Thomson Reuters is proud to bring you highlights of Budget 2009, together with analysis, professionally compiled by PricewaterhouseCoopers.

PriceWaterhouseCooper 2009 Budget Analysis

Budget 2009

Budget 2009 – Snapshot

(Wellington Editorial Bureau, Reuters)

New Zealand unveiled on Thursday 28 May 2009 its biggest fiscal deficit in 25 years and forecast up to 10 years of deficits and rising debt in a budget aimed at supporting the economy while averting a credit downgrade.

Budget 2009 Key Points

• Government forecasts:
  • 2009/10 cash deficit $12 billion dollars, 6.8 pct of GDP;
  • 2010/11 cash deficit $12.5 billion, 6.9 pct of GDP
    
    
• Gross debt as a percentage of GDP peaking at 43 percent in 2016/17;
  
  

• Net debt $27.3 billion in 2009/10, 15.6 pct of GDP;
  
  
• Total bond issuance estimated at $8.5 billion in 2009/10;
  
  
• Additional $1.45 billion in capital spending next year and reducing to $1.1 billion annually in subsequent years;
  
  
• Scrapping planned tax cuts in 2010 and 2011;
  
  
• Suspending automatic contributions to NZ Super Fund until back in surplus;
  
  
• Government cuts growth forecast to 1.7 percent contraction in the year to March 2010 and 1.8 percent growth in 2010/11

Budget Overview

Finance Minister Bill English delivered the 2009 Budget on 28 May 2009. Mr English states that Budget 2009 is aimed at starting New Zealand on the road to recovery, putting in place policies that will ensure that the New Zealand economy emerges strongly from the global recession, bring the budget back in surplus, and provide the strong growth, high incomes and quality public services that the Government wants into the future.

Budget 2009 has three main objectives:

• Helping New Zealanders through the recession and supporting jobs;
  
  
• Lifting productivity and raising New Zealand’s international competitiveness; and
  
  
• Taking steps (including the deferral of personal tax cuts scheduled for 2010 and 2011) to keep government debt under control.
  

Mr English states that the Government’s focus over the next year will be on rebuilding business confidence and ensuring that young people retain a connection with the labour market and improve their skills.

Helping New Zealanders through the recession and supporting jobs

Budget 2009:

• Maintains all entitlements to income support;
  
  
• Increases spending on front-line public services, particularly in health, education, and justice; and
  
  
• Fulfills the remaining Election commitments.

Mr English states that these elements are intended to give New Zealanders security, maintain economic activity, and enhance public services.

Lifting productivity and raising New Zealand’s international competitiveness

Mr English states that Budget 2009 is the first step in the Government’s longer-term programme to raise productivity.

The Government’s longer-term programme includes the following initiatives:

• Increasing investment in infrastructure;
  
  
• Improving the regulatory environment under which businesses operate, including changes to the Resource Management Act 1991 and reviews of the Overseas Investment Act 2005, Building Act 2004 and the electricity market regulation;
  
• Lifting the literacy and numeracy skills of young people, by providing funding to help students meet national standards and to build new schools; and
  
  
• Improving the productivity of the public sector.

Taking steps to keep Government debt under control

Mr English states that the Government intends to get the budget balance back into surplus, keep the increase in Crown debt to a manageable level, and eventually lower this debt.

To achieve these goals, the Government will:

• Restrain growth in government spending;
  
  
• Maintain the Crown’s revenue base in future years; and
  
  
• Improve the management of the Crown’s assets and liabilities.

Mr English states that to get debt under control, the Government has decided:

• To reduce its operating allowance for new budget spending to a maximum of $1.1 billion in 2010-11. For following Budgets, the operating allowance will increase at a rate of 2% per annum. The allowance for new capital spending will remain at $1.45 billion in future Budgets, until increasing to $1.65 billion in Budget 2013.
  
  
• To delay the personal income tax cuts scheduled for 2010 and 2011, because of the severity of the current recession. However, the delayed tax cuts will be assessed in future budget processes to see if they are affordable.
  
  
• To suspend automatic contributions to the New Zealand Superannuation Fund (NZS Fund). This measure will not, however, affect people’s entitlements to New Zealand Superannuation.

Mr English states that the decision to suspend automatic contributions to the NZS Fund was made because budget surpluses no longer exist. If the Government were to continue the contributions, the Government would have to borrow, in 2010, just under $30 million a week (or $1.5 billion a year) to put into the NZS Fund.

Budget 2009 Documents

Further details on Budget 2009 are available at:
www.treasury.govt.nz/budget/2009
www.beehive.govt.nz/budget2009
www.taxpolicy.ird.govt.nz/

Personal Tax cuts

Personal Tax Cuts Deferred

The Government announced in Budget 2009 that it will defer the second and third tranches of planned tax cuts in 2010 and 2011, to avoid incurring further debt. The Government remains committed, however, to lower personal income taxes, and they will be assessed in future Budgets. The Treasurer, Bill English stated that the Government has “…taken considered decisions now to avoid having to make harsher decisions later.”

Mr English said that the Government cut taxes on 1 April 2009 because it believes lower income taxes benefit the economy. However the severity of the recession means tax cuts scheduled for 2010 and 2011 are currently unaffordable. Their timing will be reassessed as part of future budgets, according to Mr English.

In summary, the Government states in Budget 2009 that:

• The Government remains committed to lower personal income taxes.
  
  
• The planned second and third tranches of tax cuts, which were due to take effect on 1 April 2010 and 1 April 2011 respectively, have been deferred to avoid further increasing debt.
  
  
• Even with the other debt reduction measures in Budget 2009, the Treasury is forecasting large budget deficits for 2010 and 2011. This means the Government would have added to its already considerable debt to fund the planned second and third tranches of tax cuts.
  
  
• This has been a difficult decision. But, on balance, the Government has decided to prioritise safeguarding entitlements, improving public services and reducing debt.
  
  
• Tax cuts will be assessed to consider whether they are affordable, as part of future budget processes.
  
  
• The Government's first round of tax cuts delivered on 1 April 2009 is not affected. It left around $1 billion a year in the pockets of 1.5 million New Zealand workers. These tax cuts were fully funded from other policy changes rather than through borrowing.
  
  
• By deferring the second and third tranches of the tax cuts, the Government will save around $900 million a year from 2011/12.
  
  
• The Government’s medium-term goal remains to align and reduce the top rate of personal tax, trust, and company tax rates at a maximum rate of 30 per cent.
  
  
• The decision to defer the tax cuts will be included in legislation introduced on 28 May 2009.

Tax scale from 1 April 2009

12.5c per $1 on income up to $14,000
21c per $1 on income between $14,001 and $48,000
33c per $1 on income between $48,001 and $70,000
38c per $1 on income over $70,000

Independent earner tax credit (IETC) from 1 April 2009$10 per week on income between $24,000 and $44,000

Annual entitlement abated at 13c per $1 over $44,000
$0 per week on income of $48,000 and over

To be eligible for the IETC an individual must not receive Working for Families tax credits, New Zealand Superannuation or a benefit.

Personal income tax examples

Example 1: Single earner

The tax payer presented in Example 1 is not in receipt of any additional core government benefits, Working for Families tax credits or New Zealand Superannuation payments. The annual value of the independent earner tax credit presented in Example 1 was determined by rates and thresholds applicable from 1 April 2009.

Example 2:Single income couple with three children under 13

Example 3: Combined income couple with three children under 13

ACC

Budget 2009 will provide $500,000 in new funding in 2009/10 for a stock take of the Accident Compensation Corporation accounts.

