Tax & Economy
As predicted, there were no major tax announcements in Budget 2022. The only tax announcements made include:
- The Government announced that from 1 July 2023 child support collected by Inland Revenue will be passed on to sole parent beneficiaries.
- In addition, the Budget provides permanent baseline funding for Inland Revenue’s on-going administration of the research and development tax incentive. Current funding was due to expire on 30 June 2022.
- The Budget also provides Inland Revenue with funding to maintain capability to support ongoing integrity work and manage cost pressures.
Below is an economic update, as well as information on what's been announced for business in this year's Budget.
So what is the business impact of Budget 2022?
With capacity and inflationary pressures impacting most organisations, how business friendly is Budget 2022? While businesses do benefit from various spending initiatives in Budget 2022, such as on infrastructure ($60 billion over the next five years), climate change and housing to name a few, the business announcements remain fairly light, presumably on the basis that many businesses benefited from Government support during COVID-19.
Announcements in Budget 2022 include:
$100 million of capital funding for a Business Growth Fund. This will be developed alongside New Zealand’s major banks to improve SMEs’ access to finance, enabling them to grow, create jobs and increase their contribution to our wider economic development.
$200 million Regional Strategic Partnership Fund to invest in local projects tailored to a region's particular needs and advantages. In addition, there will be $60 million to improve broadband infrastructure in the worst-served regions, enabling stronger connections and greater productivity.
$653 million to fund further decarbonisation, including increasing the scope of the Government Investment in Decarbonising Industry Fund to support businesses to shift to low-carbon energy sources.
$10 million for the Te Ringa Hāpai Whenua Infrastructure Fund, which will enable owners to undertake economic, cultural, social and environmental projects on their whenua.
$26 million for the Progressive Procurement programme to help build capability for Māori businesses to effectively participate in public sector procurement processes and increase supplier diversity.
Cost of living
Cost of living continues to be an issue for millions of New Zealanders, and there is no suggestion that the crisis will relent any time soon. The Government has acknowledged this in Budget 2022, providing more than $1 billion of targeted support to assist households. This includes a two-month extension to the reduction of fuel excise duty (until mid-August), an extension of the road user charges cuts (until mid-September) and an extension of half-price public transport fares (until the end of August). Other support targeted at low and middle-income households include a short term cost of living payment of $350 over three months from 1 August. This is estimated to apply to around 2.1 million New Zealanders, and incorporates people aged 18 and over who earn below $70,000 pa based on last year’s tax data who are not eligible for the Winter Energy Payment.
Given the higher-than-usual inflationary pressures on wages, the question that will be asked is: should the $70,000 pa threshold have been higher?
Alan Scott, BDO Tax Partner, has also noticed a lack of acknowledgement of fiscal drag: “Wage inflation is certainly causing a degree of fiscal drag that will be boosting Government tax revenue – as people get a pay rise they can move into the next tax bracket thereby increasing the amount of tax collected by the Government. We haven’t seen any real acknowledgement of that by the Government in Budget 2022 today.”
The NZ economy: How do the books look?
Key numbers from Budget 2022:
Strong labour demand is forecast to reduce the unemployment rate to 3.0% in 2022, with the tight labour market and high inflation driving annual nominal wage growth up to 6.3%. In the medium term, as higher interest rates impact demand and economic growth slows, the unemployment rate is forecast to peak at 4.8% and wage growth is forecast to gradually fall to 4.6%
GDP growth will peak at 4.2 percent and average 2.1 percent across the forecast period.
The operating balance before gains or losses (OBEGAL) is forecast to be a deficit of $19 billion this year but is forecast to reach a surplus of $2.6 billion in 2024/25
The consumer price index reached a 30 year high of 6.9% in the March 2022 quarter
The new debt indicator which now includes NZSF will peak at 19.9 percent of GDP (41 percent using the old indicator) before reducing further over the forecast period
Core Crown tax revenue is expected to increase by $55.4 billion from 2022 to 2026 at an average of $11.1 billion each year. Core Crown tax revenue was $2.7 billion above the 2021 Half Year Update forecast for the nine months to March 2022. Treasury notes that the higher-than-usual inflationary conditions are one of the key drivers of the tax revenue outlook. Treasury also notes that source deductions (PAYE deducted from salary and wages earners) are forecast to grow on average by around $3.6 billion per annum which is predominantly due to wage growth, fiscal drag (the increase in a person’s average tax rate as income increases) and employment growth.
As previously flagged, a significant investment of $5.9 billion a year in net new operating spending, with a multi-year funding package that also draw from Budget 2023 and Budget 2024 operating allowances.
Is there an opportunity for the Government to change immigration settings to help improve the supply of skilled labour to New Zealand? Potentially, given that current unemployment levels are not sustainable. While a few announcements have been made around skilled immigration, it is extremely limited, and it does not look as if this will change any time soon.
New fiscal rules announced to maintain lower debt levels
New fiscal rules will oblige the Government to run a small surplus on average over time once the books return to surplus, and maintain net debt below a ceiling of 30 percent of GDP.
When operating expenses (Government expenditure) are paid for by operating revenue (Government revenue), the current generation pays for its own consumption. This is important given Treasury’s long term fiscal forecasts (to 2061) which show if there are no changes to current policy settings, net debt would increase to nearly 200 percent of GDP by 2061. This is largely due to an aging population with increased healthcare and national supernation costs. Improvements to the projected net debt position could be made by finding cost savings, increased/new taxes or a combination of the two.