Molesworth & Featherston: Budget 2007 May Surprise

Budget 2007
May Surprise

Michael Cullen has unveiled a budget more substantial and containing more surprises than anyone guessed.

It plunges billions into Kiwisaver (and makes employers pay more towards the cost of it), puts billions into a Business Tax Package that cuts company tax, and it goes on a spending spree on roads, rail, tertiary education, and energy.

The 'chewing gum' adjustment to personal tax thresholds that attracted derision last year have been ditched and a ten cents a litre regional fuel tax will be available to build still more roads.

This is the most spectacular budget since 1991.

And it’s a huge political risk. Michael Cullen has rolled the dice on an untested savings scheme and business breaks unlikely to appeal to his constituency.

The riskiest new policy is a mandatory employer contribution. Bosses will have to kick in matching savings for anyone who saves four percent of their salary through Kiwisaver. The government has removed some of the sting by giving employers a matching tax credit and phasing the scheme in so it won't take full effect until 2010. The government says the net employer contribution will be about one percent of wages by the time it comes into full effect.

Savers will also get a $20 a week tax credit directly, making an overall subsidy worth $40 a week to earners who join the scheme, on top of the $1000 kick-start and $5000 first-home subsidy already in the scheme.

The Kiwisaver expansion blows $3.2 billion over four years and its ultimate cost is expected to rise to $1.6 billion a year in a decade.

Another $3.4 billion over the next four years is going into the business tax cuts.

The headline corporate rate, as widely foreshadowed, is coming down from 33 to thirty percent from next year. Modest tax credits for research and development are being introduced and international tax rules are being relaxed.

After signalling two weeks ago there would be no export tax credits, Dr Cullen announced $87 million of grants for research and development.

In a thundering response, John Key focused on the cancellation of the personal tax threshold changes, attacked the regional petrol taxes, the forecast that half the workforce "can't afford" to join the scheme and the impact on employers of the Kiwisaver payroll tax.

National appears to favour a much more stimulatory fiscal stance.

HEADLINES FROM THE GOVERNOR'S ELECTION:
Economy - Stronger outlook
Politics - Does the budget score?
Kiwisaver - Saving scheme grows; employers growl
Tax - Business tax package
Transport - Rail road

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