A stock take of ACC's levy accounts - the work account, earners' account, motor vehicle account, and the non-earners' account - was identified as a priority in National's election manifesto. It will focus on where products and services are cross-subsidised, where cost shifting occurs, where efficiencies can be made and costs can be contained, how to improve rehabilitation rates, and how ACC compares to other schemes. The stock take will also cover the governance and management of ACC's $10 billion investment portfolio.

The work will be commissioned by a steering group that has an independent chair and advisors alongside senior officials from the Department of Labour, the Department of Prime Minister and Cabinet, The Treasury and the ACC. The work itself will be undertaken by independent external advisors.

The project is due to start in a few weeks, when Cabinet has considered and approved the governance arrangements and the terms of reference. Results are expected to be reported by the end of the calendar year.

The object of the stock take is to deliver practical recommendations for improving performance and to ensure New Zealand’s accident insurance scheme remains affordable.

Agriculture and Primary Industries

New Primary Growth Partnership

Budget 2009 provides funding of $190 million over four years for the new Primary Growth Partnership (PGP). The PGP is a government-industry partnership that will invest in significant programmes of research and innovation to boost the economic growth and sustainability of New Zealand’s primary and food sectors, including forestry. When fully operating in 2012/13, the partnership will see the Government investing $70 million annually in primary sector innovation.

The Government’s commitment will be matched dollar-for-dollar by industry, leading to a total investment of up to $140 million a year.

Investments will be market-driven and focus on delivering economic growth and sustainability across the primary sectors, from producers to consumers. A government-industry partnership will lead the strategy and delivery.

The initiative includes: pastoral (including wool) and arable production; horticulture; seafood (including aquaculture); forestry and wood products; food processing; and climate change initiatives.

Budget 2009 includes funding for PGP of $30 million for 2009/10; $40 million for 2010/11; $50 million for 2011/12; and $70 million per annum from 2012/13 to be appropriated to Vote: Agriculture and Forestry. This funding will be ongoing.

Investment programmes will be funded 50:50 by industry and government overall.

Investments will focus on initiatives that deliver significant economic growth and sustainability across the primary sectors from producer to consumer. Investments will cover the whole of the value chain, including education, research and development, product development, commercialisation, market development and technology transfer.

An independent Investment Advisory Panel (IAP), appointed by the Minister of Agriculture, will call for expressions of interest and assess proposals for investment programmes Successful expressions of interest will be developed into full business plans by a Programme Steering Group of co-investors (industry and government) for further consideration by the IAP The IAP will assess business plans and make recommendations to the Director-General of the Ministry of Agriculture and Forestry, which may approve programmes for Government investment Once approved, Programme Steering Groups will arrange for contracts to be entered into through existing investment mechanisms (such as the Foundation for Research, Science and Technology (FRST)). The Programme Steering Group will also be responsible for oversight of the programme The IAP will monitor and evaluate approved programmes on an ongoing basis and may recommend adjustments to investments.

Fisheries and aquaculture

Budget funding will help the aquaculture industry grow, put more fisheries officers on New Zealand beaches and help improve recreational fisheries management.

The Government has announced $1.9 million in funding over the next four years to help development of sustainable aquaculture. Industry forecasts suggest aquaculture could grow into a billion dollar a year industry in New Zealand by 2025.

A Budget 2009 initiative will also mean more fishery officers patrolling New Zealand’s coastline. A boost of $4.2 million over the next four years will increase the honorary fishery officer network and the full time fishery officers needed to support it. This will build the honorary fishery officer network from 172 to 250 and full-time fishery officer numbers from 95 to 104 over the next four years.

Other Budget 2009 initiatives will provide better information on the recreational fishing catch to improve management of these fisheries. The money is split between two projects over the next four years:

• An extra $1.4 million will be spent on a new catch-reporting system for charter boats that carry recreational fishers
  
  
• An extra $2 million will be spent to develop estimates of recreational fishers’ harvest for some key inshore species.

Arts

Budget 2009 allocates $10.5 million extra support for key artistic and cultural organisations over the next four years.

Creative New Zealand will receive an additional $7.1 million over the next four years. The extra money will support key music, dance and theatre companies so they can continue to provide New Zealanders with cultural and performing arts experiences.

The Royal New Zealand Ballet will receive an extra $3.4 million over the next four years.

The funding for the Royal New Zealand Ballet and Creative New Zealand is expected to have positive flow-on effects for regional arts organisations such as the Auckland Philharmonic Orchestra, the Vector Wellington Orchestra and the Christchurch Symphony Orchestra.

The additional funding is intended to relieve some of the pressure created by the current economic situation, which is putting pressure on sponsorship and donations given to arts organisations.

Communication

The Government is committing $1.5 billion over the next 10 years to roll out ultra fast broadband to businesses, schools, hospitals and 75% of homes.

Of the $1.5 billion, $242 million will be spent in the 2009-10 financial year, as follows:

• $200 million capital for infrastructure investment;
• $34 million for making schools broadband-ready; and
• $8 million of operating spending (including $6 million for the Crown Fibre Investment Company).
  

In addition to the $1.5 billion committed, $48 million will be spent on broadband infrastructure in rural areas. Details of this $48 million spending will be released soon.

Community

Budget 2009 has allocated $1.2 million to strengthen local networks and give a voice to community groups that are often not heard in government processes. The Government stated that stronger tangata whenua and community and voluntary sector networks will be instrumental in finding solutions to important issues for the sector, such as strengthening governance, sharing resources and good management practices. The initiative will also provide local organisations with the opportunity to engage in the policy processes of central government.

The $400,000 annual initiative over three years, beginning in 2009/10, will involve refreshing the membership of the Community Sector Taskforce, which has experience in working with and building local community networks.

Around 97,000 non-profit organisations make up the community and voluntary sector in New Zealand. They employ 105,000 paid staff and over one million volunteers, who together contribute 4.9 per cent to gross domestic product. Overall, the sector contributes $9.8 billion of expenditure into the economy annually. Paid staff and volunteers represent 9.6 per cent of the labour force - a larger workforce than significant industries such as construction, transport and storage and government administration and defence.

Education

The Government has provided $1.34 billion in new operating spending between 2008-09 and 2012-13 and $339.6 million in capital spending. This includes $169.1 million in 2009-2010 to pay increases in teacher salaries; $70 million over 4 years to cover salary increases for school caretakers, cleaners and ground staff; and $127 million to inflation-adjust funding for tertiary institutions from 2010.

The total amount of funding for tertiary education in Vote Education will increase from a 2008-09 baseline of $2.66 billion to $2.78 billion in 2009-10. Pressure on course subsidies will also be addressed by an inflation-adjustment in 2010. This will provide $127 million of extra funding to the tertiary institutions over 4 years.

New spending includes:

• $1.68 billion to improving front-line education services in the current year and over the next 4 years.
  
  
• $523 million in operating and capital funding over 4 years for the 21st century building programme to build new schools, modernise existing schools and expand capacity.
  
  
• $80.1 million in additional funding for day-to-day school operations;
  
  
• $9.6 million (between 2008-09 and 2010-13) to help schools meet their day-to-day heating, water and lighting costs;
  
  
• $36 million to support improvements in numeracy and literacy standards;
  
  
• $19.9 million to extend the Te Kotahitanga professional development programme for teachers to more schools and for professional development programmes for principals that focus on raising Maori students’ achievement;
  
  
• $10.9 million to maintain the current number of NCEA moderators to ensure consistency of NCEA standards across schools;
  
  
• $8 million to ensure NCEA assessment tools are of a high-standard and well understood by teachers;
  
  
• $16 million to fight truancy;
  
  
• $34 million to improve schools access to high-speed broadband;
  
  
• $51 million for special education students to access support from the Ongoing and Reviewable Resourcing Schemes and $8 million to help manage disruptive pupils;
  
  
• $69.7 million over the next 4 years for improving access to early childhood education (ECE). From 1 July 2010, 5 year olds and children attending playcentres and kohanga reo will be eligible for 20 hours ECE. From 1 July 2011 the 6-hour daily limit will be removed.

