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.
36 Comments
Part privatise?
Double speak for expect 50% increase in price of power...to service the debt loans of private buyers....and all the fees of bankers....private jets, hotel rooms to work out the deal...
Dosnt look good for more growth under a ever increasing energy burden owned by overseas private investors who demand a return and have to service debt + interest....
Unintended cosequences....
Or road to slavery and hydraulic despotism?
Cue Bono?
Hello Sore Loser : Grand to have you back . And as you may have read earlier in the day , even Gareth Vaughan suggested that the Nats may as well spend the 4 hours discussing Arnold Schwarzenegger's testicles , for all the bloody good their budget will do ...... Very perspicacious of you , Gareth .
............. And yet , it was a bloody brilliant budget on one level . It tweaked and tinkered just enough to make the populence feel that Wild Bill is actually doing something , but not enough to scare them out of voting for National again , come November .
The problem with Labour is that they didn't have a decent purge after the shellacking they took in the 2008 election ....... C & C popped off to tasty little sinecures , then Goofy and Klinger slipped quietly into their old chairs .
...... Whatever B.S. Goofy may spin about it , his shadow cabinet is nearly 100 % the old hands . Just two newbies . That ain't rejuvenation . That isn't a fresh start .
Where abouts in France are you off to? Lots of lovely places over there.
That said, I think if you live over there long enough you'll come to the conclusion that people are just as grumpy, and just as eager to take advantage of the system, benefits and all, as anywhere else in the world. Nowhere is perfect (I haven't found that place yet anyway).
As for here, I quite liked the laid back "she'll be right" attitude initially - quite a change from home. These days I'm thinking it may be a little too extreme and therefore detrimental.
But you're right, the fact that we don't have the same attitude has proven to be a big advantage for us business-wise in that the customers we've worked for once absolutely want to keep us onboard afterwards!
Well, enjoy your trip and keep posting when you have time.
Had a big laugh at your wife's fantasy :)
You have to go to the La Baule area (so long as it's not July/August, too busy then). That's where I am from and it's got a beautiful beach, and there are lots of coastal walks and loads and loads of yummy fish and shell fish in the area.
My dad picks them up by the bucket, dunno how he's never had an oyster indigestion as it's one of his diet staple, and also dives for crabs and catches heaps of fish (had to buy a couple of chest freezers just for them).
Well, have a great trip and spare a thought for me when you enjoy our good cheeses & shell fish (& cheap, good wine).
A government who lowers taxes and then says it has to alter Kiwi saver (yet again), sell SOEs in order to balance the books etc etc is a government whose aim is to destroy the New Zealand economy so that the IMF can come in to impose a Milton Friedman economy on New Zealand. This will enable every large international corporation and China to buy us up. It is unbelievable. A political budget with no plan at all for the economic problems that New Zealand faces. They have to go.
Wake up for crying out loud , of course they do not. They are given instructions from elsewhere, and do not have to think much for themselves. Or is there some other explanation for 40 years of social, economic and policital failure. Because they couldn't get things wrong so requently if they wrote it themselves no!
When repeadedly the decisions made go against the interest of a sovereign nation by its so called publically elected servants, then where is the pressure and influence coming from?
"They are given instructions from elsewhere... When repeadedly the decisions made go against the interest of a sovereign nation by its so called publically elected servants, then where is the pressure and influence coming from?"
Looks like the author has found an appropriate site for his views. "Proletarier aller Länder vereinigt Euch!" ?
Alex13 - I'm not sure which way to read your response. The point was that at what stage will NZ turn towards improvement as a country heading along the current path of the past few decades? Because sadly the pride in NZ seems to be ebbing away, and those running the show have failed repeatedly, perhaps you disagree
Sore Loser and Iain Parker understand the problem and so does BH overall. Your comments are ignorant, and pretending to know someone’s views confirms it.
Tor Lawn, with respect if you think the electoral process is truly democratic then please think again. You don’t get to choose who your local candidates are nor those on the list, or the position they sit in the lists. The dearth of independent MP’s at all levels sums up the sorry state of democracy in NZ. Believe though, by all means if it makes you feel better.
Who do I think is really calling the shots – I’m not certain, but whether they are internal, external or a combination, it is clear that the only interest at play is self interest. Not sure there are too many explanations as to why country has been losing ground in every respect for so long.
As a proud Kiwi, what I would like to see is the country being run in the interests of the people who live there, not the shameful divided, broke, socially fractured experiment the place really is currently, heading for intervention and austerity sometime not too far from now.
Again Bernard, you don't understand what "foreign borrowing" really is.
"Foreign borrowing" is merely just a product of New Zealand's current account deficit. A trade deficit, (X < M), results in foreigners accumulating NZD's, with which they by necessity either save or 'invest' in New Zealand (if they spent them there wouldn't be a trade deficit). Given the reluctance of public to allow Chinese owned farms, the only real option for the time being is to save them.
It must be noted that in many cases, it is the central banks of countries that sell their own currency and buy the NZD's on the market (currency peg for example), which results in central banks holding NZD's in their reserve accounts at the RBNZ. Then, quite wisely, the foreign central bank exchanges reverses for securities, which bear a high return.
That is what "foreign borrowing" really is - just a necessary by product of a current account deficit - and NOT Bill English on the phone to China asking for a loan.
