A strong and growing economy is the real story behind the Coalition Government’s 2018 Budget. This is very evident from the Time Series of Fiscal and Economic Indicators which projects Gross Domestic Product (GDP) to grow $17 billion in the year ended 30 June 2018, from $274 billion last year to $291 billion. About 30% of GDP ends up in government coffers, so a $17 billion increase in GDP yields the government about $5 billion in additional spending money that National did not have last year.
In the four years to June 2021, Treasury is projecting GDP growth to average $35 billion more a year than National had projected in last year’s budget. It’s this additional tax revenue that Labour is spending, without increasing the benchmark spending and debt levels when expressed as a percentage of GDP.
It’s a pretty simple equation: Stronger economy, more tax revenue, more to spend. That’s the plain truth behind Budget 2018.
The irony for National is that for six years after the Global Financial Crisis and the Canterbury earthquakes, it continued to grow government spending at a time when the tax take was flat. The result was annual cash deficits from 2009-16, funded by debt. The first cash surplus was in 2017. Having done the hard graft, National handed Mr Robertson an economy that is oozing cash.
The main spending areas are:
• Health $18.1b (last year $17.2b)
• Education $14.7b ($13.9b)
• NZ Super $14.5b ($13.7b)
• Welfare $12.4b ($10.7b)
• Core govt services $5b ($5.1b)
• Law and order $4.4b ($4.3b)
Crown revenue for the 2019 year is projected to be $86.6 billion. This is collected from the following sources:
• Individual income tax $38b
• GST $22b
• Company tax $13.7b
• Other indirect tax $13b
Of the income tax collected:
• The 19% of taxpayers earning over $70k pay 64% of all income tax.
• The 11% of taxpayers earning over $90k pay 49% of the income tax.
• The 3% of taxpayers earning more than $150k pay 25% of all income tax.
New spending
The health sector gets the major share of new spending with $2.9 billion of new money over five years.
• $2.2b will go to District Health Boards.
• $126m for elective surgeries and other areas.
• $750m for hospital upgrades and rebuilds.
• Cheaper doctor visits for more than 500,000 people.
• Free GP visits extended to 13-year-olds (56,000 more children).
• About 540,000 people eligible for Community Services cards will get $20 to $30 cheaper GP visits. Cost $385m.
• $113m more for community midwives, including 8.9 per cent fee increase to level them with DHB midwives.
• $195m has been removed from the PHARMAC budget. “From July 1, Pharmac will take over responsibility from District Health Boards (DHBs) for buying all their medicines, which Treasury forecasts will save close to $200 million over four years through its purchasing power“.
Education receives $1.5 billion in new spending over five years. There is a significant reallocation of spending from the tertiary sector to early education.
To address the housing crisis, the Government will build 6400 new state houses over the next four years at a cost of $4 billion, of which $2.9 billion would be funded by Housing NZ borrowing from the private sector. Other initiatives include:
• $69m has been committed to build 200 new emergency homes within the next year. A further $101m has been allocated over four years.
• The homeowners insulation grants scheme gets a $142m boost over the next four years to help lower-income owner-occupied households insulate their homes. Landlords do not qualify. The Warm Up New Zealand: Healthy Homes schedule which may apply to landlords ends 30 June 2018.
Corrections receives $200m to build pop-up prisons to cope with growing prison numbers and house up to 600 inmates. Labour’s long-term solution to growing prisoner numbers is to reduce the prison population by 30 per cent over 15 years. How that will be achieved is yet to be detailed, although it has indicated more community support will be given to ex-prisoners to prevent re-offending. Corrections will also receive $128m to keep the public safe due to greater use of community based sentencing.
The Police will receive new funding of nearly $300m, which will go towards expanding the police force – a key election promise and part of Labour’s coalition agreement with NZ First. The coalition Government has promised 1800 new officers, including 1100 more officers on the streets. The funding in the Budget will enable the recruitment of 920 new officers and 240 support staff.
Children come in for greater welfare support. $140m over five years to extend the Youth Justice System to include 17 years olds (currently 16). $142m in additional funding for Oranga Tamariki (Child Youth and Family) to deal with “cost pressures”, and $105m to pay a clothing allowance to children supported by the orphan’s benefit or unsupported child’s benefit (e.g. grandparents).
