Financial gains? Productivity pains? Pre-election Economic and Fiscal Update 2017

Transcription

1 Financial gains? Productivity pains? Pre-election Economic and Fiscal Update 2017

2 Pre-election Economic and Fiscal Update 2017 The Public Finance Act 1989 requires the Treasury to publish a Pre-election Economic and Fiscal Update (PREFU) between 20 and 30 working days prior to an election. The Government s books are in fine shape. An incoming government will face a literal $6.4 billion dollar question by Based on existing policies, that s the size of the surplus Treasury forecasts by then. The highest projected surpluses we have seen since 2008 are now a near certainty. There are challenges ahead. Striking a balance between the demands for tax cuts, infrastructure investment, social spending, reducing debt and restarting contributing to the New Zealand Superannuation Fund will test the mettle of the incoming Minister of Finance. The highest projected surpluses we have seen since 2008 are now a near certainty. Incumbent Minister of Finance Steven Joyce himself recognises this. His call is that There is limited room for any additional expenditure beyond what is already proposed in these forecasts until the 2020 financial year.anything significant in the meantime would involve more borrowing or raising additional tax revenues. Whatever happens from now, PREFU shows New Zealand has a future filled with opportunities. It shows too that our fiscal and economic gains have been hard won maintaining them requires planning, management and balancing competing needs. 2 Pre-election Economic and Fiscal Update 2017

3 Economic outlook: towards the sunlit uplands? PREFU confirms the trend towards stable, broad based growth seen in Budget Even so, it has some warning signs compared with Budget New Zealand economy by numbers PREFU Budget 2017 Surplus Growing but not so fast? 2017 $3.7 billion (1.4% of GDP) 2021 $6.4 billion (2.0% of GDP) 2017 $1.6 billion (0.6% of GDP) 2021 $7.2 billion (2.2% of GDP) Net Debt 20% by 2020? % of GDP % of GDP % of GDP % of GDP Real GDP Growth As good as it gets? 2016/17 2.8% 2020/21 2.3% 22016/17 3.1% 2020/21 2.4% Unemployment June % 2021 forecast 4.3% March % 2021 forecast 4.3% Inflation Hitting that elusive 2% mid-point target June 2017 Quarter 0.0% Annual 1.7% March 2017 Quarter 1.0% Annual 2.2% Interest rates Official Cash Rate remains at record low 1.75% 1.75% Our economy is approaching a turning point. We are coming off a strong period of economic growth, with buoyant tax revenues and the future Government facing more choices than has been the case since the Global Financial Crisis. Can we maintain that progress? Sustained but modest Economic Growth Ahead New Zealand has a strong story to tell around economic growth, gradually reducing unemployment, strong demand for many of our commodities, a skilled workforce and opportunities for inbound investment. Over the next year to June 2018, Treasury projects growth of 3.2% in real terms (see Figure One), underpinned by investment, private consumption, strong migration inflows and low interest rates. Exports notably commodities such as milk, meat and forestry products and inbound tourism will continue to keep the economy on a stable path. That trend picks up to 3.7% in the 2019 year, but then falls back to 2.3% by 2021 in part reflecting slower population growth and interest rates rising from record lows. Residential investment forecasts have lowered a little, with capacity and credit constraints. 3 Pre-election Economic and Fiscal Update 2017

4 Economic outlook: towards the sunlit uplands? A robust labour market will see continued falls in unemployment, projected to be down to the long term norm of 4.3% by We expect to see strong growth in construction, business services, health and education. Net inbound migration will provide labour, but it comes with its own housing and infrastructure challenges, especially in Auckland. The outlook for New Zealand s primary produce sector is strong, with an improved global demand supporting food prices. Milk prices are coming off a strong run, with meat prices also firming of late, and forestry and horticulture in good shape. Business investment should hold up well, supported by low interest rates, rapid population growth and the Kaikoura earthquake build. Governments also appear likely to invest strongly into infrastructure: roading and housing being two likely areas. Domestic demand will also be driven by strong inbound migration, alongside Budget 2017 s Family Incomes Package, although high household debt and gradually increasing mortgage rates will act as constraints on the extent of demand. Annual % Change in real GDP Figure One: Annual Change in Real Gross Domestic Product As good as it gets? Actual % change in real GDP Forecasted (PREFU) Forecasted (Budget) Source: Treasury, New Zealand Challenges on the horizon But there are challenges on the horizon: more than is perhaps widely recognised. 1. Living standards real incomes are rising only slowly, and even then patchily by region, with many lower- and middleincome New Zealanders struggling to see gains. Gross domestic product (GDP) per capita is increasing at only 0.6% in 2017 although it is forecast to pick up to 1% or more from Productivity New Zealand s productivity growth has been lagging behind our competitors for several decades. Our relatively healthy economic growth has been built on longer working hours, greater participation and inbound migration. 3. Monetary policy inflation has remained stubbornly low, tracking below the Reserve Bank s 2% mid-point for several years, even with a sustained record low official cash rate (see Figure Two). How best to meet a new Policy Targets Agreement will be important to the incoming Bank Governor. Figure Two: Interest Rates and Inflation Time to Invest? Official cash rate CPI Actual 2017 Budget forecast 2017 Pre Election forecast Source: Reserve Bank of New Zealand, New Zealand Treasury 4. Construction there is a clear infrastructure and housing deficit, with major parties setting out plans to build houses, roads and hospitals. With the construction sector already witnessing high inflation, does the capacity exist to deliver on an ambitious programme? 4 Pre-election Economic and Fiscal Update 2017

