A curious mixture of give and take and rising debt in the 2010-11 New Zealand budget.
Many of the changes were signalled before the budget by the government of PM, John Key and his Finance Minister, Bill English.
Despite that, the New Zealand dollar rose on a day when its Australian counterpart was much weaker.
Analysts believe the confidence in the budget, especially in the growth and debt forecasts, makes an interest rate rise next month from the NZ Reserve Bank more likely.
But the growing uncertainty on global markets might force that rise back a few months.
The government confidently forecast higher growth than before, a quicker return to budget surpluses and lower government debt.
The GST rises to 15% from 12.5%, and that looks like it will pay for the bulk of the tax cuts for companies (down to 28% from 30%), trusts and individuals.
That will put NZ corporate tax under Australia’s current and prospective rate because the proposed cut to 28% won’t happen until 2015 and is dependant on the Super Resource Tax being implemented.
Many of the NZ tax changes start October 1, while lower tax on companies and savings change in 2011.
Someone on the NZ average weekly wage (around $NZ50K) will get a tax cut of just over $NZ29, but half of that will be taken back by the increased GST.
Superannuation, benefits, Working for Families, student allowances and other income support will rise by just over 2% (also on October 1) as part of compensation for GST increase.
The Budget also stops property investors from using depreciation to avoid paying the top rate and ends the particular Kiwi tax rort that allows wealthy households to shelter income in trusts so they can get Working for Families benefits.
But there is a cost: the budget cash deficit is forecast to widen to $NZ13.3 billion in the year ending June 30, 2011 (or 4.2% of GDP) from $NZ9.1 billion in the current year and the budget is likely to remain in the red until 2015.
But that’s two years earlier than the forecast late last year.
Net public debt will rise to 27% of GDP by 2015-16 from 14% this year. But the peak will be around three years earlier than previously forecast, according to the government.
The Key government says it wants to cut the figure to less than 20% by 2022.
Mr English said in his budget speech that "New Zealand owes the world $168 billion, or around 90 per cent of GDP.
"Private sector debt to foreign lenders has grown steadily over the last decade and our vulnerability will be increased by growth in government debt to foreign lenders over the next five years.
"The dangers of too much debt are well illustrated by a number of European nations who are currently undergoing painful changes, involving increasing taxes, cutting public services, or both.
"The Government is committed to policies that will reduce our vulnerabilities by tilting our economy away from debt and consumption toward savings, investment and exports," Mr English said.
According to Bloomberg and other reports, the budget was greeted positively by ratings groups.
Fitch Ratings has New Zealand’s AA+ credit rating on a negative outlook while Standard & Poor’s and Moody’s Investors Services have New Zealand on a stable rating.
S&P said that its views on New Zealand’s sovereign creditworthiness are not immediately affected by today’s budget.
“The ‘AA+’ long-term and ‘A-1+’ short-term foreign currency sovereign ratings on New Zealand reflect our opinion of the country’s sound public finances, as well as its sound financial sector, resilient economy, and open and transparent policy environment,” S&P said in a statement on Bloomberg.
The sales and income tax changes are part of a broader tax reform package that includes a plan to cut the company tax rate to 28% next year from 30% now, and a cut in the rate on trusts to 33%. Tax rates paid on savings will also be cut.
From October 1, the top tax rate payable on income above $NZ70, 000 will fall from 38 cents to 33 cents.
The 33 cent rate which applies on income between $48,000 and $70,000 will fall to 30 cents and the 21 cent rate, on income between $14,000 and $48,000, will fall to 17.5 cents.
The bottom rate, on earnings below $14,000, will be cut from 12.5 cents to 10.5 cents.
From next year, property investors will no longer be able to claim depreciation on their buildings against their income and the values of assets held in trusts will be counted as part of a household’s income when deciding eligibility for Working for Families.
The government says the Inland Revenue has estimated thousands of households with investment properties have used trusts to get Working for Families benefits they were not really entitled to.
There’s also more money to be spent on health (an extra $NZ2.1 billion over the next four years, including $NZ512 million this year); more on education ($NZ1.4 billion for education over four years, including $NZ417 million this year) and an extra $NZ1.45 billion for infrastructure projects, including $NZ200 million for ultra-fast broadband, $NZ500 million for rail, $NZ337.4 million to increase prison capacity and $NZ177.4 million for new school buildings.
The Budget estimates the economy will grow by 3.2% in the next year, and remain at similar levels for the next three years.
That’s faster than the forecast late last year of 2.4% and has come as commodity prices rise (especially for milk products) and stronger growth in Australia and Asia drags the Kiwi economy higher.
Unemployment is forecast to fall from 7.1% in March this year to 6.2% next year and 4.6% by 2014.
