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Dr Muriel Newman

Budget 2013

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Budget2013x300Whether we like it or not politics and politicians have an important influence on our lives. Not only do they shape the social agenda and impose regulations upon us, they control the purse strings to the state sector which represents more than a third of our economy. Their annual Budget reveals how well they are managing the economy.

While many countries around the world are still struggling with the consequences of the global economic crisis, Budget 2013 confirms that New Zealand is now one of the fastest growing economies in the developed world. Although growth is expected to weaken as a result of the drought, it is forecast to rise to a credible 3 percent in the longer term.

When National first took office in 2008, Treasury had forecast ten years of deficits and rising debt. Now, five years later, the 2013 Budget shows that the government is on track to deliver a surplus of $75 million in the 2014-15 year – despite the impact of the global financial crisis and the financial costs and tragedies of the Christchurch earthquakes. Just three budgets ago the deficit was $18.3 billion.

This turnaround has been achieved by not only keeping a tight rein on government spending, but by creating the conditions for businesses to expand and grow.

While the size of the state sector has been reduced down from an excessive 35 percent of the country’s economic activity two years ago, to a projected 31 percent of GDP next year, it is still a long way above the target 29 percent rate recommended by the 2025 Taskforce – the rate it was in 2004-05 before the Labour Government embarked on their reckless spending spree. Holding government spending and reducing waste should remain priorities into the foreseeable future.

Creating the opportunity for business to grow and prosper should also be a prime goal of any government, since the business sector is the nation’s engine room providing employment and creating wealth. The more investment businesses can attract, and the more efficiently they can operate, the more profitable they will become, the faster wages will grow, and the more tax will be paid to the government.

Budget forecasts show the unemployment rate falling to 5.2 percent by 2017, not only as a result of increasing economic activity, but also due to the impact of the next tranche of welfare reforms. The additional $188.6 million allocated to welfare over the next four years is expected to cover the hiring of more case managers for a further 80,000 beneficiaries who are being subjected to work testing requirements. On top of that there are incentive payments for sole parents who return to work earlier than required, and special funding for external providers to work with high-needs beneficiaries who will require intensive help to become work ready.

The benefits of welfare reform cannot be over-stated and is something the NZCPR has long been calling for. Until National embarked on the present reforms under the able leadership of Paula Bennett, welfare had become a soft touch and the favoured playground for socialist politicians. Changes introduced by the Labour Government over the nine years they were in office weakened the barriers to welfare: relatively few beneficiaries were work tested, sanctions for non-compliance were weak, and fraud was rife.

There were endless stories of people abusing the system: workers who had tired of their jobs cruised onto sickness benefits or the dole, and unskilled young women – many still girls at school – all too casually ended up on the Domestic Purposes Benefit instead of in employment.

Thankfully, the reforms have created disincentives, making the transition into taxpayer funded dependency more difficult – but still not difficult enough. Over time welfare should only provide support for those in genuine need – long term security for those who cannot work for a living, and shorter term support for those who are able bodied and looking for a job.

A key aspect of successful welfare reform is a buoyant job market. The Budget contains many items that will generate jobs. Prime amongst these of course is the rebuilding of Christchurch. It is difficult to comprehend the scale of the task ahead, but at a cost of around $40 billion, it is reported to be the largest rebuild undertaken anywhere in the world in modern times.

In addition, on-going job opportunities are being created through the government’s continued investment in infrastructure. This includes the proposed extension to the Northern Motorway, which is a significant investment in creating a modern transport network to open up the North to better economic growth opportunities. As New Zealand’s worst performing region, Northland is in urgent need of economic stimulus.

More growth opportunities will also be created as a result of the government’s privatisation agenda. Most of the $1.7 billion in proceeds from the 49 percent sale of Mighty River Power are being used for the Future Investment Fund: $50 million for the broadband rollout to schools, $94 million for KiwiRail, $80 million for irrigation infrastructure projects, $426 for Christchurch hospitals, and $700 million for “new contingencies” such as new schools, a new justice and emergency services precinct in Christchurch, and support for the city’s tertiary institutions.

The next State Owned Enterprise being put up for sale is Meridian Energy. Meridian is the country’s largest power company, with seven hydro-power stations and four wind farms, generating around a third of the country’s electricity. The partial sale of the company, which was valued in 2011 at $6.5 billion, is expected to provide a further $3.25 billion for the Future Investment Fund. Over the six years, the asset sales programme is expected to raise a total of $6 billion, of which $1 billion is earmarked for spending on schools and $1 billion on hospitals. Treasury has estimated that $780 million in interest costs will be saved as a result of asset sales.