New initiatives, combined with a forecast rise in the number of students, mean total Vote Education spending will rise from $10.5 billion in 2008-2009 to $10.8 billion in 2009-2010.

Energy

Offshore oil and gas exploration

Budget 2009 will make provision for a five year continuation of an exemption for offshore oil and gas exploration. The current exemption from tax on the profits of non-resident operators of offshore rigs and seismic vessels was introduced in 2004 and was to expire on 31 December 2009.

To build on the increasing interest in New Zealand from the international exploration industry following recent government initiatives, the Government will be extending the exemption until 31 December 2014 to further encourage exploration of New Zealand’s offshore hydrocarbon basins.

This measure is to be included in a tax bill to be introduced nearing the end of the year.

Prior to Budget 2009, Energy and Resources Minister Gerry Brownlee announced a renewed seismic survey programme to encourage New Zealand oil and gas exploration.

As part of Budget 2009 a total of $20 million over three years will be allocated to the seismic data acquisition programme run by Crown Minerals, which is responsible for the administration and promotion of New Zealand’s oil and gas.

The $20 million funding meets National’s pre-election policy promise for seismic exploration. A further $3.45 million has been reallocated for seismic survey work since National came into office.

Previous surveys have resulted in $1.4 billion of expenditure by exploration companies, particularly in the Great South Basin.

Biodiesel production grants

A new grants programme for biodiesel production will kickstart the biodiesel industry in New Zealand. The Government’s aim is to get a new industry up and running, which can provide jobs for New Zealanders, at the same time as helping to reduce their greenhouse gas emissions.

As part of Budget 2009, $36 million will be allocated to the programme over three years. The grants will be available from 1 July 2009, and will be available to domestic biodiesel producers selling their product for a range of end uses. The programme will provide grants of up to $9 million in the first year, up to $12 million in the second year, and up to $15 million in the third year, at a maximum rate of 42.5 cents per litre of biodiesel. To qualify for a grant, the biodiesel must meet the government's regulated fuel quality specifications that apply to all engine fuels.

Some biodiesel is already produced in New Zealand from waste cooking oil, tallow (a by-product of meat processing) and oil seed rape. Present uses include vehicles, fishing fleets and boilers.

The initiative will fulfil the government's pre-election promise of providing incentives for biodiesel producers, in recognition of the advantage that bioethanol already enjoys.

Environment

Budget 2009 increases funding for the Government’s environmental priorities in 2009/10. The Government announced that it has refocused the Ministry for the Environment to ensure it delivers tangible results in the priority areas of climate change, freshwater management, biodiversity, waste management and air quality. The Government also wants to ensure there are the necessary resources for the reform of the Resource Management Act and redesign and implementation of an Emissions Trading Scheme.

The Environment Minister Nick Smith, said that the money has been freed up by reallocations within the Ministry for the Environment’s budget, including the decision in March to end or scale back five work programmes that were not government priorities. Dr Smith said that the Government is committed to investing in real and pragmatic solutions that benefit New Zealand’s environment.

Budget announcements include the following funding over the next four years:

• An increase of funding for the reform of the Resource Management Act of $9 million.
  
  
• Increasing funding for developing the Emissions Trading Scheme, including international linkages, by $6.9 million.
  
  
• Increasing funding for the freshwater policy work programme by $2.1 million.
  
  
• Additional funding of $17.3 million for activities that would have been discontinued as a result of funding reductions in 2009/10. These activities relate to waste minimisation, Waikato River Settlement, and other policy advice.

Foreign Affairs and Defence

Foreign Affairs - $308 Million Funding Cut

The Government has decided to cut $308.1 million from the five-year, $621 million funding package announced in last year’s Budget. Foreign Affairs Minister Murray McCully states that the decision was made because a third of the $621 million funding package announced last year was unfunded.

The $308.1 million cut does not diminish the important role that trade and economic diplomacy plays in the current Government’s drive to improve New Zealand’s growth and long-term prosperity.

Defence

Budget 2009 provides an extra $309 million of spending on the Defence Force over the next 4 years. Of the extra $309 million of spending, $52 million will be spent in 2009-10 to improve operations and strengthen the capability of the New Zealand Defence Force.

Other spending includes:

• $15 million for restoring and improving infrastructure;
  
  
• $10 million for increased aircraft activity and maintenance for aircraft returned to service after being upgraded;
  
  
• $5 million for operation and maintenance of new Navy ships;
  
  
• $2 million for improved soldier protection;
  
  
• $1 million for improved intelligence capability;
  
  
• $13 million for personnel initiatives to improve recruitment and retention;
  
  
• $6 million for other initiatives.
  

One million dollars ($1 million) will be provided to the Ministry of Defence to develop a Defence White Paper in 2008-09 and 2009-10.

Health

The Government will invest $3 billion for new capital and operating spending over the next 4 years – including $750 million in 2009-10. Effectively allocating over 40% of all new Government funding from Budget 2009 to health priorities. $102 million has been reprioritised from 2008-09 to advance capital priorities.

The health package includes:

• $2.1 billion boost to DHB spending for services to their local communities. This includes $139 million for subsidised medicines, $46 million to devolve some hospital services to primary care and $90 million to improve aged care facilities and respite care for those being cared for at home.
  
  
• $70 million for up to 800 additional health professionals to increase services for New Zealanders needing elective surgery.
  
  
• 60 new medical training places and 50 extra places for general practitioner training at a combined cost of $43 million.
  
  
• $103 million to meet increased maternity service needs.
  
  
• $100 million for the New Zealand Insulation Fund, of the $323 million put aside for the Fund, to create healthier living environments and reduce the risks of illness (in Vote Energy).
  
  
• $245 million for capital infrastructure. This will be allocated across hospital developments, including the Government’s plan to increase elective operating theatre capacity.
  

District Health Boards

District Health Boards will receive an extra $2.1 billion in funding over the next 4 years. The DHBs will be required to advance a number of initiatives including:

• Funding for subsidised medicines: $138.8 million to DHBs over 4 years. Adding $46.9 million for Herceptin and associated costs - a total $185.7 million in new funding for subsidised medicines over 4 years;
  
  
• Devolving some hospital services to primary care:$45.5 million over 4 years; and
  
  
• Improving quality and supervision in aged residential care facilities and respite care for those being cared for by others at home: $89.5 million over 4 years.

Maternity

Maternity services receive additional funding of $103.5 million over 4 years to support:

• Resources for increased birth rates: $40 million;
  
  
• Longer stays in birthing facilities: $38.5 million;
  
  
• Support services for parents (including a 24/7 Plunketline telephone advice service and other advisory and information services to support the Well Child Framework): $14 million;
  
• An extra visit to the GP or lead maternity carer in each trimester for mothers or babies at risk: $9.9 million; and
  
  
• Obstetrics retraining for GPs: $1.1 million.

