By Bernard Hickey
So what does Budget 2011 mean for borrowers, savers, KiwiSavers and home owners?
Budget 2011 doesn't contain the same major taxation reform seen in Budget 2010. Last year income taxes were lowered, the GST rate was increased and changes were made to taxation rules for property investors.
This year's budget contains more tinkering than reform.
It contains a few tweaks to the tax rules for KiwiSavers and student loan borrowers. See Alex Tarrant's article with details of the KiwiSaver changes.
It also makes some marginal changes for Working For Families that actually increases payments for those on lower incomes but 7,000 families will see their payments cut. See Alex Tarrant's article with more detail on Working for Families changes.
The biggest impact over the longer term will come from much stronger economic growth will be on interest rates and on house prices.
The government is forecasting economic growth of 4.0% in 2012/13 and a rise in the 90 day bill rate to 5% from under 3% now.
That implies floating mortgage rates of around 8% by then.
The risk, however, is that economic growth is lower than the Treasury has forecast.
If growth is lower than is forecast then the budget deficit and borrowing will be higher than expected.
Standard and Poor's commented after the budget that it wouldn't change New Zealand's current AA+ rating with a negative outlook, as long as the outlook for borrowing and the deficit did not worsen.
If it does worsen this will increase the cost of borrowing for New Zealand through higher long term interest rates.
The problem for homeowners and borrowers is that interest rates have fallen as far as they will. If they do fall further, it's because the economy is in dire straights and unemployment is rising. That will also suppress demand and prices in the housing market.
The surge in activity in central Auckland in March was sparked by the March 10 cut in the Official Cash Rate after the February 22 earthquake.
Economists expect the Reserve Bank to begin reversing that cut from December or early in 2012.
That is what will hold back the housing market -- the likelihood of future interest rate increases.
More savings options
Meanwhile, the government also announced details of its plans to part privatise the big four state owned energy companies (Mighty River Power, Genesis Energy, Meridian Energy and Solid Energy) and sell down its Air New Zealand stake.
It hopes to sell these stakes to raise NZ$5-7 billion over 3 to 5 years from 2012 through initial public offerings on the NZX. It aims to give fund managers and individuals more options for savings.
Also, the government plans to offer Earthquake Kiwi Bonds to help build a NZ$5.5 billion earlthquake fund. These will be available for individual investors and offer similar rates to wholesale rates, initially around 4%.
My view
My view is this budget does nothing to fix the government's structural deficit and eventually it will have to cut spending harder and tax more to ensure New Zealand's foreign borrowing is bought under control.
See my full view here on John Key's 'Tweak And Fiddle' budget.
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