1

CTU Report on Budget 2012

Contents Introduction ........................................................................................................... 1 Key Points .............................................................................................................. 1 Forecasts ................................................................................................................ 2 Fiscal Outlook ......................................................................................................... 2 Economic forecasts ................................................................................................ 2 Government Spending ........................................................................................... 3 Government Debt .................................................................................................. 4 Effect on the economy ........................................................................................... 4 Christchurch ........................................................................................................... 4 Privatisation/PPPs .................................................................................................. 4 Taxation ................................................................................................................. 5 KiwiSaver ............................................................................................................... 5 Public Services........................................................................................................ 5 Welfare .................................................................................................................. 6 Health .................................................................................................................... 6 Education ............................................................................................................... 7 Māori ..................................................................................................................... 8 Science / Innovation/ Research .............................................................................. 8 Health and safety ................................................................................................... 8 Housing .................................................................................................................. 8 Youth ..................................................................................................................... 9 Links ....................................................................................................................... 9

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 • Only “moderate” economic growth forecast: 2.6 percent in year to March 2013

• Unemployment rate over 5 percent until 2016

• Still heading for surplus in 2014/15 – but only a tiny $197 million surplus

2

• Budgets over next four years will contract the economy

• $300 million in new spending, $3 billion in “savings”, $249 million in new revenue in 2012/13, but spending more overall than in 2011/12

• Partial privatisations will lose $325 million more in dividends than is saved in reduced interest costs on debt over the four years 2013-2016

• Several small tax changes raise $249 million in 2012/13

• Health given an estimated $230 million less than needed to cover increased costs

• Tertiary education expenditure for 2012 estimated to fall by $60 million

• Further cuts in expenditure on adult education, embedded literacy and numeracy, and industry training

• Increased funding of $29.5 million to PTEs over four years

• Major changes to student loans and allowances

• $385 million over four years for research, science, and innovation

• An increase of $8.5 million for Health and Safety services

• $104.1 million for non-government housing providers over the next three years

• 3,000 more places under the Youth Guarantee Scheme

Forecasts Forecasts used for the Budget include the following percentage changes.

June Year 2013 2014 2015 2016 GDP 2.9 3.3 3.1 2.8 Unemployment 5.8 5.3 5.0 4.7 Wages 3.6 3.8 3.7 3.6 CPI 2.7 2.3 2.4 2.4 Current A/c[1] -5.1 -5.9 -6.4 -6.5 Fiscal Outlook June Years ($m) 2012 2013 2014 2015 2016

Expenditure 69,663 73,732 72,902 74,912 77,256

OBEGAL -8,441 -7,897 -2,013 197 2,012

Operating Balance -10,642 -5,699 366 2,735 4,814

Cash Balance -12,119 -9,671 -5,184 -3,680 -1,198

Economic forecasts The Budget has a weaker economic outlook than the February Budget Policy Statement (BPS). GDP growth is forecast to be 2.6 percent in the year to March 2013, down from 2.8 percent in the BPS and 4.0 percent in the 2011 Budget. In the

[1] Current account deficit as a proportion of GDP, not percentage change.

3

following year, growth is forecast at 3.4 percent, down from 3.8 percent in the BPS. Bill English described this as “modest growth” and the Christchurch reconstruction contributes 1 percentage point of it in each of next four years. On past experience, growth forecasts have been optimistic.

Other than from Christchurch, the growth comes from Australia, China and other Asian countries. However the value of exports of goods and services is forecast to fall in 2012/13. As a result of that, increasing debt levels, and the import needs of the Christchurch reconstruction, the current account deficit (the difference between the international earnings and payments of New Zealand residents) is expected to grow, reaching 6.7 percent of GDP in 2016, increasing New Zealand’s international liabilities.

The slow growth in the economy as a whole compares to huge rises in residential investment (a 29.5 percent increase in 2012/13 and 40.7 percent in the following year, following a fall of 11.2 percent this financial year) and smaller but still large rises in business investment (7.4 percent in 2012/13 and 14.1 percent the following year).

Despite the Christchurch reconstruction and strong investment, employment is forecast to rise by only 1.3 percent in 2012/13 – barely ahead of 2010/11 and 2011/12. Unemployment will fall only slowly, with the forecast (which again has been optimistic in the past) dipping below 5.0 percent only in 2016. The average hourly wage is forecast to rise 3.1 percent in the year to June 2012 and 3.6 percent in the year to June 2013, and CPI inflation is forecast to rise by 2.6 percent next year (peaking at 2.8 percent in December 2013). However the share of income in the economy going to working people is forecast to fall in every year to 2016.

