KEY POINTS:
* This is an edited transcript of Finance Minister Michael Cullen's Budget speech, covering the main points of his financial plan for the country. It was Dr Cullen's eighth Budget speech
The central message of Budget 2007 is the importance of saving and investing. It is designed to promote a stronger saving culture and greater investing.
This will create a more productive economy, a deeper capital base, a more prosperous retirement future for New Zealanders, and will ensure we can be less dependent on foreign capital.
Increasing saving and investing will underpin the Government's three core themes of economic transformation, families and national identity.
It will help build a sustainable future for New Zealand over the long term.
Higher levels of investing and deeper and broader capital markets are important pre-conditions for improving productivity and enhancing economic transformation.
Higher levels of saving will assist young families to accumulate the deposit for a first home and help build assets to improve standards of living in retirement.
Generating more of our own saving and investing will lessen our current very high levels of dependence on foreign capital and enable us to be more economically independent.
After a brief period of economic slowdown in 2005/06, economic growth has begun to pick up again. But this growth is based on domestic demand.
The New Zealand dollar, having briefly dropped to US60c in early 2006, quickly resumed appreciating to levels well above its equilibrium rate.
This is placing significant stress on the exporting sector, though some parts, such as dairy, are substantially cushioned by high commodity prices.
At the same time, the high exchange rate means import prices remain low. With high interest rates encouraging strong capital inflows, and appreciating property values and strong household spending underpinning high levels of household borrowing, domestic demand growth has remained very strong. Hence New Zealand's current account deficit of around 9 per cent of GDP and continued inflation pressures.
While some of the economic imbalances will slowly correct over time, more fundamental imbalances are driving some of the short-term ones. This means that corrective action such as monetary policy has had to be more severe than is desirable.
In particular, the low and declining rate of household saving in New Zealand is a major contributor to these trends.
Once, low saving was put down to high inflation, but New Zealand has had low inflation throughout the last 15 years. Real personal and household incomes have been rising. Job security is much higher than it was 15 years ago in the aftermath of the Employment Contracts Act.
New Zealand Superannuation levels, in relative terms, are lower than they were 20 years ago, while the age of eligibility is five years higher. And, while the New Zealand Superannuation Fund has given much greater certainty to the future of New Zealand Superannuation, a clear majority of New Zealanders under the age of 40 still tend to doubt whether it will be there to support them in retirement.
Thus the favourite economists' (and others') nostrum of cutting taxes and New Zealand Superannuation would have no effect on the saving rate.
There are, of course, a few who say New Zealand does not have a saving problem. These are the macroeconomic equivalent of climate change deniers.
This Labour-led Government has already put in place the KiwiSaver scheme. This begins operation on July 1. KiwiSaver is designed to use the power of inertia to encourage people to save.
In its current form, it is the most significant change in saving policy since the National Government abolished the Third Labour Government's compulsory saving scheme in 1976, but it is clear that the needs of New Zealand and New Zealanders raise the question of whether more should be done.
The size of the fiscal surpluses allows room for further initiatives. There were two options facing me in recommending action to Cabinet. One was the tax threshold indexation changes outlined in 2005, or some other form of modest personal tax cuts, which for most people would increase take-home pay by a few dollars a week while adding to the demand pressures in the economy. The other was bolder moves to strengthen KiwiSaver to build greater economic and social strength for the future.
The choice was not a difficult one. Every dollar saved today is worth more in the future. A small tax cut now would be spent and then gone. Increasing saving encourages personal responsibility.
If we help more people save now, that will reduce the need for people to receive income-tested supplementary assistance from the Government in the future. That is particularly true if more saving now enables young couples to save for a deposit on a first home and work towards a mortgage-free retirement.
But in designing assistance and encouragement for saving, it is important to recognise that those on modest incomes have the most difficulty in saving and therefore need a stronger relative incentive to encourage saving. Traditional saving incentives tend to have the opposite effect.
