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Budget 2016: sensible and safe, but more to be done

Budget 2016: sensible and safe, but more to be done

Today’s Budget is sensible and predictably consistent with the Government’s longer term plan to maintain surpluses, reduce debt and grow the economy.

But is it bold enough to make a real difference to challenges like infrastructure and housing?

With the return-to-surplus imperative requiring a focus on fiscal prudence and net Crown debt reduction, the Budget is responsible. However, there is room for bolder measures to address pressing issues like transport and tourism infrastructure, and housing availability and affordability, particularly in Auckland?

The Budget allocates an additional $2.1 billion to infrastructure investment over the Budget period. More than $1.7 billion of this is on education (new classrooms) and Inland Revenue’s new tax administration system – both are worthwhile investments but leaving little for additional spending on other infrastructure needs (e.g. roads, rail and tourism). A contingency of $600 million for additional infrastructure investment may fall short in meeting other urgent needs.

$400 million extra funding for housing (social and emergency housing, healthier homes and freeing up Crown land in Auckland) will be welcomed but it may not address the level and depth of the housing need.

The Government may be keeping its powder dry though, with a National Policy Statement on Urban Development to be released soon. This will direct councils to allow more housing development and to measure the impact of their decisions on house prices.

The additional $760 million for science and innovation will boost investment in the productive economy. The focuses on research particularly in health, apprenticeship programmes, and regional initiatives are sensible.

The tax package announced in April will benefit individual taxpayers and small businesses mainly by reducing the burden of interest and penalties.

“The changes to provisional tax will give taxpayers more options but until the detail is finalised the jury is out on the compliance cost savings,” said Peter Vial, Tax New Zealand Leader, Chartered Accountants Australia and New Zealand.

“The simplification measures in the package are a good start but there is plenty more the Government could do to simplify tax. We expect Inland Revenue’s new tax administration system will provide more simplification opportunities.”

Businesses subject to the Emissions Trading Scheme will be hit by the phasing out over three years of the Government’s “one-for-two” subsidy, which has allowed some businesses to pay one emissions unit for every two tonnes of emissions. The changes will affect mainly the waste, energy and transport industries and could lead to higher costs for consumers, for example increased petrol prices. On the plus side the doubling of the price should encourage a reduction in emissions.

Looking ahead to next year’s Budget

Last year’s Budget focused on vulnerable families providing the first real increases in benefits in over 40 years. This year’s focus is on infrastructure, housing, innovation and health. What would we like to see next year?

There are no proposals to address the effect of tax ‘bracket creep’ this year. We would expect movement on this issue next year. The average annual wage is $59,000 currently and is expected to rise to $63,000 by 2020. The average wage earner is already subject to a marginal tax rate of 30 percent and more and more New Zealanders will be paying tax at that rate as wages increase.

Our personal marginal tax rates are relatively low by international standards but our highest two tax rates (30 percent and 33 percent) apply at relatively low levels of income - $48,000 and $70,000 respectively. The Australian Government is partially addressing the effects of bracket creep by moving one of its income thresholds from A$80,000 to A$87,000, with a marginal tax rate of 32.5 percent to apply to income between A$37,000 and A$87,000.

“Our Government should follow suit and take a hard look at the current thresholds and tax rates as soon as fiscal conditions allow,” says Vial.

The Budget does not signal any future change to the company tax rate. This is neither a surprise nor an omission but the Government should keep monitoring the global trends in corporate tax rates. The Australian Government has signalled the Australian corporate tax rate will fall to 25 percent, albeit gradually over the next 10 years and with an earlier reduction for SMEs. The UK Government has been much bolder in announcing it will move its corporate tax rate from 20 to 17 percent over a shorter timeframe. New Zealand needs to resist joining a race to the bottom but should keep a watching brief on the effect of our rate on competitiveness.

Again no changes to the age of entitlement for National Superannuation are contemplated. An ageing population and significant growth in national superannuation and health costs suggest a long term view is needed on this issue.

ENDS

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