By Dr Muriel Newman
Whether we like it or not politics and politicians have an important influence on our lives. Not only do they shape the
social agenda and impose regulations upon us, they control the purse strings to the state sector which represents more
than a third of our economy. Their annual Budget reveals how well they are managing the economy.
While many countries around the world are still struggling with the consequences of the global economic crisis, Budget
2013 confirms that New Zealand is now one of the fastest growing economies in the developed world. Although growth is
expected to weaken as a result of the drought, it is forecast to rise to a credible 3 percent in the longer term.
When National first took office in 2008, Treasury had forecast ten years of deficits and rising debt. Now, five years
later, the 2013 Budget shows that the government is on track to deliver a surplus of $75 million in the 2014-15 year -
despite the impact of the global financial crisis and the financial costs and tragedies of the Christchurch earthquakes.
Just three budgets ago the deficit was $18.3 billion.
This turnaround has been achieved by not only keeping a tight rein on government spending, but by creating the
conditions for businesses to expand and grow.
While the size of the state sector has been reduced down from an excessive 35 percent of the country’s economic activity
two years ago, to a projected 31 percent of GDP next year, it is still a long way above the target 29 percent rate
recommended by the 2025 Taskforce – the rate it was in 2004-05 before the Labour Government embarked on their reckless
spending spree. Holding government spending and reducing waste should remain priorities into the foreseeable future.
Creating the opportunity for business to grow and prosper should also be a prime goal of any government, since the
business sector is the nation’s engine room providing employment and creating wealth. The more investment businesses can
attract, and the more efficiently they can operate, the more profitable they will become, the faster wages will grow,
and the more tax will be paid to the government.
Budget forecasts show the unemployment rate falling to 5.2 percent by 2017, not only as a result of increasing economic
activity, but also due to the impact of the next tranche of welfare reforms. The additional $188.6 million allocated to
welfare over the next four years is expected to cover the hiring of more case managers for a further 80,000
beneficiaries who are being subjected to work testing requirements. On top of that there are incentive payments for sole
parents who return to work earlier than required, and special funding for external providers to work with high-needs
beneficiaries who will require intensive help to become work ready.
The benefits of welfare reform cannot be over-stated and is something the NZCPR has long been calling for. Until
National embarked on the present reforms under the able leadership of Paula Bennett, welfare had become a soft touch and
the favoured playground for socialist politicians. Changes introduced by the Labour Government over the nine years they
were in office weakened the barriers to welfare: relatively few beneficiaries were work tested, sanctions for
non-compliance were weak, and fraud was rife.
There were endless stories of people abusing the system: workers who had tired of their jobs cruised onto sickness
benefits or the dole, and unskilled young women - many still girls at school - all too casually ended up on the Domestic
Purposes Benefit instead of in employment.
Thankfully, the reforms have created disincentives, making the transition into taxpayer funded dependency more difficult
- but still not difficult enough. Over time welfare should only provide support for those in genuine need – long term
security for those who cannot work for a living, and shorter term support for those who are able bodied and looking for
A key aspect of successful welfare reform is a buoyant job market. The Budget contains many items that will generate
jobs. Prime amongst these of course is the rebuilding of Christchurch. It is difficult to comprehend the scale of the
task ahead, but at a cost of around $40 billion, it is reported to be the largest rebuild undertaken anywhere in the
world in modern times.
In addition, on-going job opportunities are being created through the government’s continued investment in
infrastructure. This includes the proposed extension to the Northern Motorway, which is a significant investment in
creating a modern transport network to open up the North to better economic growth opportunities. As New Zealand’s worst
performing region, Northland is in urgent need of economic stimulus.
More growth opportunities will also be created as a result of the government’s privatisation agenda. Most of the $1.7
billion in proceeds from the 49 percent sale of Mighty River Power are being used for the Future Investment Fund: $50
million for the broadband rollout to schools, $94 million for KiwiRail, $80 million for irrigation infrastructure
projects, $426 for Christchurch hospitals, and $700 million for “new contingencies” such as new schools, a new justice
and emergency services precinct in Christchurch, and support for the city’s tertiary institutions.
The next State Owned Enterprise being put up for sale is Meridian Energy. Meridian is the country’s largest power
company, with seven hydro-power stations and four wind farms, generating around a third of the country’s electricity.
The partial sale of the company, which was valued in 2011 at $6.5 billion, is expected to provide a further $3.25
billion for the Future Investment Fund. Over the six years, the asset sales programme is expected to raise a total of $6
billion, of which $1 billion is earmarked for spending on schools and $1 billion on hospitals. Treasury has estimated
that $780 million in interest costs will be saved as a result of asset sales.
Budgets give a clear picture of government spending: Crown expenses stand at $72.4 billion, a third of which will be
used for social security and welfare, 21 percent for health, 17 percent for education, 6 percent for government
services, 5 percent for law and order, 5 percent for finance costs, 3 percent for transport and communications, and 10
percent for conservation, defence, primary industries, and all of the other ministerial votes.
