Trans Tasman: Budget Special 2010

Building the Recovery

Tax Reform Biggest In 25 Years

"We owe it to hard-working Kiwi families to provide them with the financial security, opportunities and higher take-home incomes which allow them to get ahead here in this country, instead of chasing better opportunities overseas. The budget does those things and sets out a path to build on our recovery" – Finance Minister Bill English

In the biggest reform of the NZ tax system in 25 years, Bill English has cut income tax rates, raised GST to 15%, and cut company tax to 28%. Kiwis on the average wage will be about $15 a week better off , and an average family about $25 a week better off.

Other salient points include:
• Frontline health priorities will get an extra $512M in 2010/11.
• Education is allocated $417M more.
• Fiscal surpluses are in sight by 2016, 3 years sooner than last year's budget indicated.

English says his budget "grasps a once-in-a-generation opportunity for NZ to stand out from other countries." The aim is to build a stronger, faster-growing economy with low debt and low taxes by world standards.
The need to re-balance the economy away from consumption and debt to savings and exports has become "overwhelming." English says the Govt is interested less in "carving up the cake but more in growing the size of the cake."

From October 1, personal taxes will be cut across the board, GST will rise to 15%, and NZ Superannuation, Working for Families and benefit payments will all increase. From the start of their financial year in 2011 companies will be taxed at a rate of 28%, down from 30%, ensuring NZ is competitive internationally, English says. tax rules will be tightened for investment property to make the system fairer.

Brighter Look For Economy
The Finance Minister claims the Govt's growth-focused economic programme is contributing to a brighter outlook for the country. In the March 2011 year, growth is forecast to climb to 3.2%, compared with 2.4% predicted in December. That underlines the country is making a faster exit from recession, and the forecasts for greater growth mean more jobs and higher incomes than predicted earlier.

The tax package is conservatively forecast to add about 1% to the size of the recovery by 2017. But despite the better growth outlook, by 2012 GDP per capita will still be about 5% below budget 2008 forecasts. The operating deficit is forecast at $8.6bn in the coming year, and further deficits are forecast until 2016. As a result net debt is forecast to rise sharply from 14.1% of GDP in the current year to 27.4% of GDP in 2015, and then falling. Net Crown debt rises to $68bn by 2015. NZ's external liabilities jump to $250bn by 2014. Despite this English reckons the budget is strong enough, certainly in comparison with what is happening in sovereign risk in countries in Europe, for NZ to be taken off negative watch by credit rating agencies.

Income tax rates will be set as follows from October 1:
In the income bracket from
0 to $14,000, 10.5% down from 12.5%; from $14,001 to $48,000, 17.5%, down from 21%; from $48,001 to $70,000, 30% down from 30%, and over $70,000, 33% down from 38%.
(Individuals who want to work out how budget 2010 tax changes personally affect them should got to www.taxguide.govt.nz)

English says lower personal tax rates reward effort and give people an increased incentive to up-skill, develop new products and services, and get under ahead under their own steam The top rate will now be the same as the trustee rate "which is the most important thing the Govt can do to improve the integrity of the tax system."

The cost of the personal tax cuts is $2.46bn in 2010/11 rising to $4.26bn in 2013/14. English says higher income earners get the biggest gain from these income tax cuts, but on the other hand bear the brunt of the other measures like depreciation changes, either directly or because they own shares in a company.

How Compensation For Increases GST Works
In increasing the GST rate from 12.5% to 15% the Govt will provide immediate compensation, increasing payments by 2.02% for all those receiving NZ Super, a Veterans' pension, all main benefits, the maximum rates of the disability allowance, child disability allowance, and childcare subsidies, the family tax credit and minimum family tax credit which are part of the Working for Families Scheme, student allowances, and CPI adjusted payments from the Govt Superannuation Fund or National Provident Fund.

The Govt argues personal tax cuts plus compensation for GST mean the vast bulk of people are better off, even if they spend all their income. GST does not tax savings: therefore an across-the-board reduction in personal income taxes, together with an increase in GST, encourages people to save, or pay off their mortgage, rather than consume.

Statistics NZ expects the CPI to rise by about 2% as a direct result of increasing GST to 15%. The increase in GST will raise about $1.59bn additional revenue in 2010/11, rising to $$2.46bn by 2013/14. The compensation measures will cost about $420m , rising to about $620m a year by 2013/14. Items exempt from GST include rent for private premises, mortgage payments, school donations and some credit service charges.

The Govt says dropping the company tax rate will encourage productive investment in NZ, thereby increasing productivity, raising wages and creating jobs. NZ's company tax rate is high compared with most other countries: the average company tax rate in the OECD in 2009 was 26.3%.

Australia is moving to a 28% rate, phased in over 3 years from 2012/13.

The budget outlines changes in the Working for Families scheme. Well-off families will no longer be able to use investment losses, including losses from rental properties, to reduce their income from April 1, 2011. Trust income can no longer be counted as part of a family's total income for the purposes of WFF. Inland Revenue estimates about 9700 people getting WFF currently also claim rental property losses.

Tax Treatment On Investment Property
Changes to the tax treatment of investment property increase fairness and help re-balance the economy towards productive investment, English says. The measures include

• Denying depreciation deductions for buildings, such as rental housing and office buildings, with an estimated useful life of 50 years or more. This takes effect for such buildings from the start of the 2011/2012 income year.

• Changes to the tax rules for qualifying companies (QCs) and loss attributing qualifying companies (LAQCs), taking effect from income years starting on or after April 2011.

Revenue Minister Peter Dunne says ending depreciation tax breaks on buildings makes sense. On average NZ buildings actually increase, rather than decrease, in value over time. It is estimated the changes will generate about $700m in extra revenue (about half that estimated by the Tax Working Group), or $2.48bn over the next 4 years. Changes to the "thin capitalisation" rules could produce an additional $200m in revenue.

English claims Budget 2010 has freed up another $1.8bn over the next 4 years to put into high priority areas such as healthcare, education, law and order and scientific innovation. The money is in addition to the $1.1bn annual operating allowance for new spending, effectively pushing spending on new initiatives to $1.55bn a year over the next 4 years.

Standing Out From The Crowd
John Key says Budget 2010 is all about building NZ's recovery. "NZ has the opportunity to come out of this downturn in a better position than many other countries. We are well placed to stand out from the crowd. But the budget shows we are not out of the woods yet. That's why we will continue to focus on Crown debt levels, the quality and quantity of Govt spending, and our overall economic performance."

ENDS

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