Budget 2019: revenue needed for social change
“Growth alone does not lead to a great country.”
This sentiment has led the coalition government to deliver its first Wellbeing Budget, placing the “wellbeing” of New Zealanders at its heart, alongside traditional financial and economic measures.
For Finance Minister Grant Robertson, “Wellbeing is when people are able to lead fulfilling lives with purpose, balance and meaning to them.” That means tackling long-term challenges, of which the government has chosen to focus on mental health, child poverty and hardship, addressing family and sexual violence and indexing main benefits to wage increases.
This is a focused approach but will it deliver the anticipated wellbeing gains across New Zealand?
Recent research by EY Sweeney shows New Zealanders are not overly negative and have hopes for the future. Eighty-eight percent of us think we will be better off, or the same, in 12 months’ time. Our main problems look to be the cost of living and low wages. Whether that bears sufficient relation to the government’s chosen priorities remains to be seen.
The government has provided detailed benchmark reporting on its selected wellbeing measures, notably with the first-ever Budget Day report on child poverty. This benchmark reporting will enable the success of its chosen interventions to be measured in years to come.
The Budget shows a surplus for 2019 ($3.5 billion) and continuing surpluses across the next four years. The government has set itself a target of reducing net core Crown debt to 20% of gross domestic product by 2022. The Budget forecasts debt of 19.9% in 2022, so it remains on track to meet its self-imposed budget responsibility rules.
These targets are stringent and our public finances would be the envy of many countries. There is, however, no margin for error, which will have played a part in Robertson’s decision to increase flexibility by maintaining debt in a 15-25% range beyond 2022.
While a small departure from the government’s rules would not imperil our macroeconomic stability, I should sound a note of caution. Increased spending and lower economic growth mean that maintaining surpluses and meeting the debt target in future years now looks to be a tougher challenge. The Secretary to the Treasury will have applied his best professional judgment in signing off the official economic forecasts but inevitably the actual outcome will vary from that forecasted.
In my view, most of the risks to the forecasts are on the downside. The Treasury’s central prediction is for economic growth to average 2.6% over the next four years but trade tensions, a more pronounced slowdown in the Chinese economy, the impact of business confidence on investment, and uncertainty around house prices and net migration could all reduce future growth.
There is a question around the rate of productivity increases forecast, a crucial factor for our living standards and economic performance. Treasury has assumed economy-wide labour productivity growth averaging 0.9% on average each year for the next four years. In fact, New Zealand’s labour productivity gains have been poor for decades, and sat at only 0.3% in the year ending March 2018 (the latest available). Whether that figure will pick up rapidly is an open question.
Potential changes to bank capital requirements could also reduce growth. While the Reserve Bank has made no decisions yet, banks argue that higher capital ratios would increase the average cost of funding for banks, leading to slower credit growth and higher interest rates for borrowers.
These changes are not dramatic, either individually or collectively. But they each point to a lower starting point and slower growth in GDP and tax revenues than was previously forecast.
This was never going to be a business budget. With the wellbeing focus, the government has concentrated on affordable reforms with the potential to boost our poor productivity performance.
In business terms, the focus is on innovation. The government is setting up a $300 million venture capital fund for New Zealand firms that extend beyond the early start-up phase. This fund does not represent any new money for business initiatives, in that it will draw from contributions previously earmarked for the New Zealand Superannuation Fund and the New Zealand Venture Investment Fund.
The new fund will be administered by the Guardians of the New Zealand Superannuation Fund and invested by the New Zealand Venture Investment Fund through private sector fund managers. It will target mid-sized New Zealand firms with turnover between $2 million and $15 million.
Integrating public sector funds and governance standards with private sector expertise has potential. The New Zealand Superannuation Fund has a good track record but will this flow through to the new mandate and smaller investments?
Missing in action
“No further tax-related announcements were made today. Full details of Budget 2019 are available on Treasury’s website.”
The government’s stated objective is to ensure a progressive tax system that is fair, balanced and promotes the long-term sustainability and productivity of the economy. This year’s Budget takes no steps towards meeting that objective.
The government had anticipated a fair, balanced and progressive tax system was to be delivered by the Tax Working Group. With that group’s central recommendation for a capital gains tax being ruled out and the government parking many of the more technical items, the remaining tax policy work program is thin.
The government has a clear choice. If it wants to progress fundamental social policy changes, the revenue must be there.
New Zealand’s economy would strongly benefit from productivity-enhancing tax reform. Instead, Budget 2019 reheats previous comments about the need for people and businesses, including multinational companies and those in the digital services field, to pay their fair share of tax. We can expect a discussion document to explore the options for taxing the digital economy soon.
Tax policy development will continue to be “inclusive, consultative and transparent” but the ultimate objective for that development remains elusive.
In term of wellbeing, this is an innovative budget. Robertson’s articulation of budget priorities, the clarity of measures to address them and the commitment to detailed reporting sets the direction well.
The government’s books remain sound but challenges may increase in future years.
David Snell is Tax Policy Leader at Ernst & Young Ltd