Growing pains? Future gains?

Transcription

1 Growing pains? Future gains? Budget 2017 ey.com/nz/budget2017

2 Budget 2.0 Delivering for New Zealanders Finance Minister Steven Joyce s budget debut is all about Delivering for New Zealanders. Joyce is taking advantage of strong economic and fiscal conditions. Budget 2017: Lifts family incomes, by way of tax cuts, changes to working for families and a boost to the accommodation supplement Improves resilience against future economic shocks and natural disasters Invests in public services Real GDP growth per capita is less rosy, forecast at 0.9 percent for 2017, rising to 1.4 percent in That s OK by New Zealand standards but it has been higher in the past in 2013, 2012 and 2007 for example. Even so, the Government is well placed to rebuild our fiscal resilience. It remains on track to meet its net debt to GDP target of around 20 percent by 2020 and now aims to reduce net debt to between 10 and 15 percent of GDP by 2025 Net Debt to GDP over time 80 Bending the debt curve? Invests in a growing economy Invests in infrastructure Joyce says we have a strong and growing economy built on a strong economic plan. Has he delivered? The economic and fiscal outlook is positive, supported by exports, tourism, construction activity, high inbound migration and low interest rates. Annual economic growth is forecast to grow by around 3 percent over each of the next four years. Annual Change in Real GDP Net debt as a % of GDP Source: Treasury, New Zealand Actual 2004 Forecast 2009 Forecast (without policy response) 2009 Forecast (with policy forecast) 2017 Forecast Annual % Change in real GDP As good as it gets? New Zealand always benchmarks ourselves against Australia. Read our head-to-head comparison here. Overall, Joyce s first budget is a balanced affair. He s billed it as sticking to the plan and, with public services, debt, tax and infrastructure all tackled, he s done just that Source: Treasury, New Zealand New Zealand Budget

3 The economy Investing in a Growing Economy Measures to reinforce the Government s Business Growth Agenda include: Innovative New Zealand $373 million investment to help diversify the economy and support more jobs and higher wages, including: $81.9 million for the Endeavour research fund. $74.6 million for Callaghan Innovation R & D Grants. $69.3 million for increased tertiary fee subsidies. $52.5 million for university research funds (PBRF). Trade Agenda 2030 $134 million to forge new and better trade opportunities to increase the standard of living of New Zealanders. Tourism $61 million towards a new $102 million tourism infrastructure fund for regional New Zealand. $86 million for DOC tourism infrastructure around New Zealand. Natural Resources $81 million for predator control programmes, protecting our fisheries and investment in new water storage. Film Industry $222 million over four years plus $18 million in 2016/17 for the International Screen Production Grant to make more international movies in New Zealand. $64 million brought forward for the domestic screen grant. Māori Development $93 million for developing Māori tourism, Māori housing and social initiatives, Whānau Ora extensions, and supporting and sustaining the use of te reo New Zealand Budget

