The Budget Economic and Fiscal Update forecasts a faster track for economic growth over the next four years, excluding a drought-impacted fiscal 2014, which will help bolster core Crown tax revenue by some $14.5 billion. That provides room for some $5.1 billion of new operating spending, cuts in ACC levies starting in 2014, and an additional $2.1 billion contribution to the Christchurch rebuild.

The latest Treasury forecasts are for a wafer-thin operating surplus before gains and losses of $75 million in 2014-2015, in line with the estimate in December’s Half Year Economic and Fiscal Update. Residual cash deficits over the forecast horizon are estimated at $12.7 billion, which will be met from the net proceeds of bond sales of $16.5 billion.

“Although we are making good progress, there is still much to be done,” English said. “The government is firmly focused on capping, and then reducing, debt. We’re quite happy with the relatively small surplus in 2015 because it is in an environment where tax and spending is under control.”

The Treasury has lifted its forecast for economic growth in the year ended March 31 to 2.5 percent from its estimate in December of 2.3 percent.

For the 2014 March year, the estimate has been trimmed back to 2.4 percent from 2.9 percent, after drought dried off dairy herds earlier than usual in the North Island in the current season and prompted some farmers to cull capital stock. Growth is seen accelerating to 3 percent in 2015.

Core tax revenue is forecast at $62.4 billion, or 27.4 percent of gross domestic product in 2014, rising to $72.8 billion, or 28.3 percent in 2017 as the economy grows. Growth in tax revenue is expected to strongly outpace forecast nominal GDP growth over the forecast horizon, with all tax types picked to rise, especially tax from employees, the Treasury estimates.

Net debt is forecast to be $57.9 billion, or 27.1 percent of GDP in the year ending June 30, before reaching a peak in 2015 at 28.7 percent and retreating to “no higher than 20 percent of GDP” in 2021. By delaying the resumption of contributions to the New Zealand Superannuation Fund, the government avoids more than $4 billion of payments, which it may have had to borrow.

This year’s budget lifts the operating allowance by $100 million to $900 million, while in Budget 2014 it is trimmed by $200 million to $1 billion. From 2015, operating allowances will grow by 2 percent a year.

Health is the biggest beneficiary of budget largesse, with $1.6 billion allocated for new initiatives and to meet cost pressures and population growth over the next four years. Of that, $250 million goes to district health boards to address inflationary pressures and a growing customer base.

Total health spending will reach a record $14.7 billion in 2014.

The government’s contribution to the Canterbury rebuild rises by $2.1 billion to $15.2 billion over the next four years, with the timing of payments one of the key risks identified in the budget forecasts. The government’s contribution is forecast to peak in 2014 at $3.28 billion, before retreating to $538 million in 2017.

Spending in Canterbury is expected to be “a significant driver” of economic growth, mainly through residential and business investment.

Canterbury also gets a contribution of $900 million from the Future Investment Fund to rebuild Christchurch hospitals.

The FIF, set up to hold the proceeds of state asset sales and to fund capital spending on schools, hospitals, railways and irrigation will swell to $2.1 billion with a $1.5 billion allocation from Budget 2013. The fund benefits from the $1.7 billion raised from the sale of MightyRiverPower shares and will get a bigger infusion when half of Meridian Energy is put on the block later this year.

Some $94 million from the FIF had already been allocated to KiwiRail’s turnaround.

(BusinessDesk)

The widely anticipated announcement could see the government take in perhaps $3.3 billion for its so-called Future Investment Fund, with the state-owned electricity generator and retailer valued independently at $6.5 billion in 2011.

The funds will be used to pay for capital works, including $426 million for the redevelopment of the Christchurch and Burwood hospitals, a further $94 million on top of $880 million for the commercial turnaround of state-owned rail operator KiwiRail, $80 million to support private irrigation projects, and $50 million to accelerate the upgrade of schools’ technological capabilities.

The proceeds of asset sales were “only a small percentage of the government’s overall spending,” said English. “But without them, we would either have to borrow more money overseas or go without some of the new or upgraded hospitals, schools and other infrastructure and investment.”

The government believes enough is known about the two biggest threats to Meridian’s future profits to allow the sale to go ahead and achieve acceptable value for taxpayers.

Those threats are the potential closure of the Tiwai Point aluminium smelter and the Labour and Green parties’ intention to scrap the current electricity market arrangements and revert to a central government agency buying, regulating and determining investment in the sector.