One of the larger ticket items was a billion dollars allocated to a research and development tax incentives. Treasury says, “This will provide a stable mechanism to incentivise increased business expenditure on R&D. This funding also provides for implementation and will cover the costs associated with the implementation of the tax credit.”
Other business and tax initiatives include:
• $784m to be collected from the Emissions Trading schedule in the 2019 year.
• Over the next five years an additional $26.5m has been allocated to the IRD for tax audits, which is expected to yield $183m in additional tax revenue.
• Annual revenue of approx $80m a year is expected from the collection of GST on low value goods.
• $7m is being allocated over the next three years to fund e-Invoicing. This is to allow businesses to “digitally transact across the entire procure-to-pay lifecycle using their New Zealand Business Number. E-Invoicing alone results in an estimated 80% productivity gain by improving financial data quality, reducing payment cycles, and reducing the likelihood of fraud. Using the Australian framework delivers interoperability with trans-Tasman and international businesses.”
• $57m has been budgeted over the next five years to enable “science cooperation with Singapore.” The Budget documents state, “This funding will support the delivery of an ‘Enhanced Partnership’ currently being negotiated with Singapore. This partnership will leverage Singapore’s strengths in data and bio-processing to enable joint research programmes in data science and ‘future foods’, and establish a new data science platform in New Zealand.”
• The ring fencing of losses on rental properties is expected to cost landlords approx $150 million a year, following its introduction 1 April 2019.
• $142.5m for insulation and heating retrofits, for owner-occupiers, not rented homes. The current 50% insulation subsidy that landlords can access in certain circumstances will end on 30 June 2018!
The greening of New Zealand gets a $100 million boost with a commitment to a Green Investment Fund. The budget documents states: “The Green Investment Fund will support the transition towards a net-zero-emissions economy by 2050…The Green Investment Fund will be established by the Government to make investments that both reduce greenhouse gas emissions and provide a financial return. The Green Investment Fund will work with businesses, infrastructure owners and investors to bring forward emissions reduction projects and draw in private investment for these projects.”
DoC also does well. There is $181 million of new funding over the next four years for predator eradication. That is enough to fund control of an area the size of Auckland and Northland.
Farming is a big loser. Agriculture has had net funding of $102m removed from its budget over the next five years. $68m has been taken away from rural irrigation schemes, and $80m from funding for the Primary Growth Partnership, which was a joint venture between government and industry set up to invest in long-term innovation programmes to increase the market success of the primary industries. This does not include $85m set aside in biosecruity funding in “response to the Cattle Disease Mycoplasma Bovis“, of which $11.2m will be provided by the NZ Cattle Industry.
Some of the more interesting facts and spending are:
• $26m has been allocated over five years to improving the measurement of child poverty in New Zealand.
• $11.5m of funding over two years to assist Maori claims for the Marine and Coastal Area (Takutai Moana) Act 2011.
• $9m over five years to increase the number of workplace inspectors on employment issues.
• $4m on survey of youth health and wellbeing.
• $1.5m to the Welfare Advisory Group (a Green Party initiative).
• $5m over four years to fund the Asia New Zealand Foundation. “This funding will enable the Foundation to provide additional expert commentary and research on Asia; improve youth awareness of the opportunities provided by Asia; increase the quantity of engagement and events with priority countries; and increase the scale of business, entrepreneurship and residency programmes.”
• $100m for hosting the Asia-Pacific Economic Cooperation (APEC) 2021 event.
• $3.2m for an enquiry into the Earthquake Commission.
• $7.9m over four years to establish and operate a Child Poverty Unit to implement the requirements set out in the Child Poverty Reduction Bill once enacted.
• $15m over four years into the Sustainable Farming Fund “to invest in applied research and extension projects, led by farmers, growers and foresters that deliver economic, environmental and social benefit to New Zealand“.
• The estimated social cost of illegal drugs is $1.8 billion a year. To deal with the problem customs will get a $54m funding boost for Customs over the next four years.
• There are 7,890 people on the waiting list for a state house, and this is likely to increase. There are currently 61,338 state houses.
• $100m for the Americas Cup regatta.
On the economic front:
• Unemployment is expected to remain largely unchanged over the next five years.
