Budget 2011 as it Unfolds

 

As usual on budget day, it’s all ears on the live stream at Elevate CA. Here are our first impressions and some initial comment as Bill English reads Budget 2011 …

 

2:05pm

Bill English is explaining the theme of Budget 2011. This will be all about building savings and investment because as a country we need to save more, spend less and reduce our reliance on foreign debt.

 

Sounds sensible so far.  But a big ask in the context of last year’s big tax cuts and the underwhelming growth since then. Especially at a time when the country is also screaming out for investment in schools, faster broadband, better transport infrastructure and an improved national grid.  And of course rebuilding our second largest city.

 

2:12pm

John Key and Bill English are masters of public relations. Remember how the case was made for massive changes to the tax system ahead of last year’s budget?  It needed to be done, but who else could have increased GST to 15% with barely a whimper of protest?

 

This year the pre-budget rhetoric has been around the need to balance the books and get back to surplus. As we listen to the live stream, this point is coming through loud and clear. But the point I’m not hearing is that perhaps those big deficits wouldn’t be as severe if not for the generous reduction in the top personal tax rates in last year’s budget? 

 

2:15pm

KiwiSaver.  Bill English is now getting onto the much anticipated KiwiSaver announcements. 

 

Personally, I’m no fan of KiwiSaver.  To me it’s a meal ticket for the funds management industry. I’d rather see KiwiSaver funds invested as guaranteed loans to the NZ Government – receiving the same rate of interest earned by the foreign lenders to the government. What better way to reduce the country’s reliance on overseas debt than for the government to borrow $8 billion (the amount already in KiwiSaver) from individual Kiwis rather than from foreign lenders?

And what better way to retain in NZ some of the massive interest payments that flow out of the country? Government guaranteed, no fees – and I’ll bet the investment would outperform the average of KiwiSaver funds after fees too!

 

But of course that is NOT what we’re hearing right now in the live feed.

What we ARE hearing is that the $1,000 kick start KiwiSaver contribution will remain. But the annual $1,043 KiwiSaver tax credit is to be halved to $521. In addition, both the minimum employer and the minimum employee contributions will increase from 2% to 3%.  And as an unexpected detail, the employer contribution will no longer be tax free. 

 

The idea is that the mix of contributions to KiwiSaver accounts will change with less coming from the tax credit and more coming from both individuals and employers. The rationale is that there is no benefit in the government borrowing $1 billion per year offshore only to deposit that amount to individual’s KiwiSaver accounts. That is no different from you or I borrowing $1,043 from BNZ and depositing it at Westpac then kidding ourselves that we’re saving.

 

This does seem sensible, but just a thought: Surely for KiwiSaver to be sustainable it ought to stack up on its own merit without the government and employers having to incentivise savers with cash?

 

2:19pm

Working for Families (WFF). The definition of income will be further widened to include more fringe benefits provided to employees when calculating WFF tax credits. Also the threshold for reduction in entitlement will drop from $36,827 to $35,000 so families with incomes above this threshold will receive fewer tax credits. However families below that income threshold will apparently be better off by around $7 a week. Changes will be staggered in over four steps from 1 April 2012 affecting around 387,000 families.

 

The idea is that WFF should be better targeted to lower-income families who have a greater need for assistance.  But it will be less generous to families higher up the scale. This seems reasonable in tough times. But I wonder if a steeper abatement of WFF entitlement might create a disincentive for families to increase their income?

 

2:23pm

Student Loans. There will be restrictions on student loans for those over 55 and some additional measures to manage those with overdue payments. 

 

I can see the need to cut back on making student loans that aren’t ultimately recovered – but I wonder about the wisdom of targeting students over 55. After all, as a country we’re asking people to work longer – and as the population ages we’ll desperately need older people to be part of the workforce. But with many older workers unable to continue in physical jobs into old age, shouldn’t we be actively encouraging those people to retrain so they can continue to contribute positively for another decade or more?

 

2:25pm

Unlike last year’s budget, there are no major changes to the tax system that will affect small to medium Kiwi businesses. But there are some less radical changes being announced:

 

Foreign Banks.  Bill English is announcing changes to thin capitalisation rules for foreign-owned banks increasing the equity they must have in their businesses.

 

This reduces the scope for these banks to channel their profits offshore and out of the NZ tax net which has got to be a good thing for the rest of us.  I doubt any votes will be lost over this change!

 

High value mixed use assets.  The tax treatment of mixed-use assets used for both private and business purposes will be reviewed. The ability of taxpayers to claim tax deductions on high-value assets such as yachts and holiday homes that are both rented out and used privately will be reviewed – although the exact details are yet to come.

 

Livestock rules for Farmers

Under current rules, farmers usually value their livestock for tax purposes under one of two valuation methods which can result in quite different values. At the moment, it is possible for a farmer to switch back and forth between the two methods resulting in increases in market valuations going untaxed while tax deductions are possible for decreases in value. Some yet to be announced changes are in the wind.

 

2:35pm

Our wrap up

All in all, this budget shows good leadership. When was the last time an election year budget faced down sacred cows like KiwiSaver, Working for Families and Student Loan entitlements?  Regardless of political persuasion, I think many people will at least respect the fact that these changes have been announced before the election rather than shortly afterwards.  

The idea that as a country we need to live within our means is one whose time has come.  Like last year’s budget, this one has been preceded by some skilled PR making the case for potentially unpopular but prudent changes. 

None of the changes we have just heard will affect people pre-election.  Kiwis will make their own choices to accept or reject this budget in the polling booths on 26 November.