Posts Tagged ‘NZ government debt’
Finance Minister Bill English (National Party) has just revealed the Government’s 2010 Budget. It proposes a number of changes, including the biggest tax reforms since GST was first introduced and other tax rates slashed 25 years ago (under the Labour Party). These were designed to make the tax system fairer, lift income levels and address long standing economic weaknesses. Bill English stated:
It continues the Government’s focus on getting long-term, sustainable growth and shifting the economy away from borrowing, consumption and government spending and back towards saving, investing in productive areas and exporting.”
Key Changes from Budget 2010:
- Personal income tax cuts across the spectrum, as below:
| up to $14,000 | at a rate of | 10.5% |
| between $14,001 and $48,000 | at a rate of | 17.5% |
| between $48,001 and $70,000 | at a rate of | 30% |
| over $70,000 | at a rate of | 33% |
- Increasing the GST rate to 15% from 12.5% from 1 October 2010, as expected, and unlike when the Labour Government raised GST by 2.5% 21 years ago, with compensation to beneficiaries and super annuitants as pointed out by Prime Minister when he reminded Phil Goff of what he did as a Cabinet in that Labour Government 21 years ago.
- Reducing the company tax rate to 28 cents from 30 cents from 1 April 2011 (start of 2012 income year).
- Reducing the PIE tax rate to 28 cents, increasing incentives to save money for retirement to reduce dependence on the Government
- Property investment losses can no longer be claimed by those looking to reduce their taxable income to claim Working for Families.
- No depreciation on buildings with a useful life of more 50 years or more (which is the vast majority of rental properties) – ie. 0% depreciation rate on building structure.
- Businesses and Property Investors (building or replacing assets) will no longer be able to claim the 20% new asset loading (accelerated depreciation) on new plant and equipment. This change will apply to assets purchased after budget day. Note that the old rules will continue to apply for assets purchased before this date, so you can continue to claim loading.
- Changing the rules for Loss Attributing Qualifying Companies and Qualifying Companies as they apply to property investors, so they are taxed like Limited Liability Partnerships (ie. limiting the amount of a loss that one can deduct through a LAQC in any given financial year to the amount that the shareholder has invested in the LAQC. The balance of the loss would then be carried forward to future financial years.)
- Commercial fit-out depreciation rule changes (details yet to come)
- Changing the thin capitalisation rules for foreign entities who have loaded up their local subsidiaries with a lot of debt, meaning they will have to reduce their interest bearing debts and pay a whole lot more tax in New Zealand.
See http://www.taxpolicy.ird.govt.nz/sites/default/files/2010-sr-budget2010-special-report.pdf for a Guide to the Tax Changes Announced in Today’s Budget.
Tackling Government debt
The Finance Minister reminded us that we are currently borrowing $240 million each and every week to fund Government over-spending, and the interest servicing bill is going up as a result. Unfortunately we are going to need to borrow more. This means our net debt as a % of Gross Domestic Product will be nearly 30% in 2014.
This is then projected to go down to an extremely manageable 14% of GDP by 2024, assuming at least a decade of disciplined spending – which will be a challenge as history shows us exceptionally few Governments last over 9 years, and the Labour Party has a strong history of overspending, or as John Key said today ‘spending and hoping’ for things to get better.
Look at the graph below to see the forecast and projected Core Crown expenses as a % of GDP.
Source: NZ Treasury 20 May 2010
My thoughts
On the whole I think that this budget is fine. Investors lose the ability to claim on building structure (I don’t like this as I do believe commercial and residential properties in fact depreciate – just with high variance amongst properties). However we are still able to depreciate separately identifiable items (chattels) like curtains, carpets, heat pump, letterbox, which is fair. In addition any repairs and maintenance expenditure and items under $500 in value are tax deductible. So if you have to repaint your window sills and fascia, like I do on 1 of my houses before the full force of winter sets in, this will be tax deductible as repairs & maintenance. In fact it may be smart to spend money on things that need to happen before 1 October 2010 when GST goes up 2.5%. With tax losses not completely ring fenced I consider that there will be no major fall in property prices as a result of this budget.
Introduction
This month has been an interesting one with the market showing some signs of life, and strong demand and rent increases coming through in the desirable areas of the Auckland’s North Shore and Central and Eastern Beach suburbs (St Heliers, Kohimarama, Mission Bay & Orakei). The house prices are climbing in Auckland, albeit on thin volumes. The number of days to sell a house has improved too (down to just 30 days).
Fixed mortgage rates are continuing their ascent, but we now have extremely low floating interest rates. I cover off what I think investors and borrowers should be doing later in this article, after something that is worrying me a bit at present: New Zealand’s debt.
Government Debt
Unemployment is continuing to rise and manufacturing firms and exporters (including tourism operators) continue to do it tough. Whilst our economy is stabilising, we are not going to do an Iceland and have our sovereign nation bankrupted.
New Zealand is quite different to Iceland as whilst we have a lot of foreign debt, it is more of a hill, as opposed to the mountain that Iceland had.
If you look at New Zealand’s Financial Statements – as a registered company in the US (Company Number: 216105), we (NZ) have to file annual audited accounts, which are provided to the Securities and Exchange Commission, and stored here: http://sec.gov/Archives/edgar/data/216105/000110465909016652/a09-7159_1ex99dd1.htm you will note that NZ has $31.9 billion of direct public debt (ie. Government debt) as at 30 June 2008. Unfortunately this number is now rising and apparently the Government is overspending to the tune of $200 million per week. That’s right, New Zealand is making a ‘loss’ of over $10 billion/year, and is forecasting to make losses until 2020.
Whilst some of you may not care, for our children and grandchildren’s sake I think we should care. This is far too much. We need to ramp down Government services and stop the overspending. Obviously after several quarters of recession, the policies of the previous Government and the global financial crises, we have a greatly reduced tax take. Surely the corollary of this must be to reduce expenditure. Sure it may mean that we have to pay more in ACC premiums, more tolls on roads, to use our national parks, but doesn’t this beat having such high debt amounts to service. Or does having such high debt not really matter. There are some conspiracy theorists out there that say this doesn’t matter, the money system we have is a crock, and just a system of control designed to benefit very few. They would tell you to watch Money as Debt:
As for me I think the system isn’t that bad, and that increasing your financial and property knowledge is directly proportional to your financial and personal success. What I am uncomfortable with is New Zealanders collectively owing $303.5 billion dollars. Refer to the C3 Monetary and Credit Aggregate table shown by the Reserve Bank here:
http://www.rbnz.govt.nz/statistics/monfin/c3/data.html
This page is updated monthly with new statistics so you too can monitor New Zealand’s level of debt.
Property Market Drivers
The property market drivers that I rely on are:
- Affordability
- Interest rate levels
- Migration
- Supply/Demand balance
- House Sales and Building Consents
- Liquidity
- Global Financial Issues
I will cover off each one next week in another blog though.