• Treasury estimates that national house prices are expected to rise 7.0% in the year ended June 2018, then decline to annual rates of 2.8%, 2.0%, 3.4%, and 3.7% in four years to 2022.
• They estimate net migration will fall from 68,000 in the year to March 2018 to 25,000 in the year ending in June 2022.
In a pre-budget announcement Foreign Affairs is to receive an additional $900 million. Of that $714.2 million is allocated to the Official Development Assistance fund for the Pacific Islands. The Budget documents say, “This funding will significantly increase New Zealand’s overseas aid, especially to the Pacific. New funding will allow New Zealand to help address significant unmet financial needs for major global and regional challenges such as the effects of climate change, increasing regional and global humanitarian need, financing gaps in the multilateral system, and the social and environmental constraints to sustainable development.”
Why so much funding to the Pacific? Shane Jones is reported to have said because, “the US has lost the fight with China over influence in the Pacific.” $700m is hardly enough to have any impact on the might of China’s chequebook influence in the Pacific!
And a billion dollars a year is to go into the Provincial Growth Fund (the “Jones fund”). The Budget documents state, “This funding will support projects through the Provincial Growth Fund that lift regional productivity potential… Additional funding of $2 billion will be sought in Budgets 2019 and 2020. Year one of the Provincial Growth Fund totals $1 billion.” It remains to be seen if the billion dollars is less of an investment and more of a series of handouts to build a provincial constituency for NZ First.
So who are the main beneficiaries of the government’s windfall? Simple: The 50% of the population that pay the least tax, and NZ First. According to the NZ Herald, NZ First wins in the Budget totalled $2.84b compared to the Green party wins at $610m.
Conclusion
Is the Budget transformational? No.
The departure from Nationals budget trajectory is largely at the fringes, with an emphasis on social spending instead of tax cuts and roads.
The economic forecasts are for continued growth ahead, although the prospects for property investors two or three years out is less rosy with a forecast slow down in property values, higher interest rates, and lower immigration numbers. A turn in the property market could well be a turning point for this government.
strong and growing economy is the real story behind the Coalition Government’s 2018 Budget. This is very evident from the Time Series of Fiscal and Economic Indicators which projects Gross Domestic Product (GDP) to grow $17 billion in the year ended 30 June 2018, from $274 billion last year to $291 billion. About 30% of GDP ends up in government coffers, so a $17 billion increase in GDP yields the government about $5 billion in additional spending money that National did not have last year.
In the four years to June 2021, Labour is projecting GDP growth to average $35 billion more a year than National had projected in last year’s budget. It’s this additional tax revenue that Labour is spending, without increasing the benchmark spending and debt levels when expressed as a percentage of GDP.
It’s a pretty simple equation: Stronger economy, more tax revenue, more to spend. That’s the plain truth behind Budget 2018.
The irony for National is that for six years after the Global Financial Crisis and the Canterbury earthquakes, it continued to grow government spending at a time when the tax take was flat. The result was annual cash deficits from 2009-16, funded by debt. The first cash surplus was in 2017. Having done the hard graft, National handed Mr Robertson an economy that is oozing cash.
The main spending areas are:
- Health $18.1b (last year $17.1b) 22%
- Education $14.1b ($14b) 18%
- NZ Super $14.5b ($13.7b) 17%
- Welfare $14.4b ($12.7b) 17%
- Core govt services $5b ($4.8b) 6%
- Law and order $4.4b ($4.1b) 5%
Crown revenue for the 2019 year is projected to be $86 billion. This is collected from the following sources:
- Individual income tax $32.7b (32%)
- GST $20b (19%)
- Company tax $14.5b (14%)
- Other indirect tax $7b (7%)
Of the $32.7 billion collected in income tax:
- The 19% of taxpayers earning over $70k pay 64% of all income tax.
- The 11% of taxpayers earning over $90k pay 49% of the income tax.
- The 3% of taxpayers earning more than $150k pay 25% of all income tax.
New spending
The health sector gets the major share of new spending with $2.9 billion of new money over five years.
- $2.2b will go to District Health Boards.
- $126m for elective surgeries and other areas.
- $750m for hospital upgrades and rebuilds.
