(minus tables)
Introduction This is a brief report on some of the Budget highlights. There has not yet been an opportunity to analyse all aspects of the Budget so this report does not attempt to provide a full commentary. You will see that funding increases are often stated as over 4 years and we also need to factor in demographic changes as well as an inflation adjustment before we can assess real increases.
Key Points The main focus of the Budget is personal tax cuts. A $10.6 billion package over 4 years delivers tax cuts that start at $12 to $28 a week in October this year and rise to $22 to $55 a week in April 2011. In addition there is $275 million a year being added to family tax credits. Other key issues are a broadband package of $500 million, $168 million over 4 years targeted at language, literacy and numeracy initiatives and funding to reduce teacher/pupil ratios for new entrants in primary schools to 1:15.
Fiscal Outlook The Budget is showing an operating surplus for 2007/08 of $2.6 billion compared with a forecast of $6.4 billion. The cash position for 2007/08 is forecast to be a surplus of $0.9 billion. The OBEGAL (Operating balance before gains and losses) is $5.2 billion compared with the forecast of $6.6 billion. The forecasts over the next 4 years are for large cash deficits for the Government of around $3.5 billion a year. And the allocation for new spending in future budgets has been reduced from $2 billion a year to $1.75 billion.
NZ Superannuation Fund The New Zealand Superannuation Fund is forecast to be $14.5 billion in June 2008 rising to $29 billion by 2012.
Tax Cuts Tax cuts will start from 1st October this year. From then the 15% rate on income below $9,500 changes to 12.5% on income up to $14,000 and the tax thresholds change from $38,000 and $60,000 to $40,000 and $70,000. The thresholds rise by 2011 to $20,000, $42,500 and $80,000.
Family Tax Credits The Family Tax Credit, which is based on the number and age of children, will increase from 1 October 2008. The inflation adjustment due next year has been brought forward. All 371,000 families who qualify for Working for Families will benefit from this change. The family income threshold will also be increased to take account of inflation. This means that at any level of income above $35,000, there is an extra $7 per week boost to Working for Families tax credits. The Government has said that a two-income family on $65,000 a year with two children gets an extra $42.65 a week in October this year due to the combined impact of tax cuts and improvements to Working for Families.
Health Health spending has been allocated $3 billion in Budget 2008 ($750 million per annum). This represents again one of the largest budget allocations. The most significant allocation is the $2 billion inflationary adjustment to DHBs for increased costs in goods and services. DHBs also received $172.3 million of financial incentives to realise efficiencies and progress health targets. There is $160 million, over four years, for elective surgery to reduce waiting lists was announced earlier in the week. A somewhat unexpected but welcome announcement is $60 million “to build a better workforce”: $37.6 million to provide staff training including GP training, $10.4 million to extend the Pacific Provider Development Fund and $12 million to improve the capability of the Maori nursing workforce. The Primary Health Care Strategy has had $80 million allocated over the next four years, which includes reduced co-payments of prescriptions sourced from secondary care facilities, for people enrolled with a PHO, and prescriptions sourced from out-of-hours doctor visits. There are number of health conditions and projects that have been allocated funds to make up the bulk of the $3 billion allocation. The largest of these is the $164.2 million, over four years, for a major immunisation programme to fight cervical cancer. $28 million has been allocated over the next four years for programmes that focus on ensuring higher-quality care and quality improvements.
Public Sector There is some additional funding for the Department of Conservation. Also there is $216.3 million capital for the replacement of Mt Eden Prison, $205.4 million for research and development on top of the $700 million for the NZ Fast Forward Fund, $91.7 million to recruit additional probation officers, $6.3 million over two years to address the pressure on Auckland courts, $23.8 million is provided to increase the services of the Maori Trustee, $5.3 million to assist the Office of Treaty Settlements to meet the 2020 settlement target, $10.9 million for Radio New Zealand, and $4.4 million for the NZ Symphony Orchestra.
Skills, Industry Training and Tertiary Education There is $168 million over 4 years to support the Unified Skills Strategy which is a partnership between the CTU, Government, Business New Zealand and the Industry Training Federation. Most of this new spending is on language, literacy and numeracy initiatives – mainly for workers. Industry Training Organisations get an extra $32.6 million over 4 years – in line with CPI. The budget has made investments into training, infrastructure and research in the tertiary sector including $591 million over five years and $15.5 million capital for universities and polytechnics.
Compulsory Education The 5% increase in school operational funding, effective from January 2009, was announced pre-budget. This increase includes the component to assist schools with the cost of Information and Communications Technology (ICT). It therefore doesn’t deliver on expectations and hopes for increases and targeting of school-support staff which will be a major concern for education sector unions. The 2005 commitment to reduce the Year 1 teacher/pupil ratio to 1:15 has been met with $182 million in operating funding and $33.5 million in capital funding. $1.8 billion over five years is identified in the Budget ($619.1 million in Budget 2008 and the remainder from Budget 2007 and Budget 2009) for teachers’ wage settlements and key collective agreements.
Early Childhood Care Education An increase to the early childhood education (ECE) annual cost adjustment brings this sector in sight of delivering on promises to meet staffing levels and salary increases for early childhood education teachers. $63.6 million has been allocated over four years in operating funding. This will increase the ECE funding subsidy, Free ECE and equity funding rates to reflect services’ costs increases; increases in the provisionally registered teachers support grant to reflect salary increases, and; includes funding for limited attendance centres.
Student Allowances Access to student allowances has extended with an increase of 10 percent to the parental income threshold. Students whose parent’s combined income is less than $50,318.22 per annum will be eligible for a full allowance from 1 January 2009.
Home Insulation Over the next four years $6 million will be allocated for 32,000 insulation fit-outs in the homes of low-income families (on top of the $22.4m announced for fit-outs in state houses last week). A further $5 million is committed to an interest-free loan scheme for middle income families to fit out their homes.
Housing Following the $35 million announced last week over the next two years to be invested in a shared equity scheme, there will be $37.8 million spent over the next three years to develop the Hobsonville site in Auckland and a $220 million fund set up to help Wellington City Council modernise its affordable rental housing over the next decade and a half.
Superannuation Reduction in personal tax rates will increase fortnightly superannuation payments for a married couple by $45.88 and $23.84 for a single superannuitant living alone.
Community Organisations In February $446.5 million was announced to fully fund contracted essential services delivered by community organisations.
Broadband There is additional $325 million of operating funding over 5 years and $15 million capital funding in the coming year to support the rollout of high speed broadband. This includes the setting up of a $75 million contestable fund over five years for rural broadband.
Financial Education There is $7.8M for financial education in the workplace over the next four years.
Contingencies The Budget refers to a number of new or changed quantified or unquantified risks. Examples are $105 million capital on border management, impact of Schools Plus, up to $84 million a year for school property, restructuring the rail industry, not-for-profit housing, funding for Courts in Greater Auckland, and five year action plan for out of school services.
Summary This Budget is about personal tax cuts – and not a lot else. It shows that tax cuts even of this magnitude are costly - $2.7 billion a year. The forecasts show that the Government will run large cash deficits over the next 4 years, and the room for significant increases in social spending is constrained by lower revenue increases than previous years, and the tax cuts.
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