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Back in black? 19 Jul 2011
This article appears courtesy of BDO
 
While the 2011 picture looks bleak – with a forecast operating deficit of $16.7 billion – Budget 2011’s focus is on pushing the economy ahead and back into the black by 2014/15.
 
As predicted in our May 2011 Tax Today, Budget 2011’s focus is on the rebuilding of Christchurch – with the establishment of a Canterbury Earthquake Recovery Fund – and encouraging growth in the economy.
 
The majority of the tax changes in Budget 2011 were signalled in advance, including changes to KiwiSaver and Working for Families. Changes are also made to the student loans scheme, and measures to make the tax system fairer have been flagged.
 
FISCAL IMPACT – GETTING BACK IN BLACK
 
The forecast 2011 operating deficit of $16.7 billion is $5.6 billion worse than that foreshadowed at the Half Year Economic and Fiscal Update announced in December 2010 – largely as a result of the Christchurch earthquakes. However, on the flip-side, Budget 2011 forecasts an operating surplus of $1.3 billion in 2014/15 – one year earlier than was forecast at the 2010 Half Year Economic and Fiscal Update, and contributions to the NZ Superannuation Fund will resume in 2016/17, two years earlier than expected. Net core Crown debt is expected to peak at 29.6% of GDP in 2014/15 and then decline steadily to be eliminated by 2024.
 
As noted by the Hon Bill English during the Budget lock-up, the Government is borrowing $380 million per week. Budget 2011 is expected to reduce this to $100 million per week over the next three years.
 
To achieve these goals the Government is planning on rebalancing the economy towards the tradable sector, extending the Mixed Ownership Model to four State-owned electricity companies and reducing its majority shareholding in Air New Zealand, as well as better targeting of programmes such as Working for Families (WfF), KiwiSaver and student loans. It has also made a commitment to infrastructure projects including ultra-fast broadband.
 
Budget 2011 seeks $5.2 billion of operating efficiency savings in the public sector over five years. Almost $4 billion of these savings are being directed to new initiatives, mostly in health and education frontline services, and the remaining savings will be used to reduce the deficit.
 
Extending the Mixed Ownership Model (partial privatisation) is expected to realise between $5 billion and $7 billion.
 
Changes to programmes such as WfF and KiwiSaver are expected to produce savings over four years of $448 million and $2.6 billion respectively. Changes to the student loan scheme are expected to produce savings of $447 million over five years. 
 
CONCLUSION
 
There weren’t many surprises in Budget 2011. From a tax point of view, one unexpected tweak to the KiwiSaver regime will see the tax-free treatment of certain employer contributions being axed from 1 April 2012.
 
Initial reaction from Standard & Poors is that Budget 2011 is “consistent with the assumptions that feed into our sovereign ratings on New Zealand”. Standard & Poors, which has New Zealand’s rating on negative outlook, signalled that achieving stated fiscal targets will be an important component of avoiding a downgrade.
 
Many of the Budget 2011 changes do not take effect until after the November election, thereby giving people a chance to vote on them.
 
Alan Scott
Partner

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