Budget 2014: Broad-based economic recovery 'well-established'

JAMES WEIR
Last updated 16:07 15/05/2014

Budget 2014: What did you think?

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Budget 2014

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The economy is one of the fastest growing in the western world, with growth forecasts in the Budget jumping up to almost 4 per cent in the year to March 31, 2015.

That is well up on forecasts made late last year for a peak of 3.6 per cent growth. 

Despite a rock-star economy, the Government is keeping a tight rein on spending, with just a little more going into the public pot in an election year, with $1.5 billion in new allowances next year, up from $1b this year. 

The Budget confirmed a small surplus of $372 million next year, with growing surpluses in following years.

With the surplus expected to grow to $3.5b in 2017-18 the Government said it would have more choices. The could be new capital spending, cutting debt, lifting spending and cutting taxes, though there was no indication of the timing or size of potential income tax cuts.

There is also a de facto tax cut worth close to $500m as a result of planned lower ACC levies, mainly on cars, from the middle of next year.

There are small tax breaks for business research and development, and another $40m of new funding for irrigation projects, after last year's severe drought and this year's widespread dry patch in the North Island.

In an effort to bring down housing costs by about $3500 a home, the Government will temporarily drop duties on things like plasterboard, reinforcing steel bar and wire nails.

Tariffs on building products like roofing, cladding, insulations and paints and plumbing fittings will also go.

Finance Minister Bill English said he would like to see the changes to duties and tariffs become permanent, as part of wider efforts to improve home affordability.

The Budget allowance of $1.5b extra spending for next year was as much as the Government thought it could spend, without pushing up interest rates for borrowers.

New Zealanders would not thank the Government for "splashing cash about" so much that it pushed up interest rates more than they might otherwise need to go, English said.

Runaway Government spending "just six years ago" led to mortgage rates of more than 10 per cent, he said.

Treasury documents showed that despite the planned $1.5b extra spending next year, the Government spending track would actually "exert a mild tightening effect" over the next four years.

Westpac economist Felix Delbruck said the bank had been expecting a higher spending level, but "what was more of a surprise was the forecast tax revenue wasn't as high as we expected, yet they still decided to increase the spending allowance".

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The effect was that the Government would deliver a lower surplus and higher debt than it could have.

With the economy in a temporary sweet spot, he said, "this is a good time to make hay while the sun shines, but they have decided to make less hay and spend a little bit more."

The Government's spending forecasts meant that official interest rates would be 50 basis points lower than otherwise by 2018, showing the impact of the continued tight lid on expenses. That would reduce the pressure on households with a mortgage and should also keep the exchange rate lower than otherwise.

With a rapidly improving picture for Budget surpluses in the coming years, the Government will pay off debt first. It will be another six years before it starts putting money into the New Zealand Superannuation Fund, in 2019-20.

That will only happen when the Government gets debt down to 20 per cent of gross domestic product. That suggests a continued tight grip on spending, even as the economy grows rapidly and the population expands quickly.

English said there had been a surprisingly sharp slowdown in New Zealanders leaving the country, with the inflow of new migrants steady. But as the Australian economy picked up, that drop in people leaving New Zealand might change.

Treasury forecasts show jobs growth will continue strongly for the next few years, with jobs up 2.7 per cent for the year to June 30, 2015.

Unemployment, which has remained stubbornly high since the global financial crisis hit in 2008, was expected to fall from 6 per cent now, to less than 5 per cent by 2017.

The Budget shows 84,000 more jobs were created in the past year. The average wage had risen $3000 in the past three years to $54,700 a year.

Based on latest growth forecasts that were expected to grow a further $7600 to $62,300 in the next four years.

English said a broad-based economic recovery was now "well established".

In an effort to help boost exports, there was an extra $69m for New Zealand Trade and Enterprise to expand is presence in China, South America and the Middle East.

ACC LEVY CUTS

The Government is dangling a tax cut for car drivers next year.

ACC levies for cars are expected to come down by about $130 a year from the middle of next year.

The Budget shows the Accident Compensation Corporation was on track to provide further levy cuts of about $480 million in the 2015-16 year. ACC's levies for households and businesses had already fallen by close to $1 billion since 2012-12.

While final decisions would be made after consulting with the public, ACC Minister Judith Collins said the bulk of the cuts would probably be for motor vehicle levies. The levy may also be cut for employers and the self-employed.

Annual levies for households and businesses have fallen by close to $1 billion since 2011-12.

A cut to ACC levies next year was sustainable, and so it was possible the cost could be down about $480 million in 2015-16, Collins said.

In the 2013 Budget, the Government announced a de facto tax cut of $1 billion over two years, with the cuts to take effect from April this year, with a cut of $300m this year and rising to $1b in the following year.

In the past, car registration and fuel levies have cost more than $300 a year.

TAX BREAKS FOR R&D

Business research and development is getting a small boost worth about $58 million over the next four years.

As a result of Budget changes, loss-making start-up companies will be able to cash out all or part of their tax losses from research and development spending. All businesses would be allowed tax deductibility for R&D "black hole" spending that is now neither deductible nor able to be depreciated.

The Government is aiming to see business research and development reach 1 per cent of gross domestic product to help build long-term growth, Revenue Minister Todd McClay said.

The changes mean start-up companies carrying out research would have early access to all or part of their tax losses in the form of a cash receipt, rather than carrying losses forward to use against future profits.

Wellington Chamber of Commerce chief executive Raewyn Bleakley said businesses would welcome the boost for research and development, "particularly the tax breaks for loss-making start-ups and tax deductibility for "black hole" expenditure.

"These are the type of things that will help drive sectors such as Wellington's innovative ICT industry, and that's exactly what this country needs," she said.

Employers and Manufacturers Association chief executive Kim Campbell said: "We're particularly gratified to see the new measures allowing the write-off of losses made by start-up companies before they become profitable.

"Likewise, for allowing the expensing of R&D that does not result in marketable products and services.

"These long-overdue measures on their own could well result in a highly desirable pickup in private sector investment in R&D and innovation. The Government is to be applauded for introducing them."

- With Tim Hunter

- Stuff

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