Budget 2014: What's left out will define election

02:09, May 13 2014

Thursday's Budget - and the Opposition's response -should set the agenda for informed, pre-election debate on issues critical to New Zealand.

Top of mind are salary and wages growth, job creation, affordable housing, interest rates and the environment - all issues driven by the rate of economic growth.

Many other countries would like to be dealing with these issues. As the Australian Budget shows, New Zealand is in a different and better part of the economic cycle than its closest neighbour.

Unusually in an election year, calls for greater funding for public services is almost non-existent. This is against a backdrop of tight fiscal management in the past five years and increasing demands on government agencies to deliver more for less.

Could it be that the Better Public Services program and a move to focus on outcomes is actually working? We are in the middle of transformational change in areas such as social welfare, corrections and social housing, to name just three. We are not hearing the usual election year cries for more nurses, more teachers and front line police.

The current government would suggest that history shows a different pattern of spending when Labour occupied the benches. But the funding of public services and continuing reform of the public sector is unlikely to be a defining issue. A Labour-lead government is likely to continue the trend to a results-based approach to funding public services.


It is what is not in the English budget that will define the debate in the next four months.

The Budget will not include a comprehensive capital gains tax (CGT); it will not increase taxes for incomes over $70,000 and it will not signal the use of a novel, but untested, monetary tool - the Variable Savings Rate (VSR).

Nor will there be targeted tax incentives such as the already-announced Labour policy of accelerated depreciation for new capital directed at the forestry sector. On the later point, it is hard to criticize Labour when various government grant schemes are also picking winners. But tax incentives are generally just not good policy.

Does anyone else feel that everything is suddenly about the cost of housing? And, even more narrowly, the cost of housing in Auckland? I am starting to believe our rivers would be cleaner if we could only get the cost of housing down in Auckland.

Somehow, a combination of the VSR and a CGT with existing Reserve Bank monetary tools is going to slow house price growth in Auckland, shift investment away from property and into more productive areas, help people save for retirement, keep interest rates low, the exchange rate down and keep the Chinese out.

VSR is the Viagra of monetary policy.

Of course, we need a CGT because everyone else in the OECD has one but we need a VSR when no one else has one.

You can still go to non-Cabinet Club functions and find that people do not understand that the Labour proposed CGT is comprehensive, that is taxes everything  other than the family home, some small business and personal assets.

The response is often "I thought it was just about housing!" Someone needs to explain why, if the capital gains tax is comprehensive, will that shift investment from an asset class that people understand, and can feel and touch, to another asset class they don't understand as well and which may have greater price volatility.

Someone also needs to explain why, in OECD countries that have long had a CGT, there is still significant house price growth in major urban areas. Could it be that living in major cities with a strong economy is very attractive and the issue is one of supply versus demand?

Several times the statement has been made "we need to tax property speculators that are driving up house prices for ordinary New Zealanders". But many ordinary New Zealanders have a second home, be it a bach or an investment property. And speculators are already taxed under the current system.

The issue is one of enforcement, not a gap in the property tax base.

There are all sorts of nuances to a CGT that will not see the light of day in this debate. For example, most foreigners making investments outside of property and natural resources will avoid CGT through the impact of our double tax treaties.

That is an interesting contradiction to the current BEPS (base erosion and profit shifting) debate which is all about foreign businesses selling goods to New Zealand paying a greater share of the tax burden.

Another is the impact of migration. New Zealand has one of the most mobile labour forces in the world. What do you think about paying tax on notional capital gains, triggered by becoming a non-resident?

If we are taxing individuals on any gains through holding shares, should we not also tax PIEs (portfolio investment entities) on the sale of Australian and New Zealand equities (currently exempt)?

It is easy to say these are all just design issues. But, talking of pies, you know the feeling when you take the frozen pie out of the oven and the pastry is crisp but the inside is still cold? While the idea of a CGT is, on the surface, attractive, people need to dig a little deeper to understand what it will mean for them personally. They may be left with a cold taste in their mouth.

The commentary is that we have to view the reforms - increased personal tax rates (to fund what I am not sure), application of the VSR and CGT - as a package.

There is still this annoying interest in the detail of how things will play out for the average Kiwi under VSR.

You could forgive Aucklanders for thinking they're being forced to increase their Kiwisaver contributions. They know their employers won't soak up the cost by increasing their salary or wages. That might go into a Kiwisaver default fund if they haven't made an active choice. It means they will earn the same as if the money had been deposited in a bank less, of course, fund manager fees.

So, in summary, I am worse off than if I paid my mortgage off earlier. I will have less money in my pocket because I am paying more into Kiwisaver and, when I retire, my extra savings will be used to pay off a larger mortgage than I would otherwise have had.

Alan Judge is an EY partner and leader of the firm's Government sector.