Great tax incentives but little more for Vote Agriculture

Federated Farmers is welcoming Budget 2010 with some misgivings about the ongoing growth of Government spending and the impact of higher Government charges, particularly the Emissions Trading Scheme (ETS), will have on inflation.

Government's ambition to rebalance the economy in favour of the tradable sector is admirable.

Government's emphasis on encouraging sustainable growth, based on productivity and competitiveness is strongly endorsed and we welcome a much improved economic and fiscal outlook compared to this time last year.

VOTE AGRICULTURE

Federated Farmers is supportive of the Joint Border Management System (JBMS) between the Ministry of Agriculture and Forestry and New Zealand Customs Service.

Yet the $5.25 million per year (or $21 million over four years) in new spending for New Zealand's largest export industry seems small compared to what other Ministries won. $5.25 million for biosecurity seems miniscule given it's protecting $25 billion in annual exports our economy depends upon. While we call for spending restraint it's also about wise investment and biosecurity needs more funding.

TAX CUTS

Farmers will welcome the hefty tax cuts being delivered in this Budget and we need it.  However, pre-tax profitability on farm currently averages a mere 6.2 cents out of each dollar we generate. Being an average figure there will be a lot of farmers drawing up their farm budgets in red ink. So farmers won't be the big tax winners some people might assume us to be.

Federated Farmers is a big supporter of reduced personal and company tax rates. We are not averse to increasing GST as we consider it better to tax consumption rather than income.

Federated Farmers supports closing tax loopholes. We are not necessarily opposed to the changes to the depreciation of buildings as most farm structures should have an economic life of less than 50 years.

Federated Farmers also won a major victory for agriculture prior to the Budget with the Government earlier ruling out imposition of a land tax. We were extremely happy Government listened to us.

SIZE OF GOVERNMENT AND ETS

While happy with the tax changes, Federated Farmers is concerned core Crown expenses will increase by nearly $6 billion or nine percent over the coming year. This increase is huge, given talk of spending restraint.

$1 billion of this increase arises from the ETS and rams home Federated Farmers deep unease that it's a fiscal back hole. Federated Farmers maintains there will be a $527 million impact on businesses and families. But interestingly in this morning's Dominion Post, the office of the Minister of Climate Change said the impact was ‘only' $350 million. Yet by two o'clock and the Budget, the ETS' impact had expanded out to $378 million. Will the real figure please stand up?

Although the fiscal outlook is improved, it is still going to take several years before we return to surplus in order to bring Core Crown Expenses back to below 30 percent of GDP, which is where we think it must be. The Greek tragedy is a warning where spending swings out of control.

We strongly believe fiscal policy must complement monetary policy and the Reserve Bank Governor has repeatedly called for ‘fiscal consolidation' to help him do his job of controlling inflation. This has to mean Government doing more to get spending down.

BROADBAND AND WATER

We are enthusiastic about the prospect of broadband but remain concerned Government is still prioritising urban over rural. While Federated Farmers lobbying won more funds for rural broadband, it's still inequitable to what's being committed to urban broadband.

We also support Government's continued commitment to advancing water storage initiatives and look forward to further progress.

INFLATIONARY PRESSURE

The Budget also reveals that increases in Government taxes and charges will push the rate of inflation to nearly six percent over the coming months. This will put added pressure on the productive export sector when we are just finding our feet.

Although the Reserve Bank can and should ‘look through' the 2.0 percent impact on inflation from the increase in GST, it may not be easy to ignore the ETS. This will add 0.4 percent to inflation, with increased tobacco excise taxes adding 0.5 percent more and ACC levies adding 0.1 percent.

If the Reserve Bank is to tighten monetary policy due to higher Government spending and higher government charges, like the ETS, then we fear it could add further upward pressure on an already over-valued Kiwi dollar - this is the last thing the tradable sector needs.

REGULATION

Federated Farmers is very disappointed the Regulatory Responsibility Bill, something designed to introduce discipline to regulation, continues to languish. There's actually no need for further consultation, as stated in the Minister's Budget speech. It's a high quality well drafted Bill so let's get on with it.

OVERALL OBSERVATION

All in all this is a Budget that should help encouraging saving and enterprise, while lessening the attractiveness of consumption and investment in property. However, it is very much work in progress with more needed to be done if we are to get the tradable sector led growth we all want.

KEY TAX CHANGES

• Immediate removal of the 20 percent accelerated depreciation loading for new plant and equipment purchased after Budget day.
• From 1 October 2010, personal taxes will be cut, GST will rise to 15 percent and NZ Superannuation, Working for Families, and benefit payments will increase.
• From 1 October 2010, the tax rates for most portfolio investment entities and bank interest will fall.  The tax rate for other savings vehicles will fall to 28 percent from 1 April 2011.
• From 1 April 2011, tighter rules around the taxation of investment property will take effect:

1. Depreciation will not be able to be claimed on buildings with an estimated useful life of 50 years or more.
2. Rules for loss attributing qualifying companies and qualifying companies will be tightened.
3. Changes to thin capitalisation rules to limit the scope of foreign multinationals to reduce New Zealand tax liability.
4. Tightening the definition of ‘income' for Working for Families eligibility to exclude investment and rental losses.

• From the 2011/12 income year, the company tax rate will fall to 28 percent.
• Increasing IRD audit and compliance activity.

Overall, the costs of personal, company and savings tax cuts, compensation for the GST increase, and IRD costs will be $17.9 billion over four years while the revenue raising actions from GST, depreciation, thin capitalisation, tobacco excise, audit activity, etc will raise $16.8 billion. Macroeconomic effects, i.e. increased economic growth resulting in higher tax revenue, will go some way to closing the gap, however.

KEY SPENDING ANNOUNCEMENTS

• $2.1 billion in health funding, including $1.4 billion over four years to DHBs to fund demographic and price pressures.
• $1.6 billion for education over four years.
• $321 million over four years for a range of science and R&D initiatives, we understand that $225 of this is ‘new' spending with $96 million re-prioritised.

In addition the ETS will cost $1 billion in 2010/11 alone, to fund credits to forestry. This is only partially offset by $378 million in revenue from the ETS impact on electricity and fuel.

KEY FUNDING ANNOUNCEMENTS FOR CAPITAL PROJECTS

• $500 million for the electrification of Auckland rail.
• $250 million for service improvements for KiwiRail.
• $200 million for roll-out of nationwide ultra-fast broadband network.
• $190 million for new schools, school property improvement and maintenance, faster broadband in schools.
• $82 million for improved information technology solutions for border control and archiving.

ECONOMIC FORECASTS

FISCAL FORECASTS