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Frank Newman

Inside Budget 2017

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The National Government has produced a measured and politically clever Budget. Where this budget differs from its previous budgets is that it has opened its wallet and distributed the benefits of eight years of conservative management and the increased tax revenue derived from a very strong domestic economy in recent years.

Those gains have been distributed widely, nearly everyone will benefit, but they are weighted particularly to low and middle income New Zealand. That has left National’s political competitors grasping for credible points of disagreement, and placed National firmly in the middle ground. It has effectively elbowed its opponents into isolated positions representing minority constituencies or special interest groups. National occupies Middle Earth and Labour is nowhere to be seen on that battlefield.

 Just how favourable the government’s cash position has become is evident in the growth in tax revenue. In the year to June 2017 tax revenue is forecast to be $83 billion, up from $66 billion in 2013, an annual increase of 5.8 per cent. It is forecast to increase to $99 billion over the next four years, or 4.6 per cent per annum. Those are very significant improvements in numbers.

The projected operating surpluses are equally as impressive, growing from $1.6 billion in the current financial year ended 30 June, to $7.2 billion by 2021.

Those operating surpluses are being “reinvested” into infrastructure, with Finance Minister Joyce saying the government’s capital investment absorbs virtually all the cash generated from the  operating surpluses over the next four years.

In total $32.5 billion is to be spent on infrastructure over that time, including $4b in new spending which Mr Joyce described as the “single biggest investment of new capital in one budget by any government in decades”.

$9.2 billion is earmarked for roading improvements which will add some 540 single-lane kilometres of state highways.  $1 billion has been allocated to rebuilding the transport links through Kaikoura, and $1.4 billion for the central government’s share of Auckland’s City Rail Link.

Other capital spending includes $2.7 billion on housing (including 34000 new homes), $763.3 million to increase New Zealand’s prison capacity, $576 million for the New Zealand Defence Force, $450 million for KiwiRail, and $392.4 million for building and upgrading schools.

The handouts to low and middle income earners are being delivered via the Family Incomes Package which comes into effect from 1 April 2018. That package:

  • Provides a tax reduction by increasing the first 10.5 per cent tax band threshold from $14,000 to $22,000, and second 17.5 per cent tax band threshold from $48,000 to $52,000. The other tax thresholds remain unchanged: 30 per cent to $70,000 and 33 per cent above $70,000.
  • Increases the maximum Working for Families tax credit for the first child under 16 by $9 a week, and for each subsequent child under 16 by between $18 and $27 a week. There is also an increase in the abatement rate to 25 per cent, and a reduction in the abatement threshold to $35,000.
  • Increases the Accommodation Supplement maximum payment rates for a two person household by between $25 and $75 a week, and for larger households by between $40 and $80 a week. Changes to Accommodation Supplement areas will provide further gains for some families. 136000 households will benefit.
  • Increases the Accommodation Benefit weekly payments by up to $20 for students to reflect their increasing housing costs. Around 26000 students will benefit with those in Auckland, Wellington or Christchurch receiving $20 more.
  • The Independent Earner Tax Credit will be discontinued. That is an entitlement of up to $10 per week for those who earn between $24,000 and $48,000 and do not receive the Working for Families tax credit.
  • The package as a whole is expected to benefit around 1.3 million families in New Zealand by, on average, $26 per week.

Other Budgetary items of note include:

  • Superannuation payments will increase as of 1 April next year. A couple will receive an additional $13.10 a week and a person alone $8.50.
  • Homeowner insurance premiums are set to rise by up to $69 a year, to re-fund the government natural disaster fund which has been depleted by the Canterbury and Kaikoura earthquakes. The present rate of 15c per $100 of insurance cover (to a maximum of $207 a year) will rise to 20c per $100 of cover (to a maximum of $276 a year).
  • Government contributions to the (Cullen) Superfund will resume in 2020-21.
  • Crown revenue for the 2018 year is projected to be $83.8 billion. This is collected from the following sources:
    • Individual income tax $34.9b (42%)
    • GST $20.6b (25%)
    • Company tax $13.1b (16%)
    • Other indirect tax $6.8b (8%)
    • Other revenue $8.4b (9%)

The top 19 per cent of taxpayers, who earn more than $70,000,  pay 62 per cent of the income tax take. The bottom 49 per cent of taxpayers, who earn less than $30,000, contribute 9 per cent of the income tax take.  When critics say high income earners are not paying their “fair share” one must question their definition of fairness.

With Gross Domestic Product (GDP) in the current year forecast to be $269 billion, the Crown consumes approximately 30 per cent of the economy in taxes, down from 34 per cent in 2009.

Crown operational spending for the 2018 year is projected to be $80.5 billion. The main spending areas are:

  • Health $17.1b (21%)
  • Education $14b (17%)
  • NZ Super $13.7b (17%)
  • Welfare $12.7b (16%)
  • Core govt services $4.8b (6%)
  • Law and order $4.1b (5%)
  • Finance costs $3.5b (4%)

Budget 2017 also has some interesting insights into the future.

  • The Government remains committed to reducing net debt to around 20 per cent of GDP in 2020, and to between 10 and 15 per cent of GDP by 2025. Debt is forecast to be 23.2 per cent in the current financial year. In dollar terms the debt is expected to remain constant at around $60 billion, but as the economy grows the debt as a percentage of GDP declines.
  • The average wage of $58,900 is expected to rise to $64,300 over the next four years – an average annual increase of 2.2 per cent.
  • 215,000 extra jobs are forecast to be created over the next four years.
  • GDP is expected to grow by 3.1 per cent per annum over the next five years.
  • Net migration is expected to add 212,000 people to the population over the next four and a half years, similar to the gain over the past four and a half years.

With forecasts of strong net immigration inflows continuing over the next three years, a high level of activity in the building sector, and price stability in the dairy sector, there is every prospect that the government may surpass its projected surpluses.

If it does, then there may well be an adjustment to the top income and company tax rates, but clearly this was not something National was prepared to introduce, or even foreshadow, in an election year. In my view, National is likely to have that discussion next year, with a view to reducing the company tax rate to match Australia at 25% and extending the top individual tax band.