- Cheaper doctor visits for more than 500,000 people.
- Free GP visits extended to 13-year-olds (56,000 more children).
- About 540,000 people eligible for Community Services cards will get $20 to $30 cheaper GP visits. Cost $385m.
- $113m more for community midwives, including 8.9 per cent fee increase to level them with DHB midwives.
- $195m has been removed from the PHARMAC budget. “From July 1, Pharmac will take over responsibility from District Health Boards (DHBs) for buying all their medicines, which Treasury forecasts will save close to $200 million over four years through its purchasing power”.
Education receives $1.5 billion in new spending over five years. There is a significant reallocation of spending from the tertiary sector to early education.
To address the housing crisis, the Government will build 6400 new state houses over the next four years at a cost of $4 billion, of which $2.9 billion would be funded by Housing NZ borrowing from the private sector. Other initiatives include:
- $69m has been committed to build 200 new emergency homes within the next year. A further $101m has been allocated over four years.
- The homeowners insulation grants scheme gets a $142m boost over the next four years to help lower-income owner-occupied households insulate their homes. Landlords do not qualify. The Warm Up New Zealand: Healthy Homes schedule which may apply to landlords ends 30 June 2018.
Corrections receives $200m to build pop-up prisons to cope with growing prison numbers and house up to 600 inmates. Labour’s long-term solution to growing prisoner numbers is to reduce the prison population by 30 per cent over 15 years. How that will be achieved is yet to be detailed, although it has indicated more community support will be given to ex-prisoners to prevent re-offending. Corrections will also $128m to keep the public safe due to greater use of community based sentencing.
The Police will receive new funding of nearly $300m will go towards expanding the police force – a key election promise and part of Labour’s coalition agreement with NZ First. The coalition Government has promised 1800 new officers, including 1100 more officers on the streets. The funding in the Budget will enable the recruitment of 920 new officers and 240 support staff.
Children come in for greater welfare support. $140m over five years to extend the Youth Justice System to include 17 years olds (currently 16). $142m in additional funding for Oranga Tamariki (Child Youth and Family) to deal with “cost pressures”, and $105m to pay a clothing allowance to children supported by the orphan’s benefit or unsupported child’s benefit (e.g. grandparents).
One of the larger ticket items was a billion dollars allocated to a research and development tax incentives. Treasury says, “This will provide a stable mechanism to incentivise increased business expenditure on R&D. This funding also provides for implementation and will cover the costs associated with the implementation of the tax credit.”
Other business and tax initiatives include:
- $784m to be collected from the Emissions Trading schedule in the 2019 year.
- Over the next five years an additional $26.5m has been allocated to the IRD for tax audits, which is expected to yield $183m in additional tax revenue.
- Annual revenue of approx $80m a year is expected from the collection of GST on low value goods.
- $7m is being allocated over the next three years to fund e-Invoicing. This is to allow businesses to “digitally transact across the entire procure-to-pay lifecycle using their New Zealand Business Number. E-Invoicing alone results in an estimated 80% productivity gain by improving financial data quality, reducing payment cycles, and reducing the likelihood of fraud. Using the Australian framework delivers interoperability with trans-Tasman and international businesses.”
- $57m has been budgeted over the next five years to enabling “science cooperation with Singapore.” The Budget documents state, “This funding will support the delivery of an ‘Enhanced Partnership’ currently being negotiated with Singapore. This partnership will leverage Singapore’s strengths in data and bio-processing to enable joint research programmes in data science and ‘future foods’, and establish a new data science platform in New Zealand.”
- The ring fencing of losses on rental properties is expected to cost landlords approx $150 million a year, following its introduction 1 April 2019.
- $142.5m for insulation and heating retrofits, for owner-occupiers, not rented homes. The current 50% insulation subsidy that landlords can access in certain circumstances will end on 30 June 2018!
The greening of New Zealand gets a $100 million boost with a commitment to a Green Investment Fund. The budget documents states: “The Green Investment Fund will support the transition towards a net-zero-emissions economy by 2050…The Green Investment Fund will be established by the Government to make investments that both reduce greenhouse gas emissions and provide a financial return. The Green Investment Fund will work with businesses, infrastructure owners and investors to bring forward emissions reduction projects and draw in private investment for these projects.”