The Government expects that the phase-in of compulsory matching employer contributions will be taken into account in wage and salary bargaining as is the case in the current campaign by the Engineering, Printing, and Manufacturing Union.
The combined effect of the employee and employer tax credits is that the Government will be supporting saving on all those earning $500 a week or more by $40 a week, and fully matching the costs of KiwiSaver contributions on earnings of up to $500 a week.
For a couple on the average household income, with one income earner entering KiwiSaver at age 30, savings at 65 in constant dollar terms are projected to be $380,000 under the revised KiwiSaver scheme, compared with $170,000 under the initial provisions.
If the same couple on the average household income each had the same income, accumulated savings at age 65 would be $440,000 on the revised KiwiSaver scheme compared with $170,000 under the initial provisions.
The social justice element in KiwiSaver becomes even clearer if we consider a two-income couple, both on the same wage, where total income is 60 per cent of the average household income. If they enter KiwiSaver at age 30, they are now projected to accumulate $300,000 between them, compared with $100,000 under the initial provisions.
Unlike tax cuts in the pocket, the impact on demand will be very small and may well be negative. And while the increased availability of realistic first-home deposits five years or so down the track may put a little extra pressure on the housing market, the greater encouragement to non-housing saving and investing should more than counterbalance that.
One issue that has come to the fore in recent years is the growing pressure for large managed funds to be accountable for the way in which they invest.
Disclosure requirements can be a low-cost and efficient way of encouraging responsible investing. The United Kingdom has had such disclosure requirements since 2000. Australia has similar requirements.
Disclosure requirements allow providers to market themselves as responsible investors, but also ensure fund members are aware of the portfolio decisions made on their behalf.
The Government has agreed that KiwiSaver providers will be required to disclose their approach to responsible investing. It is also intended that a joint working party with scheme provider representatives will be set up to develop guidelines on responsible investing.
The returns on saving and business investing will be increased as a result of the second main element of Budget 2007, the business tax reform package.
The most obvious and expensive, though not necessarily the most important, part of this is the reduction in the headline rate of corporate tax from 33 per cent to 30 per cent from April 1, 2008.
Business has long argued that such a reduction will assist in boosting productivity and competitiveness and attracting more foreign direct investment, increasing labour productivity and wage rates.
It should also reduce the attractiveness of structuring businesses so as to report minimal profits in New Zealand.
When the business tax discussion document was released, proposals were also included for tax credits for research and development, export market development, and skills training. Following feedback from business and tax advisory groups, it has been decided not to proceed with the latter two proposals.
Instead, some $87.8 million of new funding over the next four years will be provided for the market development assistance scheme to encourage firms to take new products to market so as to boost exports and productivity. $53 million will be invested over four years to increase participation in industry training.
After careful reflection, the Government has decided to proceed with a research and development tax credit. This credit will be at the rate of 15 per cent of eligible expenditure.
To qualify, research and development activities must be systematic, investigative, and experimental. They must either seek to resolve scientific or technological uncertainty, or involve an appreciable amount of novelty. They must be directed at acquiring new knowledge or creating new or improved products, processes or services.
A business must control the research and development expenditure, bear the financial and technical risk, and own the results. The research and development must be carried out predominantly in New Zealand.
The cost is expected to rise from $140 million in 2008/09 to $260 million in 2010/11. This is a massive investment in private sector research and development and will place us in a much more competitive position vis-a-vis Australia in particular.
The total cost of this business tax reform package is estimated to be $1.06 billion in 2008/09 rising to $1.13 billion in 2010/11. It is easily the most comprehensive business tax package since the mid-1980s, and marks the first reduction in the corporate headline rate since 1988 under the Fourth Labour Government.
There are two other major developments in relation to taxation which deserve discussion today.
First, as a result of the confidence and supply agreement with United Future, a discussion document was released last year in relation to the taxation of charitable donations.
As a consequence of the submissions on the document the Government has decided to remove the rebate threshold on individuals charitable donations. In future, all such donations to organisations with charitable donee status will qualify for the 33 per cent rebate.
