Wolters Kluwer New Zealand Budget Report 2022

2022 New Zealand

Budget Report

Prepared by Wolters Kluwer in-house analysts with the assistance of specialist practitioners from Bell Gully

This 2022 Budget Report has been prepared by Wolters Kluwer in-house analysts with the assistance of specialist

In this Budget Report Budget 2022 highlights .........................................................................................................3 Budget initiatives: social policy and the economy

practitioners from Bell Gully. It

Cost of living measures ..................................................................................................4

covers announcements of interest

Climate change initiatives .............................................................................................5

to tax practitioners and the

Health ..................................................................................................................................6

business community.

Housing .............................................................................................................................. 7 Education ...........................................................................................................................8

Wolters Kluwer

Business and the economy ...........................................................................................8

Wolters Kluwer (WKL) is a global leader in professional information, software solutions, and services for the health, tax & accounting, governance, risk & compliance, and legal & regulatory sectors. We help our customers make critical decisions every day by providing expert solutions that combine deep domain knowledge with specialised technology and services.

Infrastructure investments ...........................................................................................9

Bell Gully Bell Gully is a leading New Zealand corporate law firm with extensive commercial, corporate, taxation, finance, banking, litigation and commercial property experience.

We are consistently recognised as the market leading legal tax team in New Zealand. From general corporate tax advice, including corporate restructuring, acquisitions and divestments, securitisation and financing to helping clients resolve tax disputes at all levels, customs and excise matters and set up trusts, our clients rely on our tax specialists for their technical excellence, commercial sense and ease of doing business.

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2022 Budget Report

Other measures ..............................................................................................................10 Fiscal strategy Tax Principles Bill............................................................................................................10 International tax ............................................................................................................ 12 New fiscal rules .............................................................................................................. 12 Inflationary pressures ..................................................................................................13 Revenue projections .....................................................................................................13

Budget 2022 highlights Tax concerns take a back seat in Budget 2022 as the Government focuses instead on the rising cost of living, health and climate change measures.

Cost of living Front and centre is a short-term “cost of living payment” targeted at those aged 18 and over who earned less than $70,000 pa in the past tax year. (Anyone receiving the Winter Energy Payment will not be eligible for the cost of living payment.)

The $350 payment will be paid in 3 instalments over 3 months, beginning 1 August 2022.

The other elements of the cost of living package include a time-limited extension to measures previously announced: fuel excise cuts, half-price public transport and a reduction in road user charges.

Business-friendly announcements Changes of specific interest to business include:

the introduction of legislation removing the use of restrictive covenants on land that effectively prevent new entrants from entering the grocery retailing market

$100 million in capital funding for a Business Growth Fund aimed at SMEs in partnership with New Zealand’s major banks to improve SMEs’ access to finance

$653 million to fund further decarbonisation, including supporting businesses to shift to low-carbon energy sources, and

$60 million to improve broadband infrastructure in the badly-served areas of the country.

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Budget initiatives: social policy and the economy Cost of living measures Ministerial statement “[T]hrough this Budget the Government is investing more than $1 billion in a cost-of-living package targeted at low- and middle- income households.”

Editorial comment Budget 2022 contains a number of measures that can be grouped together under the broad heading of “the cost of living”, a topic that has been the subject of significant public attention recently.

One item mentioned in the Budget (albeit not a headline item in the Minister’s speech) is the introduction of legislation intended to facilitate new grocery retailers entering the grocery market. The legislation will prohibit restrictive covenants on land that grocery retailers use to limit site availability for competitors. Such covenants will be prohibited immediately once the Bill comes into effect.

A headline cost of living-related item in the Finance Minister’s speech is a short-term “Cost of Living Payment”, which will be provided in 3 monthly instalments, starting in August. The payment will be targeted to low- and middle-income New Zealanders, whom the Minister’s speech identifies as being those particularly affected by cost of living pressures.