4 New Zealand vs Australia Budget 2.0 for an election year? With Australia s Federal Budget handed down on 9 May, the time is right for a cross-country snapshot. Both countries economies are growing. While New Zealand records a surplus, Australia is set to record 12 consecutive deficits the longest continuous period of deficits in its modern history. Prime Minister Bill English and Finance Minister Steven Joyce pride themselves on our sound public finances, targeting net debt to fall below 20% of GDP. Meanwhile Australia s net debt is expected to rise to the highest point in that country s history. Even so, Australia s peak debt is projected to peak at 19.8%. Australia s problem meets our definition of success. Is this a Budget 2.0 for an election year? Joyce has wiped the slate clean. The Government has moved on from trying to return to surplus through spending control to maintaining a surplus while simultaneously increasing public spending. Spending on the Family Incomes Package, infrastructure, tax, the care workers settlement, social investment this is a Budget featuring big changes. Infrastructure is a big winner on both sides of the Tasman. Each Government has made strong commitments to enable major infrastructure projects. In New Zealand, we see an $11 billion spend on schools, housing, state highways, rail, health facilities, defence and prisons. Australia has heralded a $70 billion infrastructure spend-up. Deficit/Surplus Is the surplus here to stay? Net Debt 20% by 2020? Real GDP Growth As good as it gets? New Zealand 2016 Surplus $1.8 billion (0.7% of GDP) 2017 Surplus $1.6 billion (0.6% of GDP) % of GDP % of GDP 2016/17 3.1% 2017/18 3.5% Australia 2017 Deficit A$37.6 billion (2.1% of GDP) 2018 Deficit A$29.4 billion (1.1% of GDP) % of GDP % of GDP 2016/ % 2017/ % Inflation Hitting that elusive 2% mid-point target Interest rates Good time to invest Average full time wage An entrenched 30% pay gap Unemployment March 2017 Skills at a premium in tightening New Zealand labour market Immigration Small net inflow from Australia 2018/19 3.8% 2018/19 3% 2.2% 2.1% % % NZ$1, % 5.9% Net inbound migration (year ended March 2017) 71,932 A$1, Net inbound migration (year ended 30 June 2016) 182, New Zealand Budget

5 New Zealand vs Australia A Tale of Two Tax Systems Amid talk of tax cuts, do the two countries share a structural problem? Revenue will grow in line with GDP, yet expenditure will rise with demographic trends. New Zealand s stable and efficient business tax system is a national asset. We are pleased to see that Joyce hasn t bowed to pressure to accelerate measures targeted at much needed inbound investment. Changes to the personal tax system around thresholds and working for families tax credits were well signalled and targeted at that vital demographic segment, the Kiwi battler. With the average full time wage closing in on $60,000, these cuts will make a real difference to a lot of people. Unlike New Zealand, Australian changes focus on increasing tax revenues. Even so, our total tax take as a share of the economy remains well ahead of that in Australia. With a top personal rate including Medicare and levies touching 47% and a company rate still above New Zealand s, Australia struggles for revenue. New Zealand tax system by numbers Tax/GDP Ratio Budget 2017 tax measures Personal tax rates 2017/18 New Zealand 27.7% for 2016/17 Remains between 27-28% until 2021 Business tax Predicting $250 million over four years in additional revenue from work to halt multinational tax avoidance Some black hole expenditure and feasibility costs to become tax deductible Personal tax from 1 April % rate increases in $14,000 threshold to $22, % rate increase in $48,000 threshold to $52,000 Abolition of independent earner tax credit Working for families family tax credit abatement changes brought forward $14, % ($22,000 from 1 April 2018) $48, % ($52,000 from 1 April 2018) $70,000 30% Above $70,000 33% Australia 23.2% for 2016/17, rising steadily to 25.4% by 2021 Business tax New major bank levy for authorised deposit taking institutions with liabilities of at least A$100 billion, to raise A$1.5 billion each year International tax anti-avoidance measures extended Small business instant write off for assets costing less than A$20,000 extended to 30 June 2018 Personal tax Medicare levy to increase to 2.5% from 1 July Relief for low income earners will remain. Temporary budget levy (on incomes over A$180,000) to end on 30 June 2017 Administration ATO funding to target serious crime Taxable payments reporting system for contractors in the courier and cleaning industries Sales suppressed technology and software banned Housing and superannuation First home super saver scheme Downsizing home to upsize superannuation A$18,200 nil A$37,000 19% A$87, % A$180,000 37% Above A$180,000 45% Excludes 2% Medicare levy New Zealand Budget

