The Civilian’s Budget

May 17th, 2013 at 2:00 pm by David Farrar

The Civilian did its own take on the Budget. Some highlights:

  • $1.7 billion to buy back Mighty River Power after Tony Ryall began missing it.
  • $1 billion to build roads that go around Hamilton instead of through it.
  • $64 for Bill English to get his printer fixed.
  • $500 in legal fees for Colin Craig.
  • $800 million to Gore, just to see what happens.
  • $30,000 for production of Air New Zealand safety video starring Maurice Williamson.
  • $170,000 for undercover double agent speech writer for David Shearer.
  • $20,000 to figure out why a McDonald’s deluxe cheeseburger costs less than a regular one.
  • $250 million to make the transformers in the national grid look more like the ones in the movie Transformers.

I especially like the $800 million for Gore, as an experiment.

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Budget Data

May 17th, 2013 at 12:00 pm by David Farrar

Those who want Budget data can check out:

  1. Keith Ng has lots of data visualisations
  2. Stuff has interactive data also
  3. Stuff also has a tax-o-meter which shows how much tax you pay every day and what it goes on
  4. Maxim has a tax tracker app which also looks at your tax on an annual basis

Best line of the day

May 16th, 2013 at 5:50 pm by David Farrar

I loved this line:

Credit where credit is due. The Labour Party has finally adopted one of the very sensible policies of the National Government, and that is the Mixed Ownership Model. That’s right, these days the Labour Party is 51% owned by Labour and 49% owned by the Greens


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Budget 2013

May 16th, 2013 at 2:00 pm by David Farrar

Have been in the Budget lock up since 10.30 am. Some key details of the 2013 Budget are:


  • The 2014/15 surplus projection remains razor thing – $75m, but projected to increase to $2.6 billion in 2016/17.
  • The deficit was $18.4 billion in 2010/11, will be around $6.3 billion for the current year and projected to be just $2.0 billion next year.
  • Over five budgets a total of $15 billion of spending has been reprioritised (eg cuts in one areas to allow new initiatives to be funded)


  • Core crown expenses to increase by $5.5 billion over four years but dropping from 35% of GDP to below 31%.
  • This is a key strategy – that expenditure growth is less than economic growth. Expenditure grew at 6.1% annually from 2003 to 2012, but will only grow 2.7% annually over next four years.


  • Net debt projected to peak at 29% of GDP in 2014/15
  • Net debt projected to be 18% by 2010 2020, compared to 60% which was the 2009 projection before policy changes
  • Contributions to NZ Super Fund will not resume until net crown debt is below 20% of GDP

Research & Development

  • An extra $100m a year for internationally-focused growth opportunities in research & development, tourism and education marketing
  • Research and development funding to increase to $1.36 billion in 2013/14, 28% higher than four years ago


  • Projected ACC levy reductions of $300m in 2014/15 and $1 billion the following year, resulting in levies being 40% lower than in 2011
  • Both households and businesses will benefit from lower ACC levies. A $1 billion reduction is around $500 per household, but no details yet on exact changes to employee and employer levies.

Asset Sales

  • Total Crown Assets forecast to grow from $250 billion to $273 billion
  • $1.5 billion of spending from the partial asset sales including $426m to redevelop Christchurch hospitals, $94 million for Kiwirail, $80 million for irrigation, $50 million for school networks
  • Meridian Energy to be floated later this year, probably October


  • $100m over three years for home insulations for low-income of high health needs households which should cover 46,000 homes on top of 230,000 homes already done
  • $27m over four years to extend income-related rents to community housing providers
  • Special housing areas as agreed by Government and Councils will have streamlined (faster) consenting under a new law
  • Reviewable tenancies will be extended to all social housing tenants, to ensure those in the most need can get into social housing. Will actually increase government spending as rents by tenants to Housing NZ will on average be lower
  • MSD not Housing NZ to assess housing needs, so Housing NZ can focus on being an excellent social housing provider
  • Housing Warrant of Fitness to be developed and trialled, starting with state houses