Workforce Initiatives

The Government is investing an extra $116.5 million over 4 years to bolster the front-line health workforce. Workforce initiatives include:

• 60 new medical training places in 2009-10 (increasing to 200 new medical training places over the next 5 years): $25 million will be transferred to Vote Education and Vote Social Development over 4 years
  
  
• 25 extra places for general practitioner training in 2009-10 (increasing to 50 extra places by 2010): $17.5 million over 4 years;
  
  
• 800 additional health professionals over 4 years to increase services for New Zealanders needing elective surgery: $70 million over 4 years;
  
  
• Training staff for the elective surgery super centres: $70 million over 4 years; and
  
  
• More training for health professionals in rural areas: $4 million over 4 years.

Miscellaneous Funding

Other health funding includes:

• Hospice and palliative care: $60 million over 4 years;
  
  
• Contribution to Energy for the New Zealand Insulation Fund: $100 million over 4 years;
  
  
• Help to securely care and rehabilitate offenders with an intellectual disability outside of the criminal justice system: $37.2 million over 4 years;
  
  
• Capital infrastructure: $245 million over 4 years; and
  
  
• Voluntary bonding for hard to staff health professions and locations: $15.3 million over 2 years starting in 2011-12.

Health for Pacific people

The Government is focused on improving child health, reducing obesity and smoking, and improving access to appropriate health services for Pacific people. Pacific families will be among the first to benefit from the National-led Government's urban regeneration initiative - the Tamaki transformation project.

Housing

Insulation

The Government has allocated $323.3 million over 4 years for a campaign to fit homes with insulation and clean heating devices (ie, heat pumps and approved wood burners). The programme will be delivered through the Energy Efficiency and Conservation Authority (EECA) as part of its EnergyWise programme.

The fund is made up of $243.7 million of new funding, on top of EECA's existing $79.6 million of home interest subsidies and home grants programmes, to provide $323.3 million for the New Zealand Insulation Fund over the next 4 years.

The scheme starts on 1 July 2009 and is open to owners and occupiers of houses built before 2000. Government grants of up to $1,800 will be available for houses built before 2000, that require ceiling and under floor insulation or a clean heating device. For holders of Community Service Cards, additional Government funding will be available.

Community Housing

The Government will provide an extra $40 million ($20 million in capital funding for Housing New Zealand’s Housing Innovation Fund) for community housing services over the next 4 years. $5 million of this new funding is for phasing in Maori development projects, to complement the work under the Rural Housing Programme.

The Government will provide $12 million over the next 2 financial years in operating funding for Housing New Zealand’s Rural Housing Programme and $6.4 million in operating funding in 2009-10 for the Residential Tenancies Services.

Infrastructure

Infrastructure - $1 Billion Annually on State Highways

The Government is committed to spending about $1 billion a year on the State Highway network.

Priority projects for the Government include the 7 initial Roads of National Significance:

• Puhoi to Wellsford (SH 1);
  
  
• Completion of the Auckland western ring route (SH 20, 16, 18);
  
  
• Auckland Victoria Park bottleneck (SH 1);
  
  
• Waikato Expressway (SH 1);
  
  
• Tauranga Eastern Corridor (SH 2);
  
  
• Wellington Northern Corridor (Levin to Wellington) (SH 1);
  
  
• Christchurch motorway projects.
  

Transport Minister Steven Joyce states that the “Government is committed to ensuring New Zealand is as productive as we can be and that Kiwis spend less time stuck in traffic and more time growing the economy.”

Justice and Related Issues

Justice sector funding

Budget 2009 provides more than $950 million over the next four years for significant initiatives across the justice sector.

The Budget funding over the next four years includes $700.7 million in operating funding and $255.7 million in capital funding. This will pay for initiatives to combat violent crime and increase public safety, and address widening funding gaps in justice sector agencies.

Major initiatives include:

Prisons

Budget 2009 provides funding of $385.4 million over the next four years to ensure there are enough prison beds to cope with a rising prison population. The prison population is forecast to increase over the next 10 years, and therefore extra beds will be built to keep pace with prisoner numbers.

Some $24 million in capital funding has been allocated in 2008/09 and 2009/10 for the design and planning of extra prison capacity in the upper North Island.

To address the immediate need for prison accommodation, $218.6 million in operating funding over four years and $145.8 million capital funding in 2009/10 and 2010/11 has been allocatedfor increased double bunking at five prisons.

They include the Northland Region Corrections Facility, Auckland Region Women's Corrections Facility, Spring Hill Corrections Facility, Otago Corrections Facility and the Mt Eden-Auckland Central Prison site.

Budget 2009 also provides more operational funding for the department to employ more frontline prison staff and provide programmes and other critical services for the higher number of prisoners.

Police

Budget 2009 provides $182.5 million for more police ($162.5 million operating, $20 million capital).

Budget 2009 will fulfil the Government's commitment to put 600 more police on the streets of New Zealand by the end of 2011. The Government will put the extra 300 officers into frontline roles in Counties-Manukau by the end of 2010 and there will be 300 more officers across the rest of New Zealand by the end of 2011.

Budget 2009 provides $162.5 million of operating funding over four years for Police recruitment, training, personnel costs and deployment.
It will also include extra police support for prosecutions. A further $20 million of capital funding in 2009/10 and 2010/11 will provide accommodation and vehicles for the additional police.

Court security

Budget 2009 allocates $9.8 million to boost court security ($9 million operating, $800,000 capital) to upgrade court security over the next four years.

Courts Minister Georgina Te Heuheu said that the new funding will help improve safety for court users and staff while maintaining public confidence in the justice system. The initiative is intended to improve safety for members of the public and those who work in courts on a daily basis.

Around 30 more court security officers will be employed over the next four years, to reduce the risk of security incidents. This will bring the total number of court security officers to around 83 by 2013. Additional security equipment will also be purchased, including walk-through metal detectors, baggage scanners, radios, and closed circuit TV systems.

There are currently 53 court security officers covering 70 courthouses with 350 court rooms and hearing rooms. In 2005/06 court security officers searched or scanned 263,000 people, taking 3,900 items into temporary custody; in 2007/08 court security officers searched 517,000 people, taking 4,300 items into custody.

Victims of crime

Budget 2009 provides $2.3 million for the establishment of the offender levy. Some $1 million in operating funding and $1.3 million in capital funding in 2009/10 is allocated to set up the collection process for a $50 levy on all convicted offenders at sentencing.

Although there will be a small initial set-up cost, the levy is forecast to collect $13.6 million in the first four years. The levy will be used to fund additional services for victims of serious crime over and above those covered by ACC or by discretionary grants from Victim Support.

Of the $2.3 million allocated in the Budget, $1.5 million is remaining from 2008/09 Budget allocation to the Sentencing Council ($1.479 million) and the Justice Advisory Board ($29,000), both of which the National Government has disbanded, as promised. The remainder is new money.

The Sentencing (Offender Levy) Bill, which is before the Justice and Electoral Select Committee, imposes the levy on all convicted offenders at the point of sentencing. The levy will be in addition to any sentence or court order and will be collected after reparation but before fines. The select committee is due to report back to the House on the bill in August.

Taser rollout

The Government has announced funding of $10 million for Tasers ($9.5 million operating, $500,000 capital).

A total of $5.3 million in operating funding will be provided in 2009/10 to complete deployment of tasers throughout the country, with another $4.2 million spread across the following three years to meet ongoing costs. An additional $521,000 in capital funding will be provided in 2009/10 for computer systems supporting the deployment of tasers.

The Budget funding announcement will bring the number of taser units available nationally to about 720. Tasers will be available to frontline police on a case-by-case basis. About 3,500 officers will be trained to use them. The funding covers full implementation, including the taser units, audio-video cameras, training, holsters and carriers.

