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Sludge Report #175: Save Some – Get More!!!

Sludge Report #175

Budget 2007 Comment - Save Some – Get More!!!

More than a few surprises, signs of innovation and a big savings sell in a far-sighted budget designed not to frighten the bankers.
By C.D. Sludge (from the budget lockup.)

Highlights – More Surprises Than Expected
Don’t Frighten The Bankers
“Save Some – GET MORE!!”
Suffer The Poor – Some More

See also…
Scoop's Budget 2007 Coverage

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Highlights – More Surprises Than Expected

This morning in the wake of such comprehensive signaling of what to expect the pre-lockup working title of the Budget 2007 commentary had been “no surprises”. Afterall we knew he was going to lower the company tax rate and grant savings incentives.

But after a few hours locked up with what seems to be an alarming number of media and economists the conclusion has to be that this budget is significantly more interesting than expected. And lots of the interesting stuff is in the detail.

As usual for Dr Cullen it contains considerable complexity, a fairly large dollop of consistency, and a significant dose of economy changing scope. Less usual and most importantly for the Dr's political future, this time it also contains some simple, easily expressed positive headlines.

In Budget 2007, Dr Cullen's 8th, he both giveth…:
- up to $40 a week potentially in tax credits to Kiwi Savers (This being the banner headline announcement and costing $3.2 billion over several years);
- a reduction in the company tax rate to 30% ($2 billion and the sub-headline announcement);
- big money $600 million for train systems in Wellington and Auckland;
- $50 million for the rest of the train tracks;
- a dramatic removal of the limit on tax deductions for charitable donations;
- a near doubling in overseas aid over a few years (pre-announced);
- a very modest increase in the thresholds for parental income for student allowance eligibility (albeit still to a very low $44,330pa);
- $70 odd million dollars for energy efficiency – including $23 million in interest free loans for clean heating and energy efficiency upgrades and $25 million for a tool to measure home energy efficiency for home buyers;
- Loads more money for health (as usual);
- 14 new schools, 180 new classrooms and 10 new school gyms, 702 new new-entrant teachers hopefully bringing the student-teacher ratio down to 1:18 for 5 year-olds;
- $1.4 million to design a shared equity scheme for first home buyers;
- $45 million for a new Supreme Court.

… and taketh away:
- a fairly large chunk of money for under-degree tertiary education which is apparently not something Kiwis wanted as much as had been expected;
- tax threshold indexation on personal income tax rates (something he only gave us a few short months ago anyway);
- provision for regional petrol taxes to pay for transport infrastructure.

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Don’t Frighten The Bankers – The Economic Background

When you look at the above in its entirety there is something of a theme (besides the official “Saving and Investing” theme from his slide presentation. Namely: lets do a bunch of stuff with money which does not put any further pressure on the Reserve Bank Governor to raise interest rates – but yet enables us to look as though we are not keeping all the taxpayers dosh.

This is not a small budget and it is not devoid of tax cuts.

In fact it contains well over $5 billion of tax cuts – but not tax cuts which can be expected to rapidly put money into consumers pockets and thereby encourage consumption and inflation.

In fact it is hard to see how any of the above announcements could be seen as inflationary. For starters Overseas Development Aid increases, money for MFAT overseas, money to help exporters overseas – are all $ spent offshore. They will not help the current account, but nor will they fuel the housing boom.

Even the company tax rate cut accords with this theme.

National Leader John Key complained this morning that by lowering the company tax rate and leaving the personal tax static phenomena company receipts will no longer be effective in fulfilling their role as a withholding tax for company owners. And in saying so Mr Key nailed it.

Companies who wish to maximise the benefits to their shareholders under this regime will be encouraged to stick their profits back into growing their businesses rather than paying dividends to shareholders.

Meanwhile realistically however this is a trophy tax cut for the business community – who odds on (as indicated by John Key's comments) will complain about it anyway. And it is also the promised trap-door for National's Bill English whom Dr Cullen is relishing watching vote against it.

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Meanwhile all this is set against an economic background of economic forecasts (including from Treasury) of a continuing slump in GDP growth, but active evidence of a New Zealand economy that is still going for it. Recent data shows retail sales are booming as are house prices and unemployment is not rising notwithstanding an exodus of many of NZ's few remaining manufacturing jobs.

“Save Some – GET MORE!!”

The centerpiece to Budget 2007 is Dr Cullen’s “New Improved – Better Bigger and Bolder - KiwiSaver Scheme".

This is no longer superannuation light. It is expected that it will result in total Kiwi retirement savings of well over $100 billion within 30 years. Like the NZ Superannuation Fund it is economic policy which will probably have an impact well into the 2020s and 30s, not simply next year.

In the shorter term it will have the effect of encouraging his “kiwi battlers” to forsake their inclinations towards spending their latest windfall on a new giant flat-screen TVs.

Kiwisaver now has significantly more zing as a marketing (and political) opportunity. An advertising campaign featuring the big fella from the Mega chain of hardware stores bellowing “Save Some – GET MORE!!” comes to mind.

In his power-point presentation Dr Cullen showed a slide which can be expected to get plenty of exposure over coming weeks in which the effects of the KiwiSaver scheme are plotted over a 4 year timeline for an average Kiwi Battler earning $52,000 pa.

In the first year they save 4% of their own income but get 7%
(+ 2% from the government tax credit + 1% from the employer contribution)
In year 4 they continue save 4% but get 10%.
(+ 2% from the government tax credit + 4% from the employer contribution)

On this basis Michael Cullen also showed a slide showing that a couple with a modest family income would be able to save $35,500 for a house deposit in just 5 years. (And presumably by then the shared equity scheme which appears to have been put in the too hard basket this year will be well and truly figured out and operational.)

And in that respect Michael Cullen has probably accomplished what he spectacularly failed to accomplish in his past two budget delivery efforts, framing his ever-so-clever-and-far-thinking stewardship of the economy in a manner that can be expressed simply in a couple of lines on a teleprompter.

Sure we can expect the usual pot-shots about the absence of personal income tax cuts from the likes of Bill English, John Key and Roger Kerr.

But with this budget Cullen will be able to respond with a simple challenge to the kiwi battler:

“What would you prefer – tax cuts now and rising interest rates for the rest of the year (and next) – or a healthy savings balance, more security and (hopefully) falling interest rates as soon as possible?”

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Suffer The Poor – Some More

There is one area where this budget remains somewhat disappointing however.

It is sometimes observed by the morally acute that the moral quality of a society can be observed through how it treats its weakest and poorest members.

This is not a budget that is going to be criticized greatly by the voluntary sector, churches, NGOs et. al. by virtue of its removal of a threshold for deduction of charitable donations.

However the clients of many of these organisations have again been forgotten in this budget.

Reading inside the budget you find that the amounts being paid to beneficiaries in New Zealand have actually fallen in $$$ terms, i.e. there are fewer dollars going to DPB beneficiaries this year compared to last.

This is mainly due to falling numbers of people seeking these benefits. However this makes little difference to those people who are not moving off the benefits, including those invalid and sickness beneficiaries who are not even expected to do so.

Eight years of a Labour Government should have been long enough for these people to wait to shareNew Zealand's significantly stronger economic position vis-à-vis 1991 when benefits were slashed (theoretically to save us from becoming a banana republic.)

16 years later New Zealand no longer has any risk of becoming a banana republic hanging over it, but it is not yet a modern social democracy so long as it allows its poorest and most vulnerable members (disproportionately young children) to scrape by on so little.


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