6 Tax Personal tax cuts from 1 April 2018 A modest dividend for middle-income New Zealand Finance Minister Steven Joyce has announced tax cuts widely signalled in advance to apply from 1 April The cuts will make a difference to millions of hard-working New Zealanders. Could they have been brought in sooner say 1 October? When challenged on that point, Joyce cited Inland Revenue s current transformation as a reason for delay. Middle income tax cuts From 1 April 2018, the $14,000 income tax threshold will increase to $22,000, and the $48,000 threshold to $52,000. The change above means anyone earning more than $22,000 annually will receive a tax reduction of at least $10.77 a week, and anyone earning more than $52,000 will receive a tax reduction of $20.38 per week. The independent earner tax credit of up to $10 per week will be discontinued. Individuals who currently receive the tax credit will be fully compensated by the increase in the $14,000 tax threshold to $22,000. These are tightly targeted, relatively small changes. It is seven years since National changed personal tax rates. Over that time the average wage has risen from $49,500 to $58,900. Many middle income earners are now faced with a marginal tax rate of 30 per cent. Examples Julia, an IT professional, earns $60,000 per annum, just over the average wage of $1,133 per week. She will see an extra $20.38 per week in her hand from 1 April The saving is smaller for the median earner. Take Kyle, a newly qualified primary school teacher on the 2016 starting base salary of $47,039, a little under the June 2016 median wage of $937 per week (or around $49,000 annually). He will gain a net $8.37 per week from 1 April 2018 $10.77 as a weekly tax reduction, but losing $2.40 from the abolition of the independent earner tax credit. And for hospitality worker Laura, on the minimum adult wage of $15.75 per hour, pulling in $24,570 per annum from a 30 hour week, the weekly gain will be $ Higher earners will receive no more than those on middle incomes as the top threshold remains unchanged. Everyone with an income in excess of $52,000 will receive the maximum weekly cut of $ Table 1: Current and new personal income tax thresholds Current Bracket New Bracket Rate 1-14, , % 22,001-48,000 22,001-52, % 48,001-70,000 52,001-70,000 30% 70, , % New Zealand Budget

7 Tax Tax and fairness Joyce has worked hard to prevent criticism on fairness grounds for delivering tax cuts for the rich. Higher earners will inevitably receive the maximum tax cut as they pay more tax. Short of increasing the top rate of tax, it is hard to see how Joyce could have delivered a different outcome given the funds available. As it is, the top tax rate will now cut in at a mere 1.2 times the average full time wages one of the lowest ratios in the OECD. Today s Budget statistics show that in 2017, taxpayers on incomes over $70,000 paying the top tax rate of 33% (the top 19 percent of taxpayers) already pay $20.5 billion in income tax, that is, 62 percent of all income tax. The bottom 49 percent, with income of $30,000 or under, paid $3.0 billion, or 9 percent of the total. (Note these figures cover all individuals over 16 years of age not just those in employment.) Today s announcements will skew this pattern further towards income tax being largely paid by higher earners. With a progressive tax system, higher income taxpayers will always pay more tax both in absolute terms and as a percentage of their total income. Fiscal drag has hit middle incomes hard Joyce has worked hard to target the cuts for maximum impact at middle income levels. The case for targeting is strong: it is people on middle incomes who have seen the biggest proportionate increase in their tax burdens since the last tax cut in For the tax year ended 31 March 2017 the average full time worker paid almost $2,000 more in income tax than they did in 2012: $10,701 compared to $8,719. That s around $38 per week more. Even inflating the 2012 payment to today s prices, that s nearly $30 per week more. That is due to fiscal drag: the combined impact of wage growth and inflation dragging people into higher tax brackets. The chart below shows the way in which the tax liability for the average full time earner has increased over time. Income tax paid by the average full time employee over time 24.00% Average tax rate for the average full time earner 22.00% 20.00% Impactof October 2010 tax cuts Average tax rate 18.00% 16.00% Impactof October 2008 tax cuts 14.00% Fiscal drag 12.00% 10.00% New rates Year New Zealand Budget