Access to justice

The Budget provides $17.1 million in operating funding in 2009/10 to maintain access to justice services through community law centres and legal aid. The funding is to ensure the immediate future of legal aid and community law centres while a fundamental review of the legal aid system is under way.

Community law centres faced a significant drop in funding which is sourced mostly from interest earned on solicitors' nominated trust accounts and is declining due to a slowing housing market and lower interest rates. A $7.2 million top-up for community law centres in 2009/10 will enable the existing level of services to be maintained. The Government is also committed over the medium term to find an enduring funding framework to ensure continuity of the services provided by community law centres.

In addition, the Legal Services Agency will receive $9.9 million in 2009/10 to help retain its legal aid providers who provide legal advice to people charged with offences.

Both initiatives provide interim funding pending the outcome of a comprehensive review of legal aid announced by the Government in April. The purpose of the review, chaired by Dame Margaret Bazley, is to consider how the system can best be structured so it delivers effective legal services to those who most need them, in a way that is cost-effective and sustainable.

Financial advice regulation

Budget 2008 allocates an additional $11.7 million to further strengthen New Zealand's financial regulations over the next four years.

The Government stated that implementation of the Financial Advisers Act and the Financial Service Providers Act will help restore confidence in the financial markets by introducing a minimum standard of competence for financial advisers. The supervision of financial advisers is also placed with a central regulatory body, the Securities Commission.

The new regime will contribute to the Government’s economic priorities by promoting the sound and efficient delivery of financial advice, and encouraging public confidence in the professionalism and integrity of financial advisers.

As the new central regulatory body for financial advisers, the Securities Commission will be responsible for:

• Assessing individual advisers seeking authorisation and entities seeking approval.
  
  
• Investigating complaints relating to financial advisers.
  
  
• Providing administrative support to the Code Committee and the Disciplinary Committee.
  
  
• Funding and supporting the Commissioner for Financial Advisers.
  
  
• Sharing information with the Companies Office, the holder of the Financial Service Providers Register, to ensure advisers are registered and have their authorisation status correctly reflected on the FSP public register.

This will enable the Securities Commission to take on additional functions as required under the Financial Advisers Act.

The Securities Commission will receive a boost to its budget of $2 million in 2009/10, $4 million in 2010/11 and $2.9 million in each of 2011/12 and 2012/13. This will bring the total available expenditure on the new financial advisers’ regime in these years to $3.4 million, $5.4 million, and $4.3 million respectively.

Funding requirements will be kept under review, but the Government expects the regime to be fully funded through industry fees and levies from 2011/12. This timetable coincides with the implementation of the regime, which is expected to be completed by the end of 2010.
These increases to funding are through fees. An independent fees review of the Securities Commission, including consideration of fees for the financial advisers' regime, is under way.

Other initiatives

• Budget 2009 provides $2.4 million to assist the Department of Internal Affairs to manage a significant increase in the demand-driven volume of censorship investigations, prosecutions and defended hearings involving distribution or possession of child sexual abuse images.
  
  
• $61.3 million to increase criminal courts capacity in Auckland ($55.3 million operating, $6 million capital).
  
  
• $16.3 million to improve fines collection ($13.1 million operating, $3.2 million capital).
  
  
• $152.9 million for more community probation and psychological services capacity to manage more offenders ($133.8 million operating, $19.1 million capital).
  
  
• $103 million to improve the quality of parole and home detention management ($71.2 million operating, $31.8 million capital).
  
  
• $600,000 in additional funding for the Independent Police Conduct Authority.
  
  
• Specific funding has been set aside for police-issued domestic protection orders, the final amount of which will be confirmed once the Government has agreed the details of this policy.
  
  
• Specific funding has been set aside to combat money laundering and the financing of terrorism, the final amount of which will be confirmed once the Government has agreed the details of this policy.

KiwiSaver

Mortgage diversion facility to close to new applicants from 1 June 2009

The mortgage diversion facility, which allows KiwiSaver members to divert up to half of their contributions to their mortgage repayments, will not be available to new applicants from 1 June 2009.

This decision is a compliance costs measure. Revenue Minister Peter Dunne says that the facility, which is offered by some banks only and which is taken up by only about 600 people out of more than a million KiwiSaver members, imposes additional and unnecessary compliance costs on KiwiSaver providers and on banks. The decision will be given legislative effect through the Taxation (Budget Tax Measures) Bill 2009, introduced on 28 May 2009.

The facility will remain available for existing KiwiSaver members. However, Kiwisaver providers and banks can stop providing the facility to existing participants if they so choose.

Maori Affairs

Treaty settlements

Budget 2009 includes an extra $22.4 million over the next four years to achieve the Government's goal of settling all historical Treaty of Waitangi claims by 2014.

The extra money, which includes $22.2 million in operating funding and $133,000 in capital funding, will allow the Office of Treaty Settlements to conduct more negotiations faster. It will also provide resources for extra facilitation and mediation assistance to claimant groups. The Government expects that this will result in more settlements being reached sooner.

Other funding

Support for families who are most vulnerable and building long-term resilience into the Maori economy are the dual thrusts of the Maori Affairs budget in 2009.

• The Government is setting up a network of whanau advocates in communities to liaise with community groups and Maori Wardens and to work with families experiencing hardship, to ensure they are getting all the assistance available to them.
  
  
• The Government will also seek greater collaboration among Maori service providers and government agencies providing assistance to whanau.
  
  
• Whanau Social Assistance Services will get $32 million over the next four years, and the Maori Economic Task Force will get $10 million over 2009/10 and 2010/11.
  
  
• In addition, new funding of $2.6 million over the next four years will help establish the Maori Trustee as a fully independent sustainable entity, with ongoing funding for enhanced services to Maori beneficial landowners.
  
  
• In the regions, the Turanganui a Kiwa tribes based in Gisborne have been allocated $500,000 a year for 10 years to enhance their capacity to lead local economic and social developments.
  
  
• $4.5 million is allocated to whanau language development over 2009/10, 2010/11 and 2011/12.

Science and Technology

Budget 2009 delivers:

• An extra $40 million over four years to the Crown Research Institute Capability Fund, to reinforce the ability of CRIs to maintain and develop their research.
  
  
• Funding of $36 million over four years to the Marsden Fund to provide for investigator-initiated excellent research.
  
  
• Thirty-two million dollars ($32 million) over four years for health research.
  
  
• A $16 million capital injection in 2010-11 for the Kiwi Advanced Research and Education Network (KAREN), to enhance New Zealand’s high-speed telecommunications research connectivity and capability.

Budget 2009 also provides new funding of $4 million over four years for the Prime Minister’s Science Prizes.

Social Services

The Government will allocate an extra $81.5 million over the next 4 years to its Fresh Start initiatives for young offenders, to extend the current range of tools available for the youth justice system.

Four million dollars ($4 million) will be spent in 2009-10 on:

• the ‘Reducing Youth Offenders Programme’;
• Kauri Centre;
• Teen Parent Service Coordinators;
• the Family Violence campaign; and
• Early Years Service Hubs.
  

The Community Response Fund, announced prior to the Budget, will make up to $40 million available in the first year to support voluntary sector groups.

Four hundred thousands dollars ($400,000) will be spent annually over the next three years to refresh the membership of the Community Sector Taskforce.

Superannuation

Suspension of Government contributions

As part of the Government’s initiatives to keep debt under control, the Government has decided to suspend automatic contributions to the New Zealand Superannuation Fund (as noted above). The suspension will remain until there are budget surpluses sufficient to fund contributions. Under current projections, the Government is not expected to have sufficient surpluses for the next 11 years.

