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Dr Muriel Newman

The Budget 2012

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Nowadays budgets are not what they used to be when the public crowded around their wireless or TV to hear the changes of the day. For many, their main interest was in knowing the increases in excise duty of smokes and beer.  Modern budgets are less newsworthy and announcements of any significance are usually made well ahead of Budget Day. In this regard, Thursday’s Budget delivered what it had promised – very little. It was a prudent, steady as she goes affair that reflected the difficult economic times we live in.

An annual budget is the main statement of the government’s overall economic and social programme. In his budget speech the Minister of Finance Bill English explained that the National-led government has three main priorities: to build a more productive and competitive economy, to deliver better public services, and to continue the rebuilding of Christchurch. He reminded us that since the recession, the economy has expanded in nine out of the past 10 quarters, and that with growth set to rise to more than 3 percent over the next three years, New Zealand’s outlook is on par with Australia, and stronger than in the Euro zone, the United Kingdom, Japan, the United States, and Canada.

Fortunately for exporters, the growth outlook for our two largest trading partners, China and Australia, remains reasonably strong, and New Zealand is well placed to benefit from closer relations and trade with the other fast-growing economies in the Asia Pacific region.

Unemployment is forecast to drop below 5 percent by 2015, with 60,000 jobs already created and 154,000 new jobs forecast. Employment stands at 68 percent which is amongst the highest in the OECD.

Households and businesses have also responded to the difficult economic conditions by saving and paying down debt. As a result, New Zealand’s household savings rate is moving into positive territory for the first time in a decade, and is forecast to grow to 4 percent by 2016. This will help to reduce our external debt, which is amongst the highest in the developed world, making us vulnerable to external shocks.

The budget provides details of where the government revenue is coming from and how it is being spent. According to the 2012 budget documents, next year core Crown revenue is forecast to be $64.2 billion or 29.5 percent of gross domestic product (GDP) – the measure of the value of all goods and services produced in New Zealand.  Individual tax should contribute $25.9 billion, company tax $9 billion, GST $15.7 billion, other direct taxes $2.1 billion, indirect taxes $5.6 billion, interest and dividends $2.4 billion, and other revenue $3.5 billion.

On the expenditure side of the equation, core Crown expenses are forecast to total $73.7 billion or 33.8 percent of GDP.  Health is expected to cost $14.7 billion, welfare $13 billion, education $12.4 billion, superannuation $10.2 billion, law and order $3.6 billion, transport and communications $2.2 billion, core government services $6.5 billion, finance costs $3.8 billion, and other expenses $7.3 billion.

Not only were those clamouring for more government handouts disappointed by the ‘zero’ budget, so too were those pushing for faster reform. The path taken by National is continuing the timid course they have been following since first elected in 2008, when the country was already in a recession and the global financial crisis was rapidly unfolding. Instead of tightening their belt as the public have done, they opted to retain many of the previous Labour Government’s big-spending policies such as interest-free student loans and Working for Families – even though they were election bribes that the country could no longer afford. National reasoned that it was better to absorb the cost of providing support to affected families onto their own balance sheet during the difficult times, rather than pulling the plug and causing more hardship. It was a course of action that also enabled them to avoid major political fallout.

This week’s NZCPR Guest Commentator is Dr Don Brash, former Reserve Bank Governor and leader of the ACT and National parties. Dr Brash has provided an analysis of the budget and makes the comment that Labour’s legacy has created an unaffordable burden on the country:

“It is an enormous tragedy that this Government failed to grasp the nettle when it first came to office in late 2008.  They had a strong mandate for action; they could legitimately blame the Clark/Cullen Government for the explosion in government spending which had taken place in Labour’s final term of office; the international crisis was obvious for all to see.  Instead, they tinkered, and all New Zealanders will pay the price for that timidity for decades to come.”

Not only did Labour introduce expensive social programmes, they also undertook a massive expansion of the public service, with the number of public servants rising from 30,041 in 2000, to peak at 47,052 in 2009. Two years later, in spite of all of National’s rhetoric about reducing government spending and rationalising the public service, the numbers on the public payroll had only reduced to 45,807. The salary cost of public servants remains at an all time high of $2.8 billion, up from $1.2 billion in 2000.1

As a result of National’s cautious approach of constraining rather than cutting government spending, debt has escalated. Over the last four years, gross debt has more than doubled from $31.4 billion or 17.1 percent of GDP in 2008 to $80.1 billion or 38.5 percent of GDP today.

