May 15, 2014 2:00pm by David Farrar

The 2014 Budget

Forecasts

Growth to almost hit 4%
An extra 170,000 jobs by 2018
Average annual wages to go up by 14% to $62,330. Inflation projection is 10% over four years so net 4% gain.
Budget surpluses to grow from $372 million to $1.3 billion in 15/16 and $3.5 billion in 17/18
Net debt to be under 20% of GDP by 2020
NZ Super Fund contributions to resume in 2019/20

The growth projections are positive, and are the most important aspect. Without economic growth, a surplus becomes a deficit. The projected increases in jobs and real wages are also a positive.

The net debt to be under 20% by 2020 is a huge turnaround. The last projection in 2008 had it ever increasing to 70% or so.

However the surplus is still fragile. There isn’t any wriggle room in 2014/15, but I believe 2015/16 should have room to consider tax cuts.

Last year

84,000 more jobs
Average weekly wages up 3.2%
Inflation has been 1.5%, so real increase in average wages is 1.7%

This Year

New spending of $5.7 billion over four years, including $1.6 billion of reprioritisation ore revenue measures
Budget surplus projected to be $372 million
Operating allowance of $1.5 billion a year, growing at 2% a year, Under Labour they ranged from $2 billion to $7 billion, averaging $3.5 billion over last five years – so under half the previous rate

2008 was the shocker year. A $7 billion increase in annual spending, which meant that when the recession kicked in, we got the projected decade of deficits.

Treasury has released advice that spending increases in excess of $1.5 billion a year will force interest rates to rise more quickly. So political parties promising spending in excess of that will need to explain how they will stop interest rates increasing more quickly.

Tax

The 6% who earn over $100,000 pay 37% of income tax
The 12% who earn over $80,000 pay 51% of income tax
The 51% who earn under $30,000 pay 5% of income tax
Cheque duty to be abolished, reducing revenue by $4 million a year

Remember when Labour introduced the rich prick tax on those earning over $60,000. Well 23% of New Zealanders now earn over $60,000 and they now pay 69% of all income tax.

The only tax cut in this budget is abolishing cheque duty. Next they’ll be abolishing excise duty on horses and carriages!

Sure tax cuts are not affordable in the 2014/15 year. But they are in the out years, and hopefully all political parties will outline policies to reduce income and other taxes in the lead up to the election.

Spending

Total spending now $73.1 billion
$375 million loan to NZTA for Auckland transport projects
$69 million for trade & enterprise
$57 million for science
$58 million for research and development
6,000 more apprentice places
$136 million for tertiary education science and research
$100 million more to assist people from welfare into work
$536 million for Defence
Of $4.7 billion raised from asset sales $200 million for health capital projects, $198 million for Kiwirail, $172 for school property and $40 million for irrigation infrastructure

Nothing too surprising here. As with previous budgets the focus is on science, research & development, schools and hospitals.

I do wish they would stop throwing good money after bad into Kiwirail.

Families

$500 million more spending on families
Additional four weeks paid parental leave (to 18)
Parental tax credit goes from $150 a week to $220 a week and from eight to ten weeks for $42 million
$90 million more to extend free GP visits to under 13s
$156 million more for early childhood education
$33 million to assist vulnerable children

This is the major focus. The paid parental leave was well signalled. The extending of free GP visits to under 13s was a surprise (and a better policy than merely paying more to parents), as was the extra $1,000 for the parental tax credit.

Education

$858 million over four years more spending
$359 million to pay top teachers and principals more
$85 million more for school operations
$11 more for school property

No extra details on the package announced in January around up to $50,000 per year more for the top principals. Lots of interest in the final package.

Health

$1.8 billion more over four years
$110 million more for 4,000 more elective surgery ops
A new Grey Base Hospital for $200 million a week

Tony Ryall remains determined not to have Health become an area of weakness for the Government.

Overall

Overall I can’t imagine this will go down as a controversial or memorable Budget. It is significant as the first Budget to project a surplus since 2008, and the difficulty of achieving that should not be under-estimated.

The Australian Budget on Tuesday shows what happens, when you don’t have a Government that can’t impose fiscal restraint, as happened with Labor. It also shows the political danger of responding to a huge deficit with a huge slashing of spending (and tax hikes), rather than a gradual reduction in spending increases.

Sometimes slow and steady does win the race, and in New Zealand’s case it looks like it will.