Sunday, May 18, 2014

Frank Newman: Budget 2014

Last week Finance Minister. Bill English, delivered his 6th budget. It was a good one, from a number of perspectives. For the first time in six years the government’s books are forecast to return to surplus (albeit by a thin margin). Perhaps the most pleasing aspect of the budget is National’s clear statement of objectives in two key areas.

The first is to reduce net core Crown debt to 20%of GDP (Gross Domestic Product) by 2020. (GDP is the value of all goods and services produced in New Zealand.) Beyond 2020, the Government intends to maintain net debt within a range of around 10% to 20% of GDP, which will provide a buffer from economic shocks or natural disasters like the Christchurch earthquakes.

By way of comparison Australia has debt of 23% this year, rising to 25% over the next two years before reducing.

The second key objective is to reduce government spending to less than 30% of GDP (against spending of around 35% just a few years ago). Based on Budget forecasts government spending is expected to drop to around 25% within six or seven years. This is still well above the 20% target set by progressive governments like Singapore.

The steady, restrained, disciplined, tight-fisted economic management of the last six years has placed New Zealand in a strong position provide “social dividends” in the future, albeit fairly modest by past standards at $1.5 billion annually. That money will not go far when spread between the big ticket items of debt repayment, increased government spending, and tax cuts.

The Budget was also smart politics in that it trumped core opposition party policies by extending paid-parental leave and free healthcare for children. By doing so it has to some degree neutered the opposition on a range of social issues and laid the foundation to make tax the defining issue of the election campaign – a choice between tax cuts under National, or tax increases (capital gains) under Labour.

The other interesting aspect of Budget 2014 is its aspirational tone, in contrast to the sour tone from the opposition parties who seem far too occupied exaggerating negatives.

Our good news budget is a stark contrast to the Australian budget delivered just two days earlier. During the six year term of the former Australian Labour government (ousted in 2013) spending increased rapidly. That and the end of the mining boom has seen the new Liberal government put the brakes on spending so it can return to surplus by 2019.

To achieve this it is planning to cut government spending by $36 billion over four years, and stimulate activity by lowering the company tax rate. The main changes are:

  • Higher education funding will be cut by 20%. Graduates will be required to pay back their student loans sooner and the interest rate will rise. 
  • Foreign aid will be cut. 
  •  Petrol tax will increase by 4 cents. High income earners (+$180k) will pay a 2% surcharge “budget repair levy”.
  • The health budget will be cut by $10b.
  • Welfare benefits will be frozen.
  • The age at which people can claim superannuation will progressively rise from 65 to 70 and the eligibility test will become tougher.
  • The company tax rate will be cut by 1.5% to 28.5% (28% in NZ). However big businesses will be required to pay a 1.5% levy to fund the government’s paid parental leave scheme.
  • The unemployment rate is expected to rise to 6.25% (in New Zealand it is expected to fall to 4.4%).

The bottom line is New Zealand has come out of its adjustment cycle, while Australia has just entered it. The turnaround is likely to have a significant impact on immigration and therefore demand for housing. Fewer New Zealanders are now leaving for Australia and more New Zealanders are returning home and that pattern is likely to last five years.

The NZ Treasury is forecasting positive migration flows into New Zealand of 38,000 in the year ahead (up from 32,000 currently) and that may be as high as 42,000. Assuming two people per residence, that represents an additional 20,000 new homes. It’s going to take the building industry some time to build enough homes to meet the currently shortfall in housing, let alone cope with increased demand. That’s got to be good news for property investors.

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