The Government will, however, make a partial contribution of $250 million to the NZS Fund in 2009-10.

Mr English states that if the Government were to continue making automatic contributions, this would add $19.5 billion to debt over the next 11 years, with interest accruing on top of that.

The decision to suspend automatic contributions to the NZS Fund will not affect people’s entitlements.

Outside the Budget

Taxation (Budget Tax Measures) Bill 2009

The Taxation (Budget Tax Measures) Bill 2009was tabled in Parliament on 28 May 2009 and introduced tax measures announced in Budget 2009. These include:

• Delays to personal tax cuts that were to have come into effect on 1 April 2010 and 1 April 2011
  
  
• Cancelling of the associated increase in the Independent Earner Tax Credit, which was to have taken effect from 1 April 2010.
  
  
• The bill also closes the KiwiSaver mortgage diversion facility to new participants from 1 June 2009.
  

Mark J Greening LLB, BA
Managing Editor - Taxation

Joanne Emery LLB, BA
Tax Writer - Taxation

Wai-boh Ding LLB, BA
Legal Editor - Taxation

Website updated by the Thomson Reuters Tax Team.

2009 BUDGET ANALYSIS
BY PRICEWATERHOUSECOOPERS

This analysis was written by John Shewan, Geof Nightingale, Emma Richards, Peter Vial, Rachel Wards, and Anthony Luk.

Contents

A Delicate Balance |
Spending in the Public Sector |
The Tax System in an Economic Crisis: Will it Save or Sink Us? |
Maintaining a Coherent Tax Strategy |
The Australian Dilemma |
2009 Australian Budget |
KiwiSaver: Mortgage Diversion Facility to be Closed |
Independent Earner Tax Credit |
Vote Revenue |

A Delicate Balance

Having warmed the Opposition benches for nine years of relatively benign economic times it must be especially galling for the new Government to have to prepare its first budget in the context of the worst global downturn in 70 years. But Finance Minister Hon. Bill English seems likely to score high marks for the delicate balancing act he has performed in trying to maintain consumer and business confidence while also trying to fend off the dual evils of ballooning debt and a threatened credit downgrade. Within hours of the Budget being released the Minister’s efforts were rewarded when Standard and Poor’s announced an upgrade in New Zealand‘s credit rating from ‘negative watch’ to ‘stable’.

As widely speculated, the previously legislated 2010 and 2011 tax cuts have been deferred indefinitely. This is forecast to save the Government $900 million per year from 2011-2012. In announcing this move the Minister said he was not willing to borrow more to pay for tax cuts and that he considered such a move would be reckless.

So when might we expect to see the tax cuts reinstated? The answer appears to be no time soon. The impact of the global recession is continuing to surprise. The latest Treasury forecast predicates that the New Zealand economy will lose around $50 billion of nominal output in the next three years alone, compared to what was forecast in Budget 2008.

In the analysts’ lock-up, kept at arctic temperature for the first hour in deference to the austere times, Bill English was challenged upfront: “how do you justify breaking your Government’s major promise on tax while not doing the same on spending?” The Minister was blunt in his response. National adjusted its tax package in early October last year when the pre-election fiscal update was much worse than expected. Since that time there have been three successive and serious deteriorations in the forecast outlook. As a result tax revenue for the period 2009 to 2013 is $15 billion lower than predicted last December. In that context the Government feels comfortable in giving priority to maintaining spending and consumer confidence over further tax cuts.

The shrinking economy was always going to lead to a significant fall in the Government’s tax take, but the size of the shrinkage is mind-numbing. The business tax take over the period 2009 to 2013 is forecast to be 6% or $5 billion lower than that forecast just six months ago in December 2008. In the 2009 financial year alone a fall in the corporate tax take of approximately $2 billion or 20% is forecast. Decreases in revenue of this magnitude are not just rounding issues – they equal the cost of large infrastructure projects ($2 billion would pay for four or five new hospitals or an infrastructure project the size of the Waterview Connection).

The news on when further tax cuts may arise is depressing. The Minister said that tax cuts will only be considered if growth significantly exceeds the forecasts contained in the Budget. Given the forecast deficits over the next decade, tax cuts in the short to medium term are highly unlikely.

The Minister also emphasised the extent the downturn has brought into focus two major structural imbalances in the New Zealand economy. Challenged to articulate these, he pointed to two key problems:

• Over the past five years core government spending has increased 49%, while revenue has increased just 25%. There is a structural imbalance between spending and revenue.
  
  
• While the non-tradable sector has grown quite quickly over the past five years, fuelled by debt, the tradable sector has shrunk. This cannot continue. The Government’s focus is on promoting investment in sectors in which New Zealand is internationally competitive.

The severity of the downturn probably made the Government’s two major decisions – the deferral of tax cuts and suspension of contributions to the New Zealand Superannuation Fund – much easier. Given the red ink that abounds in its accounts, the Government had no real option but to proceed down this path.

The Budget records that in the mid-to-long term the Government remains committed to aligning the tax rates for individuals, companies and trusts at 30% and to continuing to pursue the broad base low rates strategy. It is pleasing to see this commitment, but in practical terms alignment and lower rates are a long way off.

The Government is under pressure to explain how its Budget will promote productivity, economic growth and jobs. The Minister’s answer - “there are no silver bullets – there are about 200 things that we need to do right rather than one big thing” frustrated those who like to write about boldness and vision. It is fair to say that it is hard to see what will cause New Zealand to turn the productivity corner. While the increased spend on infrastructure and the housing insulation initiative will help, they are not the long term answers to what has become a long term problem. That will require a much sharper focus on the relative size of government in the economy. While in the heat of a recession some government spending is welcome, longer term the spending will need to be tackled much more vigorously than it has been able to be trimmed to date.

On the revenue side of the equation, there is a severe limit to the extent to which more feathers can be plucked from the two golden geese of labour and capital. Those two tax bases are already highly taxed and highly mobile. Base broadening and increases in taxes on consumption, both reforms strongly advocated by the OECD, need to be examined if New Zealand is to avoid the unacceptable volatility and distortions that the existing tax regime is causing.

Spending in the Public Sector

Looking through the broader lens of public sector performance and fiscal management, what’s most interesting about Budget 2009 is what is being tacitly signalled for Budget 2010.

For the public sector, the Minister of Finance’s drive to increase public sector productivity and get better value from core government spend is an issue of particular importance. Not only in terms of the fiscal circumstances New Zealand finds itself in – and potentially for the next decade – but the nature of the opportunities and relationships that need to be focused on for the next 12 months.

There is no doubt that Ministers and public sector leaders, through Budget 2009, have set a foundation for seeking performance improvement in the public sector. The results of the Line-by-Line Reviews conducted in the lead-up to Budget 2009 are a good signal of this intent – identifying around $2 billion of savings over the forecast period. This is a significant achievement and has effectively enabled the Government to deliver an additional $454 million of initiatives on top of the scaled back operating allowance for Budget 2009 of $1.45 billion.

It’s worth highlighting some of the reprioritisation achievements undertaken in the lead-up to Budget 2009. These include:

• Education: $661.8 million of existing planned spending for the years 2008/09-2012/13;
  
  
• Social Development: $428 million of reprioritisation of which $354 million come from projected productivity and efficiency gains – a highlight in terms of agencies looking at how they deliver their services, not just seeking savings; and
  
  
• Economic Development: $180 million of spending was reprioritised into higher priority areas across a range of Votes for the forecast period.