The deduction limit on charitable donations made by companies and Maori authorities will also be removed. The company deduction will also be extended to small unlisted companies.
In November, the Government will issue a further discussion document on proposals for a system of payroll charitable giving. This, if approved, would provide a mechanism for employees to donate to their charity of choice and receive a deduction immediately.
The second matter is of quite a different nature. Much concern has been expressed about over-investing in housing and the impact of the tax system in encouraging this.
While there is no political consensus on any major remedial measures, I am mindful of the fact that under the current law, investing in housing for the purpose of making a capital gain - that is, trading in housing - is taxable.
To underline the significance of this fact and to send a clear signal to housing investors about the purport of the current law, it has been agreed between myself and the Commissioner of Inland Revenue that an additional $14.6 million over the next three years will be provided to Inland Revenue to strengthen the auditing of property transactions.
In conjunction with KiwiSaver's encouragement of more diversified saving it is hoped that this will lead to some easing over time in the pressure on the housing market.
KiwiSaver and the business tax package are central to the Government's plans for economic transformation.
In addition to the near-doubling of the market development assistance scheme $33 million will be spent over four years towards developing better export links with Asia. This includes increasing New Zealand Trade & Enterprise services in Asia, strategic tourism marketing in China, and planning for the 2010 Shanghai Expo.
In Budget 2007, the Government's focus is on improving the quality and relevance of tertiary education with a package that will ensure the successful implementation of the tertiary reforms.
This year's Budget will enable the tertiary system to better fulfil New Zealand's needs, and at the same time provide better value for money for taxpayers and students.
This Government has paid particular attention to the development of New Zealand's long-neglected land transport infrastructure, road, rail, and public transport.
It is proposing a framework for the introduction of a limited regional fuel tax to enable local authorities and the Government to pay for transport projects sought by a region where those projects would not attract funding within the timeframe desired by the region.
It is proposed that such a regional fuel tax, covering petrol and diesel, would be at a maximum rate of 10c a litre. Preference will be given to public transport and other land transport developments which will reduce congestion, with no more than 5c a litre to be spent on roading projects.
In the case of Auckland, in order to fund electrification [of the suburban rail system] the initial rate of regional fuel tax is estimated to be 5c a litre.
Electrification is timetabled to be completed by 2013. An earlier date of 2011, to coincide with the Rugby World Cup, was considered. But it is clear that the risks of aiming for 2011 are too great, including the prospect of extensive disruption to other transport modes.
This project has the capacity to increase substantially public transport use in Auckland. It will need to be linked to integrated ticketing, increased bus patronage, and other developments to realise its full potential. But it provides the chance for Auckland to make up for decades of under-investing in public transport if it chooses to grasp the opportunity.
The Government remains committed to the future of young New Zealanders. Budget 2007 invests more than half a billion dollars in major initiatives.
The national identity theme receives a major boost. The centrepiece of the theme is raising annual official development assistance by $246 million by 2010/11, reaching 0.35 per cent of gross national income. This allows us to address urgent Pacific and Asian development needs. It is the largest increase in overseas aid in New Zealand's history and underlines our commitment to helping eliminate global poverty.
The Government has made a conscious decision to forgo a substantial proportion of its own surplus in order to underpin the most significant initiative in private saving for over a generation.
The KiwiSaver scheme is in place and begins on July 1. A recent survey shows a strong increase in awareness of the scheme and a higher than expected level of intention to participate.
New Zealand now has the opportunity to build a sustainable future of greater self-reliance, greater security and greater opportunity. KiwiSaver will greatly enhance our chances as a nation of following a sustainable path to social and economic development.
It will provide our young families with a greater chance of owning their own home. It will lift prosperity in retirement for millions of future retirees. It will support stronger and deeper investing in our own future, by ourselves for ourselves.
The chance to do this has been created by seven years of strong fiscal management. It is a chance Parliament and New Zealand should grasp with both hands.