5 Government surplus: the $6.4 billion question Right now, the Government s books are in good shape. A projected surplus by 2021 of $6.4 billion (2.0% of GDP) is a healthy position to be in (see Figure Three). Tax revenues, especially from corporates are flowing strongly. But that is lower than the $7.2 billion (2.2% of GDP) forecast in May 2017 s Budget. Treasury s major call that the upswing in tax revenue will not persist limits the pre-election fiscal upside. Since the Budget, the corporate tax take has been particularly strong, especially from the finance/investment sector. Corporate tax forecasts for the coming years are higher than projected in the Budget. But the rate of growth is not expected to continue returns from the investment sector are notably volatile. Treasury s major call that the upswing in tax revenue will not persist limits the pre-election fiscal upside. Note these numbers are before the effect of any policy announcements is factored in: they represent the position as it stands today. While not as glowing as some were expecting, we suspect the numbers are sufficiently positive for some additional proposals by all sides before 23 September. 70 Bending the debt curve? Actual 2009 Forecast (without policy response) 2009 Forecast (with policy forecast) Budget 2017 Forecast Pre-election 2017 Forecast Source: The Treasury Net government debt to GDP ratio Figure Three: Net Debt to GDP over time 5 Pre-election Economic and Fiscal Update 2017

6 Government surplus: the $6.4 billion question An incoming government remains well placed to rebuild fiscal resilience. The current National-led Government is well on track to meet its net debt to GDP target of around 20% by 2020, reducing to between 10 to 15 % by Similarly, a Labour-led Government would reduce government debt to 20 per cent of GDP by the 2021/2022 financial year, one year later than National led government. This commitment is a part of the joint Labour and Green Party Budget Responsibility Rules. Labour would prioritise investments that enhance the long term wellbeing of New Zealanders, such as restarting contributions to the Super Fund, building infrastructure and funding programmes to reduce the long term economic risks of climate change. While not as glowing as some were expecting, we suspect the numbers are sufficiently positive for some additional proposals by all sides before 23 September. An incoming government remains well placed to rebuild fiscal resilience. 6 Pre-election Economic and Fiscal Update 2017

7 Business tax election guide Who gets your vote? Aside from Inland Revenue s continuing transformation, which appears likely to retain cross-party support, what else can you expect to see as a result of the outcome of Election 2017? With New Zealand s election only weeks away, we round up what the largest four parties National, Labour, New Zealand First and the Greens - are saying on business tax issues. Whichever party leads the next government, it seems Inland Revenue s technology-led transformation will continue. Expect major change on how your business handles tax from April 2018, when Stage Two of transformation kicks off. Whichever party leads the next government, it seems Inland Revenue s technology-led transformation will continue. PAYE information for the 2018/19 year will be collected in Inland Revenue s new system from April 2018 to allow prepopulation of income tax returns to begin, and legislation currently going through Parliament could see employers reporting employee information on a voluntary basis each pay day from 1 April 2018 (mandatory from 1 April 2019). We also expect to see Fringe Benefit Tax, Gaming Duty, Automatic Exchange of Information, Foreign Account Tax Compliance Act ( FATCA ) reporting, and Withholding Tax move to Inland Revenue s new system. The accounting income method ( AIM ), a new pay-as-you-go option for provisional tax for businesses turning over less than $5 million, will be available from 1 April The company tax rate itself appears unlikely to change. The company tax rate itself appears unlikely to change. Only ACT, campaigning on a 25 per cent company tax rate, suggests any movement. Policies instead centre on international tax, incentives for preferred activities such as research and development ( R&D ), or taxes on less preferred ones like property speculation. We have opted not to include personal tax rate proposals, where the major parties have yet to confirm their position. Information is correct as at 22 August All policies included are based on material published by the current Government, on parties official websites or in recent press releases. 7 Pre-election Economic and Fiscal Update 2017