The Line-by-Line Reviews and other identified savings represent just the first step in an ongoing scrutiny and reconsideration of how public services are funded and organised. Many of the savings identified are at the margins - being based on winding back spending commitments from the last administration or reprioritising underspends across various Votes.

This is not a bad thing and the Minister of Finance was keen to remind his lock-up audience that this Budget was not to be labelled “slash and burn”. Nevertheless, with operating and cash deficits projected to continue for the next decade, it is worth pondering just what else the Government can do to manage the dual priorities of:

• Restraining core government spend as public debt increases; and
  
  
• Meeting increasing expectations from the public for more and better public services.
  

Some of the issues that confront the public sector as a result of the Budget 2009 announcements are:

• What will the next iteration of “Line-by-Line Reviews” or other expenditure reviews look like leading up to Budget 2010? To effect change, what creative thinking and innovation can be progressed in the context of a better understanding of fiscal and policy levers?
  
  
• In an operating allowance of $1.1 billion, what expectations are there that this figure will need to be supplemented (or indeed be made up of) further identified savings from core government spend?
  
  
• For big spending sectors, particularly Health and Education, what do the constraints of a $1.1 billion operating allowance mean? It seems difficult, for example, to envisage a $750 million health package being funded in 2010 without a significant proportion of that funding coming from further reprioritisation or savings.
  

Budget 2009 has set the initial foundations for an ongoing push to lift public sector productivity. It has been – on the face of it – a relatively conservative start. Although the Minister of Finance indicated he would not be starting work on Budget 2010 today, Officials will almost certainly have started considering the fiscal outlook for the next Budget and what this means for core government spend and the services New Zealanders expect of the public sector.

The next 12 months will be a challenging time for the public sector as it continues to adapt to the extraordinary economic and fiscal conditions that prevail. However, there exists a real opportunity for public sector leaders and their agencies to get ahead of the times and start thinking about how they can deliver better, smarter public services within constrained fiscal resources. For example:

• Examining the scope for shared services across major social service areas in health, education and justice;
  
  
• Looking at how to structure and organise the delivery of services to achieve efficiencies;
  
  
• Developing innovative and cost-effective business cases for capital spend to improve the delivery of public services to New Zealanders; and
  
  
• Looking at the balance of out-sourced and in-sourced services across the core public sector and leveraging off private sector expertise where appropriate.

The Tax System in an Economic Crisis: Will it Save or Sink Us?

Remember the recent good times when year after year the Treasury rather sheepishly announced that the tax revenues collected had exceeded its forecasts, sometimes by billions of dollars? It made us feel good, almost smug. The extra taxes collected papered over the cracks caused by the relentless incremental creep in government expenditure and allowed headline-making big ticket deposits to the Cullen Fund.

Well what a difference a year makes. The actual and forecast tax position outlined in Budget 2009 is the worst for nearly 30 years and has completely dispelled any residual smugness. We are left with a sickening sense of vertigo as we gaze down into a whirlpool of draining tax revenues and spiralling government debt. As a result of the impact of the recession on corporate earnings, personal income and consumption, forecast tax revenues through to 2014 are now expected to be $15 billion less than we thought last year. Our promised tax cuts are on indefinite hold.

Against this background, then, what is the role of our tax system in an economic crisis? Can it be used as a lever to drive us out of recession sooner or will it crush business revival with higher rates as the Government scrabbles for revenue to service debt and close the deficit?

Many other countries around the world have turned to their tax systems as tools to use to stave off the worst impact of the recession. The US has implemented measures to allow corporate tax losses to be carried back for up to 5 years to refund taxes previously paid and so stimulate investment. The UK Government has reduced VAT from 17.5% to 15% to try and prop up consumer spending. In Australia a range of new tax incentives was introduced to stimulate investment in capital assets and millions of earners received one off tax rebates of $A950 to stimulate consumer demand.

Measures such as these are enormously expensive as they apply so broadly. They are also difficult to target (anecdotally many young Aussies spent their $A950 in the beer gardens of Germany). And at some stage they have to be paid for. The UK has already bucked the recent global trend of reducing tax rates and has sharply increased its taxes on higher income earners. The debt position of the US means it can only but follow in the near term.

It is not at all apparent at this stage that any of these tax measures have had a material impact on economic activity in those countries. Undoubtedly they have had a material impact on public debt levels. That, for example, is why the UK Government has had to hike its top tax rate to 50%.

By and large our Government has resisted using the tax system to target “desirable” economic behaviour. It has already injected fiscal stimulus by reducing personal tax rates on 1 October 2008 and again last month. It also made a number of modest changes earlier this year to improve the cashflow and compliance costs faced by SMEs. But in Budget 2009 it has held the line on introducing new expensive incentives and one-off tax relief measures, preferring instead to focus its stimulatory efforts on the expenditure side.

This approach to the tax system is appropriate in an economic crisis. In our view, the best thing that the Government can do with the tax system in this recession is to refocus intently on imposing tax at the lowest rates possible across the broadest base of economic activity while ensuring that it minimises the compliance costs and distortions to investment caused by taxation. And then one day soon we may get our tax cuts back.

Maintaining a Coherent Tax Strategy

Developing and maintaining a coherent tax policy strategy is critical for any government particularly in the current global economic environment. Governments need to take a medium and long term approach to tax policy.

The absence of a long term framework for reform has been a feature of the New Zealand tax system for a long time. That absence is not surprising given that any reform of the tax system is integrally linked to our three year election cycle.

Over the past twenty five years successive New Zealand governments have expressed their support for a broad-based, low rate tax system but have been too ready to diverge from that strategy. The Labour Government’s introduction of the 39% highest personal marginal tax rate in 2000 is the most recent and clearest example of a willingness to pay no more than lip service to the broad-based, low rate strategy. History tells us that such divergences (driven by political expediency) can only end in tears.

As Inland Revenue suggested in its Briefing for the incoming Minister of Revenue last year, the Government should settle on a broad framework for reform and take systematic steps over time to increase the coherence of the tax system. We agree.

A key part of the tax policy strategy is the make-up of the tax base. New Zealand’s current reliance on taxing capital and labour is unsustainable in the medium to long term. Alternative sources of revenue are required to supplement these two key sources of revenue. Although we are not alone in facing this problem with most OECD economies facing the same challenge, the problem is more pronounced here. New Zealanders are a very mobile bunch. The country has the highest percentage in the OECD of its skilled workforce living abroad (over 15%).

The OECD itself, academics and commentators all emphasise that taxes on consumption and on immovable property are less harmful to productivity and growth (and therefore national welfare) than taxes on capital and labour, both of which are movable.

This is not an easy problem to solve. It is not simply a matter of increasing the GST rate to 15% or introducing a comprehensive capital gains tax. These options give rise to serious questions of integrity, fairness and efficiency. Should a government choose to pursue these options, it would need to ensure there are trade-offs such as lower personal tax rates. One of the reasons for the success of GST on its introduction in the 1980s was that it was accompanied by significant trade-offs.

Those questions aside, an increase in consumption taxes seems inevitable. The challenge will be to ensure that those most adversely affected by such an increase (the poor) are protected.

Capital gains tax remains a highly controversial issue. Our politicians have long ruled out the introduction of a capital gains tax. The models adopted overseas have met with varying degrees of success (or more accurately, failure). We have yet to see a capital gains tax that meets the criteria of being fair, efficient and straight forward from an administrative and compliance perspective. This does not mean that we should shy away from considering the options for taxing capital gains. The taxing of immovable property needs to be part of the wider tax strategy debate.

