Labour’s 2023 Budget was announced yesterday in what they termed a “no-frills” budget focusing on supporting today’s needs while also planning for our future.
While today’s economic commentators are stating it’s a budget for recovery rather than growth or the transformation of the economy and all it is doing is spreading the butter pretty thinly across the bread of the economy and really only leaving the crusts for business.
Impact on Businesses
Like with any budget under a Labour Government, this budget was never going to be pro-business, meaning Labour’s decision makers have little experience or understanding on what a business requires to run or to provide short term growth in an uncertain economy.
However, there were a number of announcements that will possibly have a long term effect on business whether as a direct recipient or as a supplier of services in an industry that the Government has indicated that they are wishing to focus on. These are:
$27 million in a digital skills package to address the skills shortage in the tech sector workforce.
$30 million to scale up NZ’s innovative horticulture technology industry, helping to increase productivity in a sustainable way.
$18 million to drive better career opportunities, improved working conditions and greater innovation within the tourism and hospitality sectors.
$941 million of operating and $195 million of capital to support communities and business affected by floods and Cyclone related events. While not all of this is targeted at businesses, it will ultimately lead to demand for businesses including in the infrastructure and construction related industries to support those in need.
$71 billion has been allocated to infrastructure investment over the next 5 years for schools, hospitals, and public housing, rail and road networks. Alongside Budget 2023, the Government has released its Infrastructure Action Plan which supports their response to the New Zealand Infrastructure Strategy which was developed in the last term of Government. The Government notes that this is crucial to continue to deliver the infrastructure transformation required, while providing certainty to the construction sector.
$6 billion has been allocated to a new National Resilience Plan to support medium and long-term infrastructure investment, with an initial focus on building back better from recent weather events.
$160 million to support the gaming sector, by providing a new 20% rebate for game development studios. This will be available for eligible businesses who spend a minimum of $250,000 each year. The maximum rebate available is $3 million per game development studio per year. The scheme is backdated to commence from 1 April 2023.
$451 million has been allocated to create three new public and private multi-institution research hubs which will be based in Wellington. The focus will be on driving innovation, collaboration and export earning potential in health and wellbeing; oceans, climate and hazards and advanced manufacturing, biotech and energy. Supporting this work will be investment in research fellowships and applied doctoral training for more than 260 people.
Economic Outlook
Interest Rates
Treasury are no longer anticipating a recession in 2023 and predict a government surplus will now be pushed out to the 2025 financial year. They have also forecasted inflation to fall to 4.5% by the end of this year, while dropping into the 1 to 3% target band in late 2024.
However, Treasury have been wrong in recent times due to market volatility. Plus none of us have lived in a post pandemic world before, so no one seems to be able reach consensus of what will actually happen to our economy or predict the length of time it takes for adjustments in monetary policy i.e. interest rates, to reduce inflation. As proven by Treasury and our NZ economists’ previously incorrect expectations, it is very uncertain out there. So it is hard to base sound business decisions off current treasury/economist forecasts.
But one thing is for sure with the Government announcing such an inflationary budget, interest rates will remain higher for longer than previously expected. So where current advice has been to fix interest rates on lending for 1 year with the idea that interest rates will peak in the current quarter, some economists are now proposing to look at fixing core debt for say, 2 years. Perhaps the Reserve Bank’s OCR announcement next week will shed more light on what tools they will use to combat inflation stimulus and where interest rates will head in the next 12 months.
Employment
For employers, while there is mixed signals at the coal face about labour demand, there is still a shortage of skilled labour out there largely due to high competition offshore. Treasury have forecasted the unemployment rate to peak around 5.3% by late 2024 before falling back to 4.8% by 2026/27. With this is mind, businesses will need to stop waiting for the labour market to get easier. Instead they need to consider:
Proactively paying more to retain good staff due to the labour shortage (while still ensuring affordability).
Creating a workplace environment that reduces employee turnover as employees still seem to have a mentality that the best way to get a pay increase is find a new job.
Looking at automation or AI to replace staffing gaps/shortages.
Spending some time on developing a strategic plan, including a review of products and services offered. Consider scaling back on those products and services that do not provide a good return or spread staffing too thin and becoming unsustainable.
Housing
While the Government is committed to grow social housing, it have been expected that construction will fall away for the next 2-3 years. However with the current boom in migration (low skilled workers and international students returning) Treasury is predicting that this fall may only last a maximum of 2 years.
It is also expected that house prices may still have a further 5% decline. With these pressures to margins in the construction industry we may see some in the construction businesses collapse over the next 2-3 years. Those most at risk are the ones who are under capitalised and over optimistic (or inexperienced). Like any down turn, it is important to ensure your customers are keeping up to date with payments so your cashflow and sustainability isn’t at risk.
Changes to the Trust Tax Rate
An increase to the trustee tax rate from 33% to 39% to align with the top individual marginal tax rate has been announced. This is expected to apply from April 2024.
This follows Inland Revenue’s High Wealth Individuals research which showed a large spike in income allocated to trust’s following the introduction of the 39% individual tax rate in 2021. So the rate increase comes as no surprise, as many have said the trust tax rate should have been increased at the same as the individual tax rate was increased.
But what is worth noting is that the Government has indicated the ability to allocate income to beneficiaries to utilise their lower personal income tax rates will not change. Similarly, investing through a Portfolio Investment Entity (PIE) provides a top tax rate of 28% no matter whether held in a trust, so there are still anomalies to be found in our current tax system. So perhaps all is not lost…
Another important point to note is that there is proposed targeted exemptions to ensure that estates and trusts for disabled persons are not subject to the new higher 39% rate.
With this new higher tax rate, the challenge now lies with balancing the use of trusts to protect personal assets while ensuring not being over taxed. We plan to review and discuss with you any entity ownership changes required when we meet to go over your financial statements this year.
Cost of Living
While the budget provides come support for combating the rise in cost of living through extending free childcare and public transport, removing $5 prescription co-payments, lowering household energy bills through the Warmer Kiwi Homes Programme and providing extra support for students in need. It has to be questioned as to whether these really will be helpful if there is no capacity to provide these services due to the shortage of labour.
You also have to wonder whether the effect on inflation from the budget ie potential rise in interest rates, will contra off any benefit that these costs of the living packages will provide resulting in households no better off.
So what could be debated leading up to the Election?
We see a lot more political antics ahead of us leading up to the election. Some areas that other parties may leverage in favour of businesses are:
Adjusting the existing individual income tax brackets
Reversing some of Labours policies including scrapping the $5 prescription charge
Reversing interest non deductibility on residential rentals
Reducing some of the regulations and red-tape businesses face to promote growth.
However, with the country’s current fiscal position and the need to provision for future natural disasters, there is a lack of room to manoeuvre within any larger policies such as housing and infrastructure. Time will tell…
As always, we are here to help with any questions you may have so please get in contact should you wish to.
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