- As expected the focus is on increased spending on health, education and housing.
- There are some promising signs like the increased support for R & D and investment in infrastructure and regional development.
- Significant tax changes will not be announced until next year or 2020 once the Tax Working Group has made its recommendations
Budget 2018 is sub-titled ‘Foundations for the Future’. How solid are those foundations?
It depends on who you are. For 384,000 Kiwi families with children, who will benefit from increased across the board support, and superannuitants and beneficiaries, who will benefit from targeted measures like the Winter Energy Payment and extensions to subsidised GP visits, the foundations – for future improved prosperity - look good.
For business, there are some promising signs like the increased support for R & D and investment in infrastructure and regional development. However, business is built on confidence and certainty – and, for it, there are still some critical gaps in the foundations.
Those gaps will only be filled once the Government has made a call on, for example, changes to tax settings, policies to boost business use of technology, further welfare reforms and on its full response to climate change. Before the Government can make those sorts of calls, it will need to consider the deliberations of the many external review committees it has set up.
The Minister talks a lot about transformation and vision. He says his Government is “determined to turn the page on the ideology of individualism and a hands-off approach to our economy that has left too many people behind”.
He talks of shifting the settings of our economy to face the challenges of the future including lifting productivity, increasing environmental sustainability and adapting to the changing world of work.
Certainly there is a vision for transformation in some important areas - reducing child poverty and supporting the most vulnerable members of our society.
But in areas important for business it is not quite so clear. The focus on infrastructure investment and regional development is visionary, albeit lacking in detail.
Whether the Budget is transformational in terms of increasing productivity and encouraging innovation i.e. whether it is visionary in an economic sense as well as a social / societal sense is less clear.
As the Minister says, transformation takes time - “we have to balance our ambitious goals with our responsibility for fiscal sustainability”. He makes a good point – we need to give his Government time.
The Big Picture on the Spending
The Budget confirms the Government’s focus on:
- health, education and justice with injections of both operating and capital expenditure into DHBs, early childhood education, schools, the police and prisons
- economic development mainly via a tax incentive for R&D and investment in infrastructure
- regional development principally via an annual $1.0 billion Provincial Growth Fund
- social issues such as child poverty, housing and homelessness with targeted measures including the extension of free GP visits to under 14 year olds, more public housing, assistance for the homeless and insulation grants on top of the Families Package, baby bonus and Winter Energy Payment enacted in December.
Support for R & D
The Government is committed to increasing investment in R & D from 1.3% of GDP to 2% of GDP inside ten years. It is choosing to do so via a tax incentive rather than an increase in grants. The R & D tax credit will allow businesses to claim a tax credit of 12.5 cents on eligible investment in R &D.
The design of the incentive including the eligibility criteria is out for public consultation and, as always, the devil will be in the detail. The key will be to ensure the Government’s subsidy is easy to access, targeted appropriately and spent wisely.
Internationally models of R& D support vary. The hope is that New Zealand introduces a best practice model that incentivises the right behaviours and leads to real innovation. The focus should be on encouraging incremental activity that would not have happened absent the support.
The last R& D tax credit only lasted a year – being repealed by the then new National-led government in 2009. This time the credit needs to have a longer run at succeeding.
In the first year of the Provincial Growth Fund (allocated $1 billion per year) money will be spent on the One Billion Trees programme ($245 million) and the establishment of the new Forestry Service in Rotorua ($15 million).
At first glance there is a lack of detail about how the balance of the $1 billion will be spent in the first year. We know there will be $684 million of operating expenditure and $316 million of capital expenditure.
Much of the additional operating expenditure will be spent on “investment ready initiatives for the current year that meet the criteria for the Fund, and funding for administration”. This will include initiatives in sectors such as tourism and transport.
How and where the money is spent is critical for the regions and for the national economy. The sooner the regions and the businesses located in those regions know the detail the better they can plan. In the meantime we will need to take Minister for Regional Economic Development, Shane Jones, on his word that “provincial New Zealand wins big”.
Support for another region: the Pacific
As announced several weeks ago the Government is increasing its commitment to the Pacific region (by $714 million over four years) to help Pacific countries meet the challenges of climate change and to support more sustainable economic development. Given the size and importance of the local Pasifika community to the national economy and our very close links to this part of the world, the increased focus seems logical.
As we all know any significant tax changes will not be announced until next year or 2020 once the Tax Working Group has made its recommendations and the Government has had the opportunity to consider them.
In the meantime the Government is focussed on several initiatives to address immediate issues in the tax system.
Crackdown on tax avoidance and other new tax initiatives
The Government is counting on an extra $726.3 million of revenue over the next four years from new initiatives including a crackdown on ‘tax dodgers’Learn more
New Zealand Budget 2018
Commentary, insights and analysis of the New Zealand Budget 2018Read more