Newsletter

Budget 2009 Commentary

By Jim Martin

National’s first budget in a decade was delivered by the Hon Bill English, Minister of Finance.

The main points of interest are:

• Emphasis on expenditure and the reallocation of resources.
• Focus on managing debt and controlling Crown expenditure through the recession, while fostering future growth so NZ is better placed when it emerges from the recession
• The projected deficit for the year to 30 June 2010 is $7.739b
• Government wants to create new jobs
• Desire to close the gap with Australia.

All this with a background of a world in recession:

• Many European economies including the UK, and the US economy have contracted by 3%. Major Asian economies, with the exception of China, have contracted by more than 5%
• The OECD predicts its members’ GDP will contract by 4.3% in 2009, the largest since WWII
• This signals long term weakness in the NZ economy highlighted by the 6th successive quarter of contraction in the NZ economy
• NZ has experienced 15 years of surpluses that are now expected to be followed by 10 years of deficits
• NZ household debt has increased by 51% since 2004.

Announcements

Tax

The tax cuts brought in on 1 April 2009 remain in place, however the second and third tranches of planned tax cuts will be deferred until economic conditions improve.

The Government will maintain at current levels NZ Super, benefits, Student Support and Working for Families.

Improve Productivity

Review various acts and regulations to improve decision making, namely:

• Resource Management Act
• Building Act
• Changes to the Overseas Investment Act
• Telecommunications regulations
• Review of the electricity industry
• Environmental legislation with emphasis on water management.

Improve Public Sector Productivity

Review various acts and regulations to improve decision making, namely:

• Measures will be brought in to allow the public sector time to plan for better performance over the next 5 years
• On coming into office the Government saw projections that showed it would run operating deficits and have high debt levels
• Those future deficits would not be temporary, with expenditure growing at twice the rate of income
• Public debt peaked in 1987 when 20% of Government spending was used to meet finance costs. It took 20 years to recover from those high debt levels. Government wants to avoid this situation from reoccurring
• Emphasis on restoring Government balance sheet to its previous health.

Rebuild Crown Finances

• Change in Government’s spending priorities
• The new net expenditure allowance will be limited to $1.45B pa, which is less than prior years’ increases, which averaged $2.8B pa.

Expenditure

• Public health will have an extra $750m pa in new expenditure over next 4 years on capital and operations
• Education will get more than $1.34b in new operating spending and $340m in new capital spending over the current and next 4 years – new schools and modernisation of existing schools plus an increase in teachers. Funding for Early Childhood Education
• Youth Guarantee funding to lift skill levels of youth and help them stay connected with the world of work
• Upgrade home insulation – grants of up to $1,800 for clean heating and insulation for households over the next 4 years
• Maori Affairs increased funding of $42m, including $32m for Whanau Social Assistance Services and $10m for the Maori Economic Taskforce
• Science and Technology – new funding of $321m for research, science and technology. This includes Primary Sector funding of $190m over 4 years to promote growth through innovation
• Law and Order – funding of more than $900m on Justice over next 4 years. Providing:
• 600 more police by 2011.
• Getting tougher on money laundering and profiting from drug dealing.
• Community Probation and Home detention, $256m increased funding.
• Expenditure on prisons. $3m in 2008/09 and $385m over the next 4 years on capital expenditures.
• Public Sector CEOs are continuing to review expenditures in their departments in light of smaller or zero increases in funding
• Roading – expenditure on state highways of $1b over next 3 years in addition to what has already been announced
• Rail funding of $115m for 20 new locomotives and the provision of working capital
• Broadband $290m
• Superannuation will be kept at 66% of the average wage after tax, paid from age 65
• New Zealand Superannuation Fund – Government automatic contributions to the fund will be suspended for 11 years. In 2009/10 $250m will be given to be invested in the local capital markets.

Future Years Expenditure

Future expenditure will be reduced to $1.1b in 2010 and only be allowed to increase at 2% per year for future budgets.

The intention is to keep Government debt manageable while maintaining public services.

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