NEWS ON POLICY AND POLITICS
22 May, 2008

Watching Brief is a regular publication from Russell McVeagh on developments in public law and policy of interest to New Zealand business.

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Budget Special 2008

Will It Be Enough?

Michael Cullen delivered his ninth budget in an environment of a slowing economy and falling Government surpluses.

Purportedly designed to provide a "fair economy and strong future" Cullen has tried to offer "more support to families and all New Zealanders", while ensuring that growth is not undermined and is, where possible, reinforced.

For the Finance Minister it was a bold budget of its sort, but whether it is a circuit breaker remains to be seen.  In terms of voting blocs, it is possible that the beneficiaries will not be Labour, but rather its support parties. Winston Peters will presumably take credit for increases to superannuation and increased support for older New Zealanders, while Jeanette Fitzsimons can be expected to 'own' those budget allocations for energy efficiency and environmental cleanup.

Which leaves Labour with tax cuts and health spending.  Certainly, the lowering of tax rates at the bottom end and increase in the progressive thresholds will be welcome. But for all that there's an additional fillip through the 'Working for Families' scheme that will give those on middle incomes (and with children) a welcome $2,000 or so. Balanced against the drop in real incomes however, the sums are conservative and will do little to alleviate the increasing pressures on family finances posed by fuel and food prices.

 Spending on health and education will be well received, but only if it's seen as delivering actual results, rather than fattening an already large health bureaucracy.

Government may win support from the 2008 budget, but not without qualification. The pressure now goes on National to present its own budgetary vision before it faces credibility issues of its own.

The Budget can be split up into three general categories:

• alleviating pressures on households due to ongoing inflationary pressure;
• public services; and
• planning for the future.

The Budget commits:

• $4.8 billion in 2008/09, rising to $7.0 billion in 2011/12 in operating spending and revenue initiatives.
• $1.9 billion in new capital spending between 2008/09 and 2011/12.

The remainder of this edition summarises major announcements in the Budget.

Personal Tax Cuts

There will be tax cuts of $10.6 billion over the next three years, making this the largest initiative in the Budget:

• Reducing the lowest personal tax rate to 12.5% (from 15%).
• Increasing the 21% threshold to $20,000 (from $9,500).
• Increasing the 33% threshold to $42,500 (from $38,000).
• Increasing the 39% threshold to $80,000 (from $60,000).

These changes will be introduced gradually from 1 October 2008 with the above adjustments complete by 1 April 2011. Worthy of note is that the second step-change will take place on 1 April 2010, a full 18 months after the initial change in 1 October this year.
The impact on weekly after-tax income levels will be as follows:

The Budget documents indicate that the personal tax cut package is designed so that it will not:

• lead to greater inequality;
• exacerbate inflationary pressures in the economy;
• require Government borrowing; or
• require cuts to public services.

There will also be changes to the Working for Families package.  

Business Tax Reform

As announced last year, $4.5 billion will be spent on in business tax reform, including reducing the company tax rate from 33% to 30%.

Investment in Primary Industries

$700 million will be invested in the New Zealand Fast Forward Fund, which supports the pastoral and food industries. The purpose of the fund is described as being to "boost innovation in the pastoral and food industries".

International Connections

Increased funding to the Ministry of Foreign Affairs and Trade and New Zealand Trade and Enterprise, including:

• $165 million to provide increased support to New Zealand firms operating internationally and increasing market access for firms operating in New Zealand.
• $26.6 million to support New Zealand's participation at the 2010 Shanghai Expo to build New Zealand's international profile.

Research and development

$205.4 million will be invested to "boost New Zealand's level of research, to improve business performance and international competitiveness".

Infrastructure

• $340 million, as part of more than a total of $500 million committed by the Government over the next five years, to facilitate high speed broadband in urban areas and extend the reach of broadband into under-served areas.
• As already announced, $690 million to purchase Toll New Zealand's rail business.
• $93 million to upgrade and maintain the rail network, and renew tracks and meet land release costs.

Environment and ETS

• Energy efficiency: $45.7 million over four years towards energy efficiency investments, including funding for EnergyWise Homes projects and upgrading state houses.
• $43.9 million over four years (part of a total of $72.1 million over 10 years) to clean up Rotorua lakes.
• $43 million to deliver the Emissions Trading Scheme ("ETS").

Health

An extra $750 million per annum for the health sector:

• Increased health spending, including a $2 billion inflationary adjustment to the District Health Board ("DHB") spending allowance.
• DHBs will also receive $172.3 million to improve the efficiency of their services and progress towards health targets.
• Cervical cancer vaccine: $164.2 million over the next five years for the Human Papillomavirus ("HPV") vaccine, which protects women against cervical cancer.
• More surgery: $160 million.
• $60 million to develop the health workforce, $79 million to improve child and adolescent oral health services, and $30 million to create more healthy living environments to reduce infectious disease risk.

Education

Increased investment in education, including more resources for schools and more and better paid teachers:

• $215.5 million to reduce new entrant class sizes to one teacher per 15 students.
• $63.6 million for Early Childhood Education Services.
• $1.8 billion over five years for better pay for teachers.
• Schools: $171.6 million increase in schools' operating funding over four years (a 5% increase) and $95.5 million to improve school facilities and build new schools.

Justice

• More police: $189.5 million for the third tranche of 1,000 additional sworn and 250 non-sworn police.
• Replacing Mount Eden Prison: $113.9 million (contributing to a total of $251.9 million).
• More probation officers.
• Speeding up the processes of the Independent Police Conduct Authority.
• $17.2 million on increased resources and training for Māori Wardens.

Housing

• Upgrading Wellington City Council's social housing ($220 million over the next 10 - 15 years).
• Affordable housing (shared equity programme): $35 million over the next two years.
• Hobsonville housing development (first stage): $42.9 million (over four years).

Māori and Treaty Initiatives

• $5.3 million funding for the Office of Treaty Settlements.
• $23.8 million to increase the services of the Māori Trustee.

Social Service NGOs

$446.5 million (including $133.1 million through reprioritisation of existing baselines) will be invested for social service NGOs, including community-based social services to help deliver essential services to support children and families, including parenting and family violence programmes, and mentoring at-risk youth.

Defence

$276.4 million to develop defence capability.

Older New Zealanders

There are a number of initiatives for older New Zealanders, including higher superannuation flowing from the personal tax cut package (superannuation is linked to average after-tax income).

Financial Sector Regulation

$9 million will be spent over the next four years implementing new legislation in the financial sector area, namely the Financial Advisers Bill and the Financial Service Providers (Registration and Dispute Resolution) Bill, with $6.5 million being paid for by industry.

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