  • $1.6 billion over four years for frontline health services


  • $900 million more for education including $173 million over four years for early childhood education.
  • ECE spending now $1.5 billion compared to $860 million in 2007/08
  • Education spending now 7.2% of GDP, compared to OECD average of 5.8%


  • An extra $2.1 billion for Christchurch increasing Crown contribution to $15.2 billion
  • Total cost of Christchurch rebuild now estimated to be 20% of annual GDP


  • $189m over four years for welfare reforms and helping people into work
  • Economic growth over next three years projected to be higher than US, Canada, UK, the Euro zone and Japan
  • The 11% earning over $80,000 will contribute 49% of all personal income tax collected

I’ve got an article in the Dominion Post tomorrow where I do a more detailed commentary. My overall take is that it is a good Budget for 2013 – still on track for a surplus, a big drop in ACC levies and significant extra spending in priority areas.

But next year’s Budget will need to be the one which spells out the vision, post getting back to surplus.


Budget spending

May 14th, 2013 at 9:00 am by David Farrar

Vernon Small at Stuff reports:

Action on child poverty is set to be a surprise package in Bill English’s fifth Budget on Thursday as the Government seeks to make an impact with limited cash to spend.

Last week, Labour leader David Shearer predicted the Budget would be “for the boardroom not the smoko room”.

But early signals suggest it will address some of the recommendations in the report to the children’s commissioner by the advisory group on child poverty.

Oh dear. if correct, Labour will need a new slogan to use.

Never mind the socialist mindset that the board room and the smoko room are contradictory targets.

Yesterday, Prime Minister John Key would not rule in or out a move on food in schools but said National would not back Mana leader Hone Harawira’s “feed the kids” member’s bill.

However, he pointed to his state of the nation speech in 2007 and the Government’s support for KidsCan, Fonterra’s milk in schools programme and an extension to the fruit in schools scheme as signals he backed such moves in partnership with business.

Oh wait is this the same evil business that Labour is targeting?


What will the Budget show?

May 13th, 2013 at 10:00 am by David Farrar

Brian Fallow writes:

The economic forecasts underpinning Thursday’s Budget will need to differ substantially from those the Treasury offered in its half-year update six months ago.

The economy began this year with a lot more momentum than it (or other forecasters) expected. Gross domestic product growth in the December quarter was three times what the Treasury had forecast. But then the drought hit.

The exchange rate is a lot higher than expected, and inflation accordingly lower. Except for house price inflation: house prices are already higher than the Treasury expected them to be in four years’ time.

Unemployment is already down to the levels expected two years from now.

Which is good. However the latest HLFS came out after the Budget forecasts were finalised.

And the estimated cost of rebuilding Christchurch has climbed by a third to $40 billion.

All of these factors will affect the forecast track for revenue, in one direction or the other, and some will affect spending as well.

In March the Treasury estimated the drought would reduce real GDP this year by 0.7 per cent from what it would otherwise have been.

Hence I expect the projected surplus for 2014/15 to remain very slim.


Where your taxes go

May 31st, 2012 at 2:00 pm by David Farrar

Worth checking out Where are my taxes. It details and shows graphically how much money per capita is spent on various activities. Some big items:

  • Superannuation $2,328
  • Primary schools $639
  • Family Tax Credits $480
  • Secondary schools $469
  • Tertiary Education $459
  • Domestic Purpose Benefit $413
  • Land and Transport $401
  • Student Loans $373
  • Early Childhood Education $313
  • Invalid’s Benefit $300
  • Accommodation Assistance $282
  • Unemployment Beneift $200
  • Sickness Benefit $177
  • Student Allowances $137
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2012 Budget highlights

May 24th, 2012 at 2:22 pm by David Farrar

Here’s some of the more significant aspects of the 2012 Budget:

