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JUL 14

Budget Comparison

With the election quickly approaching it is a good time to consider the budgets of the two major parties; what are the differences and how will these affect our economy? Although this is only a snap shot of what each Budget covers, the following are some of the most important points for manufacturers and exporters.

The National Party’s Budget focused primarily on being fiscally restrained in order to both reach Government surplus as planned, and to keep from adding additional pressure on interest rates. As such, they set their limit of new spending to around $1.5 billion per year, as a result of advice from the Treasury that this is the upper limit for new spending before it applies upward pressure on interest rates.

The Labour Alternative Budget aims to stick to the spending limit outlined by National, but allows for more spending through initiatives which would increase government revenue. For manufacturers and exporters, keeping pressure off interest rates over the coming years will be particularly important, as this will be a driving factor of the level of our already overvalued exchange rate and will determine borrowing costs. It is good to see both major parties take this responsible approach, although we would favour a more active and direct approach to tackling this issue.

The biggest difference between the budgets that directly effects manufacturers and exporters is the way in which they each plan to foster growth in business and innovation. Much of National’s Budget was business as usual in this respect, with modest increases in funding to parts of their current business grant scheme through Callaghan Innovation as well as NZTE - following their existing Business Growth Agenda.

In contrast, Labour is proposing a different approach, much of which was informed by the Manufacturing Inquiry in 2013. They are proposing moving away from grants and reinstating R&D tax credits. As a mechanism for promoting business investment and innovation, the NZMEA sees tax credits as a far more effective and accessible solution.

Also in the Labour Budget is the introduction of accelerated depreciation, which would start with advanced manufacturing and wood products, with the intent to extend to all manufacturers over time. This does not act as a tax break or credit, but simply allows a firm to depreciate capital goods faster, which helps businesses keep up with changing technologies – a critical part of staying internationally competitive. Both of these are policies that have been towards the top of the NZMEA’s wish list for a long time, and would have an immediate positive effect on manufacturers and exporters.

The most important tax change by Labour would be the introduction of a Capital Gains Tax. This is an important step in rebalancing our tax system that currently encourages speculative investment in land and buildings. They also propose the introduction of a new tax rate which would move those earning $150,000 or more to paying 36 cents to the dollar. In addition to this, they would have the tax rate for trusts match the new higher rate; primarily to remove the ability to achieve a tax advantage through the use of trusts. It is clear that tax avoidance is a focus for Labour in their Budget, with measures aimed at stopping opportunities for future avoidance, particularly for multi-national corporations.

Labour’s proposed restarting of contributions to the Cullen Fund will also be important, along with increasing the age of eligibility, for dealing with our future superannuation burden and institutional investment of New Zealander’s savings.

National are limiting their new spending and as a result, it is essentially a business as usual budget, with some minor improvements, following the belief that over the coming years, a stable economy, keeping interest rates at bay and achieving Government surplus will create the environment to further promote growth, along with their existing Business Growth Agenda.

In contrast, Labour are using taxation and clamping down on tax avoidance to provide the additional revenue to be more active in their policies for promoting growth in the manufacturing sector. While they have many of the same objectives, explicitly the limit on new spending, their approach follows a belief that more active policy change is needed to fix economic imbalances and promote faster economic growth.

“You pays your money and you takes your choice.”

tags: budget, labour, national, election, capital gains tax, callaghan, research, development, r&d, tax credits
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