8 Tax The $48,000 question Back in October 2010, $48,000 was the magic tax number. Ignoring the independent earner tax credit 1, the marginal tax rate below $48,000 was 17.5 percent. With the mean wage a little over $48,000, the median wage around $40,000 and three-quarters of all adults reporting incomes of under $48,000, most people paid only 17.5 cents of tax for every additional dollar earned. In 2010 that was smart tax design. Low marginal tax rates were targeted at middle income New Zealand. With tax rates unchanged since 2010, the downside of that targeting becomes apparent. The majority of full time workers now face a marginal tax rate of 30 percent. Each year more taxpayers face marginal tax rate of at least 30 percent. The chart below shows how tax rates for the average earner have been drifting upwards. For the 2012 income year (the first full year following the cuts applied from 1 October 2010, a full time worker on the average wage faced an average tax rate of 16.7%. This year, that same worker pays an average 18.2%. Average tax rates since , , Tax liability for the average full time earner Why is the Independent Earner Tax Credit being discontinued? Individuals who receive the independent earner tax credit will be fully compensated by the increase in the $14,000 tax threshold. Since being introduced, the independent earner tax credit has had less uptake than expected. Only 32 per cent of eligible recipients claim it during the year they are eligible. Removing the tax credit will also help simplify the system, as individuals will not have to file a tax return at year-end or use a different tax code to claim it. We think that s a good call and congratulate Joyce on removing a measure which did not meet its aims. Has Joyce delivered meaningful personal tax reform While Joyce will have had the impact on people like Julia, Kyle and Laura in his mind, he has to balance the Government s books. The increasing personal tax take has gone a long way towards meeting debt targets and shoring up New Zealand s credit rating. The chart below shows the increase in income tax receipts over the last few years, both in dollar terms and as a proportion of gross domestic product. Personal tax revenue since , Personal Tax Revenue 10, , % Income tax liability ($) 9, , Fiscal drag Impactof October 2008 tax cuts Impactof October 7, tax cuts 6, , , New rates Year Personal Tax Revenue ($b) 38, , , , , , , , ,000.0 October 2010 tax cut 14% 13% 12% 11% 10% Personal Tax Revenue as a % of GDP Tax liability Tax liability adjusted for inflation (2017 prices) 20, % Individuals Tax ($000) The Treasury Individual tax as a proportion of GDP The steeply rising tax take tells its own story tax relief had become inevitable. At a cost of almost $2 billion per annum it s a significant package but still leaves the average earner on a 30% marginal tax rate. Is that enough to stifle the calls for more? Final Thoughts Tax cuts, combined with family assistance, were a central part of Budget 2017 s Family Incomes Package. Improving economic conditions and forecasts, along with fiscal drag, have given the Government real choice this year. This is a well thought out tax package which will make a difference to many middle income New Zealanders. ¹ The independent earner tax credit abates at 13 cents in the dollar for incomes between $44,000 and $48, New Zealand Budget

9 Tax Working for families tax credits 2.0 Government to target relief towards low and middle-income families Policies evolve as circumstances change. That s the lesson we draw from today s reset around working for families tax credits. Tighter targeting, but help for younger families From 1 April 2018 Increases to the family tax credit rates for children aged 0 to 15, to align with the rates for children aged 16 to 18 years the existing five rates of family tax credit will reduce to two Abatement rate to increase from 22.5 percent to 25 percent Abatement threshold to drop to $35,000 Example Jo is a single parent with a 12-year old daughter. She earns $36,350 per annum. Right now Jo receives family tax credit ($92 per week) and the in-work tax credit $72.50 per week), therefore receives a total of $ per week or $8,554 per annum. For each dollar Jo earns over $36,350, her credit reduces by 22.5 cents. Once Jo earns over $74,367, her working for families tax credit finally disappears. Following the changes Jo will now receive an extra $2.76 per week from the family tax credit. She gains from the increased rate for her daughter, but loses from tighter abatement rules. Supporting families through tax credits Governments from both left and right have for many years seen supporting families as important. Most recently, a package aimed at alleviating child poverty was at the heart of Budget That budget included an extra $25 a week, after tax, for beneficiary families with children. For Budget 2017, Joyce sees that working families are the group in greatest need, with a boost for working for families tax credits. The working for families package has been a political football for much of its existence. Working for families expands through the 2000s Working for families was the centrepiece of Labour s 2004 Budget. Then Finance Minister Michael Cullen projected the total cost to be $1.1 billion a year. At that time, abatement started for annual incomes as low as $25,000, with the credit abating at 30 cents in the dollar. John Key, then in opposition as National s Deputy Finance Spokesperson, derided the programme as communism by stealth. He argued the package would discourage higher income recipients from working overtime and weekends given the high abatement rates for families over a wide range of middle incomes. Election 2005 honed in on this ideological difference. Labour lifted the abatement threshold to $35,000 and dropped the abatement rate to 20 cents in the dollar. Credits now extended well into middle, and - for large families even six figure incomes. Jo will of course also benefit from the cut in income taxes of $ So in net terms she gains by $ In total the Government will spend an extra $300 to $400 million each year on working for families, up from the current $2.4 billion. That s significant but many commentators had predicted more New Zealand Budget

