S3E12: NZ Budget Breakdown

just stepped out of the Beehive budget lockup. Peter, welcome to small, firm Big Impact.

New Zealanders need and rely on. A third theme was recovery and resilience, obviously in relation to or directly in response to the cyclone and floods with experienced earlier this year. And then of course fiscal sustainability, which picked up quite

a few other aspects. The challenge, I guess for Grant Robertson as Minister of Revenue again this year was to deliver a budget that continued to invest as needed infrastructure in health and education and to throw in some quite big cost of living measures to assist people who are really struggling. But to do all of that without exacerbating inflation or increasing household debt, or adding, as I say,

to inflationary pressures. So that's why he's had to go with a no frills approach and reprioritise budget allocations from one place to another in a number of cases.

they're not forecasting that we'll have that. Then they've had to defer the expectation of a surplus by one year to 2025, 2026. And that's no surprises there. One of the most interesting figures, of course, for everyone is inflation, that Treasury is forecasting that it will fall to 3.3% in 2024 and then to 2.6% in 2025. Those numbers

look or forecasts look quite ambitious to me. I'm not an economist, but given we've had just come through a period of 6.7%, 7% inflation and we're still seeing the cost of living rising, particularly with food costs, I was a bit surprised to see that inflation is predicted to drop to 3.3 and then to 2.6. And some good news. Net government debt to GDP proposed to peak at only 22% and 2024, which is way lower than comparable economies or economies.

We often compare ourselves to Australia, the UK, the US, which have much higher debt to GDP ratios, and then Treasury's forecasting that will reduce to 18.4% in four years time at the end of the budget forecast period. So again, that might look a bit ambitious, but Grant Robertson and

Treasury are trying to deliver a cautious conservative budget. They don't want to be accused of running amok and having profligate spending, and that's one of the reasons why they're obviously very keen to keep that net government debt down below 20%. Unemployment is expected to peak at 5.3% next year. It's currently around 3.4%. So that is a reasonable increase, up to 5.3 and then level off a bit and wages are expected to grow at 5.2% a year over

the four year forecast period. So those were the headline economic fundamental numbers. Economists around the country will have different views as to whether they think Treasury's, you know, landed in the right place on all of those numbers. But it's just interesting to think, think about them and reflect on how ambitious potentially some of them are.

all not in the mix. And we we read the stories about people overseas who were receiving that payment and various other people who didn't didn't need to receive it. So it's good to see this year that the the focus is a much more targeted one. There are a few platforms here, so one is early childhood education. The government is extending the subsidy for early childhood education to two year olds. Currently, the subsidy is only for 3

to 5 year olds. It will drop down to cover two year olds and so will provide some much needed assistance to parents with very young children, allowing them to return to the workforce earlier should they choose to do so, which is good, obviously good for the the country's productivity. There's the government's going to remove the $5 prescription charge, which we've all had to pay for many years from. From my recollection, that will be removed in this budget.

And that's obviously not targeted because everyone's eligible for it. But it is progressive in the sense that those with the most critical health needs, the higher health needs who need more prescriptions than other healthier people will benefit the most. So it does seem to be a sensible measure. There's some subsidies and public transport which will be of interest. So free public transport for children under 13 and permanent

half price fares for people between 13 and 25. So for a number of years now, we've had free public transport for the national superintendence and this is looking at the other end of the demographic curve and extending that free program to under 13 year olds help those who travel by public transport to school or around the urban areas and rely on public transport. It's also a sound

measure from an environmental environmental perspective, obviously. And then obviously for people like tertiary students or young people who are in work who need to rely on public transport or rely on public transport, this is a good outcome for them. And for when you think about it, for a family with a few children travelling to school by bus or for tertiary student families with, you know, several tertiary students, this is a really good way of cutting their weekly costs.

So that will be helpful. Um, you'll recall a couple of years ago we had the winter energy payment, which was a payment that went out to a broad group of people, including all national superannuation funds. It was effectively a lump sum payment spread over a few months to cover people's winter energy costs. It wasn't targeted and even wealthy people, people who didn't need the subsidy, were receiving it. And. WHEREAS, Now with this budget, the government has chosen to be

more targeted. It's going to fund 100,000 new heating and insulation retrofits and an interestingly 5 million LED light bulbs, both of these aimed at reducing the power bills of those that are most in need. So we think the more targeted approach is sensible. One obvious question is whether we have the workforce to do the retrofits, the heating and insulation retrofits. One thinks that it might well be the same workforce that has been relied on to do

a lot of the cyclone recovery work. So that will be that will time will tell whether we do have the workforce to do those retrofits. One other change here under this cost of living area and the cost of living area was we tweak to the KiwiSaver rules that it will ensure that Kiwisavers who are on parental leave won't miss out. They will not be disadvantaged by being on parental leave, so their long term savings through KiwiSaver will not be affected. And that's from a gender equity

perspective as a really good change. It's not a big change. It won't cost the government that lot, but it does send a very positive signal that that gender equity as is and savings. And there's very good research which confirms that women end up with with lower retirement savings than men. And this will be a way of helping address that. So as I say, we're pleased that the cost of

living measures are largely pretty targeted and they're not. You know, that is sensible and the constrained economic circumstances that the government and we are all in at the moment. There isn't money to spray around as there was in COVID. And as I said, with last year's cost of living payment, it has to be targeted.

