We wanted to share a quick summary of the key points from the Finance Minister's first budget announcement for the coalition government.
The operating budget has been set at $3.2 billion per year, marking the lowest operating allowance since the 2017 Budget. This year's theme centres on restrictive spending to achieve a surplus by 2027/2028.
It's clear that, in their first term, the government is prioritising the establishment of a steady foundation over immediate economic growth. This cautious approach aims to create a financial buffer against future uncertainties. Additionally, it's encouraging to see that the government has largely delivered on its election promises, enhancing the credibility of a more professionally managed administration.
Impact on Businesses
With economic concerns and financial pressures being the leading challenges for New Zealand business leaders right now, it seems that this budget provides little for them.
This is not a reformative budget aimed at driving economic recovery, as it lacks incentives for businesses to invest or innovate. Instead, this budget focuses on reducing the fiscal damage caused by the previous government. Hopefully, this will give businesses the time they need to plan, develop strong foundations, and boost productivity in the coming years. We’re seeing a reduction in spending and a significant emphasis on maintaining cash flow.
Although there are no changes to taxes, capital expenditure incentives, or employment laws in this budget, the following changes have already been confirmed:
Depreciation on commercial property will no longer be allowed from 1 April 2024.
The trust tax rate has increased to 39% unless total trust income falls below $10,000 per year.
Interest deductibility on residential rental properties has been reintroduced
The bright-line property tax period will be reduced back to 2 years starting from 1 July 2024.
The Apprenticeship boost for second-year apprentices will continue to 31 December 2024. From 1 January 2025, only first-year apprentices in key industries will be eligible for the $500 per month subsidy.
Cost of Living
With the cost of living at 6.2% and inflation at 4%, it’s crucial to understand that we are experiencing a cost of living shock, not a crisis. Most of the cash injections and savings from the pandemic have now dried up, leading to a slowdown in spending.
Businesses, especially those in retail, hospitality and construction, are finding it difficult to raise prices in line with their increased costs. Therefore, the Government's focus on supporting the middle-income bracket is a practical move. This approach aims to alleviate financial pressures while providing room for the economy to stabilise.
Budget 2024 has confirmed that personal tax thresholds will rise from 31 July 2024 (initially planned for 1 July 2024), reducing income tax for anyone earning over $14,000. However, the impact is fairly small, even though this is the first income tax adjustment in 14 years and considering average wages have risen by 63%. But these policy changes do show the government’s focus is on working mums and dads.
These tax cuts will provide savings of up to $40 a fortnight for many workers, although the lowest income earners and those on Superannuation will only benefit by as little as $9.
The Independent earners’ tax credit threshold has increased to $70,000 (up from an income cap of $48,000 a year). This means about 420,000 more people will be eligible for the $520 credit for those who do not get other assistance such as Working for Families or superannuation.
The Working for Families tax credit will also increase, giving about 160,000 low to middle-income families an extra $50 a fortnight. Additionally there is a new Family Boost childcare rebate for those families on less than $180,000 a year. This will give up to $150 a fortnight to some families, although that has come at the cost of scrapping the previous Government’s extension of free ECE to 2-year-olds.
Below are the new tax brackets:
To work out how much you’ll save with these new tax rates, use this handy calculator.
It is also worth noting that the interest rate on student loans for borrowers based overseas will increase by 1% annually for five years starting from 1 April 2025. This could lead to more parents stepping in to take over this debt from their children to avoid the interest rate increase, or encourage young Kiwis to stay in New Zealand.
Healthcare
The government has increased funding for frontline health services, including emergency services, primary care, medicines, and public health. Budget 2024 has allocated an additional $8.15 billion in operating and capital funding, including $665.1 million from reprioritisation, other savings, and revenue.
This allocation includes $2.12 billion directed towards primary care and public health, and $1.77 billion for Pharmac to ensure necessary medications are readily available.
Another positive funding allocation worth noting is the $24 million for Gumboot Friday, aimed at delivering mental health services to young Kiwis.
While the cancer treatment funding initially promised has not been realised, which is disappointing, Minister of Health Shane Reti has assured that the savings from ending universal free prescriptions will allow them to revisit this initiative next year.
Infrastructure
$68 billion has been forecasted for infrastructure over the next five years, which will help significantly in getting things back on track. However, the government and local councils need to act quickly to prevent our skilled workers and machinery from heading overseas.
It is therefore critical to build confidence in the industry by developing strong pipelines of work over the coming years, rather than having a surge of projects in the short term. This will also help those in the industry gain confidence in investing in capital and their staff.
Lending
The Reserve Bank have introduced new Debt to Income (DTI) restrictions and eased Loan to Value Ratio (LVR) rules, with effect from 1 July 2024.
DTI measures a borrower's ability to meet debt repayments by comparing their debt to their gross income. Under the new DTI rules, banks will be able to lend:
20% of owner-occupier lending to borrowers with a DTI ratio greater than 6
20% of investor loans to investors with a DTI ratio greater than 7.
While this seems like a significant change, it’s important to note that most banks already use a similar calculation when considering home loan applications, meaning these new rules simply set out standard restrictions which banks need to follow and likely won’t have a lot of impact to prospective borrowers.
On the flipside, LVRs will be used to ease DTI restrictions, and allow banks to make:
20% (up from 15%) of owner-occupier lending to borrowers with an LVR greater than 80%; and
5% of investor lending to borrowers with an LVR greater than 70% (up from 65%).
We wonder if this is really to replace the effect of cutting the Home Start Grant…
The Reserve Bank is not forecasting a reduction in the OCR until mid-2025, but based on the Budget, Treasury forecast that it may be closer to the end of this year meaning that these budget changes are expected to not have a negative effect at reducing inflation. We see that they will simple provide a small offset to the large increases we’re seeing in insurance premiums and council rates.
Treasury have speculated that interest rates could reduce by 3% over the next four years, however this seems too optimistic and we are more likely to see a slower reduction of about 1% over the next 18 months.
So, where to from here?
For many businesses, tough decisions will need to be made to avoid irreparable damage and the effects from deteriorating cash flow. Think about what products/services within your offering can be cut, what needs to be restructured and where should your resources be directed.
This is a time for planning and gaining stability, while looking at ways to improve productivity, drive innovation and protect cash flow.
However, it’s not all doom and gloom. Over the next few years, we are anticipating:
An increase in tourism, particularly with more Asian travelers coming back to NZ
An expected increase in foreign students due to Australia imposing new restrictions
Interest rates slowly starting to fall
Government and regional council spending on long-term infrastructure projects
An emphasis on productivity and innovation creating new businesses to pop up in some sectors with encouragement from offshore investment.
Now is the time to step back and identify where your focus should be over the next 12-18 months. What can you do to position your business for success moving forward?
As always we are here to help with any questions you may have, so please get in touch if you need any assistance.
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