Government Spending Spending of $1.1 billion on “new initiatives” is offset by $800 million in “savings” leaving just $300 million in “new spending”. For the great majority of “new spending” it is therefore important to ask “what is being cut to pay for this?”, and in most cases it is not clear. In addition, there are increased costs of New Zealand Superannuation and social assistance including benefits and Working for Families. Total spending for the current financial year is forecast to be less than in 2010/11, falling to $69.6 billion from $70.5 billion, but rise to $73.7 billion 2012/13 and fall again to $72.9 billion in 2013/14. Earthquake costs are a significant part of this pattern. There will be no new capital expenditure in this and next four Budgets. All capital expenditure will come from savings and asset sales. Spending is falling from 33.5 percent of GDP in 2012 to 30.2 percent in 2016.

It is stated that there are a total of $3 billion in “savings” in this Budget. As previously announced, for most government departments there will be no additional funding, and they have to find $1 billion in savings over next three years.

Contributions to the New Zealand Superannuation fund will resume in 2017/18.

Operating allowances for new initiatives in future years remain as they were - $800 million in Budget 2013, $1.19 billion for 2014, rising at 2 percent thereafter.

The Budget reiterated the government’s commitment to a spending cap of population growth plus CPI growth, excluding the unemployment benefit, debt

4

financing, asset impairments and natural disasters. This was part of the agreement between ACT and National. They will be consulting with other political parties on a more formal spending rule. If this spending rule had been in place in 2008-2010, New Zealand would almost certainly have had a much deeper recession.

Government Debt The government is still aiming for a budget surplus in 2014/15 – now down to a tiny $197 million in the forecast. Delaying the surplus by 2 years would increase debt by 5.5 percent of GDP by 2019/20.

Net debt peaks at 28.7 percent of GDP in 2013/14. The Government has a long term objective to keep it below 35 percent. It has changed its aim to have it back to no higher than 20 percent of GDP by 2020 (rather than by “the early 2020s”). Gross debt peaks this year at 38.5 percent, falls to 36.7 percent in 2013, and rises again to 38.0 percent in 2014 before falling.

The forecast deficit for 2011/12 is now $8.4 billion, $2.4 billion lower than in the pre-election forecast of $10.8 billion, largely due to the delay of earthquake expenses which now move to 2012/13.

The earthquake expenses contribute 0.7 percentage points to the OBEGAL deficit of 4.1 percent of GDP.

Effect on the economy The net effect of the Government’s fiscal (revenue and expenditure) policies is that they will reduce growth in the economy for the next four years. This will be most deeply so in the 2013/14 year. Treasury estimates that this year was “broadly neutral” due to temporary earthquake-related spending, but projected budgets will reduce growth in 2012/13 by about 1 percent of GDP, 2 percent of GDP in 2013/14 and 1 percent in each of 2014/15 and 2015/16. This requires strong growth in the rest of the economy, whether from earthquake reconstruction or otherwise, to avoid going into recession.

Christchurch A pre-budget announcement identified $2.17 billion from the Earthquake Fund (total is $5.5 billion) in the coming financial year for the repair and replacement of infrastructure. The only other announcements in the Budget were for payouts to owners of damaged and quake damage prone properties from within the Fund.

$29.9 million is to be provided over four years for the new Christchurch Central Development Unit (CCDU), which will manage the rebuilding of the CBD, and $2.8 million in 2012/13 is allocated for CERA’s Community Wellbeing team.

Land Information New Zealand is allocated $800,000 for resurveying of the Canterbury region.

Privatisation/PPPs Partial privatisations will lose $325 million more in dividends than is saved in reduced interest costs on debt over the four years 2013-2016. However, Treasury expects a $200 million per year gain on disposal of the assets to offset this, making (on paper) a gain in net worth of $475 million. This assumes the assets are undervalued in the government’s books and that they realise a better price for them

5

than is recorded. That implies higher power prices are likely, but seems a brave assumption in a declining international economy.

As previously announced, a “Future Investment Fund” will be created that notionally uses the proceeds from asset sales. In the new financial year, $559 million will be identified as spending from this including $34 million for schools, $250 million towards Kiwirail’s turnaround plan, $76 million for the capital costs of the previously announced Advanced Technology Institute, and $88 million for health, including hospital redevelopments. Of this last, $60 million is also announced under Health, and the rest is refinancing $28 million of Capital and Coast District Health Board’s debt.

