Budget 2007: Executive Summary
[Full PDF Executive Summary See... http://img.scoop.co.nz/media/pdfs/0705/execsum07.pdf]
Budget 2007 focuses on sustainability – ensuring our economy, environment, and social fabric are set on a course that protects our future generations. This Government is committed to sustainable action on all those fronts when advancing policies and initiatives in its Families – Young and Old, Economic Transformation, and National Identity objectives. In the medium term we face particular economic and fiscal sustainability challenges. We have already acted to mitigate some of these challenges – for example, by establishing the New Zealand Superannuation (NZS) Fund to address some of the future costs of our ageing population. Budget 2007 is about doing more to meet these challenges, such as raising our household savings and increasing productivity.
Medium-term challenges – saving and investing
Our household saving rate is low by world standards. There is also an imbalance in our savings with relatively high housing investment compared with financial assets. This creates difficulties for us – it means our capital markets are too shallow and we must borrow from overseas to finance investment in our businesses. Foreign lenders demand a premium, so this borrowing not only increases private debt but also means we are paying a higher price for the capital we need to grow our economy.
In order to drive economic transformation, New Zealand must clearly distinguish itself in the global economy as a dynamic and competitive place to do business. We must increase incentives for investing and innovating in our economy, which will drive the productivity improvements we need to take a sustainable step up in our living standards.
Short-term imbalances – current account deficit, higher inflation, high exchange rate
The strong growth performance over the first two terms of the Labour-led Government has come with short-term challenges. Macroeconomic imbalances have emerged in the form of a large current account deficit, higher inflation, and a very high exchange rate. These imbalances have resulted in tighter monetary policy, which given the recent increase in domestic demand, is expected to persist. This will likely result in slower growth in the March 2009 year – but with imbalances projected to ease, looser monetary policy is expected to see growth pick up in the year to 2010 as exports respond to lower exchange rates.
The Government’s response – KiwiSaver and the Business Tax Reform
Budget 2007 responds to these saving and investing challenges with two key packages: significant enhancements to the KiwiSaver scheme, and the Business Tax Reform.
In designing Budget 2007 we have had both the short term and long term in mind. In considering the short term, we have been careful not to unnecessarily exacerbate imbalances in the economy. For example, KiwiSaver has been designed to have little impact on short run demand and hence inflation. Our long term goals focus on improving growth through policies that enhance productivity, innovation, and savings in New Zealand. KiwiSaver and the Business Tax Reform are both targeted at these objectives.
Over the longer term, KiwiSaver and the Business Tax Reform support economic and fiscal sustainability by promoting a stronger savings culture and encouraging greater investment to create a more productive economy, a deeper capital base, and a more secure retirement future for all New Zealanders.
KiwiSaver was first introduced in Budget 2005 as a scheme designed to sustainably improve household saving and provide New Zealanders with a more secure retirement future. Budget 2007 invests $3 billion over the forecast period to significantly enhance the KiwiSaver scheme by introducing a tax credit for members that matches their contributions to KiwiSaver up to $20 per week (about $1,040 per year), requiring employers to match employee contributions to KiwiSaver (up to 4% of their gross salary), and introducing a tax credit for employers to offset the cost of these matching contributions (up to $20 per week per employee).
The Business Tax Reform provides incentives for our businesses to increase investment, increase innovation, and increase productivity. The package includes reducing the company tax rate from 33% to 30% (at a cost over the forecast period of $2.1 billion) and also $630 million over four years in tax credits for research and development. These changes will encourage the innovation we need to keep our firms dynamic, competitive, and productive. Budget 2007 meets the cost of the Business Tax Reform package in 2007/08 and Budget 2008 will meet future costs.
KiwiSaver and the Business Tax Reform continue this Government’s focus on targeted assistance to individuals, families, and businesses to achieve the greatest gains – in contrast with expensive across-the-board solutions, which have less impact for those who need assistance most. Previous targeted initiatives include our historic Working for Families package (Budget 2004) and our interest-free student loan policy (Budget 2006).
Further elements of the Government’s theme-driven agenda
Like Budget 2006, Budget 2007 advances key policies and initiatives in our three themes: Economic Transformation; Families – Young and Old; and National Identity.
In addition to KiwiSaver and the Business Tax Reform, initiatives in the Economic Transformation theme receive $706 million of new operating funding and $835 million of new capital funding over the forecast period. Additional investments into strengthening our firms’ international links and connections with the tertiary education sector complement the Business Tax Reform. Key investments in environmental sustainability, energy efficiency, and addressing climate change make a positive impact across all three themes – and also ensure New Zealand plays its part in creating solutions for a global problem.
Social investment is a hallmark of Labour-led governments. The enhancement in KiwiSaver will help redress the widening inequalities in wealth in our society. Budget 2007 also continues the social investment tradition by investing over $3.9 billion in operating funding and $414 million in capital funding over four years into Families – Young and Old initiatives. This funding meets commitments to our support partners by raising New Zealand Superannuation to 66% of the average wage and continuing to roll-out further frontline police. We are also providing further substantial investment into health and education.
In Budget 2007 we are spending over $1 billion in operating funding and $33 million in capital funding over four years on initiatives that advance our unique National Identity – overseas as well as at home. Budget 2007 builds our international presence, by boosting our official development assistance and defence spending.
The Government has recorded operating and cash surpluses in recent years. Beyond 2006/07, the Government is forecast to record cash shortfalls averaging $1.4 billion per annum for the next four years. As a result, gross sovereign issued debt is forecast to increase in dollar terms but to decline as a percentage of Gross Domestic Product from 22.6% in 2005/06 to 21.8% by 2010/11, consistent with the Government’s fiscal strategy.
Hon Dr Michael Cullen
Minister of Finance
9 May 2007