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BUDGET 2017: Election year budget spends down future surpluses for families and infrastructure

Thursday 25th May 2017

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Tax cuts for every working New Zealander, targeted to low and middle income earners, more generous assistance for families and renters, and a massive spend-up on public services infrastructure mark Finance Minister Steven Joyce’s election year Budget.

The package of changes to income tax thresholds, the Working for Families programme, and the Accommodation Supplement is the Budget’s political centrepiece and will cost $2 billion a year.

But it does not kick in until April 1 next year as the eight-and-a-half year old National Party-led government spends down rising Budget surpluses forecast over the next four years, making a down payment with the electorate on a fourth term in power at the Sept. 23 election.

“This is our opportunity to build on the economic platform we have all created,” said Joyce in his Budget statement. “The family incomes package will benefit 1.34 million families by an average of $26 per week.”

That is achieved by raising the amount of income that can be earned at the lowest tax rate of 10.5 percent from $14,000 to $22,000 and for the 17.5 percent income tax rate to $52,000 from $48,000.

There is no change to the 33 percent top tax rate income threshold of $70,000, reflecting the government’s sensitivity to be seen to be rewarding high income earners. However, all taxpayers will pay less on their first $70,000 of income from April 1 next year and Joyce told media he would like to move on that third threshold over time”.

The Budget also includes a larger spend on public infrastructure than previously signalled, the effect of which is that instead of Budget surpluses rising to a forecast $7.2 billion by 202/21, “the government’s capital investment absorbs virtually all the cash generated from our operating surpluses over the next four years”, said Joyce.

The spend-up runs slightly ahead of Crown income, with the government still running a small cash deficit in the next two fiscal years, followed by small cash surpluses in the following two years.

Total capital spending in the next fiscal year will total almost $4 billion, compared with $1 billion forecast in the Budget last year, and $1 billion more than the government was forecasting just five months ago.  A further $7 billion of new capital spending is available in the following three years.

Likewise, operating spending allowances are $1 billion higher over the next four years than forecast last December.

At the same time, government spending as a proportion of the total economy (GDP) continuing to fall, to a forecast 27.5 percent of GDP in the year to June 2021, compared with 28.8 percent this year and close to 34 percent when National took office in 2008.

Net Crown debt also continues to fall, meeting the government’s target of 20 percent of GDP in 2019/20 and allowing contributions to the New Zealand Superannuation Fund to resume in 2020/21 following their suspension in 2009 in response to the global financial crisis.

The most generous Budget since the last by Labour Finance Minister Michael Cullen in 2008, when a three term Labour-led government was making its last bid for re-election, today’s document includes a variety of other crowd-pleasers and political itch-scratchers

These include unfreezing funding for Radio New Zealand for the first time in eight years, a $224 million package over four years to boost mental health services, commitment to ongoing investment in rail services, including passenger rail in Auckland and Wellington, and boosted funding for cash-strapped district health boards and over-crowded schools.

The Budget largesse occurs against a backdrop of strong economic growth, forecast to average 3.1 percent annually over the next five years, with dairy exports recovering over the forecast horizon while other sectors continue to perform strongly.

Unemployment tracking from 5 percent down to 4.3 percent of the workforce by 2021, with the participation rate remaining high at close to 70 percent throughout the forecast period.

High net immigration is forecast to continue over the forecast period, although at a declining rate through to 2021, from around 72,000 in the year to June this year to 67,000 in the June 2018 year, 56,000 in 2019, 36,000 in 2020 and 20,000 in 2021. Those forecasts imply the Treasury has dropped its long-held forecast that net migration would fall to the long term average of 12,000 a year.

High migration is a driver of current economic growth but also a top election issue because of its impact on housing and other infrastructure bottlenecks, which the increased tax, family and accommodation measures are intended to help offset.

Accommodation supplement payments rise between $25 and $75 per week for a two person household, and between $40 and $80 a week for larger households, with higher payments available “in areas where housing costs have increased the most”.

On the downside, EQC levies will rise by up to $69 a year to rebuild the national disaster insurance fund to $1.75 billion within the next decade.


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