8 The Business Tax election who gets your vote? Topic National Labour New Zealand First Green EY Comment System design Establish a Tax Working Group Periodic Tax Working Groups, such as 2001 s McLeod Review and 2009 s Victoria University review can challenge existing frameworks and set out a pathway for reform. International tax Wide ranging reforms to implement OECD s BEPS recommendations. The rules would address the use of artificially high interest payments to shift profits offshore, companies which artificially avoid having a taxable presence in New Zealand, and companies which exploit mismatches between different countries tax rules. Introduce a diverted profits tax aimed at multinational tax avoidance. Believes international corporates effectively pay minimal tax in New Zealand. This will be urgently addressed as a part of a tax evasion crackdown. Changes are highly complex and may impact global operating models and tax economics for multinationals doing business in New Zealand. Little, if any, evidence of tax avoidance by inbound investors has been put forward in support of the changes. National s proposed reforms are heavily influenced by developments in Australia. Capital expenditure Make business assets under $20,000 automatically tax deductible. Increasing the immediate deduction for business assets is likely to increase incentives to invest in physical capital, but at substantial fiscal cost. The increase from $200 to the current $500 in 2005 was costly even then. R&D Continue providing R&D grants to businesses Labour plans to bring back the R&D tax credit. Tax incentives for R&D Tax credits for R&D New Zealand R&D spend is low. Business productivity needs to improve. Innovation matters. Would R&D tax credits be more successful than targeted assistance? We had a short-lived R&D tax credit in 2008/09. Exports 20 per cent tax rate on new export net income. New Zealand s previous export performance tax incentives were phased out in the 1980s. Their reintroduction would be a significant departure from our broad base low rate approach to tax policy. Designing and administering an export tax incentive would be challenging. Housing Tax capital gains on investment properties sold within five years of purchase. IIntroduce a capital gains tax on all but the family home. Bright line test already taxes gains from houses sold within two years of purchase. Will extending the test to five years discourage speculative investment or cause market distortions? Change negative gearing rules to deny losses on investment properties as expenses to reduce their tax on other income. LLabour says this change would be phased in over five years with loss deductibility reducing by 20 per cent a year. It estimates an increase in government revenue by $150 million a year once fully implemented. This money would be used to fund a home insulation subsidy scheme. Savings Use the tax system to encourage savings, especially for people saving for a deposit for a first home. Ensure that earnings from approved saving schemes will carry a tax advantage. The tax system already caps taxation of many forms of saving at 28 per cent under the portfolio investment entity tax rules, with withdrawals from KiwiSaver possible for first home buyers. Other countries provide greater incentives by, for example, exempting savings held within approved schemes. This can boost savings of the preferred type, but may simply substitute the tax preferred form of savings for a taxed alternative at significant fiscal cost. 8 Pre-election Economic and Fiscal Update 2017

9 GST Return all GST from tourist expenditure to the regions in which they spent the money. The success of this policy depends on IRD s ability to accurately isolate geographic source of spending challenging for a company operating nationwide. Earmarking, or hypothecating, taxes in this way makes the links between revenue and spending more transparent. But it would reduce flexibility and could lead to overinvestment relative to other needs. Exempt food from lia-bility for GST as a way of helping families on low-medium incomes. New Zealand First estimates this policy will cost $3 billion per year. It states funding will come from clamping down on tax evasion and the black economy, which it estimates at $7 billion annually. Remove GST from rates on residential property. New Zealand First argues GST on rates is a tax on a tax. GST has a broad base, making it an efficient form of revenue collection. It applies to other service charges akin to rates and in situations where the Government charges a separate excise tax. Removing GST from a single item such as rates would be a major change in existing policy. Taxes and the environment Exempt electric vehicles and public transport passes from the fringe benefit tax. The tax system can be used to subsidise desirable actions such as increased use of public transport. Limitations include risks associated with picking winners, fiscal cost and free riders. Charge for the large-scale commercial use of water. Require commercial use of water to be sustainable by reforms to limit resource consents rather than use of a pricing instrument. Develop a system to charge for all commercial uses of water. Environmental pricing through taxation leaves consumers and businesses the flexibility to determine how best to reduce their environmental footprint. This enables lowest-cost solutions, provides an incentive for innovation and minimises the need for government to attempt to pick winners. But high rates of taxation will have an impact on the competitiveness of affected business. For commercial water use, deciding the tax base, setting a tax rate, and matching the tax with the environmental harm will all be challenging issues. Infrastructure Regional fuel tax of 10 cents per litre for Auckland infrastructure. Labour estimates the tax will raise $160 million a year. There is a link between infrastructure spending and the tax base. But any regional tax creates scope for price spreading, avoidance and fuel market distortions. Enforcement Increase staff for tax investigations Crackdown on the e-economy and the new challenges they present to the tax base. Tax administration is not all about audits. All large and complex businesses are account managed, with ongoing scrutiny. Business Transformation will add more sources of information and data analytics to Inland Revenue s toolkit regardless of staff numbers. 9 Pre-election Economic and Fiscal Update 2017

10 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. APAC No. NZ NZ ED None For media enquiries please contact: Jenni McManus Communications Manager jenni.mcmanus@nz.ey.com Tel: Contacts Matthew Hanley New Zealand Tax Leader Matthew.Hanley@nz.ey.com Tel: Aaron Quintal Taxation aaron.quintal@nz.ey.com Tel: David Snell Taxation policy david.snell@nz.ey.com Tel: 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