Budget focuses on getting out of debt trap
For an election year, Finance Minister Bill English’s third budget is certainly unusual in that it has been rather bold in cutting spending than what most observers might have expected. Indeed, it is the first time in eighty years that a finance minister has cut spending in an election year.
Given the parlous state of the country’s finances, Mr English and his team had no option but to take whatever strong steps that were possible to try to balance the books as early as possible. The task would certainly have been made more difficult because of the November elections.
Measures proposed in Budget 2011 aim to bring down the government’s external borrowing from the whopping $380 million a week currently to a more bearable $100 million a week by next year. This could well pave the way for the government books to score a surplus as early as 2015 – a year ahead of schedule, which is an extremely desirable outcome.
Mr English said Crown net debt would now be under 30% of GDP and that without the tight fiscal policies proposed in this year’s budget it would have peaked closer to 35%. “These are changes that will have a long term effect,” he said.
But despite the cuts, the Finance Minister has managed to avoid criticism of being too harsh on any of the affected sectors. That is because any negative impact on these sectors has been kept to a minimum. The budget does not seem like a slash and burn exercise so much as mere tinkering at the edges.
Perhaps the only segment where the cuts seem drastic, if at all, is the state sector, where government departments and agencies will be given savings targets. Ending the funding of more than 100 state sector agencies’ employer contributions to KiwiSaver, the State Sector Retirement Savings Scheme and the Teacher Retirement Savings Scheme will save about $650 million. These agencies will be asked to meet these costs from their own funding, for the most part.
Other tweaking in this sector will save another $330 million, bringing savings from the sector close to $1 billion – which, indeed, is a substantial saving in tough economic times like these.
The state public sector has had runaway growth in the past decade both in terms of people employed and their annual salary increases, which have been at a faster rate than people in the private sector, even in the toughest of economic times. The budget will need the sector to implement some serious belt tightening.
Changes to KiwiSaver shifts the focus away from external debt to genuine internal savings. The government will now have to borrow less externally to fund the KiwiSaver savings scheme.
The government’s annual $1.2 billion contribution by way of the $20 tax credit a week will be halved to $10 a week (thereby halving the employee tax credit to an annual cap of $521). The $1040 kick start, though, will continue without changes, to encourage people to start the savings habit.
Other significant changes to KiwiSaver include raising minimum contributions by employers and employees from 2% to 3% from the year 2013 and ending tax-free employer contributions (they will now be taxed at the employees’ base tax rate). This will affect both higher income earners and their employers.
These changes to KiwiSaver are tipped to improve the rate of national savings by about 2.2% of GDP a year. From the present $7.9 billion KiwiSaver funds are projected to rise to $25 billion in 2014-15 and a whopping $60 billion in 10 years.
Quite courageously for an election year, the Finance Minister has taken the scissors to the Working for Families scheme as well. Phased in lowering of abatement thresholds will bring in some savings, while benefit payments to high earning families will be reduced, again producing savings.
The hand-out largesse wrought by previous government policies has led to more than 40% of New Zealanders receiving more from the state than they pay in tax, as last year’s Tax Working Group reported.
The budget has reallocated some of the savings from these cuts to the health sector, which will receive an extra $2.2 billion over the next four years, of which $585 million – made up of $420 million of new money, in addition to 165 million of savings.
This will help the healthcare system provide increased medical training and maternity initiatives, greater access to medicines and elective surgery. It also increases funding for dementia care – a growing problem because of the country’s aging population – besides mental health, disability support services and GP visit subsidies.
The Canterbury Earthquake Recovery Fund is set to receive $5.5 billion over the next six years. Local infrastructure and state-owned asset rebuild will gain from this funding. Funds will also help provide welfare support, meet costs related to the immediate response to the emergency and government's financial support package for AMI Insurance.
Communications gets a big fillip in the budget. As well as capital funding of $970 million to be provided to Crown Fibre Holdings to invest alongside private sector partners for the national broadband initiative, $28 million has been allocated for upgrading connectivity in schools – mainly providing last mile connectivity to the broadband network for the state school system.
Other infrastructure allocations include $338 million for rail and $109 million of capital funding for education sector.
Part of this will be funded by the government’s plan to sell stakes in four state-owned energy enterprises while also reducing its majority shareholding in Air New Zealand to raise up to $7 billion in capital, of course if only the government is re-elected in the November elections.
The good news for business: an additional $24 million over 4 years has been added to last year’s impressive allocation of $234 million over 4 years for business research and development. The idea is also to help commercialise research and development project, addressing a lacuna New Zealand innovators have long faced: taking their bright ideas to the world marketplace.
Though measures to bring the government books back in shape by the end of 2015 look impressive, the exercise does come at a cost. Before external borrowing comes down to zero and the government of the day embarks on a repayment programme, the tax bill is tipped to increase. From $3.5 billion this year, it is tipped to rise to $6.3 billion by 2015.