Budgets give a clear picture of government spending: Crown expenses stand at $72.4 billion, a third of which will be used for social security and welfare, 21 percent for health, 17 percent for education, 6 percent for government services, 5 percent for law and order, 5 percent for finance costs, 3 percent for transport and communications, and 10 percent for conservation, defence, primary industries, and all of the other ministerial votes.

Budgets also show the source of government funding: Core Crown revenue is forecast at $68.4 billion, 41 percent of which comes from personal income tax, 24 percent from GST, 15 percent from company tax, 3 percent from other direct taxes, 8 percent from indirect taxes, 4 percent from interest and dividends, and 5 percent from other revenue.

Over the next three years, Treasury expects income tax to increase by $2.6 billion, GST by $2 billion, and corporate tax by $1.6 billion – these increases will be generated not by raising tax rates, but by an improvement in economic growth, leading to higher business profits, higher incomes and increased household spending.

The Budget shows that of the $27.8 billion in personal taxation collected by the government, the lion’s share is paid by the 15 percent of New Zealanders who pay the top rate of tax on earnings of $70,000 and over. They contribute 57 percent of all income tax collected by the government.  That is, 15 percent of taxpayers pay 57 percent of the tax. The Green-Labour coalition think that’s not enough – they say high income earners are not paying their fair share!

Of all of the changes signalled in the budget, probably the most controversial is those associated with housing. It is no secret that concerns exist over house price inflation and the potential for a serious “housing bubble”. House price inflation is caused when the demand for housing outstrips supply. This is presently the case in the key Auckland market, where only 5,000 or so new housing permits a year have been issued over most of the last decade, when more like 9,000 were needed. As we know, housing inflation could trigger the Reserve Bank to raise interest rates, but in this environment there is a real risk that interest rate increases would push up the value of our dollar (as overseas investors would flock to buy the Kiwi to take advantage of the higher interest rates) to the detriment of exporters and manufacturers.

This is a dilemma the government is attempting to address through two initiatives announced in the Budget. The first is the establishment of Housing Accords in Special Housing Zones where there are major problems with housing affordability. These accords will be used to speed up council consent processes and free up land for housing subdivisions until the Resource Management Act and local government planning reforms are in place. Secondly, the Reserve Bank has been given additional powers to help rein in an over-heated housing market, including by restricting the number of low deposit loans that banks can issue.

This week’s NZCPR Guest Commentator, Professor Norman Gemmell, Victoria University’s Chair in Public Finance, picks up on this theme in his budget analysis, Budget 2013 – Good Policy or Good Luck?

“It is on housing affordability, and the new agreement with the Reserve Bank, where the biggest new initiatives are to be found. Numerous studies in recent years have encouraged the government to do more on the housing supply-side and this Budget offers more specifics on how they intend to speed up, facilitate and extend the supply of new houses.

“But for me, alarm bells ring with both their new demand-side initiatives – a pilot scheme of low/no interest loans to low-income borrowers, and increased rent subsidies. These always sound good as a help for the poorest buyers but are a strange way to discourage house price inflation. Namely, putting more money in the pockets of those trying to rent or buy property. If these schemes are given a wider roll-out, expect to see landlords reap much of the benefit as weekly rents rise in response, and lower-end house prices rise as the newly enabled recipients of the no-interest loans enter the market as house purchasers with greater buying power.”

Policies designed to enable people who cannot afford a deposit to buy their own home are risky at the best of times. It is schemes like this that helped to create the global financial crisis in the first place. One would have hoped that prudent policy-makers would have steered well clear of such ill-advised schemes – in spite of the increasingly loud calls by opposition parties and advocacy groups.

Similarly with Warrant of Fitness checks for rental houses – a policy long advocated by the bureaucracy-lovers of the ‘left’ who haven’t understood that such regulatory interventions achieve little other than an increase in rents – in the end, hurting the very people such misguided policies purport to be helping.

All in all, the 2013 Budget shows that while there is obviously much more to do, National has been a prudent manager of th e New Zealand economy during some of the most challenging times this country has ever known. What’s more, with the Australian economy turning from a forecast surplus to a A$20 billion deficit, many Kiwis who moved there for greater opportunity, may well find themselves attracted back home – bringing with them the talents and skills that New Zealand will desperately need as we move towards the brighter future that is being signalled.