By Jonathan Underhill.

The strength of the New Zealand economy has cut Finance Minister Grant Robertson some slack as he finalises Budget 2018 with higher-than-expected tax revenue to help fund some of the coalition government’s pledges and policies.

The Crown took in NZ$800 million more in tax than the Treasury was expecting in the first nine months of fiscal 2018 year. The nine-month surplus of NZ$3.3 billion was NZ$920 million ahead of what the Treasury was projecting in December, so it is likely the June 30 year-end surplus will exceed the NZ$2.5 billion currently pencilled in. Every dollar counts.

It cost upwards of NZ$3.7 billion to form the coalition government. The NZ$3.6 billion earmarked to the Provincial Growth Fund and the Billion Trees target is in Labour’s agreement with NZ First. The NZ$100 million Green Investment Fund is a core Greens policy. Behind such a line-up of parties comes a lot of expectation. 

In the 17 May Budget, the coalition agreement would also boost police numbers, establish a housing commission, review, and likely increase, defence spending and lift research and development spending through a tax incentive, although that won’t come till 2019. Nurses and teachers are pressing for substantial wage increases. The government wants to address rundown schools and hospitals and rebuild the core state sector.

Read CA ANZ recommendation to the Tax Working Group 

A top-up to the Ministry Foreign Affairs and Trade vote was among pre-announced Budget 2018 spending. For the Greens, their confidence and supply agreement with Labour would see more spending for conservation through a climate commission to help achieve a net zero emissions economy by 2050. A range of pledges are filed under the headings fair society, healthy environment and sustainable economy.

Labour’s own policies are among the biggest, fiscally – the resumption of NZ Super Fund payments, fee-free first-year tertiary education and the KiwiBuild plan to build 100,000 affordable homes over 10 years, along with major public transport commitments, including light rail for Auckland.

Balancing act

Robertson’s first Budget will be measured on how successfully he manages expectations while showing this is a government of action and change and holding fast to the principles of fiscal responsibility and budget surpluses. That’s a big balancing act without much wiggle room and the best strategy may be to under-deliver this year.

“It will be a relatively cautious first Budget from Robertson,” says Peter Vial, NZ Country Head at CA ANZ. “He is likely to save further big transformational changes for next year and the year after that. The government is committed to its fiscal responsibility approach and won’t be over-promising.

“The pendulum has already swung in a new direction – National’s tax cuts have been repealed and replaced with the Families Package. The pendulum will swing further, but not in this Budget.” 

Prime Minister Jacinda Ardern was also managing expectations in her pre-Budget speech. She said the government couldn’t solve all the issues “within one Budget”. Her Cabinet has had to make some hard decisions – balancing the books while investing more in core services.

There will be few surprises. The Treasury had already incorporated the government’s 100-Day Plan in its half-year economic and fiscal update (HYEFU) forecasts – a net NZ$4.9 billion fiscal impact over five years. It incorporates the government’s flagship policies: the Families Package of tax cuts and benefit increases at NZ$5.5 billion and free fees for first year tertiary students at NZ$2.57 billion. Then, on the capital spending side, there is the resumption of NZ Super Fund payments and KiwiBuild at NZ$3.3 billion and NZ$2 billion respectively over the next five years.

To remain in surplus and fund the Families Package, the new government canned the previous government’s April 1 tax cuts, which favoured higher earners. That decision frees up about NZ$8.4 billion over the five years to 2021–22.

The Finance Minister found another NZ$700 million from existing ministerial budgets and expects a crackdown on tax dodgers and new property taxes to be worth NZ$1.6 billion over four years. 

CA ANZ supports the introduction of the NZ BEPS Bill, but has a number of concerns.

It helps that economic growth is projected by the Treasury to rise to 3.6% in the June 2019 year and hold at 3% in 2020. Core Crown tax revenue is forecast to grow by NZ$19.6 billion over the next five years, while net core Crown debt is expected to rise by NZ$4.7 billion, although it keeps sliding towards 20% of GDP from 21.6% currently as the economy grows.

Tax Measures

There are other revenue-generating developments. The so-called ‘Amazon tax’ that will apply GST to low-value goods bought online overseas from October 1 next year, is projected to generate $NZ57 million in its first year at the estimated 75% compliance rate.

The Government is also counting on revenue from The Taxation (Neutralising Base Erosion and Profit Shifting) Bill (BEPS), which Inland Revenue estimates could amount to about NZ$200 million per annum. John Cuthbertson, NZ Tax Lead at CA ANZ, says Robertson is benefitting from a tax take that is ahead of forecast. While debate raged last year over former Finance Minister Steven Joyce’s claim of an $11.7 billion fiscal hole in Labour’s fiscal plans: “I don’t think they [Labour] allowed a lot for contingencies,” Cuthbertson says.

There’s likely to be slippage. For example, the forecast revenue from BEPS is probably overstated. “I don’t think they will get that much going forward. Business behaviours will change.”

Despite Budget 2018 being funded from the reversal of tax cuts, tax isn’t likely to be a big feature of policy next week. “Our working assumption is there will be no substantive tax announcements in the Budget,” Cuthbertson says.

That’s because tax reform is on its own track. The Tax Working Group, with a mandate to look at the structure, fairness and balance of the tax system, expects to produce draft recommendations towards the end of the year. There are currently papers out for submissions on R&D tax credits, GST on imported goods and loss ring-fencing for rental properties.

The elephant in the room, a comprehensive capital gains tax that the Tax Working Group is expected to traverse, is a policy choice the Labour-led government will take to the next election.

Jonathan Underhill is managing editor of the BusinessDesk news service.

Banner and main pic: Stuff / Dominion Post