DoC also does well. There is $181 million of new funding over the next four years for predator eradication. That is enough to fund control an area the size of Auckland and Northland.
Farming is a big loser. Agriculture has had net funding of $102m removed from its budget over the next five years. $68m has been taken away from rural irrigation schemes, and $80m from funding for the Primary Growth Partnership, which was a joint venture between government and industry set up to invest in long-term innovation programmes to increase the market success of the primary industries. This does not include $85m set aside in biosecruity funding in “response to the Cattle Disease Mycoplasma Bovis”, of which $11.2m will be provided by the NZ Cattle Industry.
Some of the more interesting facts and spending are:
- $26m has been allocated over five years to improving the measurement of child poverty in New Zealand.
- $11.5m of funding over two years to assist Maori claims for the Marine and Coastal Area (Takutai Moana) Act 2011.
- $9m over five years to increase the number of workplace inspectors on employment issues.
- $4m on survey of youth health and wellbeing.
- $1.5m to the Welfare Advisory Group (a Green Party initiative).
- $5m over four years to fund the Asia New Zealand Foundation. “This funding will enable the Foundation to provide additional expert commentary and research on Asia; improve youth awareness of the opportunities provided by Asia; increase the quantity of engagement and events with priority countries; and increase the scale of business, entrepreneurship and residency programmes.”
- $100m for hosting the Asia-Pacific Economic Cooperation (APEC) 2021 event.
- $3.2m for an enquiry into the Earthquake Commission.
- $7.9m over four years to establish and operate a Child Poverty Unit to implement the requirements set out in the Child Poverty Reduction Bill once enacted.
- $15m over four years into the Sustainable Farming Fund “to invest in applied research and extension projects, led by farmers, growers and foresters that deliver economic, environmental and social benefit to New Zealand”.
- The estimated social cost of illegal drugs is $1.8 billion a year. To deal with the problem customs will get a $54m funding boost for Customs over the next four years.
- 7890 people on the waiting list for a state house, and this is likely to increase. There are currently 61,338 state houses.
- $100m for the Americas Cup regatta.
On the economic front:
- Unemployment is expected to remain largely unchanged over the next five years.
- Treasury estimates that national house prices are expected to rise 7.0 in the year ended June 2018, then decline to annual rates of 2.8%, 2.0%, 3.4%, and 3.7% in four years to 2022.
- They estimate net migration to fall from 68,000 in the year to March 2018 to 25,000 in the year ending in June 2022.
In a pre-budget announcement Foreign Affairs is to receive an additional $900 million. Of that $714.2 million is allocated to the Official Development Assistance fund for the Pacific Islands. The Budget documents say, “This funding will significantly increase New Zealand’s overseas aid, especially to the Pacific. New funding will allow New Zealand to help address significant unmet financial needs for major global and regional challenges such as the effects of climate change, increasing regional and global humanitarian need, financing gaps in the multilateral system, and the social and environmental constraints to sustainable development.”
Why so much funding to the Pacific? Shane Jones is reported to have said because, “the US has lost the fight with China over influence in the Pacific.” $700m is hardly enough to have any impact on the might of China’s chequebook influence in the Pacific!
And a billion dollars a year is to go into the Provincial Growth Fund (the “Jones fund”). The Budget documents state, “This funding will support projects through the Provincial Growth Fund that lift regional productivity potential…Additional funding of $2 billion will be sought in Budgets 2019 and 2020. Year one of the Provincial Growth Fund totals $1 billion.” It remains to be seen if the billion dollars is less of an investment and more of a series of handouts to build a provincial constituency for NZ First.
So who are the main beneficiaries of the government’s windfall? Simple: The 50% of the population that pay the least tax, and NZ First. According to the NZ Herald, NZ First wins in the Budget totalled $2.84b compared to the Green party wins at $610m.
Conclusion
Is the Budget transformational? No.
The departure from Nationals budget trajectory is largely at the fringes, with an emphasis on social spending instead of tax cuts and roads.
The economic forecasts are for continued growth ahead, although the prospects for property investors two or three years out is less rosy with a forecast slow down in property values, higher interest rates, and lower immigration numbers. A turn in the property market could well be a turning point for this government.