A smelter closure is judged to be potentially positive for Meridian because the company’s portfolio of renewables-only power plants would earn higher returns if the 572 Megawatts of output reserved for the smelter were sold to a customer that paid less heavily discounted power prices.

Meridian’s smelter contracts account for about one-seventh of total electricity production in New Zealand

Yes ACC premium reductions put over $1.3 billion back into the economy over the next two years, on the other side of the ledger personal and corporate taxpayers are expected to each contribute over a $1 billion more in the 2013/14 year. This has to be fuelled by higher profitability, higher employment and higher wages.
The elephant in the room that this budget ignores is both global and local uncertainty. The looming election could well see a change of Government with the pre election regulatory uncertainty and the lock in impact from the introduction of a capital gains tax.

The budget introduces measures to clarify the tax status of black hole expenditure along with research and development tax breaks for small innovative businesses and these are welcomed. What would be even helpful is to create certainty around the runaway use of the tax avoidance rules and to assure New Zealand businesses that we are actively participating in global moves to tax international companies. The danger zone for New Zealand is the measures for countering global tax base erosion and working towards a fairer system of profit sharing also have the potential for New Zealand to lose some of its existing corporate tax take.

As a country with a highly mobile work force we are more vulnerable than we may want to admit. At a personal tax level only thirty percent of our population earn over $40,000 a year and this group pay over 80 percent of our personal taxes.

Based on OECD comparatives New Zealand Corporates are paying more than their share of taxes and our corporate tax rate at 28 percent is higher than the OECD average of 25.5 percent. Despite the counter argument that we have an imputation system, on the international scene this means we are not competitive. At the personal tax level our tax rates are lower than many of our major trading partners, comparable to Australia and higher than the United States.

Property investors are once again the target of the tax office with another $7m handed out to squeezing $45m in extra taxes from Property investors. With around $7.1 billion a year of taxes a year lost due to the great untaxed cash economy the budget does not mention anything about targeting tax evasion. While it is easy to argue the cash economy will always exist; these cash businesses jeopardise our legitimate taxpaying businesses who struggle to compete on price. Not continuing to proactively and loudly target the cash economy is in my view unacceptable.

Other than establishing a taxpayer appreciation society or stopping anyone earning over $40,000 a year leaving the country we need to do more to create as much certainty as possible on the tax and political front as without this there the foundation for growth is not stable enough.

Yes we want budget to be boring and steady as we go – this one takes this to another level with an apt description is sleep walking our way to a budget surplus.

Taxpayer’s are both highly mobile and very sensitive to the environment and this budget falls short of providing a solid foundation on which businesses can ensure they achieve above average growth rates.

Joanna Doolan is a Tax Partner with Ernst & Young Joanna.doolan@nz.ey.com phone 09 3007075 0274935627.

The predicted surplus is risky: the Government is projecting GDP growth of 2.5 percent going to 3 percent in 2015, (Australia’s GDP forecast is in the same range).  GDP is affected by a number of risks, such FX, interest rates and our terms of trade.  Predicting GDP beyond twelve months in today’s environment is not much better than guess-work.  Accordingly, the Government cannot afford to bank future optimism in its approach to expenditure control.  Again, Australia provides a bleak case study.  The Gillard Government was forecasting a surplus for the coming year only months ago before tabling a budget with a deficit of A$18 billion this week.

The Government is characterising a $75 million surplus in the 2014/15  as a return from the brink.  Interesting the Australian Government characterised a surplus of $800m in the forecast 15/16 year as breaking even.    A slim surplus in New Zealand in the midst of the risks I mention is not the safe high ground that is implied.

The Government is to be applauded for sticking to its position on assets sales.  If the government directs those proceeds away from direct revenue generation, such as to health and education, that will increase pressure on the Government’s fiscal position

At the micro level relying on corporate and personal tax increases of $1 billion each to balance its books without any shift in tax rates is dependent on high levels of growth.  There is also an increased emphasis on tax avoidance, bringing with it more uncertainty which is not conducive to the investor confidence that New Zealand needs.

Overall, a reasonable budget reflecting a rosier view of the current risks than may be justified.  Time will tell.

The Treasury sees gross domestic product growth of 2.5 percent in the year ended March 31, slipping to 2.4 percent in 2014 before rising to 3 percent and 2.6 percent the following two years, according to its Budget forecast. That will taper off in 2017 to an annual pace of 2.2 percent.

The average forecast is slightly above the annual 2.4 percent rate flagged in the Treasury’s half-year economic and fiscal update in December, with a bigger cost for the Canterbury rebuild replaces the 0.7 percent reduction from the recent drought. Residential investment is expected to peak at 29 percent growth in the 2014 March year.

“Residential investment remains a key driver of demand growth in these forecasts,” the Treasury said. “A significant proportion of the growth in residential investment across the forecast period is driven by earthquake-related investment associated with the Canterbury rebuild.”

That investment in housing is expected to spill over into other consumption, though the Treasury doubts rising house prices will have as great an effect on household demand as in the past and expects household saving rates to stay largely flat at around zero.

The Treasury overhauled its forecast on house price inflation over the next five years, with annual inflation of 7.1 percent in the 2013 and 2014 years, slowing to an annual pace of 2.6 percent the following year, then 2.4 percent and 2.1 percent by 2017.

It had previously seen housing inflation peak this year at 6.5 percent, before slowing to between negative 1.3 percent and plus 1.6 percent over the following four years.

It also has a more aggressive forecast on increases to the 90-day bank bill, often seen as a proxy for the official cash rate, than the Reserve Bank as the Canterbury rebuild chews up spare capacity and imposes inflationary pressures on the economy.

The Treasury sees the bank bill rate at 2.7 percent until 2014, rising to 3.6 percent in 2015 and 4.3 percent the following year, half a percentage point higher than the central bank’s 2016 and 2017 forecasts.

New Zealand’s bubbling property market is seen as a threat to the country’s financial stability, with the International Monetary Fund yesterday saying local housing is about 25 percent over-valued and the Reserve Bank last week threatening to introduce restrictions on low equity loans if they pose a “significant risk” to the system.

Rising house prices are seen as an upside risk to the Treasury’s economic forecast if it leads to an associated increase in consumer spending and tighter monetary policy sooner than expected. That would drive up nominal GDP by $19 billion over the forecast period and trim 0.2 percentage points from the jobless rate, leading to higher tax revenue for the government.

The Canterbury rebuild is also expected to underpin a recovery in the labour market, with unemployment currently at 6.2 percent in the March 2013 quarter, falling to 5.2 percent by 2017. Labour market data has been seen as unreliable in recent quarters, with the benchmark household labour force survey showing persistently high unemployment at odds with other measures.

New Zealand’s current account deficit is forecast to keep widening to 6.5 percent to GDP by 2017 as trade surplus from exported goods falls in the wake of the drought and the deficit from imported services remains elevated.

The Treasury sees the currency, which has been holding back export receipts, as falling to 69.2 on a trade-weighted basis by 2017 from as high as 77 in 2014. The country’s net international investment liability is forecast to grow to 80.9 percent of GDP from 71.9 percent estimated in 2013.

(BusinessDesk)

The global financial crisis is still a risk, but we’re not in the maelstrom anymore. For now, at least.

Yet if the fastest annual growth rate we can expect over the next two years is 3 percent – – with the Christchurch rebuild in full swing – then you’d have to say New Zealand’s underlying low-growth problem is far from fixed.

Christchurch was bad luck which, during the repairs, is good news for economic growth rates. But it’s not an economic strategy for lifting the country’s perennially sluggish productivity.

In other words, we may have moved from sailing a leaky P-class to a trailer sailer, but we’re a very long way from America’s Cup catamaran status.

Yes, there’s a lot of money here reprioritised or found from somewhere to spend on new initiatives, many of them carefully targeted to areas of great social need, and the government talks a coherent game about the drive for Better Public Services to deliver better outcomes on the same or fewer funds.

But the crude numerical reality is that the government only achieves its totemic target of a surplus in the year to June 2015 by cutting from $1.2 billion to $1 billion the amount available for new spending in next year’s budget. English rightly argues that’s too simplistic an analysis, but it remains true.

And when it comes down to it, the forecast $75 million surplus could vanish in the blink of an eye or, for that matter, come in far larger.

Meanwhile, having expended far more political capital than it should have on the partial privatisation programme, the government is determined to bank the dividend and will sell half of Meridian Energy later this year to raise around $3.3 billion, barring an equity market cataclysm.

It’s punting the threat of closure at the Tiwai Point aluminium smelter can either be managed in an orderly fashion over several years, or that it won’t happen. Even if the smelter does close, it’s credible to expect Meridian to make better money from other customers for its hydro-electricity than its current earnings from the smelter.

A smelter closure could, however, be bad news for Genesis Energy, because the costs of the ensuing electricity over-supply would be borne by owners of gas and coal-fired power stations, which are a big part of Genesis’s business. But it’s worth far less than Meridian, at around $2 billion.

So, whether the government pursues a part-sale of Genesis in election year remains to be seen. However, it will be keen. That’s not only because it still expects to raise $5 billion to $7 billion from asset sales, but because it would make the Labour-Greens’ electricity policy much harder to implement.

If every big power generator in the country has private shareholders by election day next year, it’s a fair bet those shareholders will take unkindly to any move that slashes the value of their newly bought shares.

Add to that whatever election year sweetener the government comes up with next year – most likely a “jam tomorrow” promise that will require National’s re-election – and the early shape of next year’s election campaign can already be seen.

(BusinessDesk)

Some $418,750 of that total will be owed to chief executive Doug Heffernan, assuming bonus benchmarks are met. Heffernan draws an annual base salary of $934,125 and earned a total of $1.49 million after bonus in the year to June 30 last year.

Heffernan, MRP’s founding chief executive, is also being paid an additional $500,000 for agreeing to stay with the newly part-privatised company until June 30, 2014.

The rest of the company’s senior executives are also being offered MRP shares paid as bonuses worth up to $1.44 million if new performance benchmarks are met under a revised long term incentive scheme in the 2015 and 2016 financial years.

The disclosures show that of the five senior managers covered by the long term incentive scheme, only Heffernan and MRP’s development general manager Mark Trigg spent their own money to buy shares in the MRP float.

Counting bonus shares that will only vest if they hold their shares for a minimum of three years, trusts associated with Heffernan bought two lots of 6,200 shares, while Trigg bought 10,100 shares.

General manager of operations, Fraser Whineray, retail general manager James Munro, and chief financial officer William Meek did not buy shares in the May 10 float, which saw 113,000 New Zealand retail investors buy 49 percent of the company along with local and foreign institutional investors.

The government retains a controlling 51 percent interest.

The existing bonus scheme ties bonus payments to the company’s “total shareholder return performance relative to benchmarks.”

However, the new plan will benchmark performance to MRP’s share price performance against the NZX50 index of the country’s top 50 listed companies, with half of the available bonuses payable if MRP performs above the 50th percentile for the index.

They will be eligible for their total bonus if the shares perform at or above the 75th percentile for the index.

MRP is New Zealand’s second largest listed electricity company, after Contact Energy and displacing TrustPower, and is expected to be included in the NZX50, perhaps in July, once it has satisfied NZX rules requiring shares to trade and demonstrate their qualification for inclusion.

The research, commissioned by the NZ US Council was conducted by the New Zealand Institute of Economic Research and analyses the economic and trade relations between the US and NZ.

“The research shows that New Zealand and the United States have a broad economic relationship that covers trade in goods, services, including digital and IT services, people-to-people links including tourism and education, and investment,” said Stephen Jacobi, Executive Director of the NZUS Council.

The US is our third largest export market, with demand increasing in 2012 as the accounted for 9.2% of total exports whilst providing 9.3% of NZ imports.

“New Zealand’s share of American imports has declined as has the United States share of New Zealand imports.  New Zealand provides 0.15% of American imports down from 0.26% in 1991.”

Over 800 domestic firms exported $1.1 billion of commercial services to the US in 2011, covering sectors such as IT, audio visual, consulting and engineering

Of particular interest is the rise in revenue from TV and film production sectors sales. Figures reached $458 million in 2012 – an increase of 57% since 2009.

The United States remains a key investment partner, with an investment stock in New Zealand of $44 billion, or 14.5% of total foreign investment stock.

“Even so, there are signs that over time New Zealand and the United States risk becoming less important economically to each other,” said Jacobi. “This underscores the importance of TPP and the boost it will give to two way trade and investment.”

The NZIER research concludes that the TPP offers a chance for New Zealand and US firms to reinvigorate bilateral linkages and work together in third markets.