Budget 2009: NZ ends tax cuts, pension contributions as deficits soar

New Zealand's government scrapped tax cuts scheduled for the next two years, suspended contributions to the Super Fund and capped new spending to curb a projected surge in public debt as the recession stretches through a second year.

Thursday, May 28th 2009, 3:40PM

by Jonathan Underhill

Net debt, the government's preferred measure, is projected to almost double to $27.3 billion, or 16% of gross domestic product this year and reach 31% of GDP by 2013, according to Economic and Fiscal Update.

Finance Minister Bill English's first budget is made against a backdrop of rising unemployment and dwindling tax revenue as the global economy suffers its worst slump since WWII. Standard & Poor's has the nation's AA+ debt rating on negative outlook and running the ruler over the 2009 budget is key to its decision whether to downgrade New Zealand. That could add $600 million to the nation's annual borrowing cost.

"I have the dubious distinction of being the first finance minister in 60 years to deliver a budget while the global economy is shrinking," English told reporters and analysts at the budget lock-up in Wellington. The 2009 budget "ensures that forecasts of skyrocketing debt . . . will not eventuate."

The Treasury now projects a weaker track for GDP than it did in its December Economic and Fiscal Update. The economy contracted 0.9% in the year ended March 31, according to its latest estimate, from a previous forecast of 0.3% growth. A contraction of 1.7% is now predicted for the current year, versus an earlier estimate of 0.8% growth.

The New Zealand dollar fell to 61.35 U.S. cents after the budget was release, from 61.60 cents immediately before.

Government bond sales are forecast to jump 55% this year to $8.5 billion, with the Debt Management Office's weekly auctions rising to between $150 million to $200 million, about twice the average of $75 million a week in prior years.

The government's contribution to the NZ Super Fund will dwindle to $250 million this fiscal year, from $2.2 billion in the previous year. Contributions may not resume until as late as 2021.

The decision means the government will avoid having to borrow about $2 billion a year to fund its commitment to the pension fund. The government will save about $900 million from 2012 by deferring tax cuts that were earmarked for April 2010 and April 2011.

English said the government is still committed to lowering the income tax rate to 30% from 33% "over the medium" though he declined to define that period. "The severity of the current recession" means that the tax cuts "are unaffordable," English said. It was "very unlikely" that they would be revived before the next general election, scheduled for 2011.

The budget squeezes $2 billion out of existing spending, with $180 million syphoned out of Vote Economic Development, $166 million taken from overseas development assistance and $105 million trimmed from Foreign Affairs and Trade, for higher priority spending on health, education and law and order.

MFAT will be required to improve the efficiency of its overseas posts as part of the cuts, Foreign Affairs Minister Murray McCully said.

The budget provides $323 million over four years for home insulation in properties built before 2000, with NZ$100 million of the New Zealand Insulation Fund coming out of Vote Health.

District Health Boards are the biggest beneficiaries of spending on health services, with $2.1 billion of increased funding.

Justice is another beneficiary of increased spending, with more than $950 million earmarked over four years, including $183 million to put 600 more police on the streets by 2011, with a major focus on Counties-Manukau, $10 million for Tasers and $61 million to increase the capacity of Auckland's criminal courts.

Prison capacity will be boosted by almost 1,000 beds by converting cells into double-bunk rooms at five prisons.

Having scrapped the $700 million Fast Forward Fund for primary sector research, the government today announced a Primary Growth Partnership with a $190 million contribution over four years. The government will contribute $70 million a year with industry putting in the same amount, once the fund is fully operational in 2013.

The budget also tightens rules around Kiwisaver, ending the option for members to divert as much as half of their contributions into mortgage payments.

Tags: Budget