Budget 2011

Budget Highlights
Budget 2011: What the budget means for borrowers, savers and home owners

Budget Announcement May 2011

Summary:

The Minister of Finance, the Hon Bill English, read the 2011 Budget Statement to Parliament on Thursday May 19 2011.

Last year tax reform was a prominent feature. This year’s budget announcement however did not come as a surprise given the Government’s priority is to constrain expenditure and look at ways of minimising revenue leakage (reduce the Governments operating deficit).

This deficit has a direct correlation to the global economic crisis and the effects of natural disasters such as the Canterbury earthquakes. The result is some severity for several years to come. However, the budget policies aim to reduce the deficit and ultimately achieve a surplus from 2014 / 15.

The 2011 Budget does not contain the same major taxation reform as seen last year with

income taxes lowered
GST rate increased and
changes made to taxation rules for property investors.

This year's budget contains more tinkering than reform.

It contains a few amendments to:

tax rules for
KiwiSavers and
student loan borrowers.

Whilst a small number of tax system adjustments were also signalled to ultimately strengthen the integrity of the tax base.

Canterbury Earthquake Recovery Fund

Canterbury has been considered in the budget, but to some commentators such as Peter Townsend, the offer is insufficient to cover the expenses, but is however a step in the right direction. One essential item of expenditure is the rebuilding of infrastructure in Canterbury. A Canterbury Earthquake Recovery Fund (CERF) is to be established to cover all the Government’s earthquake-related expenditure. An initial sum of $5.5 billion will be allocated to this fund.

A related measure is the new four-year Earthquake Bond for New Zealand investors, the proceeds of which will go to the CERF. The government plans to offer Earthquake Kiwi Bonds to help build the NZ$5.5 billion earthquake fund. These will be available for individual investors and offer similar rates to wholesale rates, initially around 4%.

Health and Education

Health and education are also in line for funding increases. New operating expenditure will total approximately $4 billion.

An estimated $5 billion of savings will arise from changes to Working for Families (WFF) tax credits, student loans and KiwiSaver. Changes in those areas, the Minister said, will not be made until after the November 2011 general election.

KiwiSaver

As anticipated, the Government wants an increase in savings by New Zealanders who join the KiwiSaver scheme and less input from government coffers. Subsequently, the rate of minimum employer contributions and member contributions has increased from 2% to 3%. The current system of Kick-Start payments is unchanged, while the member tax credit is reduced to 50c per dollar of contribution.

Working for Families (WFF)

The WFF tax credit is to undergo only minor changes. There are some changes for Working For Families that actually increases payments for those on lower incomes but 7,000 families will see their payments cut.
A gradual, four-stage programme will see alterations to the abatement threshold and abatement rate. The rate for children aged 16 and over will be aligned with the rate for those aged 13 to 15. However there will be a broader family income definition (see below)

Student loan scheme

Tighter lending criteria have been announced for student loans. Those affected are persons aged 55 years or older, part-time students and students with loans overdue or in default.

Partial State asset sell-off

Meanwhile, the government also announced details of its plans to part privatise the big four state owned energy companies:

Mighty River Power,
Genesis Energy,
Meridian Energy and
Solid Energy

The Government’s stake in Air New Zealand will be reduced. It hopes to sell these stakes to raise NZ$5-7 billion over 3 to 5 years from 2012 through initial public offerings (IPO) on the NZX. It aims to give fund managers and individuals more options for savings.

To free up Crown capital, the Government proposes that, from 2012, a Mixed Ownership Model (MOM) will be applied to the power companies, Mighty River Power, Genesis Energy, Solid Energy and Meridian Energy. Announcements on this topic made in January 2011 stated that the MOM would proceed only if specified criteria could be met. For example:

The companies involved would have to present good opportunities for investors.
The capital freed up would have to be used on behalf of taxpayers to fund new public assets and thereby reduce the pressure on the Government to borrow.
The Government would have to be satisfied that industry-specific regulations adequately protected New Zealand consumers.
For each entity, the Crown must retain a majority ownership.

Taxation

The few tax-related measures in the Budget are mostly directed at tax compliance and tax system integrity. Proposals announced by the Minister of Revenue, the Hon Peter Dunne, comprise:

an increase in the minimum level of non-deductible capital for banks under the in-bound thin capitalisation rules (from 4% to 6%)
an extension of the definition of income for WFF purposes to include more fringe benefits provided to employees
possible taxation of salary exchanged by employees for non-taxable, non-cash benefits
a review of the tax treatment of assets which are used for partly business and partly private purposes, and
alterations to the current option, which allows farmers to switch between livestock valuation methods.

Mr Dunne said that public consultation documents would be issued on all but the first of these matters later this year.

Other measures

The objective of an efficient infrastructure as a step towards a strong economy is underscored by new capital expenditure in the areas of ultra-fast broadband, KiwiRail and roads.

Economic Growth

The biggest impact over the longer term will be interest rates and house prices and subsequent much stronger economic growth.

The government is forecasting economic growth of 4.0% in 2012 / 13 and a rise in the 90-day bill rate from less than 3% currently to 5%.

That implies floating mortgage rates of around 8% by then.

The ultimate risk, however, is that if economic growth is lower than Treasury has forecast, then the budget deficit and borrowing will be higher than expected.

Standard and Poor's comments after the budget were that the budget announcement would not alter New Zealand's current AA+ rating with a negative outlook - as long as the outlook for borrowing and the deficit did not worsen.