  • Household savings rate is positive for the first time in a decade, and is forecast to increase to almost 4% by 2016
  • Unemployment is forecast to drop below 5 per cent by 2015
  • Forecast fiscal surplus in 2014/15 is $197 million
  • Core Crown expenses to fall progressively from 33.5 per cent of GDP in 2011/12, to 30.2 per cent of GDP in 2015/16
  • $385 million of new investment over four years in research, science, and innovation
  • $250m from asset part-sales going towards Kiwirail
  • Deferring the auto-enrolment exercise for KiwiSaver, until surplus is locked in
  • Goals No 2 and 3 of 10 announced - reducing prisoner reoffending by 25% in five years and increasing the rate of participation in early childhood education to 98%, up from 94.7% currently
  • $1.5 billion extra to Vote Health over four years – will include 4,000 more elective ops a year
  • Tobacco excise tax to increase 10% (plus inflation) on 1 Jan 2013 and repeat for the next three years (so a real 40% increase in excise tax)
  • $512 million towards new frontline education initiatives
  • $104m for housing




The 2nd most open budget in the world

May 24th, 2012 at 11:00 am by David Farrar

As it is Budget Day, it is worth celebrating one thing – the quality and openness of the Budget information. This year there is even a smartphone app for the Budget.

The International Budget Partnership collaborates with civil society around the world to analyze and influence public budgets in order to reduce poverty and improve the quality of governance.

They have a league table of how open budgets are and the top ten are:

  1. South Africa 92
  2. New Zealand 90
  3. UK 87
  4. France 87
  5. Norway 83
  6. Sweden 83
  7. US 82
  8. Chile 72
  9. Brazil 71
  10. South Korea 71

The bottom five are Chad, Iraq, Equatorial Guinea, Fiji and Sao Tome E Principe all on zero.

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Budget coverage

May 24th, 2012 at 7:00 am by David Farrar

For the first time in many years I won’t be in the Budget lockup today. I was in the Wellington lockup, but then I had to be in Auckland on Thursday afternoon for the debate on Europe starting at 5.30 pm. I tried to swap to one of the two Auckland lockups, but they are both full and selfishly no one from TVNZ or TV3 has died this week freeing up a place for me :-)

I can’t get to Auckland in time if I do the Wellington lockup as the first flight is at 4 pm after the lockup ends. So I am flying to Auckland in the morning and will be reading furiously come 2 pm.

So any coverage of the Budget won’t be at 2 pm, as normal, but slightly later. I need to write a small article for Fairfax on the budget also which will be my first priority (paid work trumps blogging!), but once that is done hope to have something blogged before 3.30 pm. I’m on the RNZ Panel from 1545 to 1700 also and suspect the Budget may be one of the issues we discuss!


The Budget Quiz

May 20th, 2011 at 9:13 am by David Farrar

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


PM’s response to Goff

May 19th, 2011 at 3:56 pm by David Farrar

No words are needed.

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Where your taxes go

May 19th, 2011 at 3:50 pm by David Farrar

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.

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Budget Notes

May 19th, 2011 at 2:00 pm by David Farrar

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.


Cunliffe’s poll

May 19th, 2011 at 8:49 am by David Farrar

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.

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Labour polls budget before it is delivered

May 17th, 2011 at 4:34 pm by David Farrar

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.

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A battered budget

May 13th, 2011 at 1:46 pm by David Farrar

My column this week is called “A battered budget

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A speech by John Key

May 11th, 2011 at 12:36 pm by David Farrar

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.

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Goff on Tax

May 25th, 2010 at 3:46 pm by David Farrar

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.

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Small on Inflation

May 24th, 2010 at 2:23 pm by David Farrar

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.

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NZPA on Budget

May 23rd, 2010 at 5:13 pm by David Farrar

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.

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The fiscals

May 20th, 2010 at 3:24 pm by David Farrar

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.


The Jane and John examples

May 20th, 2010 at 3:09 pm by David Farrar

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.

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The Budget Tax Package

May 20th, 2010 at 2:20 pm by David Farrar

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.

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Labour on budget

May 20th, 2010 at 9:44 am by David Farrar

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.

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