10 Tax Targeting in order following the Global Financial Crisis In 2011, anti-avoidance measures removed the ability for families to use investment losses, including losses from rental properties, to reduce their income and therefore become eligible for working for families payments, from 1 April Automatic adjustment to the abatement threshold was removed. Even so, by 2011, annual costs had grown to $2.8 billion each year, far above Cullen s original $1.1 billion costing for the more targeted original scheme. Changes announced gradually over four years to lower the abatement threshold back to $35,000, and increase the abatement rate to 25 cents in the dollar, compared to the previous 20 cents in the dollar. Time to press refresh Working for families 2.0 Have we come full circle? Targeting is now tighter than since the mid 2000s. Working for families appears engrained in our tax system for a generation, no longer communism by stealth, but instead redistribution loud and proud. Working for families is a complex scheme. Its annual focus does not sit well with the ever changing requirements of today s working world and shifting family structures. Could the Government have done a more thorough review of indexation rules, work requirements, payment mechanisms and impact on child poverty? Only time will tell. These changes had still been working through the system. Thus far the abatement rate has increased to 22.5 cents in the dollars (not 25 cents), with the increase applying from 1 April Joyce has chosen to bring forward the tougher abatement and eligibility rules that would otherwise have progressively occurred by Confused? That s not surprising. Some reports suggest that working for families is so complex that a third of payments made under it are inaccurate, that is, more than 20 percent away from the correct credit entitlement New Zealand Budget

11 Infrastructure investment Population growth combined with spending control have left New Zealand with a real infrastructure deficit. With interest rates at record lows, inflation under control and a buoyant construction sector, the Government is investing an additional $4 billion in a range of areas. Interest rates and official cash rates over time % Time to Invest? Official cash rate Consumers Price Index Announcements include: Kaikōura roading $812 million capital investment to reinstate the earthquake damaged sections of State Highway 1 from Picton to Christchurch. Rail around New Zealand $548 million investment in the rail network with Kiwirail, including $98 million for the Wellington Commuter Rail Network. Auckland City Rail Link $436 million investment for the first part of the Crown s share for the Auckland City Rail Link project. New schools and classrooms $392 million additional investment in school property with six new schools, 11 special education satellite units, and 305 new classrooms. Defence $576 million investment in Defence for new capability and the modernisation of defence bases. Justice sector $763 million investment in additional prison capacity. Health $150 million more for the District Health Boards capital plans. The Government s total investment in new infrastructure over the next four years is $32.5 billion. This includes $9.2 billion in new State Highways and $2.7 billion in housing, including the Auckland Housing Programme New Zealand Budget

