New Zealanders to get significant tax cuts

New Zealanders to get significant tax cuts, but also a GST hike

‘Save and invest’ were the key themes of the New Zealand Budget released today. The Budget focused on rebalancing the tax system towards savings and investment, and away from the borrowing and consumption that have historically dominated as the main drivers of economic growth. Finance Minister Bill English described Budget 2010 as “broadly fiscally neutral” but the jump in the projected operating deficit in the March 2011 year suggests otherwise, at least in the near term. Treasury announced four main objectives in this Budget: Lifting the long-term performance of the economy Reforming the tax system, making it fairer and more sustainable Ensuring better delivery of public services, making them better for users and better for taxpayers Maintaining firm control of government finances, with the aim of returning to budget surpluses and restraining rising debt The highlights today were the reduction in personal income taxes, the confirmed hike to the goods and services tax (GST), and the changes to the way property is taxed, although there were few surprises. Of these, the tax package was undoubtedly the most impressive, particularly the personal tax cuts worth NZ$14.3 billion over four years.

Treasury announced significant cuts to personal income tax rates across the board, effective October 1. The tax changes were significant (see below), with higher income groups likely to benefit the most given the reduction to the top marginal tax rate from 38% to 33%. The income tax cuts delivered will be partly offset by a hike to the GST, signaling clearly that the government’s main aim was to better the economic outlook, rather than to simply garner public support. The personal income tax cuts should encourage more saving, with those that save more as a proportion of their income to benefit the most.

The GST will rise from 12.5% to 15%, also effective October 1. Treasury estimates that an individual with an annual taxable income of NZ$60,000 would have an annual tax saving of NZ$1,830 following the income tax cuts announced today, but the GST hike will result in an additional NZ$952 of spending, the net effect being an extra NZ$878 each year. On balance, most income earners will be better off.?

The price impact of the GST hike should be temporary. Statistics New Zealand estimates that lifting the GST to 15% could increase retail prices by 2.2%. There are two reasons the impact would be less than the 2.5% increase. One, the absence of pricing power means some retailers will not pass on the price rise in full. Two, the GST applies only to 91% of the CPI basket.

Also announced was a cut in the company tax rate to 28% from 30%, effective April next year. The reduced company tax rate will help keep New Zealand competitive, particularly against Australia, which also will be cutting its company tax rate to 28%, but not for a few more years.

The Budget included updated Treasury forecasts (below), which showed that the government believes New Zealand’s economic growth outlook is better than expected six months ago. Treasury now forecasts that the economy will expand 3.2% in the March 2011 year, compared to 2.4% previously.

The projected recovery is expected to flow through to an improved fiscal position eventually. In the 2011 March year, an operating deficit of 4.2% of GDP is now expected (up from 3.4% previously). We had expected a better fiscal position in the year ahead given the improved economic outlook, but this was not the case. Beyond the next income year, however, the fiscal position is forecast to improve significantly, with the operating balance returning to surplus in 2015/16. The improved fiscal position will result in less bond issuance, with the government now forecasting that the bond tender program will be NZ$2 billion lower over the forecast horizon.

As expected, the Budget included measures to prevent property investors from offsetting their losses against income and other taxes. Indeed, housing market activity has cooled in recent months amid uncertainty surrounding potential changes to the way property is taxed. From April 2011, property investors that rely on claiming depreciation to offset their rental property income will be negatively impacted.?Tax rules for investment property will be tightened, with the tax depreciation rate to be lowered to zero for all buildings with an estimated useful life of 50 years or more.?Depreciation deductions will, therefore, no longer be allowed for many buildings. The government also will remove the 20% accelerated depreciation loading for new plant and equipment, effective from today.

Although the Budget was viewed positively by the market, with NZD rising half a cent and bond yields a touch higher, it has not changed our view that the RBNZ will kick of its next tightening cycle in July. It is unlikely to change the RBNZ’s train of thought either. Market pricing is still firmly centered on a June move but, although we acknowledge this as a risk, we maintain that the first hike will be delivered in July. Given growing uncertainties in the Euro area and weakness in some of the domestic indicators, the RBNZ has scope to sit on the sidelines for a little while longer.

ENDS

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