wealth tax, no capital gains tax. We might see something in Labor's policy leading into the election, but certainly nothing in the budget. Again, no surprises there. Of course many people are struggling with the effects of bracket creep whereby their incomes are pushed into, their incomes increase, but they don't get the full benefit because they're pushed into the next marginal tax rate bracket. That's been a problem that we've had for decades. It's been particularly acute in the

last few years with wage inflation. So people who are on average incomes are paying tax at reasonably higher rates. So in an ideal world we would have seen that problem tackled. But those changes are very expensive and they just aren't affordable in the current environment with the pressures of the cyclone and flood relief and and also they would be inflationary potentially. So they're off the table and we knew they were off the table. So we haven't

got any of that. But what we have got is a little surprise in there with the tax, the trustee tax rate. So the trustee tax rate has for a number of years been 33%. This government and this budget has announced that it will move the trustee tax rate from 33% to 39% to align with the top personal marginal tax rate of 39% that came in from 1st April 2021. Why is the government doing this? The government is doing this because it has identified a loophole and

the evidence is very clear. The budget documents confirm that in the first year of the increase in the to the 39% for the top personal marginal tax rate, there was a sudden spike in income earned by trustees. So trustees were earning $5.7 billion more of income in that year than they had in the previous income year. So that was the evidence the government needed to to show that there was a loophole and it was being used or,

you know, in their view, abused. So that is that opportunity has been removed with effect from one April 20th, 24. Those rates will be aligned. Personally, I was very pleased to see or hear Minister Robertson announce that that change will go through the select committee process. So there will be the opportunity for submissions, one assumes, and that will be reviewed by the the finance and Expenditure Select Committee

as normal tax change naught tax changes normally are. There could well be, you know, peripheral issues, there could be collateral damage, things that officials perhaps haven't thought about that need to be brought to their attention and to the Government's attention to Parliament's attention. So those things can be ironed out through that select committee process. But the key change here is that the trustee rate will move to 39%

to align with the top personal marginal tax rate. A few other things I should have mentioned that weren't in there. There had been some kind of scuttlebutt or gossip about whether the government might introduce a higher personal marginal tax rate to apply to very high incomes of, say, 45%. That's not in the budget. Again, it could come through in the election policies of different parties, the Labor Party and obviously might consider that. And it's and it's in

the lead up to the election mentioned. I think there's no decision to remove GST off fresh food. Often there are calls for that and particularly in times of economic pressure, there are calls for that to happen to reduce the food bill for households that are struggling. I think it's the right thing not to go down that route because New Zealand has the most efficient GST system in the world, according to the OECD, and that's been the case for decades.

It's a very comprehensive tax. It's hard to avoid and relatively easy to comply with and we don't have all the definitional issues that come when you start to make further exemptions and exclusions. And also fundamentally, there's no guarantee, excuse me, that of GST were taken off food that that would that price reduction would flow through to the end consumer. So great to see the government resisting the tax. To do something in that area. So yeah, so that's

what's happened in tax one. One little surprise and no big surprises.

small business. So, you know, measures that are specifically targeted at small business generally, small business, there will be implications for small business, for example, And all the money that's being invested in resilience and recovery from the cyclone and the floods that will have some flow on effects for those small businesses affected by those events and also the small businesses that support or work with those businesses affected.

But they did. The government, interestingly, the government did pick one winner here in the small business area. They've decided to give the gaming development sector. So video gaming entities or companies a businesses, a 20% rebate for video game development studios. So the sector brought in $400 million in revenue in 2022, and it's growing rapidly. I understand it's quite a big sector. And the Wellington region, for example.

And so they've been a winner out of this. They've got the support, the support aligns the New Zealand treatment with or puts them on a more level playing field with this kind of support and subsidy that the Australian equivalent industry receives. So and they are competing on a global stage for this. So it's great to see that this has happened for them. But the bigger question or the obvious question is what is being done to support other sectors that are made up predominantly of small business,

like the video gaming sector? They might not be as sexy as the video gaming sector, but they are making equally important contributions to the New Zealand economy and are also having to compete with global competitors, including for for labour, just in the same way as the video gaming sector has.

So what I'd like to see is if the support for the video gaming sector is successful and does that grow that industry and give a decent return on investment, then that should be a model that's looked at to see whether it can be rolled out to other sectors. Some of the other sectors that are interesting here are tourism and horticulture, for example, got relatively small, pretty, pretty small because support for technology development, for example, and their

sectors and innovation. So not a lot for them. And they are big industries, really critical to New Zealand's economy. So again, I say let's see how this gaming sector support works and if there are lessons to be learned there that can be and the money's there to roll them out more widely, then then the government, the government should should go for it. There is a focus on technology and science with $400 billion invested in some sorry,

400 million invested in several multi institution science hubs. Again, that's the type of investment that ultimately in the long term will have ripple effects around the economy. The more research that has done in those science hubs that's commercially that can be commercialized, the better and there'll be flow on effects for small business and and the hubs around those or the networks, the clusters around those science hubs. So that's that's a sizable investment.