New Zealand Budget 2013 - PwC

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Budget 2013 highlights: What’s in theGovernment’s ‘middle child’ Budget?In December 2012, we said we thought Budget 2013would be a classic ‘middle child’ Budget. That wasour analogy for a Budget delivered by a mid-termGovernment no longer flush with the policy vigourof a recent election win, but one not yet heavilyinfluenced by a looming election.We think the Hon Bill English’s fifth Budget is exactlythat. A competent and balanced budget (well at leastthe forecast is balanced) with no major surprises andone that continues the Government’s rigorous focuson its four key policy pillars:• responsibly managing its finances• building a more productive and competitiveeconomy• delivering Better Public Services• rebuilding Christchurch and surrounding areas.Like a middle child, Budget 2013 will have to workeven harder than previous Budgets to get the criticalrecognition it deserves from the voting public.Continuing to push for surplus through prudentmanagement of expenditure and tax revenues is a bitdull and does not spark the public’s imagination likebold policy choices.And like much important but dull work, it’s hardwork:• constant effort at the margins to reduce thegrowth in expenditure and to get more value fromexisting spend• constant effort to keep the tax base intact andgrowing with the economy, plugging leaks andsmoothing those areas that create distortions.All in the face of constant headwinds frompersistently rising Canterbury rebuild costs.We can see this effort in the several places inBudget 2013:• ‘reprioritising’ $238m in expenditure ineducation and $160m in NZ Police• new spending in 2013/14 limited to $900m• new funding to Inland Revenue to chase taxcollections from property speculation.But, also like a middle child, this Budget showsa depth of character of its own. Encouraged bytax revenues exceeding forecast for the first timein several years, the Government has cautiouslyannounced some additional spending in key areassuch as tourism, education and health. In fact, ithas signalled its intention to spend $5.1bn moreover the next four years, after two years of ‘zero’budgets.These are key signals Budget 2013 is aboutcontrolled and valuable spending and not simplyanother austerity budget. To us, they are alsosignals that, given the right tax revenue andeconomic picture, the pre-election budget nextyear may also contain more significant promises.Sandwiched between last year’s new term budgetand next year’s election budget, the ‘middle child’Budget may struggle for voter attention but wethink it has got the strength of character that itneeds to keep sustainably improving New Zealand.Crown expenses as a % of nominal GDP, 2005-201740%Crown expenses as a % of nominal GDP, 2005-20168%30%6%% of GDP20%% of GDP4%10%2%0%0%20052006200720082009201020112012201320142015201620172005200620072008200920102011201220132014201520162017Source: PwC, TreasuryHealthLaw and orderEducationCore Govt services3
Budget 2013WinnersBusinesses involved in R&D, tourism andinternational education look like winners in thisBudget. The Government has allocated $100ma year to an ‘internationally focused growthpackage’. It is intended to provide extra researchand development assistance to businesses,additional funding to develop the tourism sector,and to develop (or some might say rebuild) themarketing of our international education sector.There is also a strong focus on improving outcomesfor lower income families through a range ofsupport packages that include health (rheumaticfever prevention), insulation (via an extra$100m over three years for the Healthy Homesprogramme) and additional budgeting services forlow income families. In a similar vein, parts of theeducation sector also benefit, including $173m overfour years for early childhood education, $215mmore over four years for schools and $130m overfour years for Māori and Pasifika trades training,as well as boosting science and engineering courses.In addition, small R&D intensive start-up businessesare to get a leg up by being able to ‘cash-up’ theirtax losses arising out of R&D spend.Employers and households also look like being bigwinners in due course if the forecast reduction inACC levies can be achieved. The Budget predictsa saving of $300m in 2014/15 rising to $1bn in2015/16 as the ACC scheme moves closer toself-funding.In the context of the tragic earthquakes, it isunfair to describe Canterbury as a winnerfrom this Budget, but it gets the biggest hospitalinvestment in New Zealand’s history with a $426mredevelopment of Christchurch and Burwoodhospitals funded out of the proceeds of the MightyRiver Power partial sale.LosersIt is clear there will be continued pressure onthe public service to do more with less. In manycases, base line expenditure is capped or limitedto less than inflation. There has been significant‘re-prioritisation’ of expenditure as well. Examplesinclude $238m of the spend on education is fundedfrom savings within the exiting Budget, and thePolice will also have to fund its $160m technologyupgrade from within existing funding – meaninghunting for savings and making trade-offs.It is probably not fair to describe taxpayers aslosers but what is clear is there is no prospect inthe next four years of any further tax cuts as theGovernment continues its drive for surplus. Indeed,tax revenues grow faster than GDP indicating wemay pay more relative to our incomes as time goeson. In the forecasts, this is driven by fiscal drag andthe dreaded ‘other’, the bucket for extra tax fromclosing any remaining loopholes.Core government services also appear to come outof the Budget worse off over the next four years withexpenses dropping from $5.4bn in 2012 to $4.2bnby 2016/17.The New Zealand Superannuation fund gets itsGovernment contributions suspension extendedanother two or three years with 2020 now lookinglike the target date. The goal posts have shifted fromresuming contributions when there are surpluses toresuming contributions when the Government’s netdebt target is achieved.4
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