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 On Thursday May 19th the Minister of Finance, Bill English, presented this year’s Budget. The aim was simple; to get spending under control so that the debt we are incurring as a nation doesn’t continue to the point where it is uncontrollable and unstoppable.
Here’s FORTIfi’s easy to read bullet pointed summary of the 2011 Budget.
► Budget overview:
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The Budget’s aim: to move New Zealand from a record deficit of $16.7billion this financial year to a surplus within the next four years.
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The Christchurch earthquakes have put enormous pressure on our national finances. The cost of the earthquakes this financial year is expected to be $6.08billion. The total cost is expected to be $15billion.
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Post-budget the credit rating agency, Standard and Poors, affirmed New Zealand’s current credit rating. This is significant because shows their initial agreement with the steps taken in the Budget. It’s also important for you and me because changes to credit ratings can affect interest rates and borrowing costs including our mortgage interest rates and costs.
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The budget forecast a growth in GDP of 4% over the next year followed by a further 3% the following year and 2.7% the year after.
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The budget forecast 170,000 new jobs throughout New Zealand over the next four years. Many of these will be as part of the Christchurch reconstruction.
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The expected operating deficit of $16.7billion this year is forecast to drop to $9.7billion next year, $4.09billion the following year, and $719million in 2013-2014. The forecast is then for a surplus in 2014-2015.
► How they'll do it:
KiwiSaver
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Workers and employers will contribute more to the scheme. The Government will contribute less.
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The minimum contribution by workers and employers will increase by 1% to 3%.
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Tax rebates will halve. The Government currently contributes up to $20 per week or $1040 per year to your KiwiSaver account. This will become a maximum of $10 a week.
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Employer tax exemptions will go. From April 2012 employer contributions will be taxed at the employees top marginal tax rate.
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The Government’s $1,000 kick-start for new accounts stays in place.
Result:
The Government expects to save $2.6billion over the next four years.
Family Tax Credits
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Family Tax Credits are to be chopped but this will happen over a period of seven years.
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An example – a family with two income earning adults who have two children, and work 60 hours between them per week at the median pay rate of $20 an hour, will lose $30 a week in Family Tax Credits.
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These changes will be gradually phased in over the next seven years. The Government believes wage increases and regular inflation adjustments will mean most families will notice no change in their financial situation.
Result:
The Government expects the saving to be around $260million per year.
Spending cuts
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Some Government departments will have cuts made to their operating budgets.
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ACC will lose $94.17million.
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Economic Development will lose $49.27million
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Social Development will lose $46.19million.
Result:
In all, cuts to these Government departments and agencies will save around $980million in the next three years.
Health spending
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Health spending is to increase by $585million next year. This is $420million for new health initiatives and $165million reallocated money that was not spend in this past year.
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Part sale of state-owned companies
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The Government has proposed a mixed ownership model for Air New Zealand and the state owned power companies.
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Power companies: the Government will sell up to 49% of its ownership in Mighty River, Meridian, Genesis and Solid Energy.
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Air New Zealand: the Government will reduce its 75% ownership of the national airline.
Result:
The Government expects to earn between $5billion and $7billion from these sales.
Student Loans
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The eligibility of part-time students and students over 55 years old have been restricted.
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Students over 55 years old will be eligible for tuition fees only and not course costs (previously up to $1,000 per year) or living costs (previously up to $160 a week).
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Students who are studying part-time will not be eligible for the $1,000 course costs.
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The repayment holiday for borrowers living overseas will be cut from three years to just one year.
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The repayment threshold will be held at $19,084 until 2015.
Result:
The Government expects the savings to be $446.6million over five years.
Christchurch earthquake recovery
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The Christchurch earthquakes account for about $2.5billion of the $16.7billion deficit reported in this year’s Budget.
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The Government’s bill for the quake is $8.8billion with about $3.3billion of that coming from the Earthquake Commission and ACC. A recovery fund will handle the remaining $5.5billion (this will include the expected $500million bailout of the AMI Insurance Company).
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New Zealanders will be offered Earthquake Kiwi Bonds as a means to help finance the rebuild. These Kiwi Bonds will require a minimum investment of $1,000. There will be a four year term with a return of 4% per annum.
Christchurch’s Mayor, Bob Parker, said the city was grateful for the country’s contribution to the rebuild. “It’s a significant amount of money in the midst of very difficult economic times for New Zealand. I have to say, ‘thank you’ to all the people of New Zealand.”
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► What it all means for you and me
The Government is seeking to move New Zealand from a debt position to a cash-flow surplus position in three to four years. However, in doing this they have made a few assumptions. In particular they are hoping for continued growth in export and commodity sales. Commentators all seem to agree that this is crucial for the Budget to be successful but also agree it is a risky strategy.
What about home-owners?
For those with mortgages the outcome of the Budget plan is significant. If the budget fails to reach its objectives, New Zealand’s credit rating will be downgraded. This would push interest rates and, therefore, mortgage interest rates, up.
The Budget has forecast that the country will return to surplus a year earlier than expected. After the Budget Standard and Poor's said it would not change New Zealand's credit rating, as long as the outlook for borrowing and the deficit did not worsen.
That means, so long as we remain on track, we can expect interest rates to remain at their current lows.
Only time will tell how this pans out.
Some of this is commonsense!
 The country is, in fact, doing what FORTIfi has been urging clients to do for years – get rid of debt!
And, it's not just the nation that needs to make this a priority at this time. Individual New Zealanders need to work hard to get rid of their personal debt and mortgages. Our individual borrowing is a huge challenge to our country.
So, if you’re on MortgagePlan or M-Power, keep going. If ever there was a time to sacrifice in order to pay off your debt, this is it.
A word of caution:
With continued emphasis on debt reduction, banks will become more and more desperate to loan new money. So, beware – there will be a lot of good deals out there but remember, debt is debt. No matter how good the deal sounds, it will still have interest attached to it and you will still have to pay it back.
► Click on the links below to find out more about what FORTIfi Financial Solutions offers you and your family:
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