New Zealand: Budget 2013 – functional, not flashy

Brief Counsel
Last Updated: 18 May 2013
Article by Mike Woodbury and David Patterson

Finance Minister Bill English's approach to Budget 2013 was "to spend well, not to spend up". Flashy, no. Functional, yes.

If last year's budget had an edgy feel as the Government tried (successfully) to keep the ratings agencies at bay, this year's budget feels much more comfortable. The fiscal and economic outlook is steadier and the Government has managed to squeeze out of the Treasury a skinny forecast surplus for 2014/2015.

Key announcements

  • Meridian Energy confirmed to be the next partial share offer (later this year).
  • Large, although yet to be decided, cuts to ACC levies.
  • Mighty River Power proceeds to go largely to the Christchurch rebuild (the redevelopment of Christchurch and Burwood hospitals, the justice and emergency services precinct and Canterbury tertiary institutes).
  • Extension of the legislative framework supporting the Auckland Housing Accord to other high housing cost areas.
  • An announcement that the Government signed a new Memorandum of Understanding with the Reserve Bank this week which will require banks if necessary to hold extra capital on their balance sheets and to restrict high loan-to-value lending in the housing sector.
  • Contributions to the Cullen Fund not to be resumed until 2020/21.

Economic outlook

The forecast GDP growth rate for the year ended March 2014 is 2.4% followed by 3% in 2015, 2.6% in 2016 and 2.2% in 2017. But this will be driven mostly by domestic demand, reflecting in large part a continuation of current exchange and interest rate settings.

The currency is assumed to remain high until 2015 "before depreciating somewhat". The 90 day rate is expected to remain low by historic standards, although to begin rising in mid-2014 to reach 4.7% by 2017 as inflationary pressures rise in the economy.

It is accepted that the high dollar "will hold back activity in exporting and import competing firms, especially those not experiencing what are expected to be relatively strong export commodity prices".

As a result, the current account balance is forecast to plunge further into deficit – from 4.8% of GDP in 2013 and 2014 to 5.2% in 2015, 5.8% in 2016 and 6.5% in 2017. This represents a serious point of economic exposure for New Zealand, even accepting that the figures have been bulked up by the legacy of the Christchurch earthquakes.

Fiscal outlook

The promised return to surplus by 2014/15, although a source of significant scepticism in the commentaries on last year's budget, is forecast to be delivered – even if only a skimpy $75 million and even if only achieved through a fiscal sleight of hand. The Government got there by slicing $200 million off the new spending allowances from Budget 2014 onwards.

Such reductions are politically much easier to achieve on paper and ahead of the event than they are in reality. However, to the Government's credit, this subterfuge was only necessary to accommodate the lower ACC charges.

The ACC changes

Continuing improvements in ACC's performance (notably its investment returns which were $1.1 billion ahead of budget at February 2013) mean there is scope for "significant and sustainable" cuts in ACC levies.

The budget allows for $300 million in levy reductions in 2014/15 and a likely reduction of $1 billion by 2015/16. The actual size of the cuts will be determined later this year. It is projected that by 2015/16, ACC levies will have decreased by 40% from their 2011/12 levels.

The "growth package"

Consistent with the budget's general modesty, this is not large ($100 million a year) and is very tightly focussed.

Components include:

  • a boost in funding for science, innovation and research of $200 million over four years
  • the already announced $158 million for tourism
  • $40 million over four years to promote export education
  • proposals to let start-up businesses claim a refund in relation to tax losses on R&D and to allow tax deductibility for certain types of "black hole" expenditure (such as advisory costs incurred in applying for a patent, immediate deduction on annual listing fees (although not on the cost of listing), and all direct costs associated with dividend payments to shareholders), and
  • $80 million for regional irrigation projects.

However, on the other side of the ledger, the budget introduces changes to the thin capitalisation rules to prevent non-resident investors from artificially loading debt into their New Zealand investments to limit their tax exposure. These will apply from 2015/2016. See our earlier commentary here.

And the IRD gets another $7 million a year towards tax compliance relating to investment properties, which is expected to recoup $45 million a year in additional revenue.


Legislation to expand the basis of the Auckland Housing Accord, signed last week between the Government and the Auckland Council, to other tight housing markets will be introduced today as part of Budget 2013 and given urgency at select committee.

The new law will apply for three years. It will allow Special Housing Areas (SHAs) with streamlined consenting processes to be designated for residential greenfields and brownfields development where housing demand is high. The three year timeframe is to allow for the Government's Phase Two Resource Management Act reforms to come into effect.

The Government clearly regards Christchurch as a potential candidate for an accord. Should an accord not be reached in an area of severe housing unaffordability, the Government can intervene to achieve the same results.

In the social housing area, the budget:

  • extends the income-related rent subsidy scheme to community housing providers (putting them on an equal footing with Housing New Zealand)
  • shifts housing needs assessment from Housing NZ to the Ministry of Social Development to enable a more holistic response, and
  • extends regular tenancy reviews to all state house tenants who signed up to their existing leases before 1 July 2011.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

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Mike Woodbury
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