New Zealand Budget Report

Friday 19 May 2006

Prepared by the CCH Tax Editors, in association with

and

The Deputy Prime Minister and Minister of Finance, the Hon Dr Michael Cullen, presented the 2006 Budget Statement to Parliament on 18 May 2006.

This CCH Budget Report has been prepared with the assistance of specialist practitioners from Ernst & Young and Bell Gully. It covers announcements of interest to tax practitioners and the business community in general.

2006 Budget overview

The 2006 Budget contains little in the way of positive announcements for the business sector. Although there is some assistance for export marketing and the Venture Investment Fund, the main emphasis is on the three themes of improving transport infrastructure, extending the Working for Families package and reinforcing national identity.

The concept underlying the 2006 Budget appears to have a number of planks. First and foremost is the commitment to maintain current levels of taxation. The recent Australian example of significant reductions in personal income tax is ignored.

Secondly, spending on health, education and other social policy measures is to be expanded. Building on the dramatic expansion during the 2005 election campaign of the Working for Families regime to benefit upper income families, this package is scheduled to increase by $1.85 billion over four years (out of a total increase of $5.8 billion in family assistance over the same period).

Thirdly, there appears to be an awareness that it has now become necessary to make significant contributions to upgrading the nation’s roading. An additional $1.3 billion will be committed to land transport spending over the next five years.

The Government considers that the strength of its finances is due to its wise economic management, in particular the reduction of its indebtedness. The healthy state of Crown finances in turn can be attributed in part to the presence of the New Zealand Superannuation Fund. The Budget papers indicate that the balance of the Fund at 30 June 2006 will stand at $6.4 billion, increasing to $12.4 billion by the end of the 2010 financial year.

Little is said about the intergenerational issues raised by the New Zealand Superannuation Fund. The justification for the Fund is to accumulate financial resources today in order to service the Crown’s superannuation obligations in some 30 to 40 years. The consequence is that the taxpayers of today provide for the retirees of some time well out into the future. It is highly unlikely there will be any significant commonality of personnel between the two groups

An alternative, and possibly fairer, approach could have been to relieve the tax burdens of today with the reduction channelled into each taxpayer's provision for retirement.

In his Budget speech the Minister was able to observe that: "The fool who spends on the upturn will find himself broke on the downturn." This expression could suggest that pruning Government expenditure to facilitate tax cuts would be preferable to increased borrowing.

Few would quibble with the announced infrastructure bonds for the purpose of capital expenditure on roading. However, any wider application of the precedent appears to have been ruled out as contrary to the policy of keeping Crown borrowings to a minimum.

In common with arrangements made for funding future superannuation payments, the topic of borrowing also has an intergenerational dimension, particularly in relation to structural assets such as roading. Borrowing to build roads today can be serviced by the taxpayers of tomorrow who use those roads.

Such an approach can be regarded as more fairly matching payers with users. No further new measures were announced to encourage superannuation or savings. This is in direct contrast to the Australian Government's approach of providing strong incentives to encourage superannuation and savings. The availability of increased savings in New Zealand would undoubtedly assist investment in local businesses and continued local ownership as well as providing retirement benefits to the population.

For further information, please contact your usual Bell Gully advisor or:

AUCKLAND

Niels Campbell 
Partner

David Simcock
Partner

Willy Sussman
Partner

John Bassett
Senior Associate

Graeme Olding
Senior Associate

Mathew McKay
Senior Associate

Monique Mackie
Senior Solicitor