Delving into the Budget papers reveals that the Cost of Living Payment will be administered by Inland Revenue, and those eligible for the payment will be people who earned less than $70,000 in the past tax year and who are not eligible to receive the Winter Energy Payment. It is estimated that 2.1 million people will receive this payment. The Budget papers also reveal that the Cost of Living Payment will cost the Government $814 million over the period 2022/23 and 2023/24.

The cost of living measures contained in Budget 2022 also include a set of transport-related items:

extending the 25 cents per litre reduction of fuel excise duty that was introduced in March this year for a further 2 months, so that it will run until mid-August

extending the road user charges cuts that were introduced in April this year until mid-September, and

extending half-price public transport fares that were introduced in April until the end of August, and introducing a permanent half-price public transport concession for those holding a Community Services card.

The reliefs scheduled to run until August and September 2022 may create a political difficulty as their expiration nears.

If fuel prices remain elevated at that point, it can be expected that there will be considerable pressure for extensions

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to be granted. If developments along those lines occur, the Cost of Living Payment may take on a quasi-permanent complexion.

Climate change initiatives Ministerial statement “Climate change is the most pressing long-term challenge we face. It will have a significant impact on New Zealanders’ living standards in the coming years, impacting the natural environment, our health, and our economic, social, and cultural wellbeing.”

Editorial comment It is unsurprising that the climate change initiatives contained in Budget 2022 immediately follow the cost of living initiatives in the Minister’s Budget speech, given the attention that the topic of climate change currently attracts and the concerns many members of the New Zealand public have about the impacts of climate change in the future.

The climate change initiatives in Budget 2022 come off the back of the release of the Government’s first “Emissions Reduction Plan” just a few days ago, and several of the climate change-related initiatives in Budget 2022 have already been announced in that plan.

Budget 2022 allocates $2.9 billion of funding to investments to be made by the Climate Emergency Response Fund (CERF). The Minister’s speech comments that the climate investments announced in Budget 2022 are funded by those who pollute, not from increasing debt or other revenue. This is a reference to CERF’s funding being sourced from cash proceeds from the Emissions Trading Scheme.

The CERF investments mentioned in Budget 2022 include the following transport-related initiatives:

$569 million of funding to implement and operate a vehicle “scrap and replace” scheme that provides funding and “ in-kind support” to low-income households to shift to low emission alternatives, upon scrapping their vehicle

$375 million of funding for what is termed in the Budget papers a “Mode Shift and [reduction of] Light Vehicle Kilometres Travelled”, with the funding to be committed to 4 indicative investment areas: the rapid rollout of urban cycle networks, the creation of walkable neighbourhoods, support for safer, greener, and healthier school travel, and provisions for more reliable and user-friendly public transport, and

$41 million of funding to decarbonise the public transport bus fleet. The Budget 2022 papers explain that the initiatives to be funded would include deploying zero-emission buses or investing in associated infrastructure.

Absent from the Budget 2022 papers is any mention of tax concessions directed at encouraging the uptake of transportation that could assist with reducing New Zealand’s carbon emissions, such as an exemption from fringe benefit tax for employer-subsidised public transport or use of electric vehicles.

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Other climate change-related investments to be made by CERF under Budget 2022 include forestry and agriculture sector investments.

Forestry sector climate investments:

$91 million to reduce the use of coal and other carbon-intensive fuels and materials by increasing woody biomass availability, and

$145 million to create large-scale native forests as carbon sinks, to offset emissions in other sectors where abatement is difficult.

Agricultural sector climate investments:

$339 million of funding for a “Centre for Climate Action in Agriculture” to support innovation and research to reduce emissions, and

$6 million for the implementation of an agricultural emissions pricing scheme, based on the outcomes of the Primary Sector Climate Action Partnership/He Waka Eke Noa.

Health Ministerial statement “ …we need to change the way we provide funding for health. In recent years, District Health Boards have consistently run deficits, with funding unable to meet growing demand and address historic cost pressures.

Relying on the annual Budget cycle for funding has made it difficult to plan for future investments and address long-term challenges in the health system.

To address this, we are introducing a new multi-year funding model for health, beginning with two years of funding before eventually moving toward a three-year funding cycle from Budget 2024.”

Editorial comment Budget 2022 provides what the Finance Minister describes as “the largest investment ever in our health system” with $11.1 billion total operating and $1.3 billion capital funding.

Pharmac receives an injection of $191 million extra over the next 2 years, taking its total funding to $1.2 billion and a focus on better cancer treatments.

Other items earmarked for spending include:

improved access to mental health and addiction services ($202 million)

hospitals and health infrastructure ($1.3 billion)

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primary and community care ($488 million)

Maori health services ($299 million)

New Zealand’s air ambulance services ($90.7 million over 4 years), covering emergency helicopters and crew.

Housing Ministerial statement “Targeted support for first-home buyers through this Budget include[s] increases to the First Home Grant caps which will help more Kiwi families get the security of home ownership, as prices become more sustainable against the backdrop of record house-building in this country.”

Editorial comment Housing-related initiatives are an area of the Budget that receive relatively little attention and are only mentioned towards the end of the Minister’s speech, despite the spectre of housing affordability constantly lingering in public discourse in New Zealand.

That housing-related initiatives receive relatively little attention might not be altogether surprising given that the Government has already recently introduced significant measures intended to address housing affordability in New Zealand, particularly in the tax space, such as the extension of the so-called “bright-line rule” to 10 years and turning off deductibility of interest expenditure for residential landlords.

One housing-related item in Budget 2022 is funding to adjust the First Home Loan and First Home Grant settings to expand those initiatives to more first home buyers. This includes increasing the price caps on houses eligible for First Home Grants. The Budget papers reveal that the funding for this initiative will be a total of $148 million in operating expenditure over the period 2022/23 to 2025/26.

Other housing-related initiatives in Budget 2022 include:

$1 billion in funding for public and transitional housing over the period 2022/23 to 2025/26

$355 million funding for emergency housing over the period 2022/23 to 2023/24

$75 million funding to progress a homelessness action plan over the period 2022/23 to 2025/26, and

$221 million funding for the Affordable Housing Fund over the period 2021/22 to 2023/24.

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Education Ministerial statement “The Budget 2022 package includes a total of $2 billion in operating funding and $855 million capital for the education system, including investments in infrastructure, new initiatives, and funding to address critical cost pressures.”

Editorial comment The Government’s reform of the education system receives some attention in Budget 2022, with the implementation of a new “equity index” to replace the current decile system of funding (allocation of $300 million).

The commitment to pay parity between early childhood educators and kindergarten teachers is continued, with the allocation of a further $266 million in operating funding over 4 years.

The Government maintains its focus on supporting apprenticeships for business with the extension of the “Apprentice Boost” initiative (which involves financial support paid to employers to retain and take on new apprentices) until the end of December 2023.

The role of te reo Maori is recognised, with a $75 million allocation to support providers of te reo Maori, immersion and kaupapa Maori learning throughout the education system.

Business and the economy Ministerial statement “The uncertain and volatile global economic situation highlights the need for an economic plan that supports diversification of the New Zealand economy, creates new products and services, and increases our resilience in an uncertain world… Our economic plan is to build a high-wage, low-emissions economy that provides economic security in good times and bad… This Budget includes a substantial package to unleash the potential in our economy.”

Editorial comment Budget 2022 includes a number of initiatives that are grouped together in the Budget speech under the heading “Providing economic security in good times and bad”.

Those initiatives include the following:

Funding for the “Industry Transformation Plans” (ITPs) operated by the Ministry of Business, Innovation and Employment (MBIE), which have been described by MBIE as plans created in partnership by business, workers, Maori, and Government, and which set a long-term vision for transformative change and identifying near-term

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actions that will shift a particular sector toward realising that vision. Budget 2022’s allocations for ITPs include $37 million for the Construction Sector Accord Transformation Plan, $30 million for the Advanced Manufacturing Plan, an additional $5 million for the Agritech ITP, and $20 million for the Digital ITP.

Support for small businesses in the form of $100 million of capital funding for a “Business Growth Fund” (BGF). The Budget papers explain that the purpose of the BGF is to help improve small- and medium-sized enterprises’ (SMEs) access to finance, and that the BGF would involve investing alongside private New Zealand banks. The Budget papers elaborate that the BGF would provide a source of long-term, patient minority capital to SMEs.

Funding to fulfil 2 manifesto commitments with a focus on New Zealand’s regions. These are $200 million of funding allocated to the Regional Strategic Partnership Fund to invest in regional projects and $60 million of funding to improve broadband infrastructure in the worst-served regions such as Gisborne, Manawatu-Whanganui, Hawke’s Bay, West Coast and Southland, with a view to improving productivity in those areas.

Infrastructure investments Ministerial statement “This Government is focused on delivering better infrastructure. This is a key component of our vision for a high-wage, low-emissions economy.”

Editorial comment The Minister of Finance also holds the Infrastructure portfolio, and the infrastructure initiatives of Budget 2022 are of course mentioned in the Budget speech. In that speech, the Finance Minister comments that underinvestment in infrastructure will be one of New Zealand’s greatest long-term economic challenges.

New infrastructure initiatives included in Budget 2022 and directed at overcoming the challenge highlighted by the Minister include:

$349 million of capital funding to replace and modernise rail assets. The Budget papers explain that the funding would be for the final tranche of KiwiRail’s rolling stock investment programme to replace life-expired assets with modern, energy efficient units

$1.3 billion of capital funding for upgrading health infrastructure, including priority capital projects such as Whangarei Hospital and Nelson Hospital

$385 million of capital funding and $50 million operating funding for building and refurbishing classrooms

$200 million of funding to progress the delivery of the Auckland Light Rail project, and

a range of digital technology related initiatives, including: y

$220 million operating funding and $100 million capital funding for investments in data and digital infrastructure and capabilities relating to the health system

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y

$25 million operating funding and $5 million capital funding for the Computer Emergency Response Team New Zealand (CERTNZ) to provide “cyber resilience” support to private sector organisations and individuals

y

funding for a new digital case management system to increase efficiency of the courts, and

y

investment in critical satellite capability to improve the accuracy of GPS.

Other measures Ministerial statement “It is my great pleasure to present New Zealand’s fourth Wellbeing Budget… In each of this Government’s three previous Wellbeing Budgets we have not only considered the performance of our economy and finances, but also the wellbeing of our people, the health of our environment and the strength of our communities.”

Editorial comment In addition to the initiatives summarised above, Budget 2022 contains a number of other initiatives, including the following:

a $943 million package to establish a new Ministry for Disabled People, enable disability system providers to meet demand, and invest in the regional-based rollout of the Enabling Good Lives approach to Disability Support Services

over $1 billion in investments to support Maori health, education and economic outcomes, and

direct and indirect investments in child poverty and wellbeing.

Fiscal strategy Tax Principles Bill The Budget papers include a small section that addresses taxation in general.

Among the topics addressed is the Government’s plans for a Tax Principles Bill. On this subject the Budget papers state the following: “The tax system must remain fit for purpose in a changing world. Ongoing work will focus on implementing Government policy, maintaining the integrity of existing revenue bases and monitoring the sustainability and fairness of the tax system. The Government is also planning to introduce a Tax Principles Bill to legislate a

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reporting framework that will require officials to assess the performance of the tax system against a set of high-level principles. Consultation on the principles is planned for the middle of 2022. The Generic Tax Policy Process shall be used to develop and consult on tax policy where practicable.”

No further detail is provided. It remains to be seen how performance of the tax system is to be assessed: whether this concept means something more than just the collection of tax and extends, say, to measuring which groups actually pay tax. It may also be necessary to carefully identify the relevant high-level principles. For example, should those principles accept that the tax system must incorporate some degree of regression as is the case with GST (where those on lower incomes pay proportionately more of their income on this form of taxation)? It is also not clear whether the measurement process will become a vehicle for identifying “gaps” in the tax system (such as the absence of an explicit capital gains tax or an inheritance tax) that require remediation.

The Budget papers give some hint of the direction of travel. The following comments are made: “The Government has a strong focus on the fairness of the tax system. This means that the income tax system should be progressive and, in combination with transfers, reduce income inequality. The Government has increased the progressivity of the personal income tax system with a new top tax rate, and has consulted on proposals to limit opportunities to avoid paying this rate. Work is also underway to fill a data gap on the effective tax rate paid by high wealth individuals.”

The Budget papers proceed to confirm continuation of the current broad base, low-rate principle underlying the tax system. The following comments are made: “The tax framework is based on the principles of a broad base, low rates and neutrality. This generally applies, although taxation of capital is not as broad based as income. Income and consumption tax bases are broad in the sense that there are few specific concessions for particular economic activities, goods or services.

This enables tax rates to be set lower than otherwise. Neutrality in the tax treatment of different investments promotes economic efficiency and productivity.”

It is added that, on occasion, there may be a departure from the general principle of broad base, low rate. The Budget papers state: “In some cases, revenue policy will be used to influence behaviour. This is appropriate only where there is clear evidence of net social benefits, tax policy is the most appropriate instrument and fiscal risks can be managed.

As an example, the research and development tax incentives promote business innovation.”

These remarks may also be interpreted as a justification of the recent extension of the bright-line test to 10 years for non-new build residential land and the interest limitation rules.

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International tax The Budget papers indicate that some form of a digital services tax has not been forgotten. The following comments are made on this topic: “People and businesses must pay their fair share of tax, including multinational companies. The international tax framework needs to adapt to shifts in the global economy, including increased cross-border activity and digitalisation. New Zealand is continuing to work with the OECD to find a multilateral solution to the challenges that the digital economy poses for international taxation.”

New fiscal rules The Budget papers note that in 2020 relatively permissive fiscal rules were adopted to enable an effective response to the COVID-19 pandemic. Elevated funding was made available to manage the health impacts of the pandemic and to assist with economic recovery. Two years later it is proposed to adopt new fiscal rules directed to modernising the country’s public finance system and annual Budget process. The intention is to lift the time horizon for financial decisions from annual to multi-year funding across different areas of government.

Two new fiscal rules are to be adopted. These comprise:

the primary fiscal rule: return of the operating balance before gains and losses (OBEGAL) to a surplus followed by smaller surpluses thereafter, and

a net debt ceiling that complements the OBEGAL target while allowing for more fiscal capacity to fund capital investments that improve productivity and living standards.

The objective is to adopt the approach of borrowing to fund new capital investment that benefits multiple generations without borrowing to fund current operating expenses in normal times.

Unfortunately, it is not explained how this approach represents a departure from current practices in relation to Government borrowings.

Some projections are made of the expected outcomes from the new fiscal rules. It is anticipated that OBEGAL will return to surplus by 2024/25. This is to be achieved by removing stimulus from the economy over time. Core Crown expenses are forecast, for example, to fall from 34.5% of GDP in 2021/22 to 29.8% of GDP by 2024/25.

The Budget papers note that core Crown revenue is projected to increase because of a number of factors, including increased interest rates driving up core Crown tax revenue.

Once OBEGAL returns to surplus, the objective will be to run average surpluses in a range of 0–2% of GDP. One problem has been identified with the revised fiscal rules: there are some projects that require financial assistance from the Government but do not create assets on the Crown’s balance sheet.

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Examples are the Auckland light rail project, the Three Waters Reform programme, and support for local government infrastructure. Treasury proposes to explore ways in which the impact of this issue may be best addressed.

Inflationary pressures The Budget papers make some references to inflationary pressures that weigh on business and consumer confidence.

Inflation for the March 2022 quarter increased by 6.9% compared with the same quarter in 2021. The inflation rate is projected to moderate to 5% by the June 2023 quarter and near 2% by the end of 2025/26.

It is noted that inflation has been heavily concentrated in a few specific areas, particularly transport. Higher fuel prices affect not only transport directly but also other areas dependent on petrol as an input. For example, higher petrol prices are a key driver of rising food prices (with rising food prices accounting for 18% of the annual increase in the consumer price index for the March 2022 quarter).

Inflation may also emerge in other ways. Housing and household utilities account for roughly 35% of the annual consumer price index inflation for the March 2022 quarter. Some 90% of construction products used in New Zealand are imported or otherwise manufactured locally from some imported components. Increases in the cost of these imports will have an inflationary effect, as well as creating a constraint on construction when overseas supply chains become disrupted.

In relation to interest rates, the Budget papers forecast that the 90-day interest rate will reach 3.6% in 2023. This is from a base of around 1.8% in April 2022. An obvious flow-on effect will be higher mortgage rates, leading to reduced house prices and diminished demand for housing purchases.

Revenue projections The Budget papers provide an estimate of the fiscal effect of various Government measures. The estimates cover the period for the financial years 2021/22 to 2025/26.

One area of estimate concerns the restriction on the deductibility of interest on borrowings that finance investment in residential property. Significant additional tax revenue is expected from this change. The projections are increased tax revenue of $80 million for 2021/22, $200 million for 2022/23, $350 million for 2023/24, $490 million for 2024/25 and $650 million for 2025/26. This gives total increased tax revenue of $1.77 billion over the forecast period.

It appears that Inland Revenue’s business transformation project has come in under budget. Some $269 million of capital and operating funding for the project will be handed back. At the same time, it is estimated that Inland Revenue will need over the period to 2025/26 additional funding totalling $47.129 million to meet ongoing costs associated with new assets and systems related to the transformation project.

Inland Revenue is to administer the Cost of Living Payment system. Over its projected life of 3 months, Inland Revenue has been allocated $814,000 to administer the system.

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The ongoing impact of COVID-19 also affects Inland Revenue. It may retain up to 240 full-time equivalent employees to support its administration of the departmental response to COVID-19. The staff are needed to address rising levels of unfiled returns and debt, to support affected taxpayers, and to respond to emerging integrity risks. Funding totalling $154.5 million has been allocated for this purpose.

Inland Revenue administers the “flagship” Government initiative of the research and development tax credit scheme. It employs 35 to 45 full-time equivalent employees to do so. The cost of staff is estimated to total $14.95 million until the end of 2025/26. The annual quantum of the tax credit appears to be $472.52 million.

Some of the other areas of spending for the taxpayer dollar are the following.

The Financial Markets Authority is to receive $1.82 million to monitor and enforce compliance with the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021. That measure aimed to ensure that climate statements are made in line with the External Reporting Board’s disclosure framework.

The Financial Markets Authority is also to receive additional funding totalling $2.323 million to oversee the new Conduct of Financial Institutions regime. The regime provides for conduct licensing requirements imposed on banks, insurers, and non-bank deposit takers.

Some $477 million has been allocated to support an existing grant covering international screen production work.

The Commerce Commission is intended to be responsible for the implementation of the Retail Payment System Bill.

This measure provides for a regulatory regime to cover merchants and their customers that make and receive retail payments (merchant fees for the use of credit and debit cards, for example). The Commerce Commission is allocated $16.16 million to cover the cost of its responsibilities.

Some $14.875 million is set aside as funding for the Ministry of Education’s land acquisition programme for the purchase of new school sites.

The remit of the Taxation Review Authority may be expanded to hear appeals under the Charities Act 2005. A total of $1.745 million has been allocated to support this change. The allocation includes funding for 2 additional members of the Charities Registration Board.

Additional funding of $148.741 million has been allocated to the funding of the legal aid system.

The Accident Compensation Corporation is to investigate the systems and operational processes needed for the proposed income insurance scheme. For this purpose, funding of $4 million has been allocated to the Corporation accompanied by a tagged contingency totalling $56.2 million. The scheme is expected to be operational in 2024.

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