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.
- Employees will get $10 a week instead of $20
- The minimum employee contribution rate will increase in 2013 from 2% to 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.