However, there is some good news. The size of government relative to the rest of the economy, which has reduced from 35.2 percent of GDP last year to 33.5 percent, is forecast to continue to decline, falling to 30.2 percent in 2016. This is heading back towards the more acceptable level of 29 percent of GDP, that it was before Labour embarked on their reckless spending binge in 2005. It is widely accepted that limiting government spending to around 25 percent of the overall size of an economy, provides ample room for the private sector to create the jobs and growth needed to drive up living standards and create a prosperous society.

In his article Another Missed Opportunity, Dr Brash explains that a key reason for New Zealand’s failure to prosper in recent decades is that the fundamentals necessary to improve productivity have not been in place. “An acceleration of our growth rate is crucially important.  Over several decades, our productivity growth (which ultimately drives changes in living standards) has been slower than that in most other developed countries (a brief period following the reforms of the late eighties and nineties excepted).  Over the six years to 2011, productivity grew on average by just 0.2% annually, comparable to the productivity growth achieved by Portugal and Italy in the decade prior to the Global Financial Crisis.  As a consequence, our living standards continue to drift down relative to those in other developed countries, and more and more Kiwis leave for greener pastures abroad.”

So what does the government plan to do about the crucial need to improve our productivity ratings? Plenty, according to John Key and Bill English. They point to moves to free up the labour market and improve its flexibility by making it easier to hire new workers and by restraining the power of the unions. They claim that they are lifting workforce skills through a raft of new initiatives in education and welfare. They highlight the boost to research and development, not only through direct grants, but through the tertiary sector as well. They explain how their investment in key infrastructure will help: better highways to reduce productivity-killing gridlock and improve regional opportunities, high speed broadband to enable New Zealanders to improve their efficiency and output as well as take better advantage of global opportunities, upgrading the electricity network to ensure security of supply. They point to reforms of the Resource Management Act, claiming they will facilitate development and remove barriers to growth. They explain that their proposed reform of Local Government will reduce the cost burden on local communities and remove the brake on progress. And they see their moves to increase the opportunity for oil and mineral exploration and mining as a key industrial development for the future. After all, they say, Australia’s economic success is based to a large extent on their mining sector, and with New Zealand being rich in mineral wealth, they argue that facilitating development in that area will provide some of the jobs and growth that this country so desperately needs.

Whether these measures go far enough to successfully improve productivity growth, remains to be seen.

There is no doubt that National’s mantra has been to get the country back into surplus as quickly as possible so that debt reduction can begin in earnest. With their aversion to radical reform, this will not begin for 3 years and even then, the surplus is so small, that unless there are further reductions in government spending, or unprecedented economic growth, the surplus is unlikely to be achieved. However, this approach appears to have satisfied the credit rating agencies – and the financial markets, which barely blinked at the budget announcements.

What is clear is that New Zealand will not prosper unless the government sector continues to contract to make more room for the private sector – for it is private enterprise that creates jobs and growth, not the government. The role of government is to establish a suitable framework so businesses will want to invest in New Zealand. With companies being increasingly mobile these days, there needs to be a far greater focus than ever before on ensuring that the government has got the right fundamentals in place to encourage business success.

One factor that is of key importance is company tax. Governments around the world are continually lowering company tax rates in order to attract businesses to their shores. As a result, New Zealand’s company tax rate has become uncompetitive. Set at 28 percent, it is now the 10th highest amongst the 34 OECD member countries. The OECD average has dropped to just over 25 percent.2

When Canada reduced its federal corporate tax rate from almost 30 percent to 15 percent, it found that company tax revenues did not fall, they increased.3 If our government was to take the bold step of lowering our company tax to match Canada’s 15 percent rate, the estimated cost would be in the region of $2.3 billion. But that does not take into account the sort of incentive effects that Canada experienced – and if there was still a tax shortfall, there is no shortage of government waste that could be pruned to cover it.

Just imagine, not only the boost to Kiwi businesses that such a low tax rate would bring, but also the impact on Australian businesses. If New Zealand had a company tax rate of 15 percent – half their 30 percent rate – many would beat a path to our shores to set themselves up in our more tax-friendly environment. Now that would be a very positive way of reversing the exodus of skilled workers from New Zealand – “Mr English, are you listening?”

  1. Human Resource Capability Survey 2011
  2. Tax Reform Trends in OECD Countries, http://www.oecd.org/dataoecd/9/23/48193734.pdf
  3. The Washington Times, Corporate tax madness