The New Zealand Government has broken the mould, whipped out some tax cuts (following the Australian model at long last) and gone for the doctor to try and get re-elected at the national election later this year.
As a result the Government will run a deficit for the first time since 2000.
The 2009 NZ budget, announced in Wellington yesterday by Finance Minister Michael Cullen will deliver NZ$10.6 billion in tax cuts over four years from October this year, boosting the take-home pay of New Zealand’s 2.2 million workers by between NZ$22 and NZ$55 a week.
The Government confidently asserts that after a slowdown this year, the NZ economy will recover next year (just like the US, economy and probably the Aussie economy, after a fashion).
The NZ Treasury’s growth forecasts see gross domestic product growth bottoming out in the March 2009 year at 1.5%, then accelerating to 2.8% in 2010 and 3.2% in 2011.
The Treasury expects inflation to return to within the 1% to 3% target range within that period: it’s above that at the moment.
The tax cuts are a belated answer to pressure from business, the community and the Nationalist opposition for the Labour Government to match some of the tax cutting that has gone on in Australia in recent years (in the most recent Australian budget).
The tax cuts and better job opportunities are blamed for the increasing drain of thousands of Kiwis each month to Australia in search of more money and better paying jobs.
The tax cuts are also pitched to try and offset the momentum in the NZ economy towards a crashing slowdown.
Retail sales are falling, house sales and housing starts have plunged, credit card sales are lower, consumer and business confidence is plunging as well and export growth has slowed.
But interest rates are at very high levels because the country, like so many other developed economies, cannot break the upward spiral of inflation.
But the tax cuts and associated budget deficit runs the risk the NZ Reserve Bank won’t cut rates from their current 8.25% because of fears the extra income will stoke inflation and push it higher.
A survey of consumer confidence shows the problems confronting the Government.
The NZ Roy Morgan Consumer Confidence Rating is at a record low 85.6 points – down 7.1 points in 2 weeks, down 40.7 points since December 2007 and 21.0 points below the 2008 average of 108.6.
"51% (up 2% since early May) of New Zealanders say they are financially worse off than a year ago and only 28% (unchanged) say they are better off financially now than at the same time last year.
"A record high 48% (up 4%) of New Zealanders say now is a ‘bad time’ to buy major household items and 34% (down 4%) say ‘now is a good time to buy’ major household items."
That’s worse than the slump in consumer confidence in Australia and on a par with the slide in US consumer confidence levels.
The Budget delivers a three-year package of personal tax cuts for all NZ workers, using cuts in tax rates and lifts in thresholds, costing $NZ10.6 billion; Working for Families (Sounds familiar) gets a further $NZ1.1 billion, while after-tax payments for NZ Superannuation will rise for all superannuants.
Businesses get a compliance cost reduction package that will see smaller firms in particular make fewer payments and have lighter reporting requirements.
In other Budget highlights;
– A Broadband Investment Fund "will dispense $NZ500 million "as a first five-year down payment on fast broadband to NZ homes. The Government says "Any organisation – company, council, or community organisation – will be able to apply for funding for ducting and "dark fibre" infrastructure, but they will have to match government investment at least dollar-for-dollar. (Sounds a lot like Australia).
– The 2008-09 domestic debt program will see $NZ3.4 billion of bonds issued, including $NZ341m of infrastructure bonds.
The difference with Australia is dramatic thanks to our resources boom and surging terms of trade. Our budget surplus in 2009 is estimated at around $A21.7 billion, easing back under $A20 billion the year after,
That’s despite slowing domestic growth and consumption but strong growth in the resources and export sectors.
NZ’s slowing growth, tax cuts and then slow recovery is expected to generate a budget cash deficit of NZ$3.48 billion in the year ending June 30, 2009, compared with a surplus of NZ$908 million in the current year.
Over four years ending June 30, 2012, the deficit will accumulate to NZ$13.8 billion. In Australia it could be a surplus of around $US70 billion-$US80 billion, depending on the downturn, or well over $A120 billion if the infrastructure funds are included.
Of course the rationale for the tax cuts is to boost consumer spending to try and offset the slowdown.
March quarter employment fell 1.3%, the largest fall since 1989, while retail spending had the biggest drop in 11 years. Home sales have fallen to a seven year low and worse in some areas of the country.
Despite Mr Cullen warning of the possibility of a recession this year, he said yesterday the NZ Treasury was not forecasting one.
Mr Cullen said inflation will slow to 3.2% by March 2009 and 2.8% a year later: but the surging world oil price is a big imponderable.
That’s why a rate cut can’t be taken as certain at any time this year.
That’s something recognised this week by the International Monetary Fund in its annual review of the NZ economy.
The Fund urged the NZ Government and the Reserve Bank to keep monetary policy on hold until there is clarity over the direction of the economy, inflation and the global credit crunch.
The IMF sa