Budgets also show the source of government funding: Core Crown revenue is forecast at $68.4 billion, 41 percent of which
comes from personal income tax, 24 percent from GST, 15 percent from company tax, 3 percent from other direct taxes, 8
percent from indirect taxes, 4 percent from interest and dividends, and 5 percent from other revenue.
Over the next three years, Treasury expects income tax to increase by $2.6 billion, GST by $2 billion, and corporate tax
by $1.6 billion – these increases will be generated not by raising tax rates, but by an improvement in economic growth,
leading to higher business profits, higher incomes and increased household spending.
The Budget shows that of the $27.8 billion in personal taxation collected by the government, the lion’s share is paid by
the 15 percent of New Zealanders who pay the top rate of tax on earnings of $70,000 and over. They contribute 57 percent
of all income tax collected by the government. That is, 15 percent of taxpayers pay 57 percent of the tax. The
Green-Labour coalition think that’s not enough – they say high income earners are not paying their fair share!
Of all of the changes signalled in the budget, probably the most controversial is those associated with housing. It is
no secret that concerns exist over house price inflation and the potential for a serious “housing bubble”. House price
inflation is caused when the demand for housing outstrips supply. This is presently the case in the key Auckland market,
where only 5,000 or so new housing permits a year have been issued over most of the last decade, when more like 9,000
were needed. As we know, housing inflation could trigger the Reserve Bank to raise interest rates, but in this
environment there is a real risk that interest rate increases would push up the value of our dollar (as overseas
investors would flock to buy the Kiwi to take advantage of the higher interest rates) to the detriment of exporters and
This is a dilemma the government is attempting to address through two initiatives announced in the Budget. The first is
the establishment of Housing Accords in Special Housing Zones where there are major problems with housing affordability.
These accords will be used to speed up council consent processes and free up land for housing subdivisions until the
Resource Management Act and local government planning reforms are in place. Secondly, the Reserve Bank has been given
additional powers to help rein in an over-heated housing market, including by restricting the number of low deposit
loans that banks can issue.
This week’s NZCPR Guest Commentator, Professor Norman Gemmell, Victoria University’s Chair in Public Finance, picks up
on this theme in his budget analysis, Budget 2013 – Good Policy or Good Luck?
“It is on housing affordability, and the new agreement with the Reserve Bank, where the biggest new initiatives are to
be found. Numerous studies in recent years have encouraged the government to do more on the housing supply-side and this
Budget offers more specifics on how they intend to speed up, facilitate and extend the supply of new houses.
“But for me, alarm bells ring with both their new demand-side initiatives - a pilot scheme of low/no interest loans to
low-income borrowers, and increased rent subsidies. These always sound good as a help for the poorest buyers but are a
strange way to discourage house price inflation. Namely, putting more money in the pockets of those trying to rent or
buy property. If these schemes are given a wider roll-out, expect to see landlords reap much of the benefit as weekly
rents rise in response, and lower-end house prices rise as the newly enabled recipients of the no-interest loans enter
the market as house purchasers with greater buying power.”
Policies designed to enable people who cannot afford a deposit to buy their own home are risky at the best of times. It
is schemes like this that helped to create the global financial crisis in the first place. One would have hoped that
prudent policy-makers would have steered well clear of such ill-advised schemes - in spite of the increasingly loud
calls by opposition parties and advocacy groups.
Similarly with Warrant of Fitness checks for rental houses - a policy long advocated by the bureaucracy-lovers of the
‘left’ who haven’t understood that such regulatory interventions achieve little other than an increase in rents - in the
end, hurting the very people such misguided policies purport to be helping.
All in all, the 2013 Budget shows that while there is obviously much more to do, National has been a prudent manager of
the New Zealand economy during some of the most challenging times this country has ever known. What’s more, with the
Australian economy turning from a forecast surplus to a A$20 billion deficit, many Kiwis who moved there for greater
opportunity, may well find themselves attracted back home - bringing with them the talents and skills that New Zealand
will desperately need as we move towards the brighter future that is being signalled.
THIS WEEK’S POLL ASKS:
On a scale of 1 to 10 (10 being better than 1), how do you rate the government's 2013 Budget?
*Read this week's poll comments daily HERE
*Last week 96% of voters supported the idea of our politicians being guided by Singapore's success ... read the comments HERE
NZCPR Guest Commentary:
BUDGET 2013 - Good Policy or Good Luck?
By Professor Norman Gemmell
“Is Budget 2013 different? At first sight it all sounds very familiar: maintaining fiscal prudence by responsibly managing the government finances, whilst trying to wring every last ounce of efficiency from restricted public spending. The economic headwinds may be
abating with forecasts starting to look more optimistic, but this is a government still imposing strict limits on its
expenditure growth. Getting the government’s books back into surplus may sound like the proverbial ‘stuck record’, but
there can be no doubt that anything else would be a risky strategy in this ‘new world’ where financial markets no longer
believe that lending to indebted national governments is a riskless business.” ... read the full paper HERE