Government and Fiscal Policy

Back to Black

Friday May 25, 2012 Adrian Slack

The four key economic priorities outlined in the 2012 Budget were:

  • Responsibly managing the Government’s finances
  • Building a more productive and competitive economy
  • Delivering better public services within tight fiscal constraints
  • Rebuilding Christchurch


Back to black

First, returning the government’s books to surplus by 2014/15 despite an increasing austere global environment is achieved through a forecast surplus of $197 million in that year.  This is $1.1 billion lower than last year’s Budget forecast for that year. Thereafter, the fiscal surplus is set to grow further to reach $2.1 billion in 2015/16.

The “zero Budget”

The “zero Budget” involves the $4.4 billion of new operating spending over the next four year period, balanced by a set of initiatives that increase revenue and generate savings. These initiatives include:

  • Increase excise taxes on tobacco, raising about $528 million over four years. Tobacco excise tax will be increased by 10 percent per year for the next four years. This will take the price of a packet of 20 cigarettes to over $20 by 2016.
  • Increasing compliance and tightening up a variety of tax loopholes that allow people to claim tax rebates on rented holiday homes, boats and aircraft. This is collectively forecast to raise $109 million over the four years.
  • Removing three tax credits for childcare, housekeeping and for people on low incomes. The Minister says that these tax credits no longer meet their intended objectives given the support now available through Working for Families. This will save $117 million over four years.
  • Tertiary savings of $517 million in total by 2015/16. These stem from savings on student loans and student allowances that will save the government $240 million in 2011/12, plus further “operational savings” to the tune of $276 million over the next four years.
  • Welfare and housing savings of $258 million, which include “efficiency savings” within Housing New Zealand, and reductions in funding for Work and Income employment assistance and Youth Transition Services.
  • Cuts to contingency funding of $772 million.
  • And a range of other reprioritisations and savings that combine to $1.48 billion by 2015/16.


Asset sales

The Budget also sets up a Future Investment Fund.  This fund will receive all proceeds from the sale of its shares in four SOEs and Air New Zealand.  The Minister stated that Treasury’s analysis shows that asset sales “does not result in any net loss of publicly owned assets, but simply changes the mix of those assets.” The sales have three stated objectives.

  • The proceeds will be used to fund capital projects – such as building “new schools and better hospitals” – thereby avoiding borrowing more from overseas lenders.
  • New Zealanders will have additional (private) investment opportunities.
  • The sales are expected to improve the transparency and accountability of the companies.

Despite these objectives, the rationale for partial asset sales remains unclear. There are alternatives that could satisfy the first two objectives. As for the third, it implies that the government currently accepts poor corporate governance, and that somehow, partial privatisation will somehow improve the corporate governance structures and/or incentives. Questions should be:

  • Like any business, the investment required and returns delivered are not a sure bet. How risky are these assets, and is the government better off from partially divesting these assets from its portfolio?
  • As we’re changing the mix of assets, what are the ‘yields’ from the new assets, relative to the ‘yields’ on the assets that are being replaced? If the former are greater than the latter, then the business case for asset sales is convincing. However, if the former are less than the latter, then the business case for replacing higher yielding assets with lower yielding ones becomes, at best, strained.
  • Would private ownership create incentives that result in better operation and long term investment, thereby yielding greater value to customers and owners?
  • Do these assets have some strategic importance that merits (partial) government ownership rather than leaving it (solely) to private owners to direct and manage their operations?
  • Do the benefits found in the answers to the questions above justify the ‘transaction costs’ incurred in the (partial) privatisation process, and is the net benefit greater than maintaining the status quo?