Aaron Quintal: Budget for business 'reactive and piecemeal'

Aaron Quintal, tax partner with Ernst & Young, says this year's is a sensible Budget, with a hint of boring about it. Photo / File

Budget 2015 is called "A plan that's working", but it is very hard to decipher exactly what that plan is. It is a sensible Budget, with a hint of boring about it, but not one that clearly articulates a vision.

The surprise of the Budget was the level of focus on addressing child poverty.

After Bill English talked down the prospect of significant measures against child poverty, it turned out to be at the very heart of the Budget. The money spent will not be enough to please everyone but the scale and nature of the problem means that no single Budget could hope to make a significant impact on the problem.

This is, however, a move to start to turn the tide against an issue that has long-term social and economic costs, not just for those caught in poverty but for the whole country through lost output, and increased health, welfare and justice spending as children from dysfunctional homes grow to be dysfunctional adults.

The package is centred around a $25 a week increase in benefit rates for families with children, the first increase in core benefit rates (apart from inflation adjustments) since 1972. This is coupled with a $12.50 a week increase in Working for Families credits for working families earning less than $36,350 a year along with increased work testing obligations for sole parents which will kick in when the youngest child turns three.

It does not represent a change in the way the government tackles child poverty, just a lot more - $790 million more over the next four years to be exact - of the same policies. It is, however, an admission of the inescapable fact that free childcare and subsidised doctors visits will only go so far. Ultimately, the only way to make people less poor is to give them more money.

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The plan for business is less clear. The forecast for the economy remains upbeat. Economic growth is expected to average 2.8 per cent over the next four years. This is strong growth by New Zealand standards and what's more it is growth that is not driving inflation, which this year is at a staggeringly low 0.1 per cent. The "plan" for the economy seems to be to get out of the road and let it do its thing.

The elusive surplus has continued to elude the Government, which came as a surprise to no-one; Treasury were saying last year there would be another deficit this year. The fiscal priorities of the Government remain returning to surplus and using those surpluses to fund modest tax cuts and reduce net debt to 20 per cent of GDP (or lower if greater than expected surpluses allow).

What will be of a concern for the Government, although Mr English refused to admit it, is that the forecast surplus for next year also looks wafer thin, at $176 million. With total core Crown expenses of $74.9 billion it does not take a lot of movement on either the revenue or expense side of the accounts for $176 million to disappear in the rounding.

The political damage of missing the surplus two years in a row would not be a good look in the lead up to the election. This political pressure creates the risk of ill thought out knee-jerk spending cuts in next year's Budget if the economy doesn't perform as well as forecast.

The forecast surpluses are based on creating 150,000 new jobs by 2019 (on top of the 170,000 new jobs that have been created over the last four years) to bring unemployment down to 4.5 per cent and raise the average wage to $63,000 a year. These new jobs and wage increases flow through to increased tax revenues and less welfare spending that underpins the surplus. If the jobs don't come, nor will the surplus.

The Government cannot simply 'magic' jobs into existence, but it can provide support and set the right environment for business to operate in. To help bring about these jobs, there is some new spending on innovation: another $80 million over four years for R&D growth grants (which was signalled before the election) and $25 million over three years to support the establishment of privately-led Regional Research Institutes, which are intended to bring innovation and jobs to the provinces.

The growth in the rural sector will be further supported by another $150 million to boost rural broadband funded through an extension of the Telecommunications Development Levy. There is also a contingency for a further $210 million to secure the next stage of the Ultra-Fast Broadband roll out. This $360 million combined investment in broadband is an important plank in the government trying to roll out more digital services, from education to the tax system, as a means of delivering more services at lower cost.

Beyond the broadband spend, there is very little that is new for infrastructure, despite providing $939 million from the Future Investment Fund, which is the pool of money the government is sitting on from asset sales. Of the $249 million allocated to transport priorities, $210 million of this is swallowed up by capital funding to KiwiRail, a level of support that even the Minister says is "not sustainable".

Much of the spending in the business sector seems reactive and piecemeal. If there is a plan behind this spending it is well hidden not one that creates a vision to unite the business sector behind.

Aaron Quintal is a tax partner with EY.