Budget highlights
This Budget continues the trend of diminishing real spending in some key expenditure areas
No frills, no thrills
Budget 2012 is conservative and disciplined in one sense but bullish and optimistic in another.
The Government deserves credit for its strict controls on Crown spending, which it projects will increase by a total of just 11% over the next four years. With the exception of the forecast 30% hike in superannuation over this period, businesses will generally be comfortable with the forecast spending.
The arguably bullish side is that GDP growth is projected to average about 3% over each of the next four years. That drives the profitability and employment that underpin the forecast 29% increase in tax.
Economic overview
Notably the growth profile in Budget 2012 is lower but more stable than the Treasury has predicted in its previous two updates.
It’s been a year where the risks to the economy remain incredibly high, but the promise of significant economic stimulus through the Canterbury rebuild and rather bullish outlook from the Treasury on the world economy see growth rising from 1.2% in 2011 to around 3% from 2014 onwards.
Unemployment remains elevated, at 6.6%, and reduces slowly, even with the impact of the Canterbury rebuild. Despite Government scaling up its own investment spending over the last few years, business and consumer confidence has remained weak.
Canterbury Stimulus – Waiting for liftoff
One of the most significant impacts on both the fiscal and economic picture is the effect that the Canterbury rebuild will have. Most notably, the later commencement of the rebuild has seen the Government move $2 billion in spending from the present year to the 2012/13 year.
The government number
Can we really get back to surplus by 2014/15?
Budget 2012 holds the line we saw in Budget 2011 of a return to surplus in 2014/15.
In the years prior to the return to surplus, the budget significantly revises the expense profile with most of this related to the movement between years of the Canterbury spending.
We have seen a significant revision on the debt front compared to Budget 2011. Net debt is forecast to peak at 28.7% of GDP in 2014, almost 1% lower than this time last year, but still 2% higher than predicted in Budget 2010. The Government remains on track to deliver its long term fiscal objective of a debt figure of around 20% by 2020.
Overall, Crown expenses as a proportion of GDP drop as the economy improves and the Government’s focus on better public services delivers benefits.
The ability to return to surplus by 2014/15, and meet the debt targets is fundamentally dependent on the Treasury’s bullish outlook on growth, and the associated tax revenues. To average 3% growth from 2014 onwards would require New Zealand to deliver an economic performance equivalent to that of the early 2000s.
Who were the winners and losers in the lolly scramble?
The Winners
Research, Science and Innovation gets a massive boost with $385 million including $166 million for an Advanced Technology Institute, $100 million to university research and a range of other initiatives.
Infrastructure spending survives and thrives, with previously signalled expenditure carrying on, largely unaffected by the tighter fiscal environment.
Fiscal responsibility is a terribly dry area, but the proposed amendments to the Public Finance Act will be a legacy of this Budget. The moves towards greater transparency and potentially forging a greater link between the economic cycle and government spending are very important initiatives.
Health and Education but not in the way you’d think. The additional funds provided are at the margins, and the initiatives are worthy, but the real achievement for the sectors is the ability of these high-spending sectors to escape reasonably unscathed.
Inland Revenue for getting $78 million for more compliance and audit activity. IR has often used the promise of extra revenue to bolster its departmental capability, and it has successfully gone to the well again in Budget 2012. Its Policy Advice Division however cops a 50% reduction in its vote. This suggests no significant new taxes are expected in the short term, a fact confirmed by the Minister of Finance in the Budget lock-up. Mr English also noted that IR’s systems are not currently able to cope with new taxes.
The Losers
Students as the Budget confirms cuts to student loans and allowances. It is proposing to alter student loan contracts to change the repayment rate from 10 per cent to 12 per cent for any earnings over $19,084. This increase will hit students and recent graduates hard but will save the Government $240m.
Social infrastructure spending is also a possible loser with economic infrastructure nabbing some of the proceeds from the sale of shares in State Owned Enterprises. We discuss this more in a later section.
The public service and public services, mainly because the Budget continues the uncertainty for public servants and lacks any really bold moves for people using these services. The Budget announces the move to an outcomes focus in 10 areas, and also cements economies of scale efficiencies in the amalgamation of departments and back offices. While the outcome focus may yield significant results over time, the lack of specificity about how services will be transformed means we are yet to see the kinds of service improvements achieved in countries like Canada and the UK.
This Budget continues the trend of diminishing real spending in some key expenditure areas.
