In this issue I discuss some of the most important drivers and outcomes in Budget 2010, with special emphasis on tax reforms, the growth dividend and getting debt under control.
Last week I delivered my second Budget. Whereas the focus of Budget 2009 was dealing with the immediate effects of the global recession, Budget 2010 is about positioning New Zealand for faster, sustainable economic growth.
Only through lifting long-run economic growth can we create jobs, raise incomes, close the gap with our trading partners and improve the living standards of New Zealand families.
Budget 2010 delivers on that score by:
- Reforming the tax system to put the right incentives into the economy and rebalance it towards savings, investment and exports.
- Investing in New Zealand's future through a significant boost to scientific innovation and substantial new spending on infrastructure.
- Continuing to get debt and deficits under control.
- Investing record sums in priority public services such as health and education.
REFORMING THE TAX SYSTEM
The over-riding aim of Budget 2010 is to lift growth by rebalancing the economy towards savings, investment and exports - and away from borrowing, property speculation and excessive government spending. The reason we have gone for a once-in-a-generation reform of the tax system is that tax is one of the few levers we can pull which has a pervasive effect throughout the economy.
The tax package delivers on four objectives:
- It rewards effort and helps families get ahead.
- It helps us attract and retain skilled people in New Zealand.
- It encourages savings and productive investment - and discourages excessive borrowing, consumption and property speculation.
- And it makes the tax system fairer, strengthens the rules around property investment and gives Inland Revenue extra resources to enforce the current law.
At all taxable income levels, the across-the-board personal income tax cuts more than offset the rise in GST. This is fair and leaves the vast majority of New Zealanders better off. You can read more about the tax package and calculate your own tax cut at www.taxguide.govt.nz
THE GROWTH DIVIDEND
These tax reforms along with other growth-focused Budget measures, such as substantial investments in research, science and technology and infrastructure, contribute to stronger growth than previously forecast.
The Treasury is now forecasting real GDP growth of 3.2 per cent in the year to March 2011 - a significant improvement on the 1.8 per cent forecast in the Budget last year. The projections now show fairly steady growth at about 3 per cent over the next four years. This includes expected extra growth from the Budget tax package, which Treasury conservatively forecasts to add about 1 per cent to the size of the economy by 2017.
CONTINUING TO GET DEBT AND DEFICITS UNDER CONTROL
The Budget shows an improved fiscal outlook over the forecast period, with both Crown debt and Budget deficits better than forecast in Budget 2009. We now expect the deficit to peak at just over 4 per cent of GDP next year, before returning to surplus in 2016 - three years sooner than forecast in the Budget last year.
That is quite a turnaround and as a result the Crown debt forecasts have also improved. Net debt is now expected to peak at 27 per cent of GDP in 2014/15 - falling to 14 per cent by 2023/24 - reducing our vulnerability to volatile sovereign debt markets. A big part of the improvement is the Government remaining within its $1.1 billion allocation for new operating spending. We've managed this by shifting another $1.8 billion of low priority spending into higher priority public services in areas like health and education
GETTING OUT AND ABOUT
In the last week I've been getting out and about to explain the Budget, hear what people think and answer their questions. There has been an overwhelmingly positive response with large audiences throughout New Zealand. So far I have spoken in Wellington, Lower Hutt, Porirua, Christchurch, Oamaru, Hamilton, Rotorua, Tauranga, Gisborne. Over the next week I'll be speaking in Auckland, Kerikeri, Dunedin, Christchurch and Queenstown.
THINGS TO LOOK OUT FOR
- 10 June: RBNZ's next Monetary Policy Statement, including the Official Cash Rate announcement.
- 23 June: March quarter balance of payments (includes current account and net international investment position).
- 24 June: March quarter GDP.