As can be seen, these are “investments” that would have occurred anyway. That is true in legal terms too. They will go ahead regardless of any delays in asset sales, or any shortfall in the amount raised.

There are other aspects of privatisation. The “Better Public Services” programme includes “more contestability in service provision and use of alternative providers”. The government’s assets labelled as “Social Portfolio” will be “concentrating new investments in areas where ownership risks cannot cost-effectively be carried by the private or not-for-profit sectors”.

Taxation The IRD is receiving $78.4 million for tax auditing and tax compliance, generating “nearly $100m” per year or $345.4m over four years to 2015/16.

A total of $249 million will be raised in 2012/13 by a number of minor revenue-raising tax changes. This is estimated to rise to $589 million in 2015/16. The changes include:

• Tightening rules for deducting costs of assets that are used both by their owners and rented out for income, such as holiday homes, boats and aircraft

• Changes to livestock valuation rules to stop them being used for tax breaks • The child taxpayer credit, the housekeeping and childcare tax credit, and the tax

credit for transitional circumstances will be discontinued • Increasing tobacco excise tax by 10 percent • Petrol excise tax to rise by 2 cents/litre from August 2012. Road User Charges will

rise at the same time

KiwiSaver There will be new disclosure rules for KiwiSaver fund managers as from 1 April 2013 and a review of KiwiSaver default-provider arrangements. The auto-enrolment proposal has been deferred.

Public Services The PSA states that $1 billion dollars will be cut from departmental budgets this year.

The Budget statement identified the goal of an innovative, efficient public sector within tight financial restraints. The 10 targets that have been set for the public sector were reiterated with two additional targets:

• Reducing prisoner offending by 25 percent by 2017

6

• Increasing the rate of Early Childhood Education (ECE) participation from 94.7 percent to 98 percent in 2016

For other targets previously set see: http://www.beehive.govt.nz/release/budget-focuses-better-public-service-results

Welfare As per the pre-budget announcement, $287.5 million over the next four years has been allocated for the first phase of the Government’s welfare reforms, comprising $81.5 million of additional up-front funding with the remainder “reprioritised” from within Social Development. $80 million is allocated over four years for ECE childcare and the Guaranteed Childcare Assistance Payment; $55.1 million over four years for 155 Work and Income staff to move beneficiaries and sole parents into work; $148.8 million over four years for youth services and $77.6 million to support youth into education or training.

Health Health spending is $14.12 billion for 2012/13 (accounting for approx 19 percent of total spending).

According to a Ministerial statement, there is an extra $435 million in “new initiatives” in 2012/2013, but only $358 million of this was new money. This is considerably less than the $420 million of new money allocated in recent years under National, and in previous projections of funding paths. Comparing Budget 2011 with Budget 2012, the increase is even less: $337 million. We had estimated that it required an additional $506 million just to stand still (that is, cover rising costs and population growth and ageing). On top of that there has been $87 million announced in new and expanded services for the new financial year (see below), creating a total gap of an estimated $230 million that must be covered by some combination of service cuts, user charges or productivity improvements. Some $77 million of cuts and genuine savings (like lower medicine costs) have been announced but there will be increased pressure on District Health Boards (DHBs) to cut further. In recent years they have been given $350 million to cover their rising costs, and that was already inadequate, but this year they will receive a net $297 million of new money, $114 million short of needs. In addition, capital expenditure funding has been cut from $454 million to $289m. (A further analysis of the Health Vote to confirm these figures will be published next week.)

Previous announcements (all over four years unless otherwise stated) covered:

• $48.0 million to increase elective operations by at least 4,000 each year • $16.0 million on IT systems for faster access to diagnostic tests • $4.0 million for a national register of patients treated for heart conditions • $33 million to improve services for cancer patients • $12 million additional over five years for rheumatic fever prevention • An increase in prescription charges from $3 to $5 an item, raising $20m in the

first year and $40m after that. • Additional announcements were:

• $20.5 million for maternity services, PlunketLine and WellChild services • $28 million for free after-hours doctors’ visits for under-sixes

7

• $6 million for health of Pasifika communities (Whanau Ora for Pacific people) • $40 million for increased dementia services • The asset threshold for the Residential Care Subsidy for people in residential care

will rise each year by the increase in CPI rather than $10,000. In future years this will be a considerably faster rise in the threshold than at present.

