Having squandered a great opportunity to take bold decisions to right the economy in its first term, the John Key-led National government in New Zealand has continued on its tack of timid, tepid financial leadership in the first budget of its second term.
The National Party was elected in 2008 on the back of a popular vote and Key turned out to be the most popular prime minister ever throughout the first term. But that mandate, popularity and goodwill were largely wasted, with his government avoiding taking tough economic decisions, instead opting for softer options that were seen as favouring the upper crust of New Zealand society in almost its three budgets in that first term.
The National led government and its Minister of Finance Bill English have repeated that ‘softly, softly’ strategy in the first budget of its second term last month. It has once again pretended not to notice the several menacing elephants in the room, going about as though they simply didn’t exist.
John Key’s leadership was expected to bring a whiff of fresh air in New Zealand politics because of his successful background in business and the world of finance. But last month’s budget has proved beyond doubt that his government has put realpolitik and political ambitions before sound business sense to deliver a budget that does little, if at all, by way of bold initiatives to lift the country out of the financial morass it finds itself in.
There is little to nothing in the budget proposals to encourage new investment, growth and job creation, though it projects 2% growth this year and 3% next year – probably solely based on expected Christchurch rebuild initiatives. With no prospects for growth and investment, the government has been left to play within the limits of its tax pie.
Budget 2012 therefore merely tinkers around the edges, steering clear of the big issues. As a ‘Zero Budget’ it is an elaborate exercise in rebalancing of the tax take. In doing this, it leaves personal taxation at the same levels while severely punishing the easiest of targets – smokers. So, excise on tobacco will go up 10% on January 1 every year for the next four years adding over $20 to a pack of cigarettes. It is estimated to raise $528 million in revenue over 4 years.
But the budget does nothing to increase revenue from what is widely considered by sociologists as New Zealand’s Number One social problem – alcohol. It has been left untouched, not the least because it is one of the biggest contributors to the pool of the country’s indirect taxes.
Other tinkering involves saving the government some $184 million over four years by eliminating the ability for farmers to conveniently swap between livestock valuation methods.
Widely criticised as a party and government favouring the well off, the finance minister has tried to live down that image announcing the government’s plan to crack down on tax loopholes for the rich.
Deductions for expenditure related to assets like holiday homes, yachts and aircraft will be disallowed adding $109 million over 4 years to government coffers. The business and personal use of such assets is low, but the costs relating to the period of non-use has been hitherto treated as tax deductible in a bid to minimise the owners’ other tax liabilities.
Consequently, Inland Revenue will receive more funding to help it boost compliance and better tax collection with better policing.
Raiding kids’ piggy banks
Budget 2012 has enough measures in it to have displeased lower income earners. Many of these seem marginal and look like an easy way out rather than confront the fundamental macroeconomic problems facing the country, which undoubtedly look as though they are ballooning into something dangerously big in the coming decades.
For instance, the budget has proposed small, seemingly inconsequential measures like the removal of marginal tax credits raising just about $117 million over 4 years. These relate to incomes below $9880 including the active income of children, inviting widespread criticism from the opposition parties as stealing from children’s piggy banks.
At a time when record numbers of New Zealanders are leaving the country’s shores to work across the Tasman, especially in Western Australia’s mining boomtowns and elsewhere, the budget does nothing by way of any bold measures to create jobs or to develop incentives to persuade younger people to live in the country and find work.
On the contrary, cuts to tertiary student programmes’ financing has had university students up in arms disrupting traffic on main thoroughfares in Auckland on budget day as also remonstrations from a significant section of tertiary academics.
The budget also announced cuts to primary and intermediate school programmes, which caused widespread outrage from teachers, principals and parents alike, forcing the government to backtrack on some of them. This is undoubtedly going to be embarrassing for the government, especially since its much-touted return to surplus in 2014 with a wafer thin, wishfully thought $197 million margin stands threatened just a week out from the announcement of Budget 2012.
Big issues left untouched
The government has once again shown its timidity in confronting the big issues that face the nation. There is nothing in the budget that encourages investment and job creation. True, the global financial crisis and the goings on in Europe are depressing times for the entire world and this may not be the best time to embark on a high risk, growth oriented game plan. But there is little to back the government’s claim that some 154,000 jobs will be created over the next few years.
Also there seems little support in the budget in terms of strategy that tags into the recently announced super ministry headed by super minister Steven Joyce that is supposed to combine job creation, business and investment among other things.
But the biggest elephant in the room – superannuation – the annual costs of which will equal or exceed the entire education budget by 2016 and threatens to eat into a large chunk of the outlay over the next decade has been completely ignored. The National Party continues its ostrich like approach of burying its head in the sand saying it will not consider raising the super age from 65 to 67 as recommended by financial experts.
It has twice fobbed off the Labour Party’s invitation to joint consultations on the subject. And while it refuses to raise the super age, the National government does not speak publicly of what alternatives it has to deal with the situation that threatens to become a well nigh insurmountable problem if left untouched.
The government has also left alone the idea of automatic, compulsory enrolment into KiwiSaver for a later date given the half a billion dollar costs it would entail, though it has afforded more transparency to KiwiSaver users to view the affairs of their providers on a regular basis.
The much talked about capital gains tax – that other holy cow – has once again been left untouched, preserving the one and only viable investment option available to Kiwis as in the past several decades: property.
It is easy to see Budget 2012 as an insipid and tepid dish capable of whetting neither the financial nor the political appetite.