Tax and housing: will or should this remain a political no go zone? The McLeod Review raised the issue back in 2001 but the possibility of central Government taxing increases in the value of housing stock met with howls of protest – and the idea was quickly dropped. Housing is already taxed – by local Government. It may be that the capacity to tax housing is already exhausted and that the idea of further taxing it has little merit. But we need to get past emotional reactions and examine the issues in an informed and objective way.

Given the need to maintain and adhere to a steady tax policy strategy course, the Government’s recent decision to establish a Tax Working Group is timely. The group is led by Victoria University’s Centre for Accounting, Governance and Taxation Research and made up of private sector and academic experts (including John Shewan and Geof Nightingale of PricewaterhouseCoopers) and Treasury and Inland Revenue Officials.

The group will consider the medium-term direction of the tax system and assess policy options - a challenging brief in the current economic and fiscal environment.

The aim is to identify issues that need to be considered when reviewing medium-term tax policy rather than to make specific policy recommendations. The group will consider the fiscal framework, the structure of personal income tax, corporate tax and GST and tax integrity. Between June and November 2009 the group’s findings will be fed into advice to the Finance and Revenue Ministers and wider public debate.

Any changes to the tax policy strategy, the tax base and / or tax rates are unlikely until the Government has had the opportunity to consider the group’s deliberations. The challenges ahead for both the Government and the group are huge but it is crucial that the debate be robust and decisive.

The Australian Dilemma

Since the adoption of the Australia New Zealand Closer Economic Relations Trade Agreement (CER) in 1983 the New Zealand and Australian economies have become increasingly integrated. New Zealand is the fourth largest foreign investor in Australia and Australia is the largest foreign investor in New Zealand.

Australia and New Zealand remain committed to their relationship with both Governments agreeing to pursue the concept of a trans-Tasman single economic market (SEM). However, if an SEM is to be achieved it is essential that tax is not a factor when investors determine which country to invest in, and that tax does not operate as an impediment to the free flow of goods, services, people and investment.

In the light of the SEM goal there has been much discussion about the current double taxation of trans-Tasman profits which impedes the free flow of investment between the two countries. In order to address the resulting inefficiencies the Governments of both countries have stated that they are open to the idea of moving towards mutual recognition of imputation credits. Under mutual recognition each country would provide an imputation credit for company tax paid in the other country.

Mutual recognition will no longer be on the agenda if Australia decides to abolish its imputation system. At present New Zealand and Australia are the only OECD countries to retain imputation regimes. However, as both New Zealand and Australia have corporate tax rates higher than the OECD average of 26.7% there is increasing pressure to follow the global trend and abolish imputation while lowering the corporate tax rate.

The lowering of the corporate tax rate is high on the agenda in submissions lodged by leading business groups to Australia’s Future Tax System Review (the Henry Review), the review of Australia’s tax system that began in early 2008.

Recent comments by Dr Ken Henry, the Chair of the Henry Review, indicate that the review will carefully consider the impact of the current dividend imputation rules from both a tax and a global economic perspective. Although Dr Henry stressed that he is not advocating the removal of dividend imputation, his comments have led some to suggest that Australia’s current dividend imputation regime could be modified or removed as a trade off for a more benign business tax regime and a lower company tax rate.

If Australia repeals its imputation regime and lowers its corporate tax rate, and New Zealand retains its current 30% corporate tax rate, Australia will obtain a competitive advantage over New Zealand. International companies looking to enter the trans-Tasman market will have an incentive to establish themselves in Australia and trans-Tasman companies currently in New Zealand will be encouraged to shift their head offices to Australia. New Zealand companies seeking to attract Australian investment will also be incentivised to shift to Australia.

A lower corporate tax rate in Australia would also create incentives for trans-Tasman entities to thinly capitalise their operations or to use transfer pricing mechanisms to transfer profits away from New Zealand into Australia.

The Minister of Revenue has acknowledged that the New Zealand Government will monitor the Henry Review closely. Commentators have already suggested that any cut to the Australian corporate tax rate will force New Zealand to make equivalent cuts to our corporate tax rate to remain competitive. The Henry Review is due to release its report by the end of 2009. Once its recommendations are known New Zealand will need to decide whether to follow Australia. However, in the light of the Budget forecasts for the tax take and continuing deficits, New Zealand may not be in a position to follow our trans-Tasman partner. The Australian dilemma is very real.

2009 Australian Budget

The major tax initiatives in the Australian Budget include:

• Increased R&D tax relief;
  
  
• Additional tax deductions for newly purchased depreciating assets;
  
  
• Reductions in provisional tax for small businesses;
  
  
• A re-write of the controlled foreign company (CFC) rules;
  
  
• The repeal of the foreign investment fund (FIF) rules in favour of a specific anti-avoidance provision to counter tax avoidance involving offshore entities.
  
  
• A commitment to honour the existing personal tax rate reduction programme;
  
  
• Cash handouts of up to $950 per person (announced in February 2009 as part of the Australian Government’s stimulus package).
  

KiwiSaver: Mortgage Diversion Facility to be Closed

The KiwiSaver mortgage diversion facility is to be closed to new applicants from 1 June 2009. Mortgage diversion is a feature of KiwiSaver that allows a member to divert up to half their contributions to mortgage repayments on their principal residence after they have been a member of KiwiSaver for 12 months. Only 600 of the 1 million plus KiwiSaver members have taken up this facility and not all KiwiSaver providers or banks are currently offering it. The announcement is not expected to disappoint many members, providers or banks.

The Minister of Revenue, Peter Dunne, announced that the facility is to be closed because the disadvantages outweigh the benefits. The mortgage diversion facility imposes additional and unnecessary compliance costs on KiwiSaver providers and banks that offer the facility with these costs generally passed on to the member. It is also the Minister’s view that mortgage diversion moves away from the basic principle of locking in KiwiSaver funds until the member is 65.

The facility will remain available for existing participants. However, as providing mortgage diversion has never been obligatory, providers and banks are able to stop providing the facility to existing participants if they choose to do so.

The Government will introduce legislation to remove the KiwiSaver mortgage diversion facility from 1 June 2009 on Budget night.

Independent Earner Tax Credit

The Taxation (Budget Tax Measures) Bill introduced by the Government on Budget day repeals the increase to the independent earner tax credit (IETC) that was to apply from 1 April 2010. Prior to the repeal the rebate was to increase to $15 per week and the threshold at which the rebate was to abate in full was to increase to $50,000.

The Government introduced the IETC to provide tax relief for middle-income New Zealanders who do not benefit from Working for Families and other assistance packages. The IETC is currently $10 per week abating at 13 cents for each dollar of income earned above $44,000 and fully abating at $48,000 i.e. a person earning over $48,000 is ineligible for the IETC. This $10 per week IETC has not been repealed.

Vote Revenue

The annual and permanent appropriations (allowed expenditures) allocated to the Minister of Revenue (and administered by the IRD) have reduced by almost $1 billion for the 2009/2010 year compared to the estimated actual figure for the 2008/2009 year. The bulk of this relates to the repeal of the research and development tax credit from the 2009/2010 income tax year, the removal of the KiwiSaver employer tax credit from 1 April 2009 and a forecast tailing off in the KiwiSaver uptake.

Overall, no area within IRD has received any significant amount of additional funding for the 2009/2010 year. Of note, the amounts allocated to informing the public about entitlements and meeting and processing obligations and entitlements has reduced by approximately $30 million and the amount allocated to complete taxpayer audits has reduced by almost $5 million.

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