For an election year, Finance Minister Bill English’s third budget is certainly unusual in that it has been rather bold in cutting spending than what most observers might have expected. Indeed, it is the first time in eighty years that a finance minister has cut spending in an election year.
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For an election year, Finance Minister Bill English’s third budget is certainly unusual in that it has been rather bold in cutting spending than what most observers might have expected. Indeed, it is the first time in eighty years that a finance minister has cut spending in an election year.
Given the parlous state of the country’s finances, Mr English and his team had no option but to take whatever strong steps that were possible to try to balance the books as early as possible. The task would certainly have been made more difficult because of the November elections.
Measures proposed in Budget 2011 aim to bring down the government’s external borrowing from the whopping $380 million a week currently to a more bearable $100 million a week by next year. This could well pave the way for the government books to score a surplus as early as 2015 – a year ahead of schedule, which is an extremely desirable outcome.
Mr English said Crown net debt would now be under 30% of GDP and that without the tight fiscal policies proposed in this year’s budget it would have peaked closer to 35%. “These are changes that will have a long term effect,” he said.
But despite the cuts, the Finance Minister has managed to avoid criticism of being too harsh on any of the affected sectors. That is because any negative impact on these sectors has been kept to a minimum. The budget does not seem like a slash and burn exercise so much as mere tinkering at the edges.
Perhaps the only segment where the cuts seem drastic, if at all, is the state sector, where government departments and agencies will be given savings targets. Ending the funding of more than 100 state sector agencies’ employer contributions to KiwiSaver, the State Sector Retirement Savings Scheme and the Teacher Retirement Savings Scheme will save about $650 million. These agencies will be asked to meet these costs from their own funding, for the most part.
Other tweaking in this sector will save another $330 million, bringing savings from the sector close to $1 billion – which, indeed, is a substantial saving in tough economic times like these.
The state public sector has had runaway growth in the past decade both in terms of people employed and their annual salary increases, which have been at a faster rate than people in the private sector, even in the toughest of economic times. The budget will need the sector to implement some serious belt tightening.
Changes to KiwiSaver shifts the focus away from external debt to genuine internal savings. The government will now have to borrow less externally to fund the KiwiSaver savings scheme.
The government’s annual $1.2 billion contribution by way of the $20 tax credit a week will be halved to $10 a week (thereby halving the employee tax credit to an annual cap of $521). The $1040 kick start, though, will continue without changes, to encourage people to start the savings habit.
Other significant changes to KiwiSaver include raising minimum contributions by employers and employees from 2% to 3% from the year 2013 and ending tax-free employer contributions (they will now be taxed at the employees’ base tax rate). This will affect both higher income earners and their employers.
These changes to KiwiSaver are tipped to improve the rate of national savings by about 2.2% of GDP a year. From the present $7.9 billion KiwiSaver funds are projected to rise to $25 billion in 2014-15 and a whopping $60 billion in 10 years.
Quite courageously for an election year, the Finance Minister has taken the scissors to the Working for Families scheme as well. Phased in lowering of abatement thresholds will bring in some savings, while benefit payments to high earning families will be reduced, again producing savings.
The hand-out largesse wrought by previous government policies has led to more than 40% of New Zealanders receiving more from the state than they pay in tax, as last year’s Tax Working Group reported.
The budget has reallocated some of the savings from these cuts to the health sector, which will receive an extra $2.2 billion over the next four years, of which $585 million – made up of $420 million of new money, in addition to 165 million of savings.
This will help the healthcare system provide increased medical training and maternity initiatives, greater access to medicines and elective surgery. It also increases funding for dementia care – a growing problem because of the country’s aging population – besides mental health, disability support services and GP visit subsidies.
The Canterbury Earthquake Recovery Fund is set to receive $5.5 billion over the next six years. Local infrastructure and state-owned asset rebuild will gain from this funding. Funds will also help provide welfare support, meet costs related to the immediate response to the emergency and government's financial support package for AMI Insurance.
Communications gets a big fillip in the budget. As well as capital funding of $970 million to be provided to Crown Fibre Holdings to invest alongside private sector partners for the national broadband initiative, $28 million has been allocated for upgrading connectivity in schools – mainly providing last mile connectivity to the broadband network for the state school system.
Other infrastructure allocations include $338 million for rail and $109 million of capital funding for education sector.
Part of this will be funded by the government’s plan to sell stakes in four state-owned energy enterprises while also reducing its majority shareholding in Air New Zealand to raise up to $7 billion in capital, of course if only the government is re-elected in the November elections.
The good news for business: an additional $24 million over 4 years has been added to last year’s impressive allocation of $234 million over 4 years for business research and development. The idea is also to help commercialise research and development project, addressing a lacuna New Zealand innovators have long faced: taking their bright ideas to the world marketplace.
Though measures to bring the government books back in shape by the end of 2015 look impressive, the exercise does come at a cost. Before external borrowing comes down to zero and the government of the day embarks on a repayment programme, the tax bill is tipped to increase. From $3.5 billion this year, it is tipped to rise to $6.3 billion by 2015.
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