12 Housing and other social investment Accommodation supplement to rise from 1 April 2018 First increase since 2007 As part of today s Family Income Package, Finance Minister Steven Joyce today announced Accommodation Supplement maximum payments will increase. A three person family living in Auckland could receive an extra $80 per week. On average 75,000 households receiving a benefit will see an increase of $30 per week. Helping with accommodation needs Accommodation Supplement is a weekly payment which helps people with their rent, board or the cost of owning a home. The amount of any supplement depends on your income, assets, accommodation costs, family circumstances and crucially where you live. A solo parent with 2 or more children living in central or north Auckland will now be able to claim a maximum of $305 per week (up from the current $225). Living outside any of the main provincial centres that maximum comes down to $120 per week (up from the current $75). An overdue adjustment? Accommodation Supplement rates remain unchanged since 2007, and are based on 2005 rentals. Rents have moved on considerably since All the main centres have had capacity problems and therefore pressures around supply and price. Mean private sector rentals in Auckland, at $531 for a three-bedroomed house, are 58 per cent higher than in On these grounds alone, an increase merely to restore the past position can be supported. Of the approximately 300,000 recipients of the Accommodation Supplement payment, almost 200,000 are tenants. 136,000 receive the maximum rate. More and more low-income tenants are hitting the maximum payments available under the Accommodation Supplement, and struggling to pay any further increases. Consequently they have to pay any further rent increase from their remaining income. Yet other data at a national level is unclear. The Government s own experimental figures, released earlier this month by the Ministry of Business, Innovation and Employment, suggest that Renting is consistently more affordable than buying a first home At a national level, housing affordability for renters worsened following the Global Financial Crisis until June 2013, but subsequently improved 2 Housing affordability for renters in Canterbury has been improving since 2011 Even so, 2/3rds of renters nationally fall below a proposed nationally affordable benchmark. We can see the case for action. 1 Ministry of Business, Innovation and Employment, Rental Bond data, April Government figures use date only up to June New Zealand Budget

13 Housing and other social investment For the benefit of landlords or tenants? It is not easy to know how much the increased Accommodation Supplement will address affordability needs. Who will benefit most landlords or tenants? At least in the short run, there must be a risk that the increased Accommodation Supplement will simply increase rentals, making landlords rather than tenants the true beneficiaries. That s because in the short-run, the supply of rental housing is inelastic as it takes years for additional housing to be built. In the long-run the increased supplement could help to increase housing supply as renting out becomes more profitable and budding landlords invest capital into new stock. Final thoughts There is a real need for more effective help for low income families who struggle with increases in rental costs or even with housing availability. Accommodation Supplement has been a cornerstone of housing assistance since the 1990s but there has never been a full review of its effectiveness. At a cost of $1.2 billion each year, even before today s changes which will cost an extra $400 million, perhaps such a review should be the Government s next step. Investing in public services Initiatives include: Health $3.9 billion for District Health Boards, care and support workers, Disability Support Services, ambulance services, pharmaceuticals, elective surgery, bowel screening, mental health services and primary health care. Education $1.1 billion for schools and early childhood centres, roll growth and demand, and an increase in operational grant funding for schools. Vulnerable Children, Oranga Tamariki $424 million investment in the new Ministry and new model for working with vulnerable children, plus funding for caregiver support, Children s teams, Family Start and Youth Justice. Justice Sector $1.2 billion for a 10 per cent increase in police staff numbers, meeting increased demand for justice, courts and corrections services, initiatives in burglary prevention, reducing family violence, reducing youth reoffending, and supporting at-risk prisoners. Social Development $194 million for Social Development initiatives including $64 million to support people into employment and $38 million for development of the new Social Investment Agency. Social Housing $185 million for more emergency housing, to expand the Housing First programme and to provide a pathway into housing for people with a Corrections history New Zealand Budget

14 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organisation, please visit ey.com Ernst & Young, New Zealand. All Rights Reserved. For media enquiries please contact: Hilary Brown Marketing Manager hilary.brown@nz.ey.com Tel: Contacts Aaron Quintal Taxation aaron.quintal@nz.ey.com Tel: David Snell Taxation policy david.snell@nz.ey.com Tel: APAC No. NZ NZ ED None This communication provides general information which is current at the time of production. The information contained in this communication does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Ernst & Young disclaims all responsibility and liability (including, without limitation, for any direct or indirect or consequential costs, loss or damage or loss of profits) arising from anything done or omitted to be done by any party in reliance, whether wholly or partially, on any of the information. Any party that relies on the information does so at its own risk. ey.com