BUDGET 2012: Smokers, KiwiSavers, IRD lead way to surplus
BUDGET 2012: Smokers, KiwiSaver enrolments, sharper IRD teeth chart route to surplus
By Jonathan Underhill
May 24 (BusinessDesk) – Finance Minister Bill English has charted a path back to surplus by 2015 by hiking the excise on tobacco, giving the tax department sharper teeth and deferring the start of auto-enrolments to the KiwiSaver scheme.
The government will eke out a surplus of $197 million in 2014/15, based on the projected operating balance before gains and losses (OBEGAL), a turnaround from the $8.4 billion deficit seen in the current year. It will achieve that despite a weaker projected track for economic growth and an assumption that the coupon it pays to issue bonds rises in each of the next eight years.
English has produced a four-year plan of fiscal overs and unders that nets off as a “close to zero” budget, with $26.5 million net new spending. Savings and new revenue initiatives of $4.49 billion give him the leeway to announce $4.42 billion in new spending.
Health, perennially the hungriest vote, gets the biggest slice of new money – almost $1.5 billion - pushing the total health spend to $14.1 billion in 2012/13. Increased tax on tobacco provides the richest seam of new revenue - $1.4 billion over four years, based on 10 percent annual increases. That will lift the average price of a packet of 20 cigarettes to more than $20, or $1 a fag, by 2016.
“Getting back to surplus is one of the most important contributions the government can make to increasing genuine national savings and building a more competitive economy,” English said. “It will reduce upwards pressure on interest and exchange rates. It will stop our debt rising and allow us to start reducing it.”
Perhaps the best-value investment flagged in English’s fourth budget is the extra $78.4 million to be provided to the Inland Revenue Department over four years to bolster its audit and compliance activities – tackling the so-called black economy, strengthening debt collection and chasing down unpaid taxes. The ‘investment’ in IRD will add $345.4 million to the operating balance through until 2015/16 – a conservatively estimated return of $4.4 for every extra dollar spent.
The budget also includes closing some tax loopholes including $109 million over four years from tightening tax deductions on ‘mixed-use assets’ such as holiday homes and boats, $184 million from strengthening rules on livestock valuations and $117 million from the removal of three tax credits related to childcare, active income from children and the ‘income-under-$9,880’ credit for housekeepers and child minders.
The government expects to meet its target of a return to surplus in 2014/15 despite a $1.2 billion deterioration in the fiscal outlook since the budget policy statement was released in February. The tax take has lagged behind Treasury forecasts in recent months and the government has had to shuffle its obligations to the rebuild of Christchurch.
Gross domestic product is forecast to accelerate to a 2.9 percent annual pace in the year ending June 30, 2013, from 1.8 percent forecast for the current year. By 2014, GDP is seen growing 3.3 percent, underpinned by the Christchurch rebuild and a historically high surge in business investment, before slowing again over the ensuing four years.
Unemployment is projected to fall to 5 percent by 2015 and to stabilise at about 4.5 percent by 2018, the projections show. A net 154,000 new jobs would be created in the next four years, based on Treasury projections.
Economic assumptions underpinning the forecasts include a reversal of the outflow of migrants to a net inflow of 19,000 in 2014 and a long-run average of 10,000 a year assumed from 2015. Inflation is assumed to accelerate to 2.6 percent in the year ending March 31, 2013, from 1.6 percent it the latest March year, then to remain relatively stable throughout the forecast period, despite massive residential building growth in Christchurch over the next two years.
The 90-day bank bill rate is expected to rise as the Reserve Bank starts raising the official cash rate in early 2013, with the bank bill rate reaching about 4.5 percent by the end of the forecast period. The trade weighted index is seen holding around 72 for the next two years before sinking to 63 by 2016.
Crude oil is forecast to fall to US$94.4 a barrel by the June quarter of 2016 from more than US$100 a barrel in the first quarter of this year. Damage from the Canterbury earthquakes is forecast to keep within its estimate, in 2011 dollars, at $20 billion.
The budget includes plans to tighten disclosure and increase transparency of KiwiSaver, including a review of the rules for the six current default providers.
The government will avoid a four-year cost estimated at $514 million by deferring the introduction of an automatic enrolment scheme for KiwiSaver that was earmarked for 2014/15. Going ahead on that date “is not now possible without putting the surplus at risk,” budget documents say.
Core Crown debt as a percentage of GDP is forecast to peak at 28.7 percent in 2014, when net debt is seen at $66.5 billion. Net debt is forecast to increase to $69.8 billion in 2015 and to $70.7 billion in 2016.