- Using a dedicated bond issue to partially fund Canterbury reconstruction is a good idea (previously noted here). Not sure how many folks will take bonds paying 4% nominal interest when inflation's set to run reasonably high; hope sufficient numbers of investors will go for it.
- Slowed spending increases coupled with inflation running close to the upper bound means real cuts over time larger than those advertised. It's an election year budget: can't make many real cuts, so nominal spending freezes coupled with increased nominal tax revenues with inflation do some work. Shame there wasn't more courage, but little was expected. I hope the government's growth projections hold up.
- Increased mandatory employer KiwiSaver contributions increase a payroll tax from 2% to 3%, but are scheduled for 2013. That gives plenty of time for employers to shift the burden onto employees as part of general salary negotiations. I think that's a good thing as it reduces disemployment effects. I'm personally disappointed that I'll be losing the beneficent effects of the exemption from the Employer Superannuation Contribution Tax when it's scrapped next year. But it's decent policy as it removes a distortion in total compensation bundles. With the cut in the tax credit, a lot of folks may have to re-evaluate whether Kiwisaver is their best retirement savings vehicle. The loss in flexibility was worth it when the subsidy was high. But for $521 per year, not so much. Remember this if KiwiSaver inflows drop: folks may well be shifting out of the minorly tax preferred retirement savings scheme and into other retirement investments that provide more flexibility.
- I'm not at all averse to the government's selling off partial stakes in SOEs to raise money. The efficiency gains of partial privatization aren't strong relative to full privatization, but it's not particularly bad. But this bit of Key's speech worries me:
KiwiSaver funds are well placed to participate in the Mixed Ownership Model, which I will come to shortly.I don't like partial privatization where KiwiSaver providers are leaned on to invest in the SOEs. Why? Imagine that, 30 years from now, Solid Energy is 51% government owned, 49% owned by the retirement funds. Changes in Solid Energy dividend flows then become of strong public interest as they affect retirement incomes. I worry that political pressure to maintain dividend flows over investment and maintenance could distort SOE decisions over the long term. Hopefully here Key is just saying what he thinks might happen rather than that there will be any particular encouragement. But he repeats it later in the speech - that KiwiSaver, NZ Superannuation Fund, and ACC should all be investing in the mixed ownership SOEs. I've argued before that it's nonsense to require the NZ Superannuation Fund to invest domestically; pushing these investments into the SOE mixed ownership vehicles doesn't help. If the funds raised by partial privatization are just funds held by the government elsewhere in the system, it's a bit hard to see the point.
Where State-owned Enterprises raise outside equity, New Zealand investors will be at the front of the queue to invest. We expect KiwiSaver funds to become substantial long-term holders of these investments.
- I like that they're issuing inflation-protected bonds, if only because relative bond market prices then give a very quick indicator of whether the market thinks RBNZ is meeting its statutory mandate of keeping inflation between one and three percent over the medium term.
- Key committed nothing in promising to support ACT's two bills through to committee as it's always easy to kill them after committee. And spending caps, in practice, are difficult to make binding; there's always some potential emergency that can justify lifting the cap.
- The changes to WFF save money but worsen the EMTR distortions. The latter I think is worse. Abatement rates rise to 25% from 20%. So the non-working spouse in a WFF family considering taking a job paying $14K - $48K per year would face a 45% effective marginal tax rate (17.5% income tax, 2.04% ACC, 25% WFF abatement). Ignoring the moving of the threshold for WFF abatement, you can probably just ratchet this graph up by five points.
- Looming risks. Here's some of Treasury's list of risks, generally unquantified, that might affect revenue and expenditure projections: AMI Support Package (earthquake); Kyoto obligations (hopefully we'll just ignore it like everyone else); Leaky home assistance (risk exceeding the billion already provided for); Rugby World Cup (unquantifiable contingent liability).... It's harder to find plausible upside risks.
- Biggest personal disappointment: that @adzebill's early tweet hearkening the end of PBRF wasn't true (but was reported). It would have been comedy gold. After seven years or so of NZ universities (the other ones, unfortunately for us) working out how best to game the system: which staff to put on which kinds of contracts so they wouldn't count as being PBRF eligible despite effectively being faculty; how to rig a contract so an international high-flyer who's only here a few months of the year gets to count as full time PBRF-eligible and a guaranteed A for the Department (looking at you, Auckland, with a tip of the hat); endless resources put into presenting sow's ears as silk purses ... it's been all kinds of fun. Having the whole thing turned into block grant funding would have been much funnier than Lucy pulling the football away from Charlie Brown. Alas, no sense of humour.
- Tertiary funding also gets real declines, though nominal increases. Unfortunately, Canterbury will be hit reasonably hard by the CPI increase as wage contracts are CPI (not CPI less already-compensated GST changes) linked. Things will be a bit tight.
Thursday, May 19, 2011
Assorted first impressions on the budget.