Budget 2012 forecasts will show 2014/15 surplus, PM Key says; Govt eyes student loans, better targeting of financial assistance

Budget 2012 will introduce a new initiative to broaden New Zealand's tax base, Prime Minister John Key says.

Speaking to media after giving a lunch-time speech in Wellington on the upcoming Budget, Key said the new policy would come as no surprise, but would not be drawn on the size of the base-broadening measure, or whether it would target property. It would not be a capital gains or land tax, he said.

Key later said the initiative would also not be the introduction of RFRM (risk-free rate of return method) on residential investment property, something the government's Tax Working Group considered in its 2010 report on New Zealand's tax system.

Finance Minister Bill English said later on Tuesday there were a number of small measures the government was looking at as part of broadening and maintaining the tax base.

In a speech last week English referred to three of these announced in Budget 2011 – how employee benefits were treated, rules for mixed-use assets such as holiday homes, and new livestock valuation rules.

“In the context of the types of allowances we’re talking about, they help with us get to a zero budget," English told media in Parliament Buildings on Tuesday.

“Some of the measures that we’ll be brining to the Budget this year will have been consulted on; one or two of them might be new,” he said.

Those new measures would come as no surprise.

“We’ve got a series of measures, some of which we’ve had in the pipeline, and they do help us with a bit more revenue, and help us get to a zero budget. There’s no major new tax initiative. It’s just base maintenance and a little bit of base extention,” English said.

What could it be?

PWC Partner Geof Nightingale pointed to Key's 'no surprises' comment, and said the government's tax policy work programme for the next year might provide some clues for what was being considered.

Outlining the programme on the IRD's policy advice division webpage, under the heading Responsibly managing the government's finances and tax system (coherence/integrity), IRD says it is looking at:

Employee benefits – Review of the treatment of certain untaxed benefits that are substitutes for salary.

Mixed-use assets – Reforming the rules for determining deductibility of expenditure relating to assets used both privately and for income-earning.

Remedial work – There are a number of areas that require remedial changes to effectively implement existing policy, such as GST, CFCs, IFRS, life insurance, “black hole” expenditure and the look-through company rules.

Review of employee allowances – Several interpretation issues in the area of employee allowances have arisen which has meant that a wider policy response on allowances is needed.

Specified mineral mining – Review of concessionary rules for specified mineral mining (largely gold mining).

Student loans – Review the student loan scheme with a focus on overseas-based borrower debt.

Taxation of foreign retirement savings – Review the tax treatment of foreign retirement savings.

Thin capitalisation – The project will examine the ordinary thin capitalisation limits in order to maintain the New Zealand tax base.

Time period for income tax refunds – Consider whether the time periods for income tax refunds should be aligned to four years.

Various charities-related issues – This work includes the Department of Internal Affairs’ review of the Charities Act 2005, cultural giving, Schedule 32 review (overseas-focused organisations), applications for inclusion on Schedule 32, gift aid, payroll giving intermediaries, various donations tax credit remedial issues and regulations to specify charitable organisations for student loan purposes.

Valuation of livestock – Review of the ability to move from one livestock valuation method to another and, in particular, exits from the herd scheme.

'We will get to surpus'

Meanwhile, Budget 2012 forecasts would show a return to surplus in the 2014/15 year, with the government to target the student loan scheme, financial assistance packages, and the tax system, Key said.

In a speech to Business New Zealand in Wellington today, Key said the May 24 Budget would better target financial assistance in a couple of areas, including the tax system. However, he said there would be no changes to Working for Families and KiwiSaver tax credits.

There would also be some more base-broadening in the tax system, although Key said this had already been well-signalled, indicating this referred mostly to policies already announced like changes to livestock valuation rules.

However, in a media conference after the speech, Key said there was one unannounced base-broadening policy to be included in the Budget. This would not come as a surprise he said, and was not anything like a capital gains or land tax.

Govt to raise student loan repayments

While the government remained committed to keeping student loans interest free, Key said it was also determined to reduce the cost of the overall loan scheme to taxpayers.

"The scheme is very large, and not so long ago the Goverment was effectively writing off 49 cents of every dollar that was lent," Key said.

"With previous changes we've made, we've so far managed to bring that down to 45 cents," he said.

"And we intend to get it closer to 40 cents in the future by continuing to chase overseas borrowers and through the faster repayment of loans once people have finished their study. As in previous Budgets, some of the savings we make will be reinvested in improving teaching and research within our universities and other tertiary institutions for the next generation of students."

Key told media after the speech that the government would be looking to raise the repayment rates of those with student loans in the workforce. Currently, people with student loans pay 10% of their annual income above a threshold of NZ$19,084 to the IRD for repayment of their loans.

For example, at the moment, someone with an annual income of NZ$40,000 would pay 10% of their income above NZ$19,084 - $20,916 - which would mean repayments of NZ$2,091.60 a year.

Partial privatisation funds for infrastructure spending 

The Budget would further show where the proceeds of the government's partial privatisations would be funnelled to. 

The government is expecting to raise between NZ$5-7 billion over the next five years through the partial sales of energy companies Genesis Energy, Solid Energy, Mighty River Power, and Meridian Energy, and Air New Zealand.

It has so far allocated NZ$1.48 billion of this to spending on school upgrades (NZ$1 billion), irrigation (NZ$400 million) and an Auckland technology centre (NZ$80 million).

Key has previously suggested that Kiwibank may be in line for some of the proceeds from the government's mixed-ownership model.

Health, education to get new spending

The health sector would be the biggest recipient of new spending in the Budget, Key said. The government would be making "some savings" in health, but these would be "reinvested back into funding more frontline services."

Education would also get a "sizeable increase in the Budget."

"There will be carefully targeted savings proposals from within the overall vote, but again, these savings will be reinvested in the education sector to help improve student achievement," Key said.

"We will also spend some more on science and innovation, as we promised at the election, to help build the research and innovation base of the economy," he said.

Finance Minister Bill English last week said Treasury models showed an expected surplus of NZ$370 million in 2014/15 had turned into a NZ$640 million deficit since the start of the year. This was due to a lower-than-expected tax take, rising earthquake costs, and a timid economic recovery - both here and overseas.

'Why we need the surplus'

Key said the government had set a path back to surplus, and was sticking to that path despite weakening forecasts of world growth.

"Getting back to surplus is important because every year we are not in surplus we have to borrow to cover the difference between what we spend and what we raise in revenue," Key said.

"All that adds up – and it has to be paid back with interest. So the more debt we rack up the more it matters down the track. New Zealand is particularly vulnerable to an increase in government debt because we are one of the most indebted countries in the world, when you add together both public and private debt," he said.

"In these circumstances, it’s crucially important to have a strong government balance sheet with relatively low levels of public debt, as a counterweight to high levels of private debt. International lenders put a lot of store on that counterweight."