PM Key adds Justice to Health and Education portfolios that won't face spending cuts in May Budget

By Alex Tarrant

Prime Minister John Key has added the justice portfolio to health and education as those not facing cuts in the upcoming 'zero budget', while also pouring more cold water on the proposal of an earthquake levy to pay for costs arising from the Christchurch earthquakes.

Key has signalled there will be no additional spending in this year's budget from last year as the government looks to control expenditure and get its books back to surplus by 2014/15 to begin paying back higher-than-forecast debt.

When Key announced the 'zero budget' last Sunday, he indicated all areas could face spending cuts except health and education, which could share NZ$600-NZ$800 million of new spending found from other areas. The announcement has led to speculation the government could cut the top levels of Working for Families and tighten eligibility for other schemes, such as interest-free student loans.

Speaking this morning on TVNZ's Breakfast programme, Key added the justice portfolio to health and education.

"What’s going to happen in the budget, it’s reasonably clear, is that we need to pay for the earthquake, we get [recognised future costs] booked to the accounts straight away," Key said.

"I think we do need to put more money in health and education, so we’re going to do that, and justice, and we’ll find savings in other areas," he said.

No to levy

Key poured more cold water on the Green Party's proposal for a temporary earthquake levy placed on income taxes to pay for government's costs arising from the Christchurch rebuild. The Green Party is proposing a levy be placed on incomes over NZ$48,000. Calculations from the Parliamentary library for Green Party co-leader Russel Norman show the Green's suggested levy could raise NZ$457 million a year, although the party has looked at various scenarios that could raise up to NZ$1 billion a year if the company tax rate, which will drop on April 1, is held at its current level. See more in the update below.

On the Green Party blog site Frogblog, Norman said those earning between NZ$48,000 and NZ$70,000 a year could pay up to an additional 1% income tax, while those earning over NZ$70,000 could pay up to an additional 2% income tax to help pay for the reconstruction of Christchurch. People earning less than NZ$48,000 and all those living in the Christchurch region would be exempt from paying the levy.

However, Key and Finance Minister Bill English have repeatedly ruled out imposing such a levy on the grounds it would have to be applied to lower income earners than Norman suggested, and that it would have to be imposed for longer than five years, meaning it would not just be a 'short-term' option.

"As we discussed last week, there’s really only a couple of options. One is, you keep that debt forever, that’s not acceptable, I think, to New Zealand or the public, and you’ve got to pay interest on it," Key said this morning

"[Two], we send everyone a bill in the form of a levy, and that will cut in to incomes at quite low levels – NZ$40,000 and above, and you’ll pay it for decades, frankly," he said.

"Or the third option is we’re more careful with our expenditure. Yes I know that has some impacts on people, but of all the options we have, none of which are good, in our view that’s the best one."

The government's net debt is forecast to rise higher than 30% of GDP - it's self imposed comfort zone - in the next four years as it responds from a slower than expected recovery in 2010 and a larger borrowing programme to pay for the immediate costs of the Christchurch earthquakes.

Greens respond

Greens co-leader Russel Norman told interest.co.nz that the government should actually look at the numbers on the levy issue rather than scaremongering.

"In fact it is they who are risking a big bill in the form of higher interest rates," Norman said in an emailed response to this morning's comments made by Key.

"The truth is that they [government] risk adding 30 to 100 basis points on everyone’s home mortgage if we get a credit [rating] downgrade because they borrow instead of striking a levy. If you had a mortgage of NZ$300,000, then 100 basis points extra interest works out at around NZ$60 a week extra – ie we would end up paying more and it would simply go overseas, rather than paying ourselves and avoiding debt and a credit [rating] downgrade," he said.

The Green Party presented six scenarios for a levy to the government, which different options raising between NZ$229 million a year to NZ$1.026 billion.

"[The NZ$1.026 billion scenario] would mean someone on NZ$50k paying 50c a week extra; on NZ$70k paying NZ$6 a week; someone on NZ$100k paying NZ$23 a week. If you add in a delay in cutting the company tax rate (which was cut in anticipation of an Australian company tax cut to 28% that didn’t come) then you get NZ$1 billion a year. It is not a huge impost. So if you decided to raise NZ$5b from this source then it would be for 5 years," Norman said.

New Zealand's company tax rate will drop from 30% to 28% on April 1. For more on this and other tax changes on April 1 see this article from last week.

(Updates with Green Party response, link to Green Party document on levy scenarios)