Disability There is $143.7 million over the next four years for services for people with disabilities made up of $132.7 million in new investment and $11.0 million in “savings”. However the $143.7 million is almost exactly what is required just to keep up with increasing costs and population.

Education

Early Childhood Education The Government states it will continue to fund ECE services at the current rate, but targets money towards ‘vulnerable children” and children who are not participating in ECE with $110.9 million extra over the next four years. The sector is to get $47.9 million over the next four years in “Equity Funding” to increase participation in ECE. The annual universal adjustment to compensate for inflation appears to have been cut.

Compulsory Education The Budget announced $511.9 million over four years for Vote: Education. Significant pre-Budget announcements for the compulsory education sector included the increase in student:teacher ratios for students in years 2-10.

The Operations Grant is $82.6 million over the next four years. “New Initiatives” include $59.8 million in teacher and principal development, $33.8 million in capital funding and $16.8 million for a School Network Upgrade Project, with an additional $59.4 million for school projects. $8 million was announced for schools for ultra fast broadband networks.

Tertiary Tertiary education was allocated an additional $158.9 million over four years with the emphasis on engineering, science and research led learning. However the TEU estimates that tertiary education expenditure will be $60 million less in 2012 than in 2011.

Identified tertiary education “savings” to be reinvested in the university sector are from the cessation of funding for embedding of literacy and numeracy into levels 1-3 programmes, ceasing funding for Adult and Community Education in universities and an $8.9 million saving over one year to industry training courses following operational policy changes.

$29.5 million has been allocated to PTEs to “create a fairer funding system that rewards competitive innovation” with the Budget stating that it wants to close the gap between the differential funding rates of PTEs and public providers of the same service. The intention of this is to encourage PTEs in to the areas of construction and

8

engineering as well as having PTEs providing more delivery of Levels 1 and 2 foundation courses.

Student Loans Some of the biggest impacts of this Budget will be on students. The changes in Budget 2012 to the student loans scheme are estimated to save $240.3 million in 2011/12 with a further $65 to $74 million a year of savings over the next four years. Major changes are increasing the student loan repayment rate from 10 per cent to 12 per cent, repealing the student loan voluntary repayment scheme, holding the student allowance parental income threshold at its current level for four years and removing the student allowance eligibility for more than four years of study.

Māori $10 million is allocated to the Māori cadetship programme to fund 1,000 Māori cadetships over the next four years (250 a year).

$76.4 million is identified for improving Māori education outcomes. But some of that funding is part of other budgets such as the Equity Funding in the case of Early Childhood Education (ECE). $19.1 million is allocated over four years to improve access to Māori medium ECE; $33 million for work on professional learning; and $8.5 million for assessment resources and standards to support learners to achieve NCEA in Māori medium education.

Science / Innovation/ Research Budget 2012 outlines an increase in funding of $385 million over four years for research, science, and innovation, including:

• $166 million to develop the Advanced Technology Institute in addition to an announcement on capital of $76 million said to come from the Future Investment Fund

• $60 million National Science Challenges seeking innovative solutions to questions of national significance

• $100 million for the Performance Based Research Fund ($6.2 million in 2012/13)

• $59 million for science and engineering courses ($8.4 million in 2012/13) • $270 m for the Primary Growth Partnership awaiting approval of business

plans or negotiating contracts

Health and safety The appropriation for health and safety services has increased by $8.5 million in 2012-13 to $50.6 million. This includes $597,000 for improving health and safety in high hazard industries and $6.8 million for increasing investment in safe and skilled workplaces.

Housing “Reprioritised” funding (from where is not clear) will provide $104.1 million for non-government housing providers over the next three years to be provided through the Social Housing Unit.

An extension of the Heat Smart programme will insulate 41,000 more homes.

9

Youth $37.7 million provides 3,000 more places under the Youth Guarantee Scheme. This brings the total to 12,930 places for 16 and 17 year olds at levels 1-3 in Institutes of Technology, Polytechnics Wananga and PTEs. Priority trade areas will be carpentry, engineering, horticulture, plumbing, gas fitting and brick and block-laying.

$18.3 million is allocated over the next four years for mental health services for children and young people. This will be directed to youth workers and One Stop Shops.

Links Budget documents can be downloaded from http://www.treasury.govt.nz/budget/2012