Cognito Budget 2006

Budget 2006 saw the Government unveil its latest vision for New Zealand.

Gone is the “Growth and Innovation Framework”, Labour’s thoroughly dreary and impossible to grasp “project” for New Zealand’s future. Instead, the new vision is to be built around the themes of “economic transformation” as well as families and national identity.

In reality though, the new themes are little more than a “wrap around’ for what was very much an old fashioned social spend up in the traditional Labour mould. Fulfilling election promises around Working for Families and student loans, and increasing health care, and education spending were centre stage. However, just enough new funding was allocated to transport, research science and technology and industry training to justify the “transformation theme”. At least for now.

The Finance Minister’s described the Government’s “transformation” theme as being designed to “removing bottlenecks to growth”. But the budget offered little evidence the Government understands, outside of telecommunications, that many of the “barriers” are in fact the result of its own regulations and increasing bureaucracy.

There was at least one well kept secret. Namely, the Government’s planned massive $1.3 billion transport spend-up. Given the Telecom leak, this was the budget centrepiece. But in making it so, the Government may well find itself hoist with its own “transformation” petard. For transport is bedevilled not only by a lack of funding, but also by too many local authorities, too many transport agencies and too many planning rules and restrictions. And so, if the Government is serious about transport “transformation” it needs to deal with those matters. Thus far, it has failed to do so, just as it has failed to deal with such issues in other sectors of the economy, most notably energy.

Aside from transport and some key election commitments, the overall impression of the budget is “bitsy”. Money is allocated here and there to deal with this or that. Most of the announcements will soon be forgotten. The biggest Party winner was NZ First, which saw key promises in law and order and transport honoured. The biggest Ministerial winner was Annette King , with huge funding boosts to transport and police. The biggest losers were probably Labour’s Maori MPs – the budget pack contained nothing in new funding for Maori, almost inexcusable given the rise of the Maori Party.

The Government will see the budget as a success. It was “safe”, with no repeat of the “chewing gum” tax fiasco of last year. It has probably done just enough to convince its key health and education constituencies to show it is “back on track” after a fairly disastrous run post election. And the mostly positive reaction to the Telecom announcement, though leaked, will have its Ministers and advisors believing there are rewards to being “bold”, regardless of the impact on NZ businesses and investors.

Fiscal and Economic Outlook

The Government expects to run an operating surplus of $8.5 billion in 2005/06, but this will fall to $5.8 billion in 2006/07.

The Government’s cash position will move from a surplus of almost $2 billion in 2005/06 to a deficit of $1.5 billion in 2006/07. Essentially, revenues are falling with the slowdown. Some of the anticipated deficit will need to be funded from debt, which will need to be financed from borrowing. However, despite this need for debt funding, New Zealand’s level of debt to GDP is expected to fall to under 20 per cent of GDP by June 2010.

Treasury notes the economy has entered a period of slow growth. Higher interest rates, the high exchange rate and lower net migration are listed as factors leading to the slowdown. GDP growth will fall from 3.7 per cent in the year to March 2005 to 2.1 per cent in the year to March 2006 and then to a low of 1 per cent average growth in the 12 months to March 2007 before picking up to between 3 and 3.5 per cent in March 2008.

Tax

The election campaign decision to extend the Working for Families scheme has increased spending on the package to $1.845 billion over the next four years. The Government claims this will see 350,000 New Zealand families receiving “tax relief” by 2006. Others would say this probably makes New Zealand families the most welfare dependent in the Western world!

The absence of tax cuts for middle and higher income earners or business is, of course, no surprise. Indeed the Government believes its decision to target relief at lower earners is partially responsible for the “softness” of the slowdown. There is also a degree of smugness here – the Party that promised the big cuts for high earners lost. Nor does the Government feel bound to address business tax rates, or parity with Australia’s reduced rates, this early in the election cycle. Just whether that will attract or retain the businesses and skills needed to “transform” the New Zealand economy. Many, justifiably, have their doubts.

Taxation changes for the New Zealand Racing Industry are expected to see it gain some $136 million from gaming duty realignments and depreciation changes. In addition, small firms have been offered a subsidy to assist with payroll costs, expected to cost the Government almost $80 million.

Energy

The budget did little to boost or incentivise energy research and exploration.

A paltry extra $6 million has been allocated to the geotechnical data programme, though an additional $11.7 million will be allocated to energy research over the next four years.

The proposed energy research will focus on using renewable energy resources, no doubt including biofuels, as well as developing new energy technologies and on the understanding and implementing of opportunities to use energy more efficiently in homes and businesses.

More funding has been allocated to the development of a carbon accounting system and a slight increase is provided for the Home Energy Rating Scheme. The budget notes the Government has made no decisions on how to fund its Kyoto Protocol liabilities, or on how to meet its international oil storage obligations.

Retirement Savings

The New Zealand Superannuation Fund is expected to rise from $12.7 billion in 2006/07 to $23.3 billion by 2009/10.

Health

For 2006/07, Government will spend an additional $3 billion over the next four years. Total Government health spending is now $10.6 billion. This is $4.2 billion more than was spent in 2000/01. Some Government Ministers and advisors are clear these increases cannot continue and at least one Minister is of the view that there are far too many District Health Boards. That said, Budget 2006 contained little evidence that future health spending will need to focus more on quality and less on quantity.

Major initiatives include:

• An additional $126 million over the next four years for home based support and residential based care services for the aged. Of this, $58 million will go on home based services and $68 million for residential care services. The small size of the residential care increases its unlikely to resolve the serious funding, training and staffing shortfalls in the sector.

