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Budget 2014 is first and foremost a conservative budget. You could only be disappointed if you went into it expecting something spectacular. This budget didn’t disappoint because we got exactly what we expected: more of the same. This is not a budget that will change anyone’s opinion of the Government, be they friend or foe. But it does allow the Government to keep its powder dry in the run up to the election.
The much promised return to surplus, a key plank of the Government’s strategy over the last few years, has been delivered on. The surplus is forecast at $372 million for 2014/15, consistent with the expectations that it would be “wafer thin”, and expected to grow to $3.5 billion in 2017/18. Even this is a modest surplus compared to the large surpluses the Labour government ran from 2004 to 2008. But a budget surplus is not a goal in its own right; it is a tool to achieve the Government’s key long term goal of getting net Crown debt back down to under 20% of GDP. At the start of the GFC, New Zealand’s net Crown debt was an enviable 5.5% of GDP. This low net debt, and the headroom it gave the government to run deficits and borrow during the bad times, played a key part of New Zealand coming through the GFC in a much better position than many of our contemporaries.
The government has learned an important lesson from this experience and wants to rebuild that buffer for the future. It is clear that nothing will take priority over getting the level of debt down. Any hints of tax cuts or promises of restarting contributions to the New Zealand Superannuation Fund are foremost contingent on getting net debt down. If the economy does better than is expected over the next few years, that extra money will go back to repaying lenders well before there is any sniff of tax cuts.
High dairy prices and low interest rates have buoyed the New Zealand economy, but at the cost of a high New Zealand dollar and the corresponding strain that puts on exporters. The government knows that this convergence of favorable conditions (relative to the rest of the world) cannot go on forever. They want, and need, to make sure there is still some money in the jar to cover every eventuality of the tide does turn against us.
They also know they need to keep interest rates down to keep the good times going as long as they can. Advice to the government says any increase in spending of more than $1.5 billion per annum will be inflationary and will lead the Reserve Bank to push up interest rates faster than they otherwise would. The government is determined to do all it can to avoid that. So spending is not going up and taxes are not coming down. What does that leave? Repayment of debt.
When it comes to an election showdown over tax policy, this Budget does put a small stake in the ground. Recent speculation has suggested the National government is warming slightly to the possibility of a capital gains tax. Buried in the Fiscal Strategy Report is a comment that at the time of the Tax Working Group the government considered and rejected both a land tax and a capital gains tax and “the Government is comfortable with the broad structure of the tax system and has no plans for further major reforms in the near term”. It looks like it will be only Labour and the Greens that go into the next election promising new taxes.
If not capital gains tax (the effect of which on house prices in the long term is dubious at best) what, then, is to be done about at all consuming issue of housing prices? First, tariffs and duties on building products will be removed. This is expected to cut $3,500 from the cost of building a home. Second, the Government wants to continue to increase supply through its program of housing accords. While 33,500 new sections have recently come into the supply chain in the Auckland housing market, this only goes some way to addressing the lack of building over the last few years combined with combined with positive net migration has continued to put upward pressure on house prices.
New spending, as would be expected in an election year, is focused on the social sector; health, early childhood education and schools, and the collective group the government calls “families”. New spending for this last group includes an extension of paid parental leave from 14 to 18 weeks, an increase in the amount and an extension of eligibility for the parental tax credit. While this slightly narrows the gap between the National and Labour policies, there is still plenty of ground to fight over in the coming months.
Aaron Quintal is a Tax Partner at Ernst & Young.
Aaron.Quintal@nz.ey.com