Frank Newman: Budget 2015

Economically the 2015 Budget was steady as it goes. Politically it was masterful.  

Child poverty

The main talking point was the $790m child hardship package which includes a $25 increase in core benefits for beneficiaries with children. Increasing benefits is something no-one had expected, and certainly not from a National government.  It is fair to assume this "generosity" is in part due to the savings that have accrued and will continue to accrue from National's welfare reforms which require beneficiaries to find work.

The budget extended those reforms by requiring sole parents to be available for part-time work of 20 hours a week (instead of 15) once their youngest child turns 3 (instead of 5). Few would disagree that savings from moving those who can work off welfare should be distributed to those in genuine need.

Other changes in the welfare area include:

• Lower-income working families not on a benefit will get up to $12.50 a week extra from Working for Families, and some very low-income working families will get $24.50 extra.
• The childcare assistance subsidy for low-income families will increase from $4 an hour to $5 an hour for up to 50 hours of childcare a week per child.

For so-called zombie towns in remote provincial communities the child hardship package will provide a significant cash injection.

Child poverty has become a battleground for activists and National's political opponents. Those groups have over-played the issue by redefining and exaggerating the extent of poverty in New Zealand. They have become shrill in their advocacy.

There is no better example of that than the Sue Bradford led Auckland Action Against Poverty group that attempted to barge their way into a post-budget lunch speech by the Prime Minister. Their action was a publicity stunt in response to a budget that increased benefits to families on low incomes for the first time in 43 years! This shows how thankless and  marginal that group is. Quite frankly the people involved disgraced themselves and were shown to be a rabble of the agitated, albeit one savvy enough to bring along their own film crew.  

The poverty policy appeared to stun Labour. Andrew Little's reply in Parliament was flat and grasping, as were all of the replies by the leaders of the opposition parties. National had just pulled the child poverty rug from underneath them and left them sprawling.  In many ways they were set up days before by National down-playing what the Budget may do to address poverty. Mr Little compounded his problems when replying to questions about what he would do differently. He said he would means test superannuation, which appeared to be news to his colleagues.

The only Budget debate speech that had an impact in the chamber was that given by John Key. He summed it up masterfully when he described their approach as "compassionate conservatism". That's a message that will resonate with most New Zealanders and I would not be surprised to see that as National's 2017 election slogan.

Housing

Besides poverty, the Budget tackled the other big social issue of housing. The government is clearly unimpressed with the efforts of the Auckland Council to address the issue so it will free up 500ha of state-owned land to address the supply shortage. It is estimated that this may add between 4,500 and 10,000 houses. This is sensible, but not a quick fix given the time frame is measured in years rather than months, and longer if council planners hold up the process as is usually the case.

Other housing initiatives include an income-related rent subsidy to an extra 3000 tenants will be entitled to the by extending the subsidy to community housing providers and forcing some currently in state housing into private rentals but with a housing subsidy.

KiwiSaver

The total cost to the government of KiwiSaver has been $6 billion. While 2.5 million people have signed up to KiwiSaver, 38% are making no contributions. Clearly they signed up solely to receive the free $1,000 kick-start subsidy. It also appears that those who signed up to KiwiSaver were those who already save. In this respect KiwiSaver has failed to increase the savings of those who most need to save. It is therefore not surprising that the $1,000 kick-start has been removed with immediate effect. All other subsidies remain.

Taking away the kick-start incentive will remove the attraction of parents signing up their kids, but it should not deter other savers. There are still compelling reasons to join. The free money that remains is the $521 annual tax credit for all, the employer subsidy (minimum of 3%)  for salary and wage earners, and the first home buyer benefits of up to $10k for those building a new first home and $5k for buying an existing first home. It's still free money and one would be lacking in financial sense if they did not take advantage of it. The "late adopters" who did not see the $1000 gift for what it was must simply see it as a lost opportunity and see it as a lesson that they should be more alert to free money in the future. This was one of those situations where something that seemed too good to be true, was true.

Property tax

The Budget day kafuffle overshadowed the bigger news about changes to the Income Tax Act with respect to property announced earlier in the week. Under the current law a gain on the sale of an asset is taxable at the taxpayer’s marginal rate if they purchased that asset with the intention of resale (the "intention test"). The problem with that tax is the ease with which it can be avoided.  The new law gives clarity to this test by removing the need to establish intention where the a residential investment property is sold within two years of purchase. Exemptions apply where it is a person’s main home, inherited, or transferred in a relationship property settlement. The law does not extend to other forms of investment asset, all of which are caught in the intention test. 

Whether the new law is a capital gains tax or not is one of semantics over definitions, but what it does do is make it easier for a future government to make incremental changes to turn it into a capital gains tax - for example by extending the time frame to say 5 years or 10 years, and/or increasing the range of assets caught by the time limit test to include other investment assets like shares, businesses, art, and so on. Clearly, by limiting the time test to residential property, it is targeting Auckland property speculators.  

IRD audits

The Budget also gave the IRD an additional $29 million to chase property investors, bringing the total over the next five years to $62m. That is expected to generate $420m of extra tax over the five years - 6.8 times that spent.

A significant part of that is an information gathering exercise about foreign buyers. Overseas buyers will now be required to have a NZ Bank account and IRD number. This is in part to track down foreigners speculating in our property market, but also to counter money laundering in the cash economy.  

Other changes

• ACC levies will reduce by $375m next year, followed by cuts of $125m in 2017. From 1 July this year the ACC levy cuts already announced in vehicle registrations will come into effect.
• New funding of $210m for more ultra-fast broadband and $150m for improvements to rural broadband.
• $12m has been allocated for the New Zealand Business Number which is a foundation stone for data sharing by government departments and online services. This is part of the government’s proposal to reduce compliance costs by 25% by 2017.
• $425m has been allocated to support Business Growth Agenda initiatives. $25m has been allocated to establish three regional research institutes to focus on creating new jobs in the regions.
• Border security will be beefed up with funding from a new "border clearance levy" for arriving and departing passengers of $16 and $6 respectively. 

The outlook

The Budget is anticipating a deficit of $684 million this financial year, and a wafer thin surplus of $176 million surplus in 2015/16. Whether that is achieved that will depend to a large extent on international commodity prices.

Government spending represents about 34% of New Zealand's gross domestic product. Its long-term target is 30%. As  Rob McLeod from EnrstYoung points out, "The spending percentage is a crucial KPI: it is essentially the nation's average tax rate, since a deficit and its companion debt comprise future taxes...Given the near break-even fiscal position, all the hype about the deficit is a sideshow. The trend in spending is more important."

 Economic growth is expected to average nearly 3% over the next four years and unemployment expected to fall below 5%. That's a solid performance and raises the possibility of "modest" tax cuts in 2017 - election year!

All in all it's a budget that continues the government's focus on steady economic progress in line with its long-term objectives and its preference for incremental change.  By addressing social issues in the manner that it has National has undermined the presumption that parties of the left are the only ones that care about the most disadvantaged. The label of uncaring Tories trampling on the poor just does not work against John Key's government. John Key's personal story of a kid growing up in a state house now living in a posh house in Remuera with a holiday home in Success Street, Omaha, is one most kiwi's applaud. It's the sour-faced left that seem to think success is not inspirational.