• Some $76 million for a fight obesity campaign over the next four years. In his announcement, Health Minister Hodgson indicated his support for the Healthy Eating Healthy Action Programme, being undertaken with the food industry. Campaign details are yet to be announced, but it will focus on initiatives with schools, primary health care, social agencies and food industry bodies.

• An additional $40 million over four years for child oral health
services.

• $24 million over four years for health checks for pre-schoolers and
4 year olds.

• $16 million for a newborn hearing programme.

Industry Training

The budget allocates an additional $58 million of new funding over the next four years. This includes:

• An additional $34 million over four years to expand the Modern Apprenticeships Scheme, expected to have 14,000 students by 2008.

• $15.6 million for the Industry Training Fund.

School Funding

An additional $361 million will be put into schools over the next four years. Major highlights include:

• An additional 455 teachers for primary and special schools.

• An increase of $149 million in school property funding.

• An additional $96 million over four years in schools operational funding though, as is admitted, this will do little more than stay ahead of inflation.

• A $33 million digital information technology package. The Government intends to purchase new software licensing to give schools access to the latest software.

Early Childhood Education

A further $162 million, over four years, will be spent to implement the Government’s promise for 20 hours free early childhood education for three and four year olds. Some $4 million will be given to play centres and an extra $30 million has been allocated to assist the sector with upskilling around teacher registration.

Tertiary Funding

During 2006/07 the tertiary sector will absorb almost $3 billion of operational expenditure. Of this, funding for interest fee student loans and student allowances will amount to $1 billion.

An additional $166.4 million of new operational funding is allocated to the tertiary sector over the next four years. Major initiatives include:

• $33.5 million to improve workforce literacy, numeric and language skills.

• $12.7 million to boost career services training.

• $23.7 million to increase Performance Based Research Funding.

• $40 million for the Partnerships for Excellence Programme.

Student Allowances

Student allowance income thresholds are increased by 10 per cent. However, the threshold has only been raised to $39,270 and so a mere 10,000 more students will benefit. This is unlikely to be seen as of any real significance to the sector. The threshold raising will cost the Government only an additional $14 million over the next four years. In an effort to retain top students, the bonded merit scholarship scheme receives an additional $13 million over the next four years and doctoral students will have their allowances increased.

Child Youth and Family

An extra $68.8 million has been allocated for programmes to reduce truancy, disruptive behaviour in schools and to assist ‘at risk’ youth. Funding is being increased to community organisations working with victims and family violence prevention agencies like Women’s Refugee. Major programmes include:

• $11.5 million over 4 years for community violence prevention campaign.

• $17.5 million to help at risk school leavers.

Broadcasting, Arts and Culture

Creative New Zealand Funding is to increase by $10 million over the next four years. This is to enable New Zealand to maintain the level of support it gives to around 30 key arts organisations.

New Zealand on Air is to receive an additional $20 million over the next four years for local programming. This brings total Government investment in public broadcasting to almost $130 million.

Tourism

An additional $64 million will be spent on Tourism New Zealand over the next four years to promote New Zealand in key overseas markets.

Research and Development

Research and science funding is to be increased by $100 million over the next four years. Of this $81 million will be used to support key industries and $16 million will accelerate the commercialisation of research. The Government plans to spend $15.6 million on pastoral research.

Business

In a sign it intends to get more interventionist and punitive with the business sector the Government has increased litigation funding for both the Commerce Commission and the Securities Commission. Litigation funding for the Commerce Commission is to be increased by $8 million over the next 2 years and by $6 million for the Securities Commission over the next four years.

Maori

The budget seems to have delivered little of significance in terms of direct funding for Maori initiatives. This is rather surprising, given the success of the Maori Party at the last election, and is certain to leave Labour’s Maori members looking rather vulnerable.

Indeed all the budget press pack contained for Maori was notice that some $24 million is to be reallocated from existing spending to three new investment areas. These areas include:

Investing in building knowledge and growing skills and talents. These investments are to build financial literacy and give greater opportunities to portray Maori culture on the international stage.
Investment in strengthening leadership and decision making.
Investment to assist Maori participation in business, enterprise and community development.

Sport and Recreation

Government funding is set to increase to $58 million in 2006/07, up from around $51 million in 2005/06. This increase, really little more than has been foreshadowed in previous budgets, boosts funding for elite athletes, regional sports development and active living programmes run by Sport and Recreational New Zealand.

Economic Development

An additional $60 million is to be spent on new capital funding for the venture investment programme. Market development assistance for firms trying to break into overseas markets will increase by $64 million over the next four years, though this is to come from a reallocation of existing funding. Eligibility criteria are being widened to include more medium-sized firms.

Biosecurity

The Government is to increase funding by $33 million over the next four years. $20 million of this is to boost biosecurity response preparedness and $13 million is for pest management and invasive ant surveillance.

Transport

The Government is to spend an extra $1.3 billion over the next five years to accelerate key transport projects.

Of this $862 million will be used to eliminate current shortfalls, so is in reality little more than a “catch up’ for existing programmes. However, some $425 million will be used to accelerate a series of key roading projects in Auckland, Wellington and Christchurch. Much of this investment is being funded by a special dividend from Meridian Energy.

Fulfilling another pledge to New Zealand First, the Tauranga Bridge will no longer be a toll road. This leaves Transit’s plans for road tolling in a state of flux, with only one current project now left on its books. In a sign the Government is losing patience with its own transport entities, Treasury is to take direct control of $600 million from Vote Transport to fund ONTRACKs upgrading of Auckland rail infrastructure.

Mark Blackham
021 891 042

Senate's Government Team
Mark Blackham - Partner
Tracey Bridges – Partner
Michael Parker – Consultant