Okay rpcas, if foreign biorrowing is a mere bagatelle why is John boy carrying on about borrowing Xmillion$ a week? Why are they frightened to death of Moodys? And it is know okay for us to have guaranteed the Big Bank's overseas borrowings? Why is it a problem for Ireland? Yippee do da.
NEVER compare New Zealand to Ireland because Ireland is a currency user, not a currency issuer. Ireland does not have monetary sovereignty, whereas New Zealand does. Ireland's spending is revenue constrained in the same way as it is for you and me. The same is not true for New Zealand.
John Key doesn't understand monetary operations, and in all likelihood, Bill English is too politically entrenched to speak out (and thats if he actually understands). In 1971, the United States moved away from the gold standard and towards a non convertible fiat currency. Many economic theories and models still running rampant are based on the gold standard, which is not even remotely comparable to the currency monetary system (rendering these models inapplicable).
As well as that, it is probably not in the best interests of the government/reserve bank to tell the public the truth in some situations (for example, taxes don't fund spending).
The monetary system is also exceedingly complex.
Wouldn't competent CEO's/CFO's do their utmost to understand the monetary operations they have to deal with? Further proof that billy boy and smiley wavey are incompetent then and shouldn't be in charge of NZ.
Great article here on central banks in the US. Wonder what the charts would look like if applied to NZ.
http://www.marketoracle.co.uk/Article28181.html - The Road to Hell is Paved by Central Bankers.
Yep, while I understand the distinction between Ireland and NZ in terms of monetary sovereignty I cannot understand the difference when we, the taxpayers of NZ through their Government, have guaranteed the wholesale funding of the big 4 banks. That is what Ireland did and it certainly is now up the creek without a paddle. From what I understand the NZ Govt's borrowing is not horrific but nor was Irelands until they took over the Banks' debts. The private borrowing in NZ is horrific and that private borrowing includes the Banks overseas borrowing so what is the potential difference? . When the s.. hits the fan we can devalue but apart from that none as far as I can see.
Perhaps it is convenient to use fear of Moodies and their ilk to try to justify the continuing breaking of election promises and the continuing corporate welfare and the continuing attacks on the lower/middle income to pay for their tax cuts and other stupid decisions.
So funny when George " The Animal " Steele took a fancy to Macho Man's squeeze , Miss Elizabeth .
.......... Wonder if " The Animal " needs a new gig , this country could do with a P.M. who exhibits some charisma , and who doesn't piss around wasting everyone's time .
This government is making a serious mess of things, no doubt.
Borrowing $350Mil a week, with absolutely nothing to show for it.
If they were actually serious about getting the economy sorted, they would reverse the tax cuts, that we are borrowing heavily to fund, tomorrow.
The growth forecasts are a joke, and actually boardering on outright dishonest, we know it won't happen, they are in fact preventing it from happening by their very actions of borrowing so much money the dollar is pushed higher.
We will never have an export led recovery while these guys are borrowing to fund tax cuts.
Philithy - I suppose its a case of whether you think rebuilding Chch is producing something useful or not. Clearly you don't think so, but others might not agree with you. Its gross generalisation like the one you just made that kills your creditability.
Yes scoffing at growth forecasts is popularist today, but in my experience of the public's utterings, we do actually get it wrong more often than the appropriate specialist(s). Its just that we have the luxury of moving on to the next subject that we'll dump on, and forget about the previous uninformed, and subsequrnly proved incorrect, comments that we've got wrong .
Isn't Christchurch 'replacement' not 'production'? Replacing my stolen TV might push up Harvey Normans figures, but I have to either pay for it directly myself, at the expense of other purchases, or the insurance comany pays for it, and eventually recoups its costs from me, no matter where the funding comes from in the initial stage? Then, after my initial replacement spend, Harveys has to sack his idle salesman, as I haven't been back to buy that new DVD player and dishwasher that I really wanted before the theft.
And here's the thing, Grant. If it's down to me to pay, as it appears that AMI has taken at least some of the insurance cover out of my sails, do I accept I can't afford a replacement TV, and go to the neighbours in Timaru to watch telly?
So please explain to me "number 6" how tax cuts we can't afford and are borrowing to pay for, has anything to do with Chch?
They were already borrowing about $300 mil or so a week before Chch, and then they decide that's a good time to go and cut taxes.
Treasury has got it's growth forecasts over optimistically wrong for the last 3 years, so why would this year be any different?
Absolutely, its replacement Number 6, and it is not a good thing to destroy something and then need to rebuild it. If what youre suggesting is don't rebuild Chch, expand Timaru, there's still a cost even if that made sense.
Borrowing for Chch/Timaru has to be done, it isn't positive (the quake costs us alot in the short-term, gives us a boost in the medium term, but overall costs us an underperformance against what it would have been long-term). However, my point was the borrowing has to be done and to criticism the Govt for borrowing to do so is farcial. A one-off tax ? maybe at some other point of the economic cycle, but not now as the economy is trying to get back on its feet - beside we will end up with a better city in Chch that future generations will be able to enjoy, and borrowing is the appropriate way to finance that sort of asset.
Philithy - if you check the Budget income detail on this site ypu'll see that taxes weren't cut, merely some income taxs were and GST tax put up by the same amount roughly - taxes are the same, but better incentiving savings i.e. you don't have to spend all of it an incur GST taxes
I'm also glad to hear YOU know more about forecasting tax revenue than Treasury - it is an imprecise science but I'm sure they have a better record over the long term than you.
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