. But then most of all explain that you want to borrow some more money fro the bank, so you can invest it on the sharemarket.

The manager may be hesitant, but explain that you are sure you will make more money in the long run. And offer to mortgage your house further to pay for the extra borrowing. So long as you offer security the bank will eventually agree.

Then after having extended the mortgage on your house, go off to your investment advisor and tell them to invest it in a fund that mirrors the Super Fund.

Now I don’t want to hear any excuses about why you can’t do this. If you want the Government to do this on your behalf, you should have the courage of your convictions and go do it yourself.

Audrey Young:

National’s first Budget has accomplished its mission of avoiding a costly credit-rating downgrade. …

Brian Fallow:

It may not be a black Budget but it is definitely a grey one.

It meets the first test of not doing any harm, in that it averts a credit rating downgrade.

Even if we had not had to worry about the rating agencies, the case for getting a grip on a scary projected debt and hauling it down was compelling for its own sake.

But it has come at a price. The Government has had to lock itself into a sort of fiscal chastity belt by slashing the allowance for future spending increases.

John Armstrong:

Tough, but fair. Tough enough to have satisfied, nay, perhaps even pleased the solemn-faced foreign financial gnomes from Moody’s and Standard & Poor’s. Yet not so tough as to scare the living daylights out of the average punter back home – at least not until he or she reads the fine print.

Fran O’Sullivan:

Finance Minister Bill English’s first Budget is not an economic game-changer but the first move in a Great Survivor exercise to get New Zealand’s creaky balance sheet into shape.

So far, English has succeeded. …

But nowhere is there any evidence (yet) of the bold growth-focused policies that must be developed if more companies are to be persuaded to build their international empires from New Zealand and more talented Kiwis are to be attracted to either stay or return here to build their careers.

NZ Herald:

The budget Bill English delivered yesterday was a difficult one not for the reason he gives, the global recession, but because the outlook in recent weeks has brightened a little. …

Mr English said the Budget’s aims were to “cushion the immediate impact [of recession] on New Zealanders and enhance future growth”. But he has gone mainly for the cushions. Growth-enhancing measures are modest by comparison with the deficits he projects for the next nine years and the debt that he will allow to rise to levels last seen in the mid-1990s. …

The recession has shown Labour’s spending levels to be unsustainable, and the more since Labour and National have indulged in a round of tax cuts. Hard decisions on welfare entitlements for the well-off, interest-free tertiary loans, free childcare and the like – decisions Mr Key and Mr English were proud to avoid yesterday – will probably have to be made. Maybe next year.

Nine years of deficits is simply too long. The world economy will surely have recovered in half that time. The Government needs to be looking beyond its cushions. The country needs to be awake and well geared for the first signs of recovery.

Claire Trevett:

When Mr English was done, Labour leader Phil Goff stood. It took only two minutes of wrath before his face went a florid red and a vein in his forehead started popping. …

Prime Minister John Key was having none of that. He had a new nickname for Mr Goff – “whack it on the bill Phil” – and for Labour, “the credit card Opposition”.

“Whack it on the bill Phil would have seen us run up a quarter of a trillion of dollars of debt by 2023.”

Benedikte Jensen:

The Government had a real opportunity with this Budget to show some political courage and make the hard decisions that would set a clear course towards higher productivity and a stronger society.

Instead, the Government has delivered a Budget that works on cost control across the board, without the more deep-seated changes in spending priorities needed to invest behind growth, and invest in people to avoid a social deficit.

I’m in meetings for the next six hours, so reactions from Stuff/Fairfax later in the day.

Well that was quick. The worst case scenario was NZ get a credit downgrade which would just put $600 million a year down the drain. The middle scenario was we remain on negative outlook, and the best case scenario was we get taken off negative outlook, which S&P has just done according to NZPA:

International credit rating agency Standard and Poor’s has cast a favourable verdict on the budget, upgrading New Zealand’s outlook from negative to stable. …

S&P said today that the budget delivered a “sound” outlook.

“The change in the outlook on the foreign currency rating reflects our view that the measures announced in today’s budget will support stabilisation in the government’s fiscal position over the medium term,” S&P credit analyst Kyran Curry said.

Fiscal deficits were offset against the deferral of personal income-tax cuts and savings measures associated with public sector reforms and service delivery, he said.

“The Government estimates that additional debt required to fund the deficits to be 38.7 percent (of GDP) by 2013. The successful delivery of this strategy — returning the operating position to surpluses over the cycle and maintaining low debt — is consistent with maintaining the `AA+’ foreign currency rating on New Zealand.”

A credit downgrade would not only have cost taxpayers $600 million a year more – it would also have cost most NZ businesses more with their financing – which would have an impact on employment.

First of all kudos to Bill English and Treasury for getting rid of the old rolling embargo that was in place for previous budgets. This meant you could not blog a specific item until the Minister of Finance read it out in his speech. It made blogging and reporting very hard as it was not always clear whether the part you wanted to cover was even in the budget speech, let alone when.

So now it just a simple 2 pm embargo which means I can just hit publish at 2 pm, which I have done.

Deficits and Debt

The fiscal parameters inherited by Labour meant gross debt was tracking to reach 48% of GDP by 2013, and 70% of GDP, or $227 billion by 2023 – equal to $180,000 of debt for every household of four. There was a very significant structural deficit. This is because the economy will have $50 billion less output over next three years than forecast in the 2008 budget.

The status quo would have meant future generations would face either massively higher taxes, or cuts in health and welfare spending as more and more money would be spent on debt servicing. Debt servicing would have increased to $14 billion a year – more than current Vote Health.

The measures outlined in the 2009 budget are forecast to have gross debt peak at 43% of GDP in 2016/17 and then decline to 37% by 2023 – almost half the 70% on existing parameters.

The projected deficit for this upcoming year is still a very large $7.7 billion and next year looks to be $9.3 billion, before gradually reducing. So the Government is borrowing a lot of money to help keep people’s incomes and jobs steady.

Labour budgeted for $1.75 billion a year of new spending initiatives. National is reducing this to $1.45 billion for this year and $1.1 billion in out years. This is pretty reasonable – in the late 1990s it was only $600 million a year. However it will pose some real challenges in around 2011/12. For the next two years expectations will be lowered due to the global recession. People are accepting zero wage increases etc, and lobby groups know now is not the time to ask for lots more money.

But in two to three years, with the recession behind us, there may be a lot of pressure for new spending beyond the $1.1 billion. Inflation and population growth alone can take up a fair bit of that. We will still be running large deficits, but the economy will be growing and the Government will come under real pressure.

Spending Initiatives (generally all over four years)

• $323 million for home insulation – grants of up to $1,800 for most households and up to $3,000 for community service card holders
• $3 billion for Vote Health, being $2.1b for DHB services, $70 million for 800 more health professionals, $130 million for maternity services and $245 million for 20 new elective surgery theatres
• $1 billion in new spending including $523 million on new schools and school upgrades
• $900 million for Justice including 600 more police for $183 million, 246 more probation officers at $256 million and 1,000 more prison beds at $385 million

There is lots of little stuff also, but the Government has targeted most of the extra spending in a few key areas.

Jobs

Unemployment is forecast to peak at 8% in September 2010. I hope so, but suspect it may push 10% as I think the US and Europe are more stuffed than people realise.

The Government has committed $7.5 billion of infrastructure investment over the next five years through toad building, state house building and refurbishments, new and improved schools and broadband rollout. On top of that 600 more police, 246 more probation workers and 800 new training placing for health professionals.

Labour’s planned infrastructure/capital spend was $900 million a year – it has increased to $1.5 billion a year. Labour will claim more should be done for jobs, but in reality National is spending more on infrastructure projects than Labour would have. And the long term solution to jobs is having a competitive robust economy.

Reprioritisations

The line by line reviews have identified $2 billion of savings (around $500 million a year) that is being reinvested in frontline services. This means that that the $1.45 billion increase in operating spending will fund $1.9 billion of new initiatives.

As an example the Government has cut funding for adult community education hobby courses by $54 million, and increased special education funding by $51 million. Sounds like a good reprioritisation to me.

Also reducing support function expenditure at the Ministry of Education by $18 million to help fund a $36 million literacy and numeracy initiative.

Tax Cuts

Yes they are gone. The official Government line is deferred, but to no particular date, so I say they are cancelled. When tax cuts are budgeted again in the future, it will be a new package I suspect, not just reinstate the planned 2010 and 2011 tax cuts.

English said that it is highly unlikely tax cuts would be reinstated before the next election. He was asked if he would deliver tax cuts before the books were back into surplus (which is not until 2017), and he said the main thing they would look at is if the economy was growing strongly enough.

The deficits for the next two years, even without the tax cuts, is a combined $17 billion. They are a victim of timing partly. I did ask the Minister what their rationale was for deciding to break a tax cut promise rather than a spending promise such as interest free student loans, especially as he originally opposed interest free student loans but always campaigned for tax cuts. English responded that people feel insecure in a recession, and they made a decision not to cut any current entitlements to help confidence and security.

Several from the “right” congratulated me on my question, as no one else really pushed back much on the tax cuts vs spending issue. I was however amused to be berated by Miss Ten, who was attending as an analyst, for trying to get interest put back on her rather large student loan.

The $900 annual cost of the future tax cuts is around 20% of the total tax cut package. The Oct 2008 and April 2009 tax cuts are worth around $4 billion a year of foregone revenue and were very well timed in terms of fiscal stimulus. So at least we got $4 billion of the $5 billion!

In my words the main reason why they are gone is that they had not yet occurred. It is far less painful to cancel future spending or tax cuts, than to cancel existing spending or hike existing tax rates. Yes people get annoyed when they don’t get something promised, but they get more annoyed if you actually take away something they already have.

National did “pay” for the 2010 and 2011 tax cuts by reducing KiwiSaver subsidies by over $1 billion to compensate. The problem is that the fiscal position has changed so much since PREFU that anything not yet nailed down had to be sacrificed.

The problem for the Government is that while fiscally cancelling the tax cuts was the right thing to do, it makes their long-term closing the gap with Australia objective much harder. A low tax economy (with less tax churn) will generally grow faster than a higher tax economy (there is 40 years of OECD data to back this up).

The Government says it has a medium-term goal of a top company, trust and personal tax rate of 30%. I asked the Minister if he could define the medium-term and he said they were having problem even defining the short-term!

NZ Super Fund

As everyone expected, and as Dr Cullen himself said would be sensible when he set the Fund up, the automatic contributions are being suspended until there are surpluses again. The fund was explicitly set up to be funded out of surpluses. It was never intended to borrow for the contributions. So when you hear Goff and Cunliffe squeal about this, remember they are wrong.

The automatic contributions are likely to be suspended for 11 years, and this will prevent $19.5 billion of extra debt (plus interest). Once automatic contributions resume, they will be higher due to the Fund’s formula – $2.5 billion instead of $2.2 billion.

The Government is still going to make a voluntary contribution of $250 million this year. They seem to be tagging it for investment within NZ and to supplement the supply of capital to local businesses. This is very smart politically, but very dumb in an economic sense. However it was an election policy so no surprise.

Summary

There’s not much one can argue should be done differently. I would almost say the budget wrote itself, as the structural deficit and debt projections had to be dealt to. This budget knocks $100 billion off the long-term debt projection.

It is quite a canny mixture of ingredients:

• An increase in infrastructure spending
• Focusing new spending on core areas of health, education & law & order
• Plowing savings back into new frontline spending, so one is not cutting overall spending in a recession.
• Reducing future spending and future tax cuts to bring the deficit into surplus and cap debt.
• Suspending Super Fund contributions so you don’t borrow $20 billion to “save”

It is pretty orthodox, and as I said probably almost wrote itself. It isn’t a budget for closing the gap with Australia, or seriously rejigging the economy. It’s the budget you have to have first, before you can get to grips with some of the other stuff. I can over-state how much of a disaster it would be I financing costs on debt were allowed to grow to greater than current Vote Health.

The politics around the Budget will be interesting. You could almost see the Greens abstain on it – after all it cancels tax cuts and gives a huge amount to home insulations etc. Labour will not be able to propose a constructive alternative (they will of course scare monger). The consensus amongst most media in the lockup seems to be that there wasn’t much else the Government could have done.

It also sets up an interesting election in 2011. The books will still be significantly in deficit, and National will not be offering tax cuts in all probability. So what will Labour promise to do differently? If they promise extra spending, then they can be branded as irresponsible and increasing debt. If they promise tax increases, then that won’t be very popular either.

Labour’s entire 2008 election campaign was based on how you can’t trust John Key, that he is not a centrist – but secretly a hard line right winger (like me who wants to sell everything and slash spending and taxes. Their worst nightmare continues to play out – that John Key is exactly what he campaigned on – a centrist.

I’m in the Budget lockup from 10 am to 2 pm, so hope to have some initial posts by 3 pm (there is a rolling embargo which means you can only blog certain stuff as Bill gets to it in his speech).

Until I post further, feel free to use this thread for budget related discussions.

Any posts which appear between 10 am and 2 pm are time delayed from this morning.

Brian Fallow in the Herald looks at why we now have a debt problem:

Over the past five years, government spending has increased by 50 per cent – twice as fast as the economy or tax revenues have grown.

Even in the same budget as which Dr Cullen finally gave tax cuts, he still increased spending by $4.5 billion. He didn’t even leave enough money for his Super Fund contributions – and that was before the flobal recession.

But now tax revenues are falling as the recession lays waste to the tax base. Treasury secretary John Whitehead says it will be some time in 2011 before the level of economic activity is back to where it was in 2007.

So three or more years of no extra income, yet the continual spending increases give us a huge deficit and debt problem.

This would see gross government debt double by 2013, relative to the size of the economy, and in the absence of a policy response climb to over 75 per cent of GDP by 2023. That is where it peaked in 1987; only by 2023 there will be the added pressure of baby-boomer pressure on health and superannuation costs.

This is what the situation would be under Labour. Labour have condemned basically every saving National has made, and just demanded more and more spending.

Whitehead in a speech on May 15 spelled out what that level of debt would mean. It would be $49,000 for every man woman and child in the country: “A family of four would basically have another mortgage of close to $200,000″.

$200,000 debt for a four person family. Not much of a future.

“But as we see it the most effective way the Government can begin to get on top of expenses is by reducing the spending allowances for future Budgets, currently set at $1.75 billion for the 2009 Budget and increasing by 2 per cent a year in each of the next three Budgets.”

Over four years that provision is a cumulative $18 billion in new spending. “We expect the Government to halve those spending allowances,” Purdue said.

Reducing the provision is sensible. In the late 1990s it was only $600 million a year. At $600 million a year then over four years it is only $6 billion as opposed to $18 billion.