8 minute read 14 May 2020
Open for business sign hanging from the window

New Zealand Budget 2020

By EY Oceania

Multidisciplinary professional services organization

8 minute read 14 May 2020

The biggest mini budget you’ll ever see.

With businesses across the country reopening their doors and beginning to truly understand the economic impacts of COVID19, today’s budget was never going to be normal. In previous years we would debate topics like debt to GDP ratios, or the subtle tweaking of economic levers like increasing infrastructure spend. They just don’t seem relevant anymore. Throw the rule book out – none of that matters.

What is most surprising is that for a budget that was unprecedented in its size, parts of the country have merely shrugged their shoulders and moved on already. Maybe it’s because we’ve been in survival mode for so long (it’s been nearly two months since the start of lockdown) that our senses have been numbed.  

The government just committed $50bn in a budget, while that’s not to be baulked at, it was kind of expected because of the circumstance.

What we needed from the Budget today was a clear plan for economic stimulus that gets the nation through what could be an excruciatingly tough next six months and beyond, but also a strong view of what the long term plan is to wrestle the economy away from recession and avoid a fiscal crisis following the health and economic crisis we are already in. Unfortunately, we are only getting the former, with the government announcing a budget whose ideas will get us through to the election, maybe Christmas, but not the further policy changes that move us into recovery. It’s the biggest mini budget we’ll ever see. 

The good bits

There were good elements - $3bn for infrastructure will be good news for larger construction companies and the subcontractors they contract out to, while the investment of $1.2bn for rail will be welcome news for the nation’s civil engineers. Some operators in the rail sector have proven recently that they are doers, so we see it as no surprise funding has been pushed their way. They will spend the money, which means new projects and new jobs.

Extending the wage subsidy will give businesses still struggling an additional lifeline, especially those in the hospitality and tourism sectors.

Business owners will also welcome the fact there was no mention of tax reforms. This will create stability for businesses in the short term and allow them to spend less time learning complex new tax laws, and more time focussing on important things, like increasing sales and retaining staff. The government is also offering support to businesses to make it easier to deal with Government around compliance, especially as the proliferation of e-commerce continues to see more businesses turning to digital platforms to sell their goods and services.

Finally, New Zealander’s out of work and entering the workforce will be given the ability to retrain. About $1.6bn has been set aside for the entire Trades and Apprenticeships Training Package to support vocational training. This will target specific industry needs in areas of building and construction, agriculture and manufacturing. 

The not so good

The budget lacked detail, is reliant on increasing debt and it didn’t tell us much about what this government will do during its second term, if it were retained at the election. While changes to tax policy have not been tabled, $50 billion doesn’t pay itself back. Businesses can expect short term stability around tax, but inevitably the government will be forced to make claw backs. Whether this is via increasing personal taxes and re-tabling capital gains tax, or increasing corporate taxes, we will have to wait and see. And, we’re dubious as to if those working in the tourism and hospitality sectors will bother re-training. 

Many of the jobs in the tourism sector are taken up by temporary visa holders, so once those jobs have gone and the industry has consolidated, we suspect those left will hunker down and hold on.

So, what's our view?

To be fair to the Government, having fresh new ideas for how to spend $50bn dollars when they have just been blind-sided by a once in 100 year pandemic that has shut borders, decimated health systems and created states of emergency around the world, was always going to be tough. The focus of today’s budget was all about raising cash (or increasing debt), to keep the economy ticking over in the short to medium term and a "plan to have a plan" over the long term.

At a time when businesses are praying for a surge in sales, we need to act  with caution. For New Zealand to return to a budget surplus by 2028, which the Government has boldly set as the target, its forecasted GDP growth will peak at 8.6 per cent. As a nation we haven’t come anywhere near that for years. We know from history that economies bounce back well after downturns, but this number seems ambitious at best. If we can achieve that it will be an incredible come back, however eventually, the $50bn will need to be repaid. If the economy does not perform to forecast, the Government will need to reconfigure the tax settings to recoup its spending. So, while there was not much announced in the tax space today, we can expect to see tax reforms soon and these will only create greater headwinds for our recovering economy. Businesses should be cautious about the country’s long-term fiscal position as we fight our way out. 

Contact:

Chris Money, EY New Zealand, Strategy and Transactions Partner
Chris.Money@nz.ey.com

Sladjana Freakley, EY New Zealand, Tax Policy Senior Manager
Sladjana.Freakley@nz.ey.com

Summary

With businesses across the country reopening their doors and beginning to truly understand the economic impacts of COVID19, today’s budget was never going to be normal.

About this